Maersk Transfer Pricing Ites

आयकर अपील य अ धकरण “ K ” (SPECIAL BENCH) यायपीठ मब
ुं ई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL “ K ” (SPECIAL BENCH),
MUMBAI
ी डी.मनमोहन, उपा य, ी बी.आर.मतल, यायक सदय ,
एवं ी पी.एम. जगताप, लेखा सदय ।
BEFORE SHRI D. MANMOHAN, V.P., SHRI B.R. MITTAL, JM
AND SHRI P.M. JAGTAP, AM
आयकर अपील सं./I.T.A. No.7466/Mum/2012
(नधारण वष / Assessment Year : 2008-2009
Maersk Global Centres बनाम/ Asst. Commissioner o f
(India) Private Limited, Income Tax- Ci rcle 6(3),
Vs.
4 t h and 5 t h Floor, Aayakar Bhav an,
Prudential Building, Mumbai.
Central Avenue Road,
Hiranandani Business
Park, Powai,
Mumbai – 400 076.
थायी ले खा सं . / PAN : A ADCM7786M
(Appellant) .. Respondent)
Appellant by : Shri Porus Kaka

Shri Sunil M. Lala &
Shri Manish Kanth
Department by : Shri Ajeet Kumar Jain
Interveners M/s Shri Ajay Vora
Omniglobe Information
Technologies India Pvt.
Ltd. and M/s CRM
Services India Ltd. by
सन
ु वाई क) तार*ख /Date of Hearing : 13-2-14
घोषणा क) तार*ख /Date of Pronouncement : 7-3-14
आदे श / O R D E R
PER P.M. JAGTAP, A.M. :

पी.एम. जगताप, लेखा सदय
This Special Bench has been constituted by the Hon’ble President

to dispose of the appeal filed by the assessee against the order passed by
the ld. ACIT- Circle -6(3), Mumbai (A.O.) u/s 143(3) of the Income Tax
http://transfer-pricing.in
2 ITA No.7466/M/12(Special Bench)
Maersk Global Service Centres (India)Private Limited
Act, 1961 in pursuance of the directions given by the Dispute Resolution

Panel – I (DRP) u/s 144-C-(5) of the Income tax Act, 1961 and specifically
to decide the following important questions (as reframed) involved
therein:-
“1) Whether for the purpose of determining arm’s length price of
international transactions of the assessee-company, providing
back office support services to their overseas associated
enterprises, companies performing KPO functions should be
considered as comparable ?
2) Whether, in the facts of the assessee’s case, companies earning

abnormally high profit margin should be included in the list of
comparable cases for the purpose of determining the arm’s length
price of an international transactions?”
2. The assessee in the present case is a company incorporated in

India on 19-11-2003. It is a wholly owned subsidiary of Maersk GSC
Holdings A/S, which in turn is a downstream subsidiary of APMM Group
(“Maersk Group). It is engaged, inter alia, in the business as shared
service centre and renders transaction processing, data entry,
reconciliation of statements, audit of shipping documents and other
similar support services. It also renders I.T. services such as process
support, process optimization and technical support services. The return
of income for the year under consideration was filed by it on 30-9-2008
declaring total income of Rs. 34,14,980/- under the normal provisions of
the Act and book profit of Rs. 12,29,06,881/- computed u/s 115 JB of
the Act. In the said year, it had carried out, inter alia, the international
transactions of providing I.T. enabled services to its Associated
Enterprises (AEs) for the aggregate value of Rs. 117,56,19,974/-. The
nature of such services was stated to be transaction processing, data
entry, accounting and other support services. During the course of
assessment proceedings, a reference was made by the A.O. to the TPO
u/s 92CA(1) of the Act to determine the arm’s length price (ALP) of these
international transactions of the assessee with its AEs along with other
international transactions.
3. In the TP study report submitted by the assessee, the Arm’s Length

Price (ALP) of the international transactions representing I.T. enabled
services provided to the AEs was determined by applying Transactional
Net Margin Method (TNMM) and adopting the operating profit to total
cost (OP/TC) as the Profit Level Indicator (PLI). The OP/TC of the
assessee company was worked out at 12.82% while the average OP/TC of
the thirteen comparables selected by the assessee was arrived at 13.90%.
Since the profit margin of the assessee company after claiming working
capital adjustment at 4.79% and risk adjustment at 7.46% was higher
than the average profit margin of the comparables, it was claimed in the
TP study report that the price charged by the assessee company to its
AEs for the international transactions involving provision of I.T. enabled
services was at arm’s length.
4. After a careful study and analysis of the T.P. study report

submitted by the assessee, the TPO found the following material defects
in the T.P. analysis done therein:-
“1. As per Rule 10B(4), it is mandatory to the use the current

financial year data i.e. the financial year in which the
international transactions took place. (FY 2007-08). But the
taxpayer did not consider current year data in 3 of 10 comparable
companies.
2. The taxpayer used earlier two years data without justifying

how such earlier data had an influence on pricing for the taxpayer
or the comparable companies.
3. The taxpayer considered following companies with

significant controlled or related party transactions.
Sl No. Name of the company

1 Fortune Infotech Ltd.
2 ICRA Online Ltd.
3 KPIT Cummins Global
Business Solutions Ltd.
4. The taxpayer considered following companies with domestic

operations as well when the taxpayer’s ITES segment is mainly an
export oriented.
Sl No. Name of the company

1 Informed Technologies India
Ltd.
2 Shreeji Info Hubs Ltd.
5. As discussed above, some of the taxpayer’s comparables do

not stand scrutiny of FAR analysis.
6. Some companies like Eclerx Services Ltd., though is into

KPO services and qualify all the filters applied by the tax payer
based on the data pertaining to the FY 2007-08, have not been
selected.”
5. Keeping in view the above material defects pointed out by him, the
TPO rejected the TP report submitted by the assessee treating the same
as un-reliable and in-correct and proceeded on his own to determine the
ALP of the relevant international transactions entered into by it. In this
regard, he noted that the assessee company was operating with more
than 2000 employees out of the State of Art facility and was providing
support services to its AEs such as documentation, finance, operations,
logistics, global information systems etc. According to him, these services
were in the nature of knowledge based services and thus were liable to be
characterised as Knowledge Process Outsourcing (KPO) services. He
noted that the assessee was rendering mainly logistic outsourcing
services and business analytic services to its AEs which involved the
transfer of knowledge intensive business process that required
significant domain expertise. He observed that for global corporations
looking to move their higher-end research like market research and
equity research, analytical based services, engineering design, IPR, legal
services, remote education and publishing, India was currently the
location of choice.
6. Having held that the services rendered by the assessee company to

its AEs were in the nature of Knowledge Process Outsourcing (KPO)
services, the TPO rejected twelve of the thirteen comparables selected by
the assessee its T.P. study report on the following grounds:-
Sl. Name of the comparable Remarks

No.
1 Allsec Technologies Ltd. The annual report of the company is

available for the FY 2007-08. As per the
information available in the annual report,
the company merged its subsidiary B2K
Corp. Ltd. was closed down. Due to this
peculiar circumstance, the same is not
considered as a comparable.
2. Caliber Point Business The company is not into KPO services and
Solutions Ltd. thus the same is not considered as a
comparable.
3. Cosmic Global Ltd. The company is not into KPO services and
thus the same is not considered as a
comparable.
4. Fortune Infotech Ltd. The Company has related party transactions

(RPTs) to the extent of 100.03% of its
revenue for the FY 2007-08 (RPTs) on income
and expense side combined). Thus the
company fails 25% RPT filter applied by the
TPO and is not considered as a comparable.
5 ICRA Online Ltd. The company is a subsidiary of ICRA Ltd. As

per the information submitted by the
company, its ITES segment fails 25% RPT
filter. In this regard, the annual report of the
company (contained in AR for ICRA Ltd.) and
reply received from the company are
enclosed herewith as a soft copy.
6 ICRA Techno Analytics The annual report does not contain

Ltd. segmental results as the company is into
software products, software services and IT
enabled services. 133(6) notice was issued to
the company. In response, the company
submitted segmental results for software and
professional services. But, it was also stated
that professional services include both
software development services and IT

enabled services. Sub-segmental results are
not submitted. Thus the same is not
7 Informed Technologies The company has exports to the extent of

India Ltd. 66.52% of its revenues for the FY 2007-08
(RPTs on income and expense side
combined). Thus the company fails 75%
export filter applied by the TPO and is not
8 KPIT Commins Global The company is a subsidiary of KPIT

Business Solution Ltd. Cummins Infosystems Ltd. As per the
information and annual report submitted by
the company for the FY 2007-08, the
company fails 25% RPT filter.
9 Maple E- solutions Ltd. The company is not into KPO services and
thus the same is not considered as a
comparable.
10 R System International The company is not into KPO services and

(segmental) thus the same is not considered as a
comparable.
10 Shreejal Info Hubs Ltd. The company was earlier known as Ask Me
Info Hubs Ltd. The company fails 75% export
earning filter as it does not have any export
for the FY 2007-08. Thus the company is not
11 Spanco Telesystems and Now the company is known as Spanco Ltd.

Solutions Ltd. The Annual Report is available for the FY
(Segmental) 2007-08. This BPO segment is not into KPO
services and thus the same is not considered
as a comparable.
12 Triton Corp Ltd. The company is into KPO services and

qualifies all the filters applied by the TPO.
Thus the same is considered as a
comparable.
7. The TPO also considered the various filters applied by the assessee
and found only some of them to be appropriate for the following reasons:-
Sl No. Particulars Remark of the TPO

1 Companies for which It is pertinent here that the TPO used only the data for the
financial data was FY 2007-08. Thus the TPO excluded those companies whose
available only upto data was not available for the FY 2007-08.
March, 2005 were
excluded
2 Companies having zero This is an appropriate filter. But the TPO applied this filter
sales or sales less than based on the revenues for the FY 2007-08 as only the
Rs. 1 crore in the latest current year data has been considered. The TPO applied
year for which the this filter mainly due to the unreliability of the results of
financial data available these companies with low cost base.
were rejected.
3 Companies having sales The taxpayer applied a turnover range of Rs. 1 crore to Rs.
more than Rs. 250 250 crores. The taxpayer’s turnover in its ITES segment is
crores in the latest year Rs. 117.56 crores. Thus the taxpayer considered companies
for which the financial varying from twice the size of the taxpayer to almost 117th of
data is available in the its size, which is not rational. Moreover, size does not play a
databases were rejected. major role in service industry like IT enabled services. Thus
the upper turnover filter applied by the taxpayer is rejected.
4 Companies whose Not an appropriate filter. TPO has applied a more
manufacturing sales appropriate filter in this regard. The companies whose
were equal to or greater revenues from IT enabled and related services are more than
than 50% of their total 75% of their operating revenues for the FY 2006-07 were
sales in the latest year selected as companies. This is an appropriate filter as this is
for which financial data the stage which will determine the correct comparability.
was available were
rejected.
Companies whose
trading sales were equal
to or greater than 50% of
their total sales in the
latest year for which the
financial data was
available were rejected.
5 Companies not This is considered an appropriate filter since this filter will
disclosing segmental help to identify companies which are similar in function (IT
financials, whose enables service) to arrive at appropriate comparables.
services appeared Wherever segmental information is available, the same is
different from that of considered as a comparable.
taxpayer
6 Companies excluded for This is to be seen case by case. TPO tried to obtain
other reasons (based on maximum information using powers u/s 133(6). If sufficient
information contained in information is not obtained, the decision is taken based on
the product profile, the information available in the Public domain.
Director’s report and
other information
available in the
database)
8. In addition to some of the filters found to be appropriate by him as

discussed above, the TPO considered some additional filters or criteria
which, according to him, would lead towards selecting proper
comparables and finally applied the following filters or criteria in
searching for comparables:-
“- Companies whose data is not available for the FY 2007-08 were

excluded and the data for the FY 2007-08 has been considered for the
period from 01-04-2007 to 31-03-2008.
- Companies with IT enabled service income of less than Rs. 10 Cr

and more than 250 crores were excluded
- Companies whose IT enabled service revenue is less than 75% of

the total operating revenues were excluded
- Companies who have more than 25% related party transactions

(sales as well as expenditure combined) of the operating revenues were
excluded
- Companies who have less than 75% of the revenues as export

sales were excluded
- Companies who have diminishing revenues/persistent losses for

the period under consideration were excluded
- Companies having different financial year ending (i.e. not March

31, 2008) or data of the company does not fall within 12 month period ie.
01-03-2007 to 31-03-2008, were rejected
- Companies that are functionally different from that of taxpayer or

working in peculiar economic circumstances, after giving valid reasons,
were excluded
- Companies that are not mainly engaged in KPO services were

excluded.”
Applying the above filters/criteria, the TPO selected the following seven
entities as final comparables:-
Sl Name of the comparable Functional Lines

No.
1 Acropetal Technologies (Seg.) The ITES segment of the company is
engaged in engineering design services.
2 Coral Hubs Ltd. (Formerly The company is mainly engaged in data
Vishal Information processing services
Technologies Ltd)
3 Crossdomain Solutions Ltd. The company is mainly engaged in data
processing, insurance claims processing
and payroll processing services
4 Datamatics Financial The company is mainly engaged in
Services Ltd. (seg) financial accounting and internet based
research services.
5 eClerx Services Ltd. The company is mainly engaged in data
analytics and data process services.
Pricing analytics, bundling optimization,
content operations, sales and marketing
support, product data management,
revenue management and data analytics
are some of the offerings to Retail and
manufacturing clients. To its Financial
Services clients, it offers realtime capital
markets, middle and back office
support, portfolio risk management
services and various critical data
management services.
6 Mold-Tek technologies Ltd. The company is mainly engaged in
Engineering design services
7 Triton Corp Ltd. The company is mainly engaged in
knowledge process outsourcing and
legal process outsourcing services.
9. The TNMM adopted by the assessee for benchmarking the relevant

international transactions with OP/TC as PLI was accepted by the TPO.
Accordingly, he considered the profit before interest and tax for
computing the operating margins but treated only the income and
expenses related to the operations of the relevant financial year for the
computation of operating margins of the comparables. Accordingly,
certain income and expenses of non-operating nature having nothing to
do with the operations of the comparables were excluded by him for the
purpose of considering the operating revenue and operating expenses.
Similarly, extra-ordinary expenses/income which were non-recurring in
nature such as donations, preliminary expenses etc. were not considered

by him as operating expenses or operating income. Accordingly, the
arithmetic mean of OP/TC of seven comparables selected by him was
worked out by the TPO at 47.74% and after allowing the working capital
adjustment at 2%, he worked out the adjusted arm’s length mean margin
at 45.74%. Applying this arm’s length margin at 45.74% to the operating
cost of Rs. 104,44,80,271/- submitted by the assessee in its TP report,
the arm’s length price of the international transactions between the
assessee and its AE involving provision of IT enabled services was
determined by the TPO at Rs. 152,22,25,547/- and since the price
charged by the assessee for the said transactions was Rs.
117,83,81,799/-, the difference of Rs. 34,38,43,748/- was treated by the
TPO as the transfer pricing adjustment required to be made in the case
of the assessee.
10. In addition to the I.T. enabled services, the assessee company had
also provided I.T. services to its AEs for the agreed value of Rs.
13,93,30,950/-. The T.P study report submitted by the assessee in
respect of these transactions was also not accepted by the TPO.
According to him, the nature of these services was also ITES and
adopting the same basis and following the same method as in the case of
provision of I.T. enabled services, he selected the following 23
comparables after analysing the database, the annual reports etc. :-
11. The arithmetic mean of the OP/TC of the above comparables

selected by him was worked out by the TPO at 24.99% and after applying
the same as average profit margin of the comparables, without allowing
any working capital adjustment, to the operating cost of
Rs.12,05,35,098/- as submitted by the assessee in the TP study report,
he determined the ALP of international transactions of the assessee
company with its AEs involving provision of I.T. services at Rs.
15,06,56,819/-. Since the price charged by the assessee to its AEs for
these international transactions was Rs. 13,96,31,210/-, the difference
of Rs. 1,10,25,609/- was treated by the TPO as transfer pricing
adjustment required to be made in the case of the assessee in respect of

I.T. services rendered to its AEs.
12. In the draft assessment order, the A.O. proposed to make, inter
alia, the T.P. adjustments of Rs. 34.38 crores and 1.10 crores determined
by the TPO in respect of the international transactions of the assessee
company with its AEs involving provision of I.T. enabled services and I.T.
services respectively. On receipt of the said draft assessment order from
the A.O., the assessee filed its objections before the DRP. The first
objection raised by the assessee before the DRP was that the low-end
back office support services rendered by it have been erroneously
categorized by the TPO as high-end knowledge process outsourcing
services. It was submitted that the TP study of the assessee would show
that the functions during the year under consideration remained the
same as in the last year and therefore its categorization as KPO instead
of BPO was in-correct. It was contended that the rejection by the TPO of
atleast five comparables selected by the assessee namely (i) Caliber Point
Business Solutions Ltd., (ii) Cosmic Global Ltd., (iii) Maple E Solutions
Ltd., (iv) R Systems International (segment) & (v) Spanco Telesystems
and Solutions Ltd. on the ground that the same are not KPO was not
correct and the same should be included for the purpose of comparability
analysis. This objection of the assessee was considered by the DRP in the
light of functions performed by it as well as qualification and pay profile
of the work force employed by it. On such consideration, the DRP held
that the assessee could not be considered only as a low-end service
provider. It was also held by the DRP that the activities of the assessee,
at the same time, could not be considered as that at the high end of the
spectrum to be qualified as KPO. It was noted by the DRP that the
assessee had been considered as I.T. enabled service provider generally
in earlier years and there being no segmental division between the
different services and their profitability, the DRP considered it proper in

the facts of the case to compare the assessee with the mix selection of
comparables of I.T. enabled service sector in order to provide reasonable
and appropriate comparability. Accordingly, the objection of the assessee
regarding the rejection by the TPO of the five comparables selected by it
merely on the ground that they are not KPO service provider was held to
be sustainable by the DRP.
13. As regards the seven comparables selected by the TPO, the

assessee apparently did not raise any material objection in respect of two
comparables namely Crossdomani Solutions and Datamatics Financial
Services Limited while one comparable namely Triton Corpn. as taken by
the TPO was there in the list of comparables selected by the assessee
itself. As regards the remaining four comparables selected by the TPO,
which were objected by the assessee, the DRP accepted the objection of
the assessee in respect of two comparables namely Acropetal
Technologies Limited and Coral Hubs Limited and directed exclusion of
the same from the comparables for the following reasons :-
“Acropetal Technologies Ltd.— It has been pointed out by the

assessee in its submission wherein the Annual Reports of the
comparables have been filed, that this comparable fails the export
earning filter of 75% in respect of ITES. This has been seen and
found correct. Therefore, this comparable fails the TPO’s own filter
and cannot be held comparable.
Coral Hubs Limited - It is seen that this comparable has very low
employee costs (2.93%) whereas it has very high costs on account
of vendor payments and data charges, suggesting outsourcing as
its business model. In view of these functional differences, the
same is rejected as comparable:”
14. The objection of the assessee regarding other two comparables

selected by the TPO namely Eclerx Services Limited and Mold-Tek
Technologies Ltd. however, was not found sustainable by the DRP for the
following reasons:-
“Eclerx Services Limited – assessee’s argument is not acceptable

in view of above discussion and it is found to be functionally
comparable as an ITES provider since it is in the business of
custom designing of processes and operations management, like
the assessee.
Mold-Tek Technologies Ltd.- The assessee has objected to the fact

that the comparable is into structural engineering and design
services which are functionally the same as the work of the
assessee. Further, it says that since Allsec was rejected, Mold-Tek
should be rejected on the same grounds. It also states that it is an
outlier in terms of margin and that the margin calculation is
wrong:
We find that this comparable’s services fall within the category of

ITES as per the CBDT circular and in functionality. Further,
Allsec went in for a merger in this year with a loss making
subsidiary whose business was wound up. In the case of Allsec it
is also seen that its margins have shown a precipitous decline
from 27.98% to (13.95%) in the relevant year this is certainly not
normal in terms of results. This is very different from the case of
Mold-Tek, where a restructuring has taken place and demerger
happened of an entirely different business segment, that too in
October, 2006 and accounts restructured as on 1-4-2007 ie the
beginning of previous year relevant to the assessment year under
consideration. This has brought the comparable closer to the same
line of ITES business as the assessee. That the company is
comparable is clear from its functional profile.
As far as not taking provision for derivative losses as an operating

expense is concerned, reliance can be placed upon the decision of
ITAT, Pune in the case of Honeywell Automation India Ltd. Vs.
DCIT , (2009-TIOL-104-ITAT-PUNE in ITA No. 4/PN/08 dated 10-
02-2009) wherein it was held that the provisions made for future
losses cannot be considered while computing the operating profit
of the relevant year. We also find that TPO/AO has taken this view
consistently ie in the case of other comparables and assessee.
From the Annual Report submitted by the assessee it is not clear

how the assessee has stated that it has controlled transactions or
if it violates the RPT limit. In conclusion, this company is found to
be comparable.”
15. The three comparables selected by the TPO namely Mold-Tek

Technologies Ltd., M/s Coral Hubs Ltd. and M/s eClerx Services Limited
were also objected by the assessee before the DRP on the basis of their
high profitability. This objection of the assessee was not found
sustainable by the DRP observing that high and low margins both reflect
the industry profitability especially when they are acceptable on
functional similarity. It was also observed by the DRP that as the average
mean of a fair number of companies is being considered for
comparability analysis to arrive at the ALP margin, the super profit of an
individual company cannot be objected to if it is otherwise functionally
comparable. It was also noted by the DRP that omission only of high
profitability comparables as outliers would be addressing only one end of
the spectrum which is not correct. It was observed that the Income Tax
Act in any case provides for an arithmetic mean and not median range of
profitability.
16. The DRP then proceeded to deal with the objections of the assessee
in respect of TP adjustment of Rs. 1.10 crores proposed in respect of
provision of I.T. services rendered by the assessee company to its AEs. In
this regard, DRP found from the functional profile of the segment given in
the TP study report that the services rendered by the assessee in respect
of process support, process optimization and technical support were
essentially support services rendered by the assessee whereby the
systems of the business as used by the employees were kept in working
order and all glitches were taken care of. The DRP held that these
services were similar to I.T. enabled services and not something which
could be classified separately. Relying on the CBDT circular No. SO 890
(E) dtd. 26-9-2000 giving a detailed list of products or services that could
be claimed as ITES for the purpose of section 10A/10B of the Act, the
DRP held that the services claimed to be IT services by the assessee were
falling under the broad category of ITES being akin to support center’s
back office operations and remote maintenance. The DRP, therefore,
considered both the I.T & ITES services claimed to be rendered by the
assessee company to its AEs as ITES and accordingly directed the
A.O./TPO to bench mark these transactions by taking the following ten
entities as final comparables:-
1. Caliber Point Business Solutions Ltd.

2. Cosmie Global Ltd.
3. Maple E Solutions Ltd.
4. R. Systems International (Segmental)
5. Spanco Telesystems and Solutions Ltd.
6. Triton Corp. Ltd.
7. Mold-Tek Technologies Ltd.,
8. Crossdomain Solutions Limited
9. Datamatics Financial Services Limited (segmental)
10. eClerx Services Ltd.”
17. As regards the objection of the assessee that the TPO has not
allowed the working capital adjustment to the margins of the
comparables selected by him, the DRP directed the TPO to allow such
adjustment based on the final comparables selected by following the
same method and basis as adopted in assessee’s own case in the earlier
years.
18. As regards the objection of the assessee that the TPO has not
allowed appropriate risk adjustment to the margins of the comparables
selected by him as required u/r 10-B(1)(e)(iii) of the Income Tax Rules,
1962, the DRP discussed the claim of the assessee in respect of various
risks as under:-
“Market Risk/Business Risk: The taxpayer’s claim that it does not

bear market risk as it renders services exclusively to its group
company is not acceptable. In fact, the taxpayer bears a much
bigger market risk viz, single customer risk. As the taxpayer is
dependent on its AE its entire existence is dependent on it. If the
AE runs out of business or if AE’s business gets reduced
substantially, the taxpayer’s business will also get adversely
affected. The taxpayer being a captive service provider cannot even
look for other customers. Thus, in fact the taxpayer runs a greater
risk than an average independent entity which can always look for
other customers or other markets. Thus, there is more risk in the

case of tax payer who is dependent on a single customer when
compared to comparables who may not depend on single
customer. At the time of entering into contract with its associated
enterprise, the tax payer is not assured of any business and also it
is not guaranteed any steady increase in the business. There are
two components of’ a single customer risk which have to be kept
in view:
i. The loss of realization of the debt for the services

already rendered from the single customer if the
customer goes into liquidation or bankruptcy.
ii. The loss of future revenues if the single customer

either goes into bankruptcy or liquidation or
terminates the contract.
This holds true for Contract Risk and Credit Risk in the case of’
the assessee. What it sees as a risk free business is in fact a very
risky model, where it is totally dependent on the AE.’.
Price Risk: It is clear that it bears price risk as the taxpayer is a

contract service provider based on a cost plus model for its
services. Thus, the taxpayer in a way is agreeing that the price
charged for rendering the services is independent of the prevailing
market price charged for such services.
Manpower Risk: In this case the assessee also faces manpower

risk. That is the most vital risk in the line of business that the
assessee is in and has been mentioned earlier also in the context
of the manpower costs vis a vis total costs. It has to collect and
nurture pool of talented manpower so that it can carry out its
functions efficiently. In this day of high attrition rates, all
enterprises face this risks especially these like the assessee.
Hence, in the event of the assessee being unable to do so, its
position will be compromised. In the 21st century, corporations
have become increasingly reliant on human capital, at a time
when this resource is becoming more difficult to retain. With the
globalization of trade, many new opportunities are available to
skilled staff, contributing to the already prevalent breakdown of
bonds between employers and employees. A soaring employee
turnover across many economic sectors has resulted in enormous
losses to employers and has in turn enhanced the value of
securing and retaining a stable, skilled workforce. Many MNEs are
currently investing considerable resources in efforts to retain their
employees, although such expenditures do not create ‘assets’ in
the traditional sense. Corporations are still coming to terms with
the fact that the most valuable information in the organization
may be lost when an employee leaves the organization.
The assessee is in a business which requires skilled manpower to

run its business. There are judicial pronouncements which
confirm that a trained and assembled workforce has a
measurable, identifiable value. One example is Ithica Industries
Inc. V. CIT 97 TC 253 where the Appellate Tax Court, USA has
reached the conclusion that an in-place work force was an
intangible asset with an ascertainable value.”
19. After the above discussion, the DRP also referred to the various
decisions of the Tribunal wherein a similar claim of the assessee for risk
adjustment was considered by the Tribunal and held finally, for the
following reasons given in its order, that no risk adjustment could be
allowed to the assessee:-
“- As discussed above, the taxpayer has also undertaken

several risks. Therefore, it is correct to say that it is a risk
mitigated entity.
- The taxpayer is totally dependent on the AE for business.

Thus the taxpayer takes the risks associated with heavy
dependence on a single customer, In common business parlance it
is known as ‘single customer risk’.
- The AE is exposed to the market risk and any fluctuation in

the business conditions of the AE affect the contractual terms
between the AE and the taxpayer. Thus even if independent
comparables undertake some risk, the taxpayer also had to
undertake risks
- Different comparables can have different risk profiles and

different profit margins. The proviso to Sec. 92C(2) of the Act
provides for adopting arithmetical mean of the different prices.
This provision neutralizes the effect of difference in the risk profile,
if any between the tax payer and the comparables as realized risk
may pull down the profitability below the risk free return.
- It is not sufficient to merely spell out risks. It has to be

shown risk was actually undertaken by the comparables and to
what extent it affected the profitability. The taxpayer has not done
so.
- In the various decisions of the ITATs as referred to above no

risk adjustments has been allowed in such cases.”
20. As regards the objection of the assessee that the A.O./TPO has
resorted to the use of single year data instead of multiple year data of the
companies selected by him u/r 10B(4) of the Income Tax Rules, 1962,
the DRP overruled the same by observing that the assessee has not given
any details as to how earlier years data have the impact on the profit of
the current year of the assessee or of the comparables. The DRP in this
regard relied on OECD Transfer Pricing Guidelines as revised on 22nd
July, 2010 wherein it was cautioned that use of multiple year data does
not necessarily imply the use of multiple year average for the purpose of
bench marking.
21. The DRP thus issued directions u/s 144-C(13) of the Act on the
objections raised by the assessee vide its order dtd. 7-9-2012 and
directed the A.O./TPO to give effect to the said directions. Accordingly,
the margins of final set of comparables after giving working capital
adjustment were worked out by the A.O./TPO as under:-
Sr. Company Name Assessee/ FY 2007-08 Adjustment FY 2007-08

No. Department NCP Revised NCP
1 Caliber Point Asseassee 9.67 (2.50) 7.17
Solutions Limited
2 Cosmic Global Assessee 23.30 (2.43) 20.87
Limited
3 Maple Esolutions Assessee 20.41 (5.27) 15.14
Limited
4 R Systems Assessee 11.87 (9.27) 8.90
International
Limited- Segmental
5 Spanco Telesystems Assessee 7.22 (4.23) 2.99
& Solutions Limited -
Segmental
6 Triton Corp Limited Common 23.81 (4.46) 19.35
7 Mold-Tek Department 96.66 (13.35) 83.31
Technologies Limited
8 Crossdomain Department 26.96 (1.25) 25.71
Solutions Limited
9 Datamatics Financial Department 34.87 (0.97) 33.90
Services Limited -
Segmental
10 eClerx Services Department 65.88 (2.82) 63.06
Limited
Average 32.07 (4.02) 28.04
22. The adjusted average profit margin of comparables at 28.04% was

applied by the A.O./TPO to the combined total operating cost (ITES and
IT segment) of the assessee amounting to Rs. 116,50,15,369/- to work
out the ALP of the international transactions of the assessee with its AEs
at Rs. 149,16,85,678/-. Since the price charged by the assessee to its
AEs for such services was Rs. 131,80,13,009/-, the difference of Rs.
17,36,72,669/- was added to the total income of the assessee on account
of TP adjustment in the final assessment made by the A.O. vide an order
dated 31-10-2012 passed u/s 143(3) r.w.s. 144-C(1) of the Act.
Aggrieved by the same, the assessee has preferred this appeal before the
Tribunal.
23. In its appeal, the assessee has raised as many as 11 grounds out
of which ground No. 1 is general in nature seeking no specific decision.
Ground No. 2 challenges the selection of comparables by the TPO as
approved by the DRP. In its TP study report, the assessee had selected
thirteen comparables out of which only one comparable was accepted by
the TPO. After rejecting the TP study of the assessee, the TPO proceeded
to do his own exercise of TP analysis and keeping in view the nature of
services rendered by the assessee as understood by him and after
analyzing the database, annual report etc., he selected seven
comparables including the one selected by the assessee namely Triton
Corpn. Ltd. The DRP excluded two of these final seven comparables
selected by the TPO namely Acropetal Technologies Ltd. (segment) and
Coral Hubs Ltd. while it included five of the comparables selected by the
assessee but excluded by the TPO. Accordingly, a set of the following ten
comparables was selected by the DRP:
1. Caliber Point Business Solutions Ltd.

2. Cosmic Global Ltd.
3. Maple E-Solutions Ltd.

4. R Systems International (Segmental)
5. Spanco Telesystems and Solutions Limited
6. Triton Corpn. Ltd.
7. Mold-Tek Technologies Ltd.
8. Crossdomain Solutions Limited
9. Datamatics Financial Services Limited (segmental)
10. eClerx Services Ltd.
24. As submitted by Sr. Advocate Shri Porus Kaka, the ld. Counsel for
the assessee, the assessee is disputing the inclusion of two entities out of
ten comparables finally selected by the DRP namely Mold-Tek
Technologies Ltd. and eClerx Services Ltd. on the ground that firstly they
are KPO service providers who cannot be compared with the assessee
company, which is basically a BPO service provider and secondly both
these entities earning abnormally high profit margins should not be
included in the list of comparables. Both these issues are raised in the
questions specifically referred for the consideration of this Special Bench
and answers to these questions thus will decide the issue raised in
ground No. 2 of the assessee’s appeal as agreed by the ld.
Representatives of both the sides.
25. While opening his arguments on the issue involved in question No.
1, the ld. Counsel for the assessee Shri Porus Kaka referred to the
relevant portion of the TPO’s order for the earlier year at page 5 of his
paper book wherein the nature of work performed or services rendered by
the assessee company was discussed. He then invited our attention to
the specific finding recorded by the A.O. in his final order for the year
under consideration clearly accepting that there was no material change
in the activities undertaken by the assessee company during the year
under consideration. He submitted that going by the nature of work
performed by the assessee or services rendered, it is basically a back
office service provider or low end service provider. He contended that the
assessee thus is basically a BPO service provider and it was wrongly

categorized by the TPO as KPO service provider. He took us through the
submissions made by the assessee company in this regard before the
TPO at page 211 & 212 of his paper book to point out that the brief
overview of the assessee’s back office support services was given therein
as under:-
“Brief overview of Assessee’s back office support services:
The assessee is a captive service provider primarily engaged in providing

back office support services to its AE i.e. APMM.
The activities primarily comprises of low end data entry, transcription,

reconciliation, consolidation, co-ordination, preparation, processing and
review of shipping documents such as bills of lading, etc. and similar
support services.
Assessee acts as a contract service providers carrying out limited low end
functions based on instructions, standardized processes, data,
specifications, process notes and statement of work all of which are
historically provided by its AE. The activities performed by the assessee
are thus merely supportive and auxiliary in nature. For ease of
understanding attached is the flow chart explaining the work process of
documentation activity in brief (Please refer Exhibit 1).
The activities primarily involves the information collation from the

shippers/customers/AE and populating the same in various processes
and systems provided by the AE. The work requires limited domain
expertise and no analytical skills. These activities are performed by low
skilled employees who are primarily graduates by qualification. For ease
of reference, we have attached herewith the available data of employees
during FY 2007-08 and their qualification along with their birth date and
in Exhibit 2. Broad classification of employees, based on their
qualification is diagrammatically presented as under:-
On perusal of above, your goodself would appreciate that since majority

of employees are only graduates, activities of the Assessee cannot be
qualified to be high end in nature.
Following are some of the key features of the Assessee’s business which
are worth noting:
• Assessee’s business activities are performed by graduates and freshers

with limited experience. Average age of employees is around 26-27 years;
• Activities of the Assessee arc based on instructions, standardized

processes, data, specifications, process notes and statement of work
provided by its AE;
• Team size generally vary from 17-18 employees with one Team Leader;
• Quality or output is generally measured in terms of number of

documents / transactions processed, number of punching errors,
number of queries, etc.;
• Assessee normally operates in three shifts (8 hours each).
In contrast, KPO services generally would not have the above

characteristics and primarily comprise high end research and
analytical services such as software development, Research and
Development in pharmaceuticals, Engineering Design services and
other such high end value adding services. Qualifications of the
employees, Team size and Quality yardsticks are substantially
different in KPO business.”
26. Mr. Porus Kaka pointed out that even the brief overview of the KPO
services was also given by the assessee in its submissions filed before the
TPO along with objections raised in the light of the same for
characterizing it as KPO service provider as under:-
“Brief overview of Knowledge Process Outsourcing services

and the Assessee’s objections
It is pertinent to note the following understanding of the KPO

services as provided in the captioned notice and relevant
annexures available in the CD form:
“KPO involves the transfer of knowledge intensive business

processes that require significant domain expertise, to other
geographic locations. For global corporations looking to
move their higher-end research like market research and
equity research, analytical based services, engineering
design, IPR, legal services, remote education and
publishing, India is currently the location of choice.”
KPO- A new breed of high end knowledge based BPO called

Knowledge Process Outsourcing (KPO,) emerged. This comprises of
vendors providing higher end research and analytic based services
in traditional service lines as well as new business areas. Areas for
KPO include healthcare — intellectual property rights research,
design and development for automotive and aerospace industries
and animation and graphics in the entertainment sector.
(please refer IT enabled Services definition as provided in the CD,)

(Please refer Exhibit 3)
We respectfully submit that we object to the characterization of

the Assessee as a KPO.
Merely because the services performed by the Assessee pertain to

the logistics industry we request your goodself not to conclude
that the services performed by the Assessee can be categorized as
KPO.
A KPO industry is significantly higher on the value chain and

involves processes that demand advanced information analysis as
well as some judgment and decision making. Further the main
concern of the KPO is the quality of the service provided as the
same would involve strategic decision making. Thus a KPO
industry is extremely sensitive and absorbs higher risks involving;
confidentiality, quality, decision making etc.
As discussed in above paragraphs, the Assessee in turn is a

captive entity engaged in the provision of data processing services
merely to its AE, which inter alia involves activities such data
entry, transcription, reconciliation, consolidation, co-ordination,
preparation, processing and review of shipping documents such as
bills of lading, etc and similar support services, following pre-
defined procedures and adhering to the set standards and criteria
as laid down by the AE and routinely sending the same to the AE
as required by them.
The Assessee does not have authority to make any decisions (as
would he required to be made by an independent KPO) and
operates as per the directions and instructions provided by its AE.
The activities performed by the Assessee are merely preparatory
and auxiliary in nature. Thus the Assessee’s role does not involve
any judgment or decision making skills and thereby the services
provided do not face the risks arising there-from, as in the case of
a KPO.
Based on the above, it is evident that the environment within

which the services are provided by the Assessee are not as
sensitive, risk oriented as that of the KPO and thus the Assessee
should not be compared to the companies engaged in KPO
services and cannot be possibly expected to attain margins as
demanded by the KPO industry due to the extreme sensitivity and
decision making involved therein.”
27. Shri Porus Kaka contended that the proposed action of the TPO in
characterizing the assessee as KPO service provider thus was strongly
objected to by the assessee by making a detailed submission pointing out
the distinction between the low-end services rendered by the assessee as
back office support services and the high-end knowledge process
outsourcing services. He contended that this elaborate submission made
by the assessee to show as to how and why it could not be treated as
KPO service provider, however, was completely ignored by the TPO and
he treated the assessee as KPO without giving any convincing reasons to
justify the same. He submitted that similarly four additional filters were
arbitrarily applied by the TPO to remove the comparables which
otherwise met FAR analysis just to suit and support the huge TP
adjustment suggested by him. He submitted that the nature of functions
of the assessee or the FAR analysis made by the assessee was not
disputed by the TPO and the findings given by him about the nature of
activities of the assessee on page 8 to 9 of his order to treat the assessee
as KPO are contrary to the nature of activities of the assessee discussed
by the TPO himself on page 2 of his order.
28. Our attention was invited by Shri Porus Kaka to the relevant
portion of the submissions made by the assessee before the DRP at page
No. 116 & 117 of the paper book to point out that the erroneous
categorization of the assessee as KPO was challenged by the assessee by
making the following submission:
29. Shri Porus Kaka argued that various processes and systems
required for providing back office support services were provided by the
concerned AE and there was neither any transfer of knowledge by the
assessee nor any research and analysis involved in providing the said
services. He invited our attention to para 2.1.3 of the DRP’s order to
show that the case of the assessee of low end service provider still was
not fully accepted by the DRP without giving any cogent or convincing
reasons. He pointed out that the DRP, however, held that the assessee
could not be considered as KPO going by the qualification and profile of
its workforce. He contended that the objection of the assessee for
inclusion of two comparables on the basis of functional difference,
however, was not considered by the DRP specifically.
30. Shri Porus Kaka submitted that none of the services rendered by
the assessee is in the nature of logistics outsourcing services and
business analytic services and the finding given by TPO to this effect is
contrary to the business profile of the assessee company given by the
TPO himself on page No. 2 of his order. He contended that even the
qualification and profile of the workforce employed by the assessee
established the fact that the assessee is providing low end services which
cannot be characterized as KPO services.
31. Shri Porus Kaka contended that ITES sector as a whole is taken as
functionally similar by the TPO as well as by the DRP for the purpose of
comparability analysis, which is not as per the procedure prescribed in
the relevant Rules. Relying on the decision of Hon’ble Delhi High Court
in the case of Li and Fung (I) Pvt. Ltd. dtd. 16-12-2013, he contended
that arbitrary exercise of TP adjustment is not permissible and this
exercise has to be done following the Rules prescribed.
32. Shri Porus Kaka then proceeded to explain the nature of functions
performed by two entities namely Mold-Tek Technologies Limited and
eClerx Services Ltd., with the help of relevant documents. He invited our
attention to the relevant portion of the annual report of Mold-Tek
Technological Services for financial year 2007-08 at page 139 of the
paper book wherein the said entity was described as “pioneers in
structural engineering services”. He also invited our attention to page
140 and 144 of his paper book to point out that almost the entire sales of
the said entity for the financial year 2007-08 was on account of export of
KPO division. He also brought to our notice the relevant portion at page
145 & 146 of his paper book wherein it was clearly stated that Mold-Tek
Technologies Ltd. is providing only structural engineering services and it
has suitably enlarged its HRD Deptt. to handle the increasing number of
manpower in the KPO division. He contended that M/s Mold-Tek
Technologies Ltd. thus is clearly a KPO service provider and the
functions performed by it of providing only structural engineering
services are not comparable with that of the assessee.
33. Referring to the relevant extracts of annual report and web-site of

another comparable chosen by the TPO namely eClerx Services Ltd.
placed at page 167 to 177of his paper book, Shri Porus Kaka pointed out
that the said entity had claimed itself, at page 167, to be a knowledge
process outsourcing (KPO) company providing data analytics and data
process solutions to some of the largest brands in the world with
expertise in financial services and retail and manufacturing. In the
message to the shareholders at page 171, the Chairman of the company
had clearly stated that it is a very different company with industry
specialized services for meeting complex client needs. It was also stated
that the company provides solutions that do not just reduce cost but
helps the clients to increase sales and reduce risk by enhancing
efficiencies and by providing valuable insights that empower better

decisions. It was also clarified that the company therefore cannot be
compared to a BPO or an IT offshoring company. Shri Porus Kaka also
took us through the note given by the company on KPO placed at page
No. 173 of his paper book and submitted that the contents thereof clearly
make out the distinction between BPO and KPO. The said contents are
extracted below:-
“Knowledge Process Outsourcing (KPO)
The global business environment is becoming increasingly

information and knowledge intensive. In such an environment,
business entities have realized the importance of and opportunity
in assimilating data, analyzing trends, creating knowledge and
harnessing this knowledge for running business operations
efficiently thereby contributing to growth and profits.
The evolution and maturity of the Indian BPO sector gave rise to
Knowledge Process Outsourcing (KPO). The term KPO has
generally come to refer to such activities and process solutions
supplied by the service provider that essentially involve
information searching, analyzing, interpreting and require
significant domain expertise on part of the service provider.
A KPO firm requires substantially more domain expertise than

BPO firm. Professionals continue to learn: and undergo
continuous training to learn new procedures and newer
interpretations. Consequently, a good KPO firm is likely to be
judged more by the depth of knowledge and experience of its
professionals than just its Size.
India is a preferred destination for KPO because of its large

English speaking labour pool, inherent domain expertise due to a
large and developed domestic services industry and knowledge
and application of internationally accepted quality standards and
processes. The country adds more than three million graduates
and professional degree and diploma holders annually. It is home
to the world’s second largest reservoir of engineers and scientists,
and the second largest pool of IT manpower.
The knowledge services provided by this industry include

Investment Research, Legal Research, Sourcing Management,
Information Management, Market Research and Analytic Services.
Some of the key sectors it services include Banking and Financial
Institutions, Legal, Paralegal and Intellectual Property, Contract
Research Organizations and the Bio-Pharma Industry.
According to a research paper released by KPMG, the global KPO

industry is expected to reach USD 17 billion by 2010, of which
USD 12 billion (almost 70%) would be outsourced to India alone.
In addition, the Indian KPO sector is also expected to employ more
than 250,000 KPO professionals by 2010.
After achieving great success in BPO, India automatically becomes

a natural choice for KPO services. Due to a large knowledge pooi
and a significant cost arbitrage, countries like India are front
runners in providing outsourced services. Overall, India’s position
in the IT-KPO-BPO field is visibly strong and it may, considering
the trends and possibilities, occupy higher grounds in the future.”
34. Reliance was placed by Shri Porus Kaka on the Notification No. SO
2810 (E) dtd. 18th September, 2013 issued by the CBDT in exercise of the
power conferred by section 92CB r.w.s. 295 of the Act making the Safe
harbour Rules and our attention was invited to the definition of
“Information Technology Enabled Services” given in Rule 10 TA(e) as the
various business process outsourcing services specified therein which
are provided mainly with the assistance or use of the information
technology. He pointed out that the services so prescribed by the CBDT
include back office operations and support centre, which are the services
rendered by the assessee company in the present case. He then referred
to the definition of “knowledge process outsourcing services” given in
clause (g) of Rule 10TA to mean certain specified business process
outsourcing services which are provided mainly with the assistance or
use of information technology requiring application of knowledge and
advanced analytical and technical skill. He contended that the services
so specified by the CBDT do not include back office support services as
rendered by the assessee company in the present case. He contended
that the services rendered by the assessee also do not require application
of knowledge and/or advance analytical and technical skill. He
contended that these provisions given by the CBDT in safe harbour rules
thus clearly show that there is a clear distinction between KPO services
and BPO services and the back office support services rendered by the
assessee fall within the category of BPO services.
35. Shri Porus Kaka submitted that before the decision of the Mumbai
Bench of Tribunal in the case of Willis Processing Services (I) Pvt. Ltd. Vs.
DCIT (supra), several Benches of the Tribunal took a view in favour of the
assessee, accepting the distinction between BPO and KPO and holding
that the BPO service provider cannot be compared with the KPO service
provider. He cited two of such decisions one rendered by Hyderabad
Bench of ITAT in the case of Capital IQ Information Systems (India)(P.)
Ltd. DCIT (I.T.A No. 1961/Hyd.2011 dtd. 23-11-2012 and other rendered
by Mumbai Bench of ITAT in the case of Lloyds TSB Global Services Pvt.
Ltd Vs. DCIT (ITA No. 5928/Mum/2012 dtd. 21-11-2012). He submitted
that even after the decision in the case of Willis Processing Services (I)
Pvt. Ltd. rendered on 1-3-2013 taking a view against the assessee, the
Tribunal has decided this issue in favour of the assessee in the various
decisions rendered thereafter. He filed the copies of such orders of the
Tribunal passed in the following cases:-
1. Zavata India Pvt. Ltd. Vs. DCIT – ITA 1781/Hyd/2011 dtd. 2-7-2013
(2013) 35 Taxmann.com.423)
2. PTC Software (I) Pvt. Ltd Vs. ACIT ITA 1605/PN/2011 dtd. 30-4-2013
3. Cognizant Technology Services

Pvt. Ltd. Vs. ACIT ITA 2106/1864/Hyd/2011 dtd.
Dated 22-5-2013
4. Symphony Marketing Solutions ITA 1316/Bang/2012 dt. 14.8.2013
India Pvt. Ltd. V. ITO
5. Market Tools Research ITA 1811/Hyd/2012 dt. 24.10.2012
Pvt. Ltd. Vs. DCIT
6. Avineon (I) P. Ltd. DCIT ITA 1989/Hyd/2011dtd. 31-10-2013
36. As regards the decision of Division Bench of this Tribunal in the

case of Willis Processing Services (I) Pvt. Ltd. (supra), Shri Porus Kaka
submitted that a different view has been taken therein by not accepting
the distinction between BPO service and KPO service and characterising
such services as ITES, without taking into consideration the view already
taken by the co-ordinate Benches. He took us through the order passed
by the Tribunal in the case of Willis Processing Services (I) Pvt. Ltd.
(supra) and submitted that the reliance in support of its view on this
issue was placed by the Tribunal on the so called accepted rule of
sampling that larger size of sample would be better and adequately
represent the lot or population to which the sample belongs. He
contended that in so far as transfer pricing exercise is concerned, the
comparables have to be better than larger and what matters is the
quality of sample/comparables and not the size/quantity. He contended
that the comparability for this purpose has to be seen on the basis of
FAR analysis and the relevant Rule 10B(3)(ii) allows only reasonably
accurate adjustment to be made to eliminate the differences, if any. He
contended that in the transfer pricing exercise, analysis has to be
qualitative and not quantitative. He also contended that the broad
characterisation of BPO and KPO services made by the Tribunal in the
case of Willis Processing Services (I) P. Ltd. (supra) as ITES, based on the
larger size of sample, is not in accordance with the TP regulations
prescribed in the relevant Rule and thus the view taken in the said case
has not been followed even by the other co-ordinate Benches of the
Tribunal.
37. Reference was made by Shri Porus Kaka to section B.3.1 of the
OECD transfer pricing guidelines issued in July, 2010 and our attention
was drawn to paragraph Nos. 2.68 to 2.75 contained therein explaining
the comparability standard to be applied when TNMM is followed. The
said paragraphs read as under:-
“2.68 A comparability analysis must be performed in all cases in

order to select and apply the most appropriate transfer pricing
method, and the process for selecting and applying a transactional
net margin method should not be less reliable than for other
methods. As a matter of good practice, the typical process for
identifying comparable transactions and using data so obtained
which is described at paragraph 3.4 or any equivalent process
designed to ensure robustness of the analysis should be followed
when applying a transactional net margin method, just as with

any other method. That being said, it is recognised that in practice
the level of information available on the factors affecting external
comparable transactions is often limited. Determining a reliable
estimate of an arm’s length outcome requires flexibility and the
exercise of good judgment. See paragraph 1.13.
2.69 Prices are likely to be affected by differences in products,

and gross margins are likely to be affected by differences in
functions, but net profit indicators are less adversely affected by
such differences. As with the net margin method resembles, this,
however, does not mean that a mere similarity of functions
between two enterprises necessarily lead to reliable comparisons.
Assuming similar functions can be isolated from among the wide
range of functions that enterprises may exercise, in order to apply
the method, the net profit indicators related to such functions may
still not be automatically comparable where, for instance, the
enterprises concerned carry on those functions in different
economic sectors or markets with different levels of profitability.
When the comparable uncontrolled transactions being used are
those of an independent enterprise, a high degree of similarity is
required in a number of aspects of the associated enterprise and
the independent enterprise involved in the transactions in order
for the controlled transactions to be comparable; there are various
factors other than products and functions that can significantly
influence net profit indicators.
2.70 The use of net profit indicators can potentially introduce a

greater element of volatility into the determination of transfer
prices for two reasons. First, net profit indicators can be
influenced by some factors that do not have an effect (or have a
less substantial or direct effect) on gross margins and prices,
because of the potential for variation of operating expenses across
enterprises. Second, net profit indicators can be influenced by
some of the same factors, such as competitive position, that can
influence price and gross margins, but the effect of these factors
may not be as readily eliminated. In the traditional transaction
methods, the effect of these factors may be eliminated as a natural
consequence of insisting upon greater product and function
similarity. Depending on the facts and circumstances of the case
and in particular on the effect of the functional differences on the
cost structure and on the revenue of the potential comparables,
net profit indicators can be less sensitive than gross margins to
differences in the extent and complexity of functions and to
differences in the level of risks (assuming the contractual
allocation of risks is arm’s length). On the other hand, depending
on the facts and circumstances of the case and in particular on
the proportion of fixed and variable costs, the transactional net
margin method may be more sensitive than the cost plus or resale
price methods to differences in capacity utilisation, because
differences in the levels of absorption of indirect fixed costs (e.g.

fixed manufacturing costs or fixed distribution costs) would affect
the net profit indicator but may not affect the gross margin or
gross mark-up on costs if not reflected in price differences. See
Annex I to Chapter II “Sensitivity of gross and net profit
indicators”.
2.71 Net profit indicators may be directly affected by such forces

operating in the industry as follows: threat of new entrants,
competitive position, management efficiency and individual
strategies, threat of substitute products, varying cost structures
(as reflected, for example, in the age of plant and equipment),
differences in the cost of capital (e.g. self financing versus
borrowing), and the degree of business experience (e.g. whether
the business is in a start-up phase or is mature). Each of these
factors in turn can be influenced by numerous other elements. For
example, the level of the threat of new entrants will be determined
by such elements as product differentiation, capital requirements,
and government subsidies and regulations. Some of these
elements also may impact the application of the traditional
transaction methods.
2.72 Assume, for example, that a taxpayer sells top quality audio
players to an associated enterprise, and the only profit information
available on comparable business activities is on generic medium
quality audio player sales. Assume that the top quality audio
player market is growing in its sales, has a high entry barrier, has
a small number of competitors, and is with wide possibilities for
product differentiation. All of the differences are likely to have
material effect on the profitability of the examined activities and
compared activities, and in such a case would require adjustment.
As with other methods, the reliability of the necessary
adjustments will affect the reliability of the analysis. It should be
noted that even if two enterprises are in exactly the same
industry, the profitability may differ depending on their market
shares, competitive positions, etc.
2.73 It might be argued that the Potential inaccuracies resulting

from the above types of factors can be reflected in the size of the
arm’s length range. The use of a range may to some extent
mitigate the level of inaccuracy, but may not account for
situations where a taxpayer’s profits are increased or reduced by a
factor unique to that taxpayer. In such a case, the range may not
include points representing the profits of independent enterprises
that are affected in a similar manner by a unique factor. The use
of a range, therefore, may not always solve the difficulties
discussed above. See discussion of arm’s length ranges at
paragraphs 3.55-3.66.
2.74 The transactional net margin method may afford a practical
solution to otherwise insoluble transfer pricing problems if it is

used sensibly and with appropriate adjustments to account for
differences of the type referred to above. The transactional net
margin method should not be used unless the net profit indicators
are determined from uncontrolled transactions of the same
taxpayer in comparable circumstances or, where the comparable
uncontrolled transactions are those of an independent enterprise,
the differences between the associated enterprises and the
independent enterprises that have a material effect on the net
profit indicator being used are adequately taken into account.
Many countries are concerned that the safeguards established for
the traditional transaction methods may be overlooked in applying
the transactional net margin method. Thus where differences in
the characteristics of the enterprises being compared have a
material effect on the net profit indicators being used, it would not
be appropriate to apply the transactional net margin method
without making adjustments for such differences. The extent and
reliability of those adjustments will affect the relative reliability of
the analysis under the transactional net margin method. See
discussion of comparability adjustments at paragraphs 3.47-3.54.
2.75 Another important aspect of comparability is measurement

consistency. The net profit indicators must be measured
consistently between the associated enterprise and the
independent enterprise. In addition, there may be differences in
the treatment across enterprises of operating expenses and non-
operating expenses affecting the net profits such as depreciation
and reserves or provisions that would need to be accounted for in
order to achieve reliable comparability.”
38. Referring to the relevant portion of the OECD guidelines, Shri

Porus Kaka submitted that determining a reliable estimate of arm’s
length outcome requires flexibility and exercise of good judgment. He
contended that a reasonable, sensible and practical approach is expected
to be adopted in order to ensure that the TNMM can afford a practical
solution to otherwise insoluble transfer pricing problems. Referring to
para 2.92 of the OECD guidelines, he also contended that cost based
indicators should only be used in those cases where costs are a relevant
indicator of the value of the functions performed, assets used and risks
assumed by the tested party. In addition, the determination of what cost
should be included in the cost base should be derived from a careful
review of the facts and circumstances of the case.
39. Shri Porus Kaka also referred to Chapter III of the OECD
guidelines and submitted that para 3.2 of the said chapter, dealing with
“Performing a Comparability Analysis”, recommends that where it is
possible to determine that some uncontrolled transactions have a lesser
degree of comparability than others, they should be eliminated. He also
referred to the typical process given in para 3.4 of the guidelines that is
commonly followed when performing a comparability analysis. He also
referred to Section A-5 of OECD guidelines on “selecting and rejecting
potential comparables” and pointed out that as per para 3.56 of the
guidelines, where it is possible to determine that some uncontrolled
transactions have a lesser degree of comparability than others, they
should be eliminated. He also referred to para 3.57 of the guidelines
wherein it is stated that if the range of comparables includes a sizeable
number of observations, statistical tools that take account of central
tendency to narrow the range (e.g. the interquartile range or other
percentiles) might help to enhance the reliability of the analysis. He also
referred to para 3.59 of the OECD guidelines wherein it is suggested that
where the application of the most appropriate method produces a range
of figures, a substantial deviation among points in that range may
indicate that the data used in establishing some of the points may not be
as reliable as the data used to establish the other points in the range or
that the deviation may result from features of the comparable data that
require adjustments. It is suggested that further analysis of those points
in such cases may be necessary to evaluate their suitability for inclusion
in any arm’s length price.
40. Reference was made by Shri Porus Kaka to section A.7.3 of the
OECD guidelines dealing with “extreme results in the context of
comparability considerations” to point out that extreme results might
consist of losses or unusually high profits. It is suggested that extreme

results can affect the financial indicators that are looked at in the chosen
method and where one or more of the potential comparables have
extreme results, further examination would be needed to understand the
reasons for such extreme results. He submitted that if the relevant data
is secured, further analysis is required to find out the reliability of such
data as suggested in the OECD guidelines. He contended that this vital
aspect was not considered by the Tribunal in the case of Willis
Processing Services (I) Pvt. Ltd. (supra) and the decision was rendered
without further analysis or investigation to find out any abnormality and
to nullify the effect of such abnormality by applying suitable statistical
method. He submitted that even the comparison of functions made by
the Tribunal in para 30.10 of its order passed in the case of Wills
Processing Services (I) Pvt. Ltd. is very generic which is done without
making any further analysis of the functions performed in order to
ascertain whether it was a case of BPO service provider or KPO service
provider.
41. Advocate Shri Ajay Vora, the ld. Counsel appearing for both the
interveners M/s Omniglobe Information Technologies India Pvt. Ltd. and
M/s CRM Services India Ltd. put forth his propositions on the issues
involved in two questions raised before the Special Bench. As regards the
issue involved in Question No. 1, he referred to section 92-C (1) of the Act
which provides for computation of income arising from the international
transaction having regard to the arm’s length price. He submitted that
the ALP of an international transaction is required to be determined by
applying one of the methods provided in section 92-C (3) of the Act, being
the most appropriate method and such method must take into
consideration certain aspects which are critical. He contended that this
position is further amplified in Rule 10-B of the Income Tax Rules, 1962
which envisages adjustment on account of functional and other

differences. He contended that adopting of any method ultimately
envisages comparison of apple with apple and Rule 10B(2)(a) provides
that specific characteristic of services rendered by the two entities should
be compared in order to treat the same as comparables for the purpose
of transfer pricing analysis. He relied on the decision of Hon’ble Supreme
Court in the case of DIT (International Taxation) vs. Morgan Stanley and
Co. Inc. [2007] 292 ITR 416 wherein the Hon’ble Apex Court emphasized
the significance of functions performed and risks assumed by the
enterprise in undertaking the transfer pricing analysis. He contended
that comparability should be based on the conclusion drawn from the
functional analysis of the enterprise and it should be a backdrop of
benchmarking and determining the arm’s length price. He argued that
the parameters for taking an un-controlled transaction as comparable to
international transaction are provided in Rule 10-B(2) and as held by the
Bangalore Special Bench of ITAT in the case of Aztec Software and
Technology Services Ltd. vs. ACIT 107 ITD 141 (Bang.)[SB], this criteria
should form a basis for judging the comparability, whatever be the
methodology chosen for the purpose of determination of ALP. He also
relied on the decision of Delhi Bench of ITAT in the case of Mentor
Graphics (Noida) Pvt. Ltd. Vs. DCIT, 18 SOT 76 (Delhi) wherein it was
held that the first step in the determination of ALP is to analyse the
specific characteristics of the controlled transaction so as to make
meaningful comparison with the comparables possible.
42. Shri Ajay Vora contended that there are basic and fundamental
differences in the characteristics of BPO as compared to KPO. In support
of this contention, he relied on the report prepared by the National Skill
Development Corporation (NSDC) on Human Resource and Skill
Requirements in the IT and ITES Industry Sector (2022) placed at page 7
to 45 of his paper book and took us through the relevant portion thereof.
He invited our attention to page 12 of the said report to point out that
the expression “ITES” and “BPO” are used interchangeably. He invited
our attention to page 19 of the report wherein it is stated that customer
interaction and finance and accounting services form a significant
portion of BPO services. He contended that the BPO thus is involved in
rendering mainly voice and data processing services which are in the
nature of low end services. He contended that the KPO services on the
other hand, as stated in the report, move beyond simple voice and data
services and include data analytics, content management, research and
information services, animation, biotech and pharmaceutical research,
medical and health services. He submitted that the KPO services also
include legal services, engineering services and financial and marketing
research services. He contended that all these services included in KPO
segment are high-end services for which skill set required is entirely
different from BPO as stated on page 32 of the report and further
explained on page 34 to 38 of the report pointing out skill requirement
and skill gap in KPO. He contended that no domain knowledge is
required to render BPO services whereas it is very much required to
render KPO services. He submitted that the BPO sector as stated on
page 27 of the report contributes large volume while the KPO sector is a
“value play”.
43. Shri Ajay Vora referred to an article “KPO- An emerging

opportunity for the Chartered Accountants” published in July, 2006
issue of Journal “The Chartered Accountants” wherein after explaining
the concept of KPO, the difference between KPO and BPO is pointed out
by the author as under:-
“2. Difference between KPO & BPO
1. Process: It’ is s not a simple case of the ‘K’ replacing the ‘B’.
KPO involves high-end processes like valuation and, investment,
research, patent filing, legal and insurance claims processing,
amongst others.
2. Focus: Unlike conventional BPO where the focus is on

process expertise, in KPO, the focus is on knowledge expertise.
3. Specialisation: The difference lies in domain specialization. BPO

employees do not generally require specialized knowledge.
Customer care executives at a BPO require good knowledge of the
English language, the ability to be articulate and possess basic
computer kills. On the other hand, a KPO organisation
specializing in equity or financial analysis for example, can employ
highly qualified professionals who possess high-end knowledge of
accounts and finance. S/he should hold MBA or a CA
qualification.
4. Driving Force: While KPO organizations are knowledge-driven,

BPOs are process-driven.
5. Activities: KPO involves off shoring of knowledge intensive

business processes that demand specialised expertise. This
delivers high value to organisations by providing much required
business expertise. A few examples of KPO businesses are online’
teaching, patent filing, legal and insurance claims processing,
valuation research, investment research and media content
supply. BPO on the other hand, involves a predefined way of
handling a business process, which is taught to agents or
employees. BPO services normally include transaction processing,
setting up a bank account, selling of insurance policies, technical
support and voice and email-based support.
6. Contact with clients: Unlike BPOs, KPO employees tend to have

greater direct contact both with international clients and with
their teams overseas, once again underscoring the need for
specialised skills. This could mean establishing direct channels of
communication with a team member overseas to seek
clarifications in the midst of completing work. If the work involved
is complicated, direct communication with the client may also be
needed, as seen in several cases of filing tax returns.”
44. Shri Ajay Vora contended that even the CBDT now has recognized
the difference between KPO and BPO while framing the safe harbour
rules. He contended that the FAR analysis will be different in case of BPO
as compared to KPO and pointed out that in the case of CRM Services (I)
Pvt. Ltd. (ITA 4068/Del/2009 and ITA No. 4796/Del/2010 dtd. 30th
June, 2011), Delhi Bench of ITAT in para No. 9.3 of its order has made a
distinction between voice based and non-voice based BPO services while
applying the functional test in comparability analysis.
45. Shri Ajay Vora submitted that Rule 10-B(2)(a) provides that the
comparability of an international transaction with uncontrolled
transaction is to be judged with reference to the specific characteristics
of the property transferred or services provided in either transaction and
this India specific Rule is not there in the OECD guidelines. He
contended that the TP regulations stipulated in the relevant Rules have a
force of law and as held by the Delhi Bench of ITAT in the case of Mentor
Graphics (Noida) Pvt. Ltd., (supra) the TPO cannot refuse to consider the
specific characteristics of the transactions, notwithstanding the OECD
guidelines.
46. As regards the notification No. FO 890(E) dtd. 26-9-2000 issued by

the CBDT specifying the various back office support services as ITES,
Shri Ajay Vora submitted that the said notification is issued in the
context of section 10A, 10B and 80 HHE of the Act to explain and define
the term “computer software” for the purpose of Explanation 2(1)(b) of
section 10A, Explanation 2(1)(b) of section 10-B and Explanation (b) of
section 80HHE of the Act and the same cannot be extended or applied to
treat the BPO as KPO. He contended that the said notification is to be
read in the context in which it is issued and the same, issued on 26-9-
2000 by the CBDT, cannot be applied to decide the issue relating to
transfer pricing as the provisions relating to transfer pricing were not
even in the statute when the said notification was issued by the CBDT.
47. The ld. CIT (DR) Shri Ajeet Kumar Jain submitted in his reply that
the characterisation of the services rendered by the assessee company is
required to be done in order to ascertain whether it is a BPO or KPO or
something in between. In this regard, he invited our attention to the
executive summary given in the TP study report submitted by the
assessee at page 62 of the paper book and pointed out that the services
provided by the assessee were broadly categorized therein as Information
Technology Enabled Services (ITES) and Information Technology Services
(ITS). He submitted that the ITES services provided by the assessee were
stated to be that of transaction processing, data entries, reconciliation of
statements, audit of shipping documents and other similar support
services. He submitted that this nature of services rendered by the
assessee again was repeated in the relevant portion of the TP study
report appearing on page 65 of the paper book. He also invited our
attention to the information relating to the functions performed by the
assessee in connection with provision of I.T. enabled services to its AE as
given in the relevant portion of the TP study report appearing at page 76
and 78 of the paper book and pointed out that the services performed by
the assessee included, inter alia, to reconcile the differences between
Equipment Management System and the Transport Plan in Global
Customers Service Systems, tender handling, contract drafting and data
quality. He contended that all these services rendered by the assessee
are clearly in the nature of KPO services and not routine BPO functions
as it is not possible to render these services without a specialized
knowledge. He contended that the assessee thus cannot be considered
either as BPO or KPO but it lies somewhere in between as the services
rendered by it are in the nature of BPO as well as KPO. He contended
that keeping in view these characteristics of the services rendered by the
assessee company, both BPO and KPO can broadly be taken as
comparables as held by the DRP.
48. Shri Ajeet Kumar Jain, the ld. CIT(DR) invited our attention to the
relevant portion of the TPO’s order wherein the comparables selected by
the assessee and those finally selected by the TPO were discussed. He
filed a compilation of relevant portion of the annual reports of some of
such comparables and pointed out that M/s ICRA Online Ltd. selected by
the assessee company itself as comparable was into KPO services.
Similarly, he pointed out from the relevant portion of the annual reports
of the other companies that M/s ICRA Techno Analytics Ltd. and KPIT
Cummins Global Business Solutions Ltd., selected by the assessee itself
as comparables, were into KPO services. He also pointed out that M/s
Cosmic Global Ltd., M/s Maple E-Solutions Ltd. and M/s Spanco
Telesystems and Solution Ltd. (segmental) selected by the assessee
company as comparables, on the other hand, were providing low end
BPO services such as call centers. He contended that the assessee
company had rightly selected BPO as well as KPO as comparables in its
own TP study since the distinction between BPO and KPO would not
have much impact for comparability where TNMM is followed particularly
when the services rendered by the assessee have attributes of KPO also.
49. Reference was made by Shri Ajeet Kumar Jain, ld. CIT (DR) to the
order of the Tribunal passed in assessee’s own case for A.Y. 2007-08
placed at page 28 to 40 of his paper book (ITA No. 8558/Mum/2011 dtd.
29-2-2012). It was pointed out from the relevant portion of the said order
of the Tribunal at page 33 of the paper book that eClerx Services Pvt. Ltd.
having 90.43% OP/TC was taken by the TPO as comparable and the
same was not disputed by the assessee. He pointed out that one of the
thirty comparables taken by the TPO was M/s Mod-Tek Technogies Ltd.
and although the said entity having 113.49% OP/TC was disputed by the
assessee, inter alia, on the ground of abnormal profits, the Tribunal
finally restored the matter to the file of the A.O. with a direction to
recompute the ALP margin on the basis of profit margin of all the thirty
comparables. He contended that both the entities having higher profit
margin thus were finally included and taken as comparables for transfer
pricing analysis in assessee’s own case for A.Y. 2007-08.
50. As regards the dispute raised by the assessee in respect of filters

applied by the TPO for the selection of comparables, Shri Ajeet Kumar
Jain contended that different filters are required to be applied in order to
find a suitable comparable transaction. He submitted that the objective
of such search for comparable companies, as stated in the TP study
report submitted by the assessee (relevant portion of the paper book page
88), is to identify a group of independent companies with publicly
available data that perform broadly similar functions, operate in broadly
similar market and bear broadly similar risk to that of tested party. He
invited our attention to the reasons given by the TPO on page 3 & 4 of his
order for rejecting the filters applied by the assessee and contended that
the same are sufficient to show that the filters applied by the assessee
were not appropriate. He pointed out that the filters applied by the TPO,
on the other hand, were fully justified in the facts of the case as the same
were fair and logical as explained by the TPO giving cogent and
convincing reasons. He submitted that the assessee, in any case, has
finally disputed only two comparables and contended that even though
both these entities are KPO service providers, it is to be noted that the
assessee company itself has taken some other KPO service providers as
comparables and that atleast some of the functions/services rendered by
it are in the nature of KPO services.
51. As regards the reliance placed by the ld. Counsel for the assessee
Shri Porus Kaka and the ld. Counsel for the intervener Shri Ajay Vora on
the safe harbour rules framed by the CBDT, Shri Ajeet Kumar Jain
submitted that these rules are framed by the CBDT as per section 92-CB
of the Act whereas the determination of ALP is governed by section 92-C
read with Rule 10B of the Income Tax Rules, 1962. He pointed out that
the definition given in Rule 10-TA are for the purposes of Rule 10TA to
Rule 10TC and not for the purpose of Rule 10B. He submitted that as per
Rule 10-TD, safe harbour rules are applicable to the assessee who
exercises a valid option for application of safe harbour rules. He
contended that the assessee in the present case has not exercised this
option and therefore it cannot take a shelter under safe harbour rules by
relying on the definition given therein in support of its case that the BPO
and KPO services are different and there is no similarity between them.
He also contended that the safe harbour rules are framed by the CBDT
vide circular dtd. 18-9-2013 and they cannot be applied in the present
case involving A.Y. 2008-09. A reference was made by him to the Circular
dtd. 20-12-2013 issued by the CBDT wherein it is clarified that if the
safe harbour rules are not opted by the assessee, they cannot be relied
upon and referred to by him. Relying on the decision of Hon’ble Supreme
Court in the case of ITO vs. M.C. Ponnoose and Others - ITO vs. Excel
Productions and Others [1970] 75 ITR 174 and in the case of Govinddas
and Others vs. ITO [1976] 103 ITR 123, he contended that the safe
harbour rules cannot be applied retrospectively to support the case of the
assessee that there is a difference between BPO and KPO.
52. Shri Ajeet Kumar Jain invited our attention to para 1.38 of the
OECD Transfer Pricing Guidelines issued in July, 2010 wherein it is
stated that the information on product characteristics might be more
important if the method applied is a comparable uncontrolled price
method than if it is TNMM. He also relied on para 1.40 of the said
guidelines wherein it is stated that the factor of characteristic of property
or services must be given more or less weight depending on the transfer
pricing method. It is explained that under CUP method, any material

difference in the characteristics of property or services can have an effect
on the price whereas such difference in the characteristics of
property/services is less sensitive in the case of TNMM. It is suggested in
para 1.41 that in comparability analysis for method based on gross or
net profit indicators, it may be acceptable depending on the facts and
circumstances of the case to broaden the scope of comparability analysis
to include uncontrolled transactions involving products that are different
but where similar functions are undertaken. He submitted that the
assessee himself took call centers as well as KPO as comparables and the
same approach being adopted by the TPO, no fault can be found going by
the OECD guidelines suggesting broad functional similarities where
TNMM is followed.
53. As regards the reliance placed by Shri Porus Kaka on para 2.64
and 2.65 of the OECD guidelines, Shri Ajeet Kumar Jain submitted that
the weaknesses of the TNMM are listed in these paragraphs. He
submitted that the strengths of TNMM are discussed in para 2.62 and
2.63 of the OECD guidelines and as suggested in para 2.62, one of the
strengths of TNMM is that the net profit indicators are less affected by
transactional differences than is the case with price as used in the CUP
method. It is also stated that the net profit indicator may be more
tolerant to some functional differences between the controlled and
uncontrolled transactions than gross profit margins. It is suggested that
the differences in the functions performed between enterprises are often
reflected in variations in operating expenses which may lead toa wide
range of gross profit margins but still broadly similar levels of net
operating profit indicators. He also relied on para 3.7 of the OECD
guidelines wherein it is suggested that the broad based analysis is an
essential part in the comparability analysis.
54. Shri Ajeet Kumar Jain submitted that there are five methods
prescribed to determine the ALP in relation to the international
transaction and the requirement for comparability analysis are method
specific as given in sub rule (1) of Rule 10-B. He referred to the said Rule
and submitted that price charged or paid for the property transferred or
service rendered in the comparable transaction is relevant in case of CUP
and re-sale price method while the cost of production incurred in respect
of property transferred or services provided is relevant for cost plus
method. He submitted that there is, however, no mention or reference to
any property transferred or services provided in case of TNMM which is
specifically there in case of other method. He contended that the relevant
Rule thus makes it clear that specific characterization of the property
transferred or services is not relevant for TNMM and this position is in
conformity with the relevant OECD guidelines which suggest that broad
comparability of functions to be done for TNMM. He contended that there
is thus no need to make any distinction between BPO and KPO for
TNMM and the broad category of ITES can be taken for the purpose of
comparability analysis. In support of this contention, he relied on the
decision of Delhi Bench of ITAT in the case of ACTIS Advisors Pvt. Ltd.
(supra) wherein neither the assessee nor the TPO had gone into
functional line horizontal test within ITES inasmuch as the comparables
were selected from ITES without applying specifically any qualitative
filter and the contention of the assessee seeking further dissection of
these comparables was not accepted by the Tribunal observing that there
will not be any end in that way and it is a very subjective exercise. Shri
Ajeet Kumar Jain contended that the assessee in the present case has
also not done any horizontal classification since it has taken call centers
and KPO as comparables and since the broad comparability at ITES level
is quite fair and proper in the facts and circumstances of the case, the
claim of the assessee for further dissection in the form of BPO and KPO
should not be accepted.
55. In the rejoinder, Shri Porus Kaka submitted that Rule 10B(2) of the
Income Tax Rules, 1962 is applicable in case of all the methods applied
for determining the ALP of an international transaction and there is no
merit in the contention raised by Shri Ajeet Kumar Jain, the ld. CIT (DR)
that the applicability of the said Rule depends on the method followed.
Relying on Section B.3.1 of the OECD guidelines and the decision of
Hon’ble Delhi High Court in the case of Li and Fung India Pvt. Ltd.
(supra), he contended that the standard of comparability is the same to
TNMM.
56. We have carefully considered the rival submissions and also

perused the relevant material on record to which our attention was
drawn during the course of hearing. We have also deliberated upon
various aspects of the issues specifically referred to this Special Bench
for consideration and decision. Question No. 1 referred to this Special
Bench involves the issue relating to selection of comparables in the
process of transfer pricing analysis for the purpose of determining the
arm’s length price in relation to the international transactions of the
assessee with its AEs. Before we refer to the provision of section 92-C
and Rule 10-B, which are relevant in this context, it would be relevant to
trace, in brief, the genesis of T.P. regulations in India. The increasing
participation of multinational groups in economic activities in the
country gave rise to new and complex issues emerging from transactions
entered into between two, or more enterprises belonging to the same
multinational group. The profits derived by such enterprises carrying on
business in India could be controlled by the multinational group, by
manipulating the prices charged and paid in such intra-group
transactions, thereby, leading to erosion of tax revenues. With a view to

provide a statutory framework which could lead to computation of
reasonable, fair and equitable profits and tax in India, in the case of such
multinational enterprises, the Finance Act, 2001 substituted the then
existing section 92 of the Income-tax Act by new sections 92 and 92A to
92F. As provided therein, income arising from an international
transaction between associated enterprises shall be computed having
regard to the arm’s length price. The term ‘associated enterprise’ has
been defined in section 92A. Section 92B defines an ‘international
transaction’ between two or more associated enterprises. The provisions
contained in section 92C provide for methods to determine the arm’s
length price in relation to an international transaction, and the most
appropriate method to be followed out of the specified methods. While
the primary responsibility of determining and applying an arm’s length
price is on the assessee, sub-section (3) of section 92C empowers the
Assessing Officer to determine the arm’s length price and compute the
total income of the assessee accordingly, subject to the conditions
provided therein. The Board has prescribed rules lOA to 1OE in the
Income-tax Rules, 1962, giving the manner and the circumstances in
which different methods would be applied in determining arm’s length
price and the factors governing the selection of the most appropriate
method. These provisions have been enacted with a view to provide a
statutory framework which can lead to computation of reasonable, fair
and equitable profit and tax in India so that the profits chargeable to tax
in India do not get diverted elsewhere by altering the prices charged and
paid in intra-group transactions leading to erosion of tax revenues.
57. During the course of hearing before us, the ld. Representatives of
both the sides have referred to and relied on the OECD Transfer Pricing
Guidelines for multinational enterprises and Tax Administrations issued
in July, 2010 in support of their respective arguments. These guidelines
focus on the main issues of principle that arise in the transfer pricing
area and are intended to address transfer pricing and other related tax
issues with respect to multinational enterprises. They provide practical
guidance on the application of arm’s length principle to evaluate the
transfer pricing of Associated Enterprises and analyse the method for
evaluating whether the conditions of commercial and financial relations
within an multinational enterprises satisfy the arm’s length principle.
58. In so far as the relevant T.P. Regulations in India are concurred, it

is observed that sub-section (1) of section 92-C of the Act provides that
the arm’s length price in relation to an international transaction shall be
determined by any of the methods specified therein, being most
appropriate method, having regard to the nature of transaction or class
of transactions or class of associated persons or functions performed by
such persons or such relevant factors as the Board may prescribe. Sub-
section (2) of section 92-C provides that the most appropriate method
referred to in sub section (1) shall be applied for determination of ALP in
the manner as may be prescribed. The manner in which the ALP in
relation to an international transaction is to be determined by any of the
methods, being the most appropriate method, for the purposes of sub
section (2) of the section 92-C of the Act has since been prescribed in
Rule 10-B of the Income Tax Rules, 1962 which reads as under:-
“Determination of arm's length price under section 92C .

10B . (1) For the purposes of sub-section (2) of section 92C, the arm's
length price in relation to an international transaction 55a[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;
(ii) such price is adjusted to account for differences, if any, between the
international transaction 55a[or the specified domestic transaction] and

the comparable uncontrolled transactions or between the enterprises
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 transaction55a[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;
(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;
(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;
(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 55a[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;
(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;
(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;
(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;
(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 transaction55b[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);
(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;
(d) profit split method, which may be applicable mainly in international
transactions 55b[or specified domestic transactions] involving transfer of unique
intangibles or in multiple international transactions 55b[or specified domestic
transactions] which 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 55b[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 55b[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 55b[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 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 55c[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 55c[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 realized 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;
(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 55c[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 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 55c[or the specified domestic transaction];
56
[ (f) any other method as provided in rule 10AB. ]
(2) For the purposes of sub-rule (1), the comparability of an international
transaction 55c[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;
(b) the functions performed, taking into account assets 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;
(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.
(3) An uncontrolled transaction shall be comparable to an international transaction 56a[or
a specified domestic transaction] if—
(i) none of the differences, if any, between the transactions being compared, or
between the enterprises entering into such transactions are likely to materially
affect the price or cost charged or paid in, or the profit arising from, such
transactions in the open market; or

(ii) reasonably accurate adjustments can be made to eliminate the material effects of
such differences.
(4) The data to be used in analysing the comparability of an uncontrolled
transaction with an international transaction 56a[or a specified domestic
transaction] shall be the data relating to the financial year in which the international
transaction 56a[or the specified domestic transaction] has been entered into :
Provided that data relating to a period not being more than two years prior to such
financial year may also be considered if such data reveals facts which could have an
influence on the determination of transfer prices in relation to the transactions being
compared.”
59. The manner in which the ALP in relation to an international

transaction is to be determined is prescribed in Rule 10B and it is
relevant in this context to take into account the specific method followed
for determining the ALP in relation to an international transaction. In the
present case, the method followed for determining the ALP of an
international transaction by the assessee as well as by the A.O./TPO is
Transactional Net Margin Method (TNMM) and the comparability of an
international transaction with an uncontrolled transaction has to be
judged with reference to the functions performed, taking into account the
assets employed or to be employed and the risks assumed by the
respective parties to the transaction as per Rule 10B(2)(b). The specific
characteristics of the property transferred or services provided as
envisaged in Rule 10-B(2)(a) in either transactions may not be that
relevant to judge the comparability of an international transaction in
TNMM as the price charged or paid for property transferred or services
provided and the direct and indirect cost of production incurred by the
enterprise in respect of property transferred or services provided are
taken into account for comparability analysis in the transaction methods
such as CUP, resale price and cost-plus whereas the profit based method
such as TNMM takes into account, the net margin realized. In TNMM, the
comparability of an international transaction with an uncontrolled
transaction is required to be judged with reference to functions
performed as provided in sub Rule (2)(b) of Rule 10-B read with sub Rule
(1)(e) of that Rule after taking into account assets employed or to be
employed and the risks assumed by the respective parties to the
transaction.
60. The OECD transfer pricing guidelines, issued in July, 2010, also
express a similar view when it states in para 1.38 that information on
product characteristics might be more important if the method applied is
CUP than if it is TNMM. It further explains in para 1.40 that the
requirement for comparability of property or services is the strictest for
the CUP method whereas differences in characteristics of property or
services are less sensitive in case of transactional profit methods than in
case of traditional transaction methods. It further clarifies, in para 1.41,
that the comparability analysis for method based on gross or net profit
indicator often puts more emphasis on functional similarity than on
product similarity and, depending on the facts and circumstances of the
case, it may be acceptable to broaden the scope of comparability analysis
to include un-controlled transactions involving products that are
different, but where similar functions are undertaken.
61. Chapter II of the OECD transfer pricing guidelines (July, 2010)

deals with selection of the transfer pricing method and Part III thereof
deals with transactional profit methods. Section B-2 of this part
discusses about strengths and weaknesses of Transactional Net Margin
Method (TNMM) and one of the strengths of TNMM, as explained therein,
is that the net profit indicators (e.g. operating income) are less affected
by transactional differences than is the case with price as used in the
CUP method. It is further explained that the net profit indicators may
also be more tolerant to some functional differences between the
controlled and uncontrolled transactions than gross profit margins as
the differences in functions performed between enterprises are often
reflected in variations in operating expenses leading to wide range of

gross profit margin but broadly similar levels of net operating profit
indicators.
62. At the time of hearing before us, Shri Porus Kaka has relied on the
guidelines given by the OECD in section B-3.1 (para 2.68 to 2.75) in
respect of the comparability standard to be applied to the Transactional
Net Margin Method. However, as rightly pointed out by the ld. D.R., these
guidelines are issued by the OECD as a caution to overcome the number
of weaknesses of the TNMM, as clearly mentioned in para 2.64. In any
case, we will deal with these guidelines, given by the OECD,
subsequently at an appropriate stage. Suffice it to say at this stage that
the net profit indicators such as operating profit to operating cost or total
cost or total sales are less affected by transactional differences and the
same being more tolerant to some functional differences between
controlled and uncontrolled transactions, broad functionality can be
taken into consideration for selecting the potential comparables in case
of TNMM. If such broad functionality is taken into consideration in the
present context, we are of the view that the potential comparables at
ITES sector level can be selected at first stage in the comparability
analysis as the functions performed by IT enabled service providers are
broadly similar and there is a common thread running through them as
rendering of these services involve extensive use of information
technology.
63. At this stage, it may be relevant to deal with the contention raised
by Shri Porus kaka that the standard of comparability is the same even
to TNMM. We may clarify here that it is not at all our intention to dilute
the standard of comparability just because the method followed is
TNMM. We are fully aware of the decision of the Hon’ble Delhi High Court
in the case of Li and Fung India Pvt. Ltd. (supra) wherein it was observed
in para 34 that the standard of comparability for application of TNMM is

no less than that for the application of any other transfer pricing method.
We are also aware of the guidance provided in OECD Transfer Pricing
Guidelines in section B.3.1. of Chapter II wherein it is stated that a
comparability analysis performed for selecting and applying a
transactional net margin method should not be less reliable than for
other methods. At the same time, we have to take note of the fact that
the relevant financial data is not available in the public domain in
respect of many ITES service providers as they are private limited
companies. Moreover, many of the ITES providers, which are listed
public limited companies and whose financial data is available in public
domain, are captive service providers and they, therefore, cannot be
considered as comparables having substantial related party transaction.
Keeping in view these problems as well as other problems discussed in
the remaining portion of this order, which are peculiar to the ITES
industry, our endeavor is to find out a practical solution which can help
to perform a comparability analysis in the cases belonging to ITES sector.
In our opinion, this problem can be solved by splitting the exercise of
comparability analysis in two steps in order to attain relatively equal
degree of comparability, the first being to select the potential
comparables at ITES sector level by applying the broad functionality test.
64. Having held that all the entities providing IT enabled services can
be taken as potential comparables by applying a broad functionality test,
the next issue that arises is whether further dissection or bifurcation of
ITES is possible for rejecting or selecting the potential comparables.
65. A useful reference in this regard can be made to the OECD transfer
pricing guidelines. Section A-1 of Chapter III of these guidelines narrates
the typical process that is considered as an accepted good practice which
can be followed while performing the comparability analysis. One of the

steps involved in this process stated as step 2 is “broad-based analysis of
the tax payer’s circumstances”. It is explained in section A-2 (para 3.7)
that the “broad-based analysis” is an essential step in the comparability
analysis which can be defined as an analysis of the industry,
competition, economic and regulatory facts and other elements that
affect the tax payer and its environment, but not yet within the context of
looking at the specific transactions in question. Section A-5 of Chapter III
of the OECD guidelines deals with “selecting or rejecting potential
comparables” and suggests that there are basically two ways in which
the identification of potentially comparable third party transactions can
be conducted. As stated in para 3.41, the first one, which can be
qualified as the “additive” approach consists of the person making the
search drawing up a list of third parties that are believed to carry out
potentially comparable transactions. It is stated that this approach gives
a wide set of companies that operate in the same sector of activity,
perform similar broad functions and do not present economic
characteristics that are obviously different.
66. Section A.7 of Chapter III of the OECD guidelines deals with “arm’s
length range” and states that as the transfer pricing is not an exact
science, there will also be many occasions when the application of the
most appropriate method or methods produces a range of figures all of
which are relatively equally reliable. It is stated in para 3.56 that in some
cases, all comparable transactions examined will not have a relatively
equal degree of comparability. It is suggested that where it is possible to
determine that some uncontrolled transactions have a lesser degree of
comparability than others, they should be eliminated.
67. As already observed, the comparability of an international

transaction with uncontrolled transaction for the purpose of determining
the ALP of an international transaction by following TNMM is required to
be judged with reference to the functions performed as per sub Rule
(2)(b) of Rule 10B read with Rule (1)(e) thereof and there is no bar in the
TP regulations in India to exclude certain entities selected as potential
comparables on broad functionality test by applying the functional test
at narrow or micro level to attain the relatively equal degree of
comparability. On the other hand, Rule 10-B(3) provides that the
uncontrolled transaction selected/judged as per Rule 10-B(2) shall be
comparable to an international transaction only if none of the
differences, if any, between the transactions being compared, or between
enterprises entering into such transactions are likely to materially affect
the price or cost charged or paid or the profit arising from such
transaction in the open market or reasonably accurate adjustment can
be made to eliminate the effects of such difference. In our opinion, sub
Rule (3) of Rule 10B thus clearly provides for further exclusion of the
comparables selected by applying the test/criteria given in sub Rule (2)
of Rule 10-B if there is any difference found between the enterprises
entering into the transactions which materially affects the cost charged
or the profit arising from such transaction in the open market.
68. Keeping in view the relevant portion of the OECD T.P. Guidelines
discussed above and having regard to the relevant TP regulations as
contained in Rule 10-B(3) of Income Tax Rules, 1962, we are of the view
that further dissection or classification of ITES services can be done
depending on the facts and circumstances of each case so as to select
the entities having a relatively equal degree of comparability.
69. Having held that further dissection, bifurcation or classification of

IT enabled services may be required to be done to bring into relatively
equal degree of comparability, the next question that arises is whether
such classification can be done into BPO & KPO services so as to say
that the BPO & KPO services have a lesser degree of comparability and
cannot be compared with each other. During the course of hearing
before us, Shri Ajay Vora has filed a copy of report prepared by National
Skill Development Corporation (NSDC) on Human Resource and Skill
Requirements in the IT and ITES Sector (2022). This report is mainly
focused on mapping of human resource skill in India till 2022 especially
with reference to the requirements of IT and ITES sector. As per this
study report, even within the ITES industry, the skill sets required for
BPO services are very different from KPO services and this aspect has
been examined by NSDC in great detail in its report. It is mentioned in
para 1.4.2. of the report that the growing area in this segment is what is
called as Knowledge Process Outsourcing (KPO) which is moving beyond
simple voice and data services and includes data analytics, content
management, research and information services, animation, biotech and
pharmaceutical research, medical and health services. It is also stated
that the growth in this segment is expected to be in the areas of legal
process outsourcing, engineering services outsourcing and financial and
market research. In para 1.4.3 of the report, one of the key success
factors for Indian BPO industry is stated to be its ability to move up the
value chain through KPO service offerings. In para 4.3 of the report, it is
stated that the ITES industry is likely to see an increasing share of
penetration from KPOs. It is also stated that while the BPO sector would
contribute large volumes, the KPO sector would be a “value play”. It is
further stated that a lot more areas are likely to witness KPO activity
spanning patent advisory, high end research and analytics, online
market research and legal advisory.
70. Shri Ajay Vora has also placed on record a copy of Article “KPO –
An Emerging Opportunity for Chartered Accountants” published in 2006
in the Journal “The Chartered Accountants” to highlight the distinction
between BPOs and KPOs. As stated in the said Article, KPO, simply put,
is the upward shift of the BPO industry in the value chain. It is explained
that the KPO is a new industry with high growth rate in India and older
BPO companies that provided basic back-end or customer care support
service are moving up this value chain. It is stated that unlike
conventional BPO, where the focus is on process expertise, the focus in
KPO is on knowledge expertise. It is explained that KPO involves
business process requiring domain expertise and high end qualifications
such as MBA, engineering, medical, law, accountant degree or other
highly skilled professional qualifications. It is further explained that KPO
requires moving away from the simple execution of standardized
processes to the implementation of processes that demand advanced
analytical and technical skills together with some decision making. The
difference between KPO and BPO is also highlighted with particular
reference to process, focus, specialization, driving force, activities etc.
71. Shri Porus Kaka and Shri Ajay Vora have relied on the Notification
No. SO 2810(E) issued by the CBDT on 18th September, 2013 making
Rules 10-TA to Rule 10-TG as Safe Harbour Rules. In clause (e) of Rule
10TA, the term “information technology enabled services” is defined as
under:-
“’(e) “information technology enabled services” means the

following business process outsourcing services provided
mainly with the assistance or use of information technology,
namely:-
(i) back office operations;
(ii) call centres or contact centre services;
(iii) data processing and data mining;
(iv) Insurance claim processing
(iv) legal databases; -
(v) creation and maintenance of medical transcription

excluding medical advice;
(vi) translation services;
(vii) payroll;
(ix) remote maintenance;
(x) revenue accounting;
(xi) support centres; -
(xii) website services;
(xiii) data search integration and analysis;
(xiv) remote education excluding education content

development; or
(xv) clinical database management services excluding clinical

trials,
But does not include any research and development services

whether or not in the nature of contract research and development
services;”
72. The term “knowledge process outsourcing services” is defined in

clause (g) of 10-TA as under:-
“(9) 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;
(iii) engineering and design services;
(iv) animation or content development and management;
(iv) business analytics;
(v) financial analytics; or
(vi) market research,

but does not include any research and development services
whether or not in the nature of contract research and development
services;”
73. On a careful study of the material placed before us to highlight the

distinction between BPO services and KPO services, we are of the view
that even though there appears to be a difference between the BPO and
KPO services, the line of difference is very thin. Although the BPO
services are generally referred to as the low end services while KPO
services are referred to as high end services, the range of services
rendered by the ITES sector is so wide that a classification of all these
services either as low end or high end is always not possible. On the one
hand, KPO segment is referred to as a growing area moving beyond
simple voice services suggesting thereby that only the simple voice and
data services are the low end services of BPO sector while anything
beyond that are KPO services. The definition of ITES given in the safe
harbour rules, on the other hand, includes inter alia data search
integration and analysis services and clinical data-base management
services excluding clinical trials. These services which are beyond the
simple voice and data services are not included in the definition of KPO
services given separately in the safe harbour rules. Even within KPO
segment, the level of expertise and special knowledge required to
undertake different services may be different.
74. One of the key success factors of the BPO industry is stated to be
its ability to move up the value chain through KPO service offering. While
KPO is termed as an upward shift of the BPO industry in the value chain,
it is also stated that the evolution of majority of Indian BPO sector has
given rise to KPO. The KPO thus is an evolution of BPO and upward shift
in the value chain. BPO trying to upgrade it as KPO is likely to render

both BPO as well as KPO services in the process of evolution and such
entity therefore cannot be considered strictly either as a BPO or KPO.
Going by the nature of mixed services rendered by it, it may be difficult
to classify it either as BPO or KPO and going by its functional profile, it
may fall somewhere in between. Again, the determination of exact
portion of BPO and KPO services may also not be possible in the absence
of relevant data maintained by the entity and in these circumstances, it
may not be possible even to create a third category which is somewhere
in between BPO and KPO.
75. Keeping in view the large number of services falling under ITES,
the difficulty in classifying these services either as low end BPO services
or high end KPO services, the difficulty in creating a third category of
entities falling in between BPO and KPO and lesser degree of
comparability even within BPO and KPO sector, we are of the view that
the ITES services cannot be further bifurcated or classified as BPO and
KPO services for the purpose of comparability analysis. In our opinion,
there could exist significant overlap between the ITES activities or
functions with some activities/functions being very fact-sensitive and
introducing an artificial segregation within ITES may lead to creation of
more problems in the comparability analysis than solving the same.
76. Having held that ITES services cannot be further bifurcated as

BPO and KPO services for the purpose of comparability analysis, the next
question that arises is what could be the basis of such dissection,
bifurcation or classification of ITES services to facilitate relatively equal
degree of comparability when the broad functional analysis based on
ITES sector is taken into account by applying TNMM. In our opinion, this
purpose of attaining a relatively equal degree of comparability can be
achieved by taking into consideration the functional profile of the tested

party and comparing the same with the entities selected as potential
comparables on broad functional analysis taken at ITES level. The
principal functions performed by the tested party should be identified
and the same can be compared with the principal functions performed by
the entities already selected to find out the relatively equal degree of
comparability. If it is possible by this exercise to determine that some
uncontrolled transactions have a lesser degree of comparability than
others, they should be eliminated. The examination of controlled
transactions ordinarily should be based on the transaction actually
undertaken by the AE and the actual transaction should not be
disregarded or substituted by other transaction.
77. A useful reference in this regard can be made to the OECD

guidelines on Transfer Pricing (including paragraph No. 2.68 to 2.75
thereof relied upon by Shri Porus Kaka) to establish the comparability.
As suggested therein, determining a reliable estimate of arm’s length
outcome requires flexibility and the exercise of good judgment. It is to be
kept in mind that the TNMM may afford a practical solution to otherwise
insoluble transfer pricing problems if it is used sensibly and with
appropriate adjustments to account for differences. When the
comparable uncontrolled transactions being used are those of an
independent enterprise, a high degree of similarity is required in a
number of aspects of the AE and the independent enterprise involved in
the transactions in order for the controlled transactions to be
comparable. Given that often the only data available for the third parties
are company-wide data, the functions performed by the third party in its
total operations must be closely aligned to those functions performed by
the tested party with respect to its controlled transactions in order to
allow the former to be used to determine an arm’s length outcome for the
latter. The overall objective should be to determine a level of

segmentation that provides reliable comparables for the controlled
transaction, based on the facts and circumstances of the particular case.
The process followed to identify potential comparables is one of the most
critical aspects of the comparability analysis and it should be
transparent, systematic and verifiable. In particular, the choice of
selection criteria has a significant influence on the outcome of the
analysis and should reflect the most meaningful economic characteristics
of the transactions compared. Complete elimination of subjective
judgments from the selection of comparables would not be feasible but
much can be done to increase objectivity and ensure transparency in the
application of subjective judgments. Keeping in mind all these factors, it
is necessary in the present context that all the relevant facts peculiar to
ITES sector should be taken into account including particularly the
problems discussed by us in para 73 to 75 of this order and accordingly
the relatively equal degree of comparability should be sought to be
achieved by taking into consideration the functional profile of the tested
party and comparing the same with functional profile of the potential
comparables selected at ITES level.
78. To sum up, we hold that the potential comparables of ITES sector
level can be selected by applying broad functional test at first stage and
although the comparables so selected can be put to further test,
depending on facts of each case, by comparing the specific functions
performed in the international transactions with that of uncontrolled
transactions to attain the relatively equal degree of comparability as
discussed above, the classification of ITES into low-end BPO services and
high-end KPO services for comparability analysis would not be fair and
proper. The first question referred to this Special Bench is whether for
the purpose of determining the arm’s length price of international
transactions of the assessee company providing back office support

services to their overseas associated enterprises, companies performing
KPO functions should be considered as comparable ?. In our opinion, the
answer to this question will depend on the facts and circumstances of
each case inasmuch as if the assessee company, on the basis of its own
functional profile, is found to have provided to its AE the low-end back
office support services like voice or data processing services as a whole or
substantially the whole, the companies providing mainly high-end
services by using their specialized knowledge and domain expertise
cannot be considered as comparables.
79. In so far as the present case is concerned, we now proceed to do

an exercise of comparability analysis keeping in view the observations
made in para 76 to 78 in order to attain relatively equal degree of
comparables by taking into consideration the functional profile of the
assessee company and comparing the same with that of the entities
selected as comparables by TPO/DRP on broad functional analysis taken
at ITES level. There are ten entities which are finally selected as
comparables in the present case by the AO/TPO as per the direction of
the DRP and the assessee has mainly disputed the inclusion of only two
comparables namely Mold-Tek Technologies Ltd. and eClerx Services Pvt.
Ltd. on the ground that they are functionally different from the assessee
company. In order to appreciate the stand of the assessee on this issue,
it is necessary to identify the principle functions performed by the
assessee and compare the same with the principle functions performed
by the entities selected by the AO/TPO. The claim of the assessee right
from the beginning was that there are two types of services mainly
provided by it to its AEs and they were classified under two heads
“provision of IT enabled services” and “provision of IT services”. Although
this claim of the assessee has not been accepted by the DRP which
treated both these services under one broad head of “IT enabled
services”, the functions performed by it in relation to both these types of

services were separately given by the assessee company in its TP study
report as under:-
“4.1.1 – Provision of I.T. enabled services.
MGSCIPL is engaged in providing back office support services to

AE. Activities undertaken by MGSCIPL are essentially IT enabled
services such as data entry, transcription, reconciliation.
consolidation, co-ordination, preparation, processing and review of
shipping documents such of hills of lading. etc.
Broad activities carried on by MGSCIPL as directed by AL from

time to time are as follows:
Export/Import documentation
- Log, review and process shipping instructions to produce draft

transport documents;
- Receive, log and process amendments to shipping instructions:
- Publish Transport Documents to the Web;
- Perform data quality checks and updates;
Reconcile differences between Equipment Management System

(RKEM — Rederiets Kontainer Equipment Management) and the
Transport Plan in Global Customer Service System (GCSS): -
Identify and correct manifest errors including coding errors in
GCSS;
- Other services such as daily exchange rate update in Maersk
Line Invoicing System (MLIS), manual entry of surcharges not
covered by Maersk Automated Rating System (MARS), reports
required by local authorities and customs, submit vessel port
omission notifications, issue arrival notices, manual entry of
surcharges not covered by MARS, confirm and collect invoice
details, etc.
Agency Operation:
- Prepare vessel load and discharge lists;
- Clearance of Electronic Data Interchange (EDI) errors in the
tracking system;
- Update of various operations systems including Global
Schedule Information System (GSIS):
- Prepare Hazardous and special cargo manifests and lists:
- Maintenance and update of the transport plan in GCSS;
- Verify and index dangerous good declarations in Global
Hazardous Declaration Electronic Replacement (GHDER)
system:
- Approve hazardous cargo on Maersk Line vessels, etc.

Logistics Export/Import handling
- Update Shipment details in Maersk logistics Operations and
Documents )MODS) system;
- Check MODS updates to ensure alignment with APMM SOP
:
- Prepare airfreight shipment file, payment of carrier bill of
lading, etc.; and
- Other services such as daily overview report to Areas;
packing list update; report on late shipping instruction
submission b vendors to Areas: update of KPI Measurement
data. etc.
Finance and Accounting
- Accounting to Reporting: Reconciliations, Period End Close
and Rolling Budget:
- Exception handling of scanned invoices for matching
against open purchase order;
- Travel expense management;
- First time creation and maintenance of Master Data; and
- Other services such as payment applications, write-offs,
invoicing, exchange rate update; bank reconciliations;
demurrage and detention waivers and audits: accounts
payable audit; invoice verification: owner’s expenses;
monthly disbursements; RKDS pay-at; purchase order
creation: Maersk Logistics Import Processing System (MIPS)
web; Hyperion Financial Management (HFM) controlling
tasks.
Other services
- Tender Handling: Prepare tenders by updating Maersk
Product Catalogue (MEPC) details;
- Contract Drafting: Draft all lanes in MARS awarded to
Maersk Line; and
- Data Quality: Various audit functions based on different
business units’ strategy (Global invoice audit, (Container
billing count, DSL Audit. GBR dispute team).
L
4.1.2 Provision of IT services
MGSCIPL provides IT services such as process support. process
optimization and technical support to its A Is. MGSCIPL
provides technical support services to users of corporate
systems. Functions performed by MGSCIPL under IT
services segment could be categorised under following
headings: DL
Process support
MGSCIPI, provides first line process support services or

preliminary support services to users o corporate systems. Users
are the employees of Maersk group entities worldwide. IT
professionals of MGSCIPL analyze the problem faced by users and
offer preliminary solutions on use of systems and provide support
to system implementation. If the problem is not resolved, then the
same is escalated to second level support.
Process Optimisation
Second level support is provided by technical personnel who are

expert in specific modules within the corporate systems and
provide solutions through remote access control. Employees who
are involved in rendering these services require in depth
understanding of the system for analyzing system utilization and
user behavior. MGSCIPL provides consultancy to Global IS
portfolios and Area business teams in areas of deployment
support and post implementation audits. MGSCIPL also carries
out surveys, identifies the gaps in the process and bridges the
same.
Technical support
MGSCIPL provides following technical support services:
• Service desk support which includes desktop and telephony

systems, mobility solutions and server support (including setting
up of server and optimizing its utilisation):
• Resolution to incidents raised by users, including technical set

up of devices (PC, laptop, PDA, etc):
• Interface monitoring, security systems Support (firewall,

antivirus/antispam solutions etc.) configuration, testing and
implementation of solutions:
• Remote infrastructure support to its corporate system users: and
• Assistance in implementation and monitoring of the Global

security policy followed by the group.”
80. A perusal of the functional profile of the assessee company shows

that although the services claimed to be provided by it to the AEs as IT
services such as process support, process optimization and technical
support are not in the nature of low end services such as voice or data
processing as they require some degree of special knowledge and domain
expertise in the concerned field, the revenue generated from these
services was only about 10% of the total revenue generated during the
year under consideration. There were also some other services rendered
by the assessee company to its AEs as IT enabled services such as
reconciling the difference between equipment management system and
transfer plan in global custom services study, contract drafting, various
audit functions based on different business strategy, tender handling etc.
which, as rightly submitted by the ld. D.R., cannot be strictly considered
as low-end services as they involved some degree of special knowledge
and expertise in the relevant field. However, these services again were
only incidental to the main services rendered by the assessee involving
information collation from shipper/customer/AE and populating the
same into various processes and systems provided by the AE. These
main services rendered by the assessee to its AEs thus involved primarily
data entry, transcription, consolidation, co-ordination, preparation,
processing and review of shipping documents and such other similar
support services which were mainly comprising of back office support
services rendered by the assessee to its AEs in the nature of low-end
services. The profile of work-force employed by the assessee during the
year under consideration comprised of 96% of graduates and post-

graduates whereas only 4% work-force was professional such as CA,
B.Tech etc. which again goes to show that the functions performed by
the assessee company to its AEs were mainly in the nature of providing
back office support services of low-end nature. Going by the functions
performed by the assessee to its AEs during the year under
consideration, we are of the view the assessee was a captive contract
service provider mainly rendering back office support services and such
services rendered by it to its AEs involving some degree of special
knowledge and expertise formed only small portion of the services
rendered by it which essentially were in the nature of incidental services.
81. In so far as the case of Mold-Tek Technologies Ltd. is concerned, it

is observed from the annual report of the said company for the financial
year 2007-08 placed at page 139 to 151 of the paper book that the said
company was pioneer in structural engineering KPO services and its
entire business comprised of providing only structural engineering
services to various clients. Further information of Mold-Tek Technologies
Ltd. available on their Website is furnished in the form of printout at
page 158 to 165 of the paper book and a perusal of the same shows that
it is a leading provider of engineering and design services with
specialization in civil, structural and mechanical engineering services. It
is stated to have a strong team of skilled resources with world class
resources and skill sets. It is also stated to have consistently helped the
clients to cut down design and development costs of civil, structural,
mechanical and plant design by 30-40% and delivered technologically
superior outputs to match and exceed expectations. It is claimed to have
in-house software development team, quality control training and trouble
shooting facilities. M/s Mold-Tek is also rendering web design and
development services with experience in turning them into an effective
graphic design representation and creating dynamic and graphic rich

web applications from IT specs, design prints etc. Keeping in view this
information available in the annual report of Mold-Tek as well on its
website, we are of the view that the said company is mainly involved in
providing high-end services to its clients involving higher special
knowledge and domain expertise in the field and the same cannot be
taken as comparable to the assessee company which is mainly involved
in providing low-end services. It may be pertinent to note here that the
financial year 2007-08 was a unique year for Mold-Tek Technologies Ltd.
as the scheme of arrangement involving amalgamation between Tekmen
Tool Pvt. Ltd. and Mold-Tek Technologies Ltd. and de-merger between
Mold-Tek Technologies Ltd. simultaneously was sanctioned by the
Hon’ble AP High Court by 15th July, 2008 with the appointed date for
amalgamation and de-merger being Ist October, 2007 and Ist April, 2007
respectively. It is also pertinent to note that while working out the
operating margin of the said company, provision for derivative loss of Rs.
6.43 crores made by Mold-Tek technologies Ltd. was excluded by the
A.O. treating the same as non-operating expenses whereas in the case of
Rushabh Diamonds (supra), it was held by the Division Bench of this
Tribunal that the gain or loss arising from the forward contract entered
into for the purpose of foreign currency exposure on the export and
import has to be taken into consideration while computing the operating
profit.
82. In so far as M/s eClerx Services Limited is concerned, the relevant

information is available in the form of annual report for financial year
2007-08 placed at page 166 to 183 of the paper book. A perusal of the
same shows that the said company provides data analytics and data
process solutions to some of the largest brands in the world and is
recognized as experts in chosen markets-financial services and retail and
manufacturing. It is claimed to be providing complete business solutions

by combining people, process improvement and automation. It is claimed
to have employed over 1500 domain specialists working for the clients. It
is claimed that eClerx is a different company with industry specialized
services for meeting complex client needs, data analytics KPO service
provider specializing in two business verticals – financial services and
retail and manufacturing. It is claimed to be engaged in providing
solutions that do not just reduce cost, but help the clients increase sales
and reduce risk by enhancing efficiencies and by providing valuable
insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is
also claimed to have a scalable delivery model and solutions offered that
include data analytics, operations management, audits and
reconciliation, metrics management and reporting services. It also
provides tailored process outsourcing and management services along
with a multitude of data aggregation, mining and maintenance services.
It is claimed that the company has a team dedicated to developing
automation tools to support service delivery. These software automation
tools increase productivity, allowing customers to benefit from further
cost saving and output gains with better control over quality. Keeping in
view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and
its functional profile, we are of the view that this company is also mainly
engaged in providing high-end services involving specialized knowledge
and domain expertise in the field and the same cannot be compared with
the assessee company which is mainly engaged in providing low-end
services to the group concerns.
83. For the reasons given above, we are of the view that if the functions
actually performed by the assessee company for its AEs are compared
with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec
Technologies Ltd., it is difficult to find out any relatively equal degree of
comparability and the said entities cannot be taken as comparables for
the purpose of determining ALP of the transactions of the assessee

company with its AEs. We, therefore, direct that these two entities be
excluded from the list of 10 comparables finally taken by the AO/TPO as
per the direction of the DRP.
84. As submitted by the ld. Counsel for the assessee, if these two
entities are excluded from the comparables and the ALP of international
transactions of the assessee company with its AEs is recomputed by
taking into consideration the arithmetic mean of the margins of the
remaining eight comparables, the difference between such ALP and the
price charged by the assessee would be within the safe harbour limit of
5% requiring no TP adjustment. We accordingly direct the A.O.to
recompute the ALP of the transactions of the assessee company with its
AEs applying the average profit margin of the remaining eight
comparables. If the difference between the ALP so recomputed and the
price actually charged by the assessee is within the safe harbour limit of
(+) or (-) 5%, the A.O. is directed not to make any TP adjustment as per
the second proviso to section 92C(2) of the Act.
85. Keeping in view our decision rendered above, the other issues
involved in ground No. 2 to 8 of the assessee’s appeal including the issue
involved in Q No. 2 referred to this Special Bench have become
infructuous/academic requiring no adjudication on merit. The same are
accordingly dismissed. However, keeping in view that the issue involved
in Q No. 2 has been specifically referred for the adjudication by this
Special Bench, we now proceed to consider and decide the same for the
sake of completeness.
86. As regards the issue involved in question No. 2 as to whether in

the facts and circumstances of the case, the company earning abnormal
high profit margin should be included in the list of comparable cases for
the purpose of determining ALP of an international transaction, Shri

Porus Kaka referred to the provisions of section 92-C of the Act to point
out that the word used therein is “Arithmetic mean” and not “mean” or
“average”. He contended that the arithmetic mean envisages existence of
arithmetic progression meaning thereby that it expects the comparable
figures in a specific range. He contended that anything beyond that
range therefore should not be taken into consideration. In support of this
contention, he relied on the meaning of the expression “arithmetic mean”
given in the Concise Oxford Dictionary which says that it is a mean
number of arithmetic progression. He relied on the Board Circular No. 14
of 2001 (252 ITR (St.) 103) explaining the object of provision of section
92-A to 92-F of the Act to contend that the object of these provisions is to
provide a detailed statutory frame work which can lead to computation of
reasonable, fair and equitable profits and tax in India in the case of such
multinational enterprises. He also referred to para 55.10 of the said
circular wherein the purpose of arithmetic mean is explained. He
submitted that the application of most appropriate method to different
sets of comparable data can possibly result in computation of more than
one ALP and as explained by the CBDT, with a view to avoid unnecessary
disputes in such a situation, the proviso to section 92-C(2) of the Act
provides that the arithmetic mean of the prices shall be adopted as ALP.
He submitted that if the different sets of comparable data are equally
reliable, there may not be any significant diversion between the various
ALPs determined in the normal course as mentioned by CBDT in para
55.10 of the Notification. He contended that this clearly indicates the
expectation of the legislature that there would not be any significant
diversion between various ALPs if the different sets of comparable data
are equally reliable.
87. Shri Porus Kaka submitted that there are several cases decided by
the different Benches of the Tribunal wherein it is held that the
comparables earning super normal or abnormal profits should be

excluded. He placed on record the copies of orders passed by the
Tribunal in the following such cases:-
88. Shri Porus Kaka took us through the relevant portion of some of
the above orders of the Tribunal to support and substantiate his
contention that the entity earning super normal or abnormal profits
ought to be excluded from the list of final comparables. He pointed out
that in the case of Agnity India Technologies Pvt. Ltd. (supra), the Delhi
Bench of ITAT applied the turnover filter to exclude Infosys Technologies
Ltd. from the final list of comparables and this reasonable and fair view
taken by the Tribunal has been upheld by the Hon’ble High Court. He
submitted that the Bangalore Bench of ITAT in the case of Sap Labs
India Pvt. Ltd. (supra) has held that if the difference in the margin earned
by the entity selected as comparable is wide, the onus is on the
A.O./TPO to show the common thread running through these entities so
as to include them in the list of final comparables. Our attention was
drawn to the decision of Chandigarh Special Bench of ITAT in the case of
Quark Systems Pvt. Ltd. wherein the issue of super normal profit was
considered by the Tribunal and it was held that when the profit margin is
abnormally high, the matter may be investigated further. Mr. Porus Kaka
also relied on the decision of Mumbai Bench of ITAT in the case of
Symantec Software Solutions Private Limited (supra) and pointed out
that the entities earning super normal profits were excluded by the
Tribunal in this case on the ground that there was failure on the part of
the A.O./TPO to prove that the higher profits shown by these entities
were normal. He contended that super normal profits thus certainly is a
trigger which atleast should invoke further investigation or enquiries to
ascertain and decide whether the entities earning such super normal
profits should be included in the list of final comparables or not.
89. Shri Ajay Vora, the ld. Counsel for the intervener also put forth his
argument on the issue relating to the exclusion of entity earning super
normal or abnormal profits from the list of final comparables. He
contended that if the high margin earned by the concerned entities is due
to their efficiency, these entities cannot be excluded merely on the
ground of high margin. He contended that if such high margin, however,
is due to any exterior factor, the concerned entities should be excluded
from the list of comparables. He submitted that such exterior factor
could be different such as lower depreciation, earnings due to fluctuation
in foreign currency rates etc. He contended that the consistency of high
margin is also required to be seen to find out as to whether the high
margin is a normal situation or abnormal. He submitted that in the case

of Symantec Software Solutions Pvt. Ltd. (supra), three out of thirteen
comparables selected by the TPO were showing high magnitude of
margin as compared to the remaining 10 entities and the Tribunal held
that these three entities should not be taken as comparables on account
of their super normal profit since the TPO did not establish on evidence
that these super normal profits earned by them was in accordance with
normal activities of their business. He contended that whether the high
profit is normal or abnormal profit is required to be seen from the
relevant facts of each case. He also relied on the decision of the
Chandigarh Bench of ITAT in the case of Quark Systems (India) Pvt. Ltd.
(supra) wherein it was held by the Tribunal in para 13 that if one entity
was not treated as comparable by the tax authority on the ground of
heavy losses suffered by it, they also have to consider that another entity
taken by them as comparable had earned extra ordinary profit. He also
cited the decision of Bangalore Bench of ITAT in the case of SAP LABs
India (P.) Ltd.(supra) wherein it was held in para 54 of the order that in
the absence of any common thread explained by the A.O./TPO running
through the four entities earning super profit to bring out the functional
similarity, the same could not be considered as comparable.
90. In his reply on this issue, Shri Ajeet Kumar Jain at the outset
invited our attention to page 22 of the decision of the Tribunal in the
case of Willis Processing Services India Pvt. Ltd. (supra) to point out that
the extreme cases of loss and profit were considered by the Tribunal in
the said case to work out the average profit margin of the comparables by
taking the arithmetic mean. He submitted that as per the principles of
statistical analysis, the size of sample is important inasmuch as higher
the sample size, better or closure is the estimate. He referred to Chapter
5 “Measures of Central Tenancy” given in the book “Statistics for
Economics” prescribed as text book for class XI and submitted that
arithmetic mean as explained therein is the most commonly used

measure of central tendency. It is defined as a sum of the values of all
observations divided by number of observations. He pointed out from the
example given therein that in case of extreme figures also, the arithmetic
mean is used as a measure of central tendency. He contended that by
adopting the arithmetic mean to work out the average profit margin of
the comparables, Indian law has recognized the extreme values also for
comparability. He submitted that the quartile method of central tendency
removes the extreme results but by adopting the arithmetic mean and
not quartile, the law makers want even the extreme results to be
considered.
91. As regards the CBDT Circular No. 14 of 2011, para 55.10 referred
by Shri Porus Kaka, Shri Ajeet Kumar Jain submitted that section 92-C
of the Act was originally introduced w.e.f. 1-4-2002 in the statute
providing for calculating the average profit margin by using arithmetic
mean without any scope for further adjustment. He submitted that an
amendment, however, was made subsequently to allow such +_ 5%
adjustment right from inception providing more flexibility. In this regard,
he relied on para 50.4 of the CBDT Circular No. 8/2002 issuing
clarification regarding provision for transfer pricing wherein it is clarified
that under the existing provisions contained in the proviso to the sub-
section (2) of section 92-C of the Act, if the application of the most
appropriate method leads to determination of more than one price, the
arithmetic mean of such prices shall be taken to be the ALP in relation to
the international transaction and with a view to allow a degree of
flexibility in adopting the ALP, the Finance Act 2002 has amended the
said proviso to provide that where the most appropriate method results
into more than one price, the price which differs from the arithmetic
mean by an amount not exceeding 5% of such mean can be taken to be
ALP, at the option of the assessee.
92. As regards the orders of the Tribunal cited by Shri Porus Kaka in
support of the assessee’s case that the entities earning super normal or
abnormal profits should be excluded from the comparables, Shri Ajeet
Kumar Jain furnished a chart giving findings recorded by the Tribunal in
those cases along with the remark of the Revenue thereon. Referring to
the said chart, Shri Ajeet Kumar Jain contended that the Tribunal in the
case of Adobe Systems India (P) Ltd. took a view on this issue without
much discussion or without giving any reason and it has been followed
by the Tribunal in the case of Teva India (P.) Ltd. He pointed out that the
decision in the case of Teva India (P.) Ltd. has been followed by the
Tribunal in most of the other cases cited by Shri Porus Kaka. He
contended that none of these decisions of the Tribunal contains any
meaningful discussion on this issue and this Special Bench, in any case,
now has to decide this issue afresh in the light of the submissions made
by both the sides. Shri Ajeet Kumar Jain submitted that there are several
decisions of the Tribunal rendered by different Benches holding that the
comparables cannot be excluded merely on the basis of abnormal and
super normal profits. Some of such decisions cited by him are as
under:-
Al No. Name of the case Date of Bench

decision
1 Exxon Mobil Company India Pvt. Ltd. 10.06.11 Mumbai
2 BP India Services Pvt. Limited 23.09.11 Mumbai
3 Actis advisors Pvt. Limited 12.10.13 Mumbai
4 Nextlink India Pvt. limited …10.12 Bangalore
5 24/7 Customer.Com. Pvt. Limited 09.11.12 Bangalore
6 Trilogy E-Business software India Pvt. 23-11-12 Bangalore
Limited
7 Exxon Mobil Company India Pvt. 19.12.12 Mumbai
Limited
8 Stream international Services Pvt. 11.01.13 Mumbai
limited
9 Willis Processing Services (I) P. Limited 01.03.13 Mumbai
10 Vodafone India Services P. Limited 26.04.13 Mumbai
11 Rushabh Diamonds 26.04.13 Mumbai
12 Syscom Corporations 12.07.13 Mumbai
13 ChrysCapital Investment Advisors 20.12.13 New Delhi
India Private limited
93. Shri Ajeet Kumar Jain pointed out that there were atleast eight
decisions rendered by the Tribunal prior to the case of Willis Processing
Services (I) P. Ltd. (supra) taking a view in favour of the assessee on this
issue and it therefore cannot be said that the Tribunal in the case of
Willis Processing Services (I) Pvt. Ltd. deviated from the consistent view
taken earlier by the Tribunal on this issue in favour of the assessee. He
submitted that in para 34.1 of its order passed in the case of Willis
Processing Services (I) Pvt. Ltd., the Tribunal in fact has taken note of at
least five decisions rendered by the co-ordinate Benches taking a view in
favour of the Revenue on this issue. He submitted that in most of these
thirteen cases decided by the Tribunal, all the material aspects including
the relevant Rules and even the OECD guidelines have been taken into
consideration by the Tribunal while passing the orders. He submitted
that in the case of BP India Services Private Limited (supra), for instance,
the fact of comparables earning extreme profits than the profits earned
by other comparables was taken note of by the Tribunal and it was held
that the very rationale of having average in case of more than one
comparables is to iron out the effect of extreme cases and find out the
profit margin as a representative of the whole lot. He submitted that even
the relevant provisions of Rule 10B(2) and 10B(3) of the Income Tax
Rules were taken into consideration by the Tribunal and it was held that
nowhere in the said Rules, the higher or lower profit rate has been
prescribed as the determinative factor to make a case incomparable. It
was also held that the profit rate in any case cannot be such
determinative factor in itself as it is a consequence of the effect of the
various factors.
94. Reliance was placed by Shri Ajeet Kumar Jain on the decision of the
Tribunal the case of 24/7 Customer.Com Pvt. Ltd. (supra), wherein it
was held by the Bangalore Bench that the exclusion of companies with
abnormal profits from the comparables may be in line with the principles
enumerated in the OECD guidelines but the same cannot be said to be in
tune with the Indian TP regulations. It was noted by the Tribunal in this
context that the Indian TP Rules specifically deviate from OECD
guidelines in this aspect and specify the arithmetic mean for determining
the ALP as against the quartile method suggested in the OECD
guidelines which excludes the companies that fall in the extreme
quartiles for comparability. He submitted that in the case of Trilogy E-
Business Software India Ltd. (supra) a similar view was reiterated by the
Tribunal holding that there is no bar in the relevant Rule 10B(2) to
consider the companies earning abnormal profits as comparable to
tested party as long as they are functionally comparable. It was held
that this question may not arise at all in the context of OECD guidelines
and US TP regulations as they advocate a quartile method for
determining ALP whereby the extreme results get automatically excluded.
It was also held that the Indian regulations, however, deviate from OECD
guidelines and provide arithmetic mean method for determining ALP
whereby all companies that are in the sample are considered without
exception and the average of all the companies is considered as ALP. It
was held that the entity showing extreme results, however, can be
excluded for comparability if it is found there are specific or special
reason for such extreme results. In the case of Stream International
Services Pvt. Ltd., (supra) it was held by the Mumbai Bench of ITAT that
comparability is judged primarily by seeing the functional similarity and
then the capital employed and risks undertaken. Higher or lower profit
rate is not and can never be a relevant criteria to judge the
comparability. Shri Ajeet Kumar Jain contended that the filters are the
means to achieve the end results of comparables in order to determine
the ALP on the basis of margin. He contended that the margin therefore
cannot be considered as filter as sought to be contended by Shri Porus

Kaka or otherwise it would amount to taking end result as mean. He
contended that the factors affecting end result only can be taken as
filters.
95. As regards the reliance placed by Shri Porus Kaka on para 3.63 to
3.66 of the OECD guidelines dealing with extreme results, Shri Ajeet
Kumar Jain pointed out that these paras are part of section A-7 of the
OECD commentary dealing with arm’s length range and it is suggested
that if such range includes a sizeable number of observations, statistical
tools that take account of central tendency to narrow the range (e.g. the
inter-quartile range or other percentile) might help to enhance reliability
of the analysis. He contended that there is no such arm’s length range
recognized by Transfer Pricing Regulations in India and the statistical
tool to take account of central tendency to narrow the range in order to
enhance reliability of the analysis in TP regulations in India is arithmetic
mean and not inter quartile range or other percentile as suggested in the
OECD guidelines. He contended that para 3.63 to 3.66 of the OECD
guidelines dealing with extreme results in the context of the arm’s length
range thus are not relevant in the Indian context and the reliance of Shri
Porus Kaka thereon is clearly misplaced.
96. We have considered the rival submissions on the issue involved in

Question No. 2 referred to this Special Bench relating to exclusion of
high margin comparables and also perused the relevant material
available on record. As per the first proviso to section 92C(2) of the Act,
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. The meaning of the term “arithmetic mean” is given
in the Concise Oxford Dictionary, as a mean number of arithmetic
progression and relying on the same, Shri Porus Kaka has argued that
by using the expression “arithmetic mean” in the statute, the legislature
has expected the comparable figures to be within a specific range. He has
contended that anything beyond that range should not be taken into
consideration and any significant diversion such as abnormal high profit
margin should not be included in the list of comparable cases for the
purpose of determining the ALP of an international transaction. We find
it difficult to accept this contention of Shri Porus Kaka. The arithmetic
mean may be a mean number in the context of any arithmetic
progression as given in the Concise Oxford Dictionary. However, in the
context of measuring central tendency or averages like that of more than
one price as contemplated in the first proviso to section 92C(2) of the Act,
it is to be taken as the sum of the values of all observations divided by
number of observations as rightly submitted by the Shri Ajeet Kumar
Jain, the ld. CIT (DR) relying on the Text Book “Statistics for Economics”.
It, therefore, cannot be said that by using the term “arithmetic mean” in
the said proviso, the legislature has envisaged existence of the
comparable figures in a specific range as sought to be contended by Shri
Porus Kaka. On the other hand, the arithmetic mean is a commonly used
measure of central tendency after taking into consideration the sum of
the values of all observations and then divided by the number of
observations. At the time of hearing before us, Shri Ajeet Kumar Jain has
furnished hypothetical working of arithmetic mean of profit margins of
fifteen comparables to show that even the extreme values do not affect
the arithmetic mean materially or substantially. We also find from the
final working of arithmetic mean of profit margins of ten comparables
made by the A.O./TPO in assessee’s own case that out of these ten cases,
three cases were of low profit with 2.99%, 7.70% and 8.90% of profit
margin and two were of high profit margin of 83.31% & 63.06% while the
remaining five were in the range of 15 to 35% and their average profit
margin by calculating the arithmetic mean was 28.04%. This working

made in assessee’s own case thus clearly shows that the extreme values
in both the end of spectrum do not materially affect the arithmetic mean
and such extreme values are taken care of when the arithmetic mean is
used as the measure of central tendency.
97. At the time of hearing before us, both the sides have cited several
decisions of the Tribunal in support of their corresponding stand taken
on this issue. After going through all these decisions of the Division
Benches of this Tribunal, we find that the issue relating to exclusion of
high profit margin entities from comparables has been decided in favour
of the assessee in the cases cited by Shri Porus Kaka without taking into
consideration some vital aspects including the relevant TP Regulations in
India. It is observed that the decision initially taken in one case without
much meaningful discussion has been invariably followed by the
Tribunal in other cases decided thereafter. On the other hand, it is
observed that the Tribunal, in some of the cases cited by Shri Ajeet
Kumar Jain, the ld. CIT DR, has passed well discussed and well
reasoned orders after taking into consideration not only the relevant TP
regulations in India but even the relevant OECD guidelines. For
instance, in the case of BP India Services Private Limited (supra), it was
held by the Mumbai Bench that the very rationale of having average in
case of more than one comparables is to iron out the effect of extreme
cases and find the profit margin as a representative of the whole lot. It
was also held by the Tribunal that the higher or lower profit rate has not
been prescribed as the determinative factor in the relevant Rules i.e. Rule
10B(2) and 10B(3) to make a case incomparable. The Tribunal observed
that the profit rate in any case cannot be such determinative factor in
itself as it is a consequence of the effect of the various factors. In the case
of 24/7 Customer.Com Pvt. Ltd. (supra), the Bangalore Bench of this
Tribunal considered the relevant OECD guidelines in this respect and

held that the exclusion of companies with abnormal profits from the
comparables may be in line with the principles enumerated in the OECD
guidelines, but the same cannot be said to be in tune with the Indian TP
Regulations. The Tribunal noted that there was a deviation in the TP
Rules specifically from OECD guidelines by specifying the arithmetic
mean for determining the ALP as against the quartile method suggested
in the OECD guidelines which excludes the companies that fall in the
extreme quartiles for comparability. To the similar effect is another
decision of Bangalore Bench in the case of Trilogy E-Business Software
India Ltd. (supra) wherein it was held that the TP Regulations provide
arithmetic mean method for determining the ALP wherein all companies
that are in the sample are considered without exception and the average
of all the companies is considered as ALP. In the case of Stream
International Services Pvt. Ltd.(supra), the Mumbai Bench of ITAT held
that comparability is judged primarily by seeing the functional similarity
and then the capital employed and risks undertaken but the higher or
lower profit rate is not and can never be a relevant criteria to judge the
comparability.
98. As noted by the Division Benches of the Tribunal in the cases

discussed above, the OECD guidelines suggest quartile method which
excludes the companies that fall in the extreme quartiles for
comparability and there is deviation in this respect in T.P. Regulations in
India which specify the Arithmetic Mean for determining the ALP.
Neverthless, the OECD TP Guidelines have considered and dealt with the
situation of extreme results in the context of comparability consideration
in section A.7.3 of chapter III and it is
++++++ suggested in para 2.63 that where one or more of potential

comparables have extreme results consisting loss or unusual high
profits, further examination would be needed to understand the reasons
for extreme results. After taking into consideration this guidance
provided in OECD Transfer Pricing Guidelines and on analyzing the
decisions rendered by the Division benches of this Tribunal on this issue
after taking into consideration inter alia the T.P. Regulations in India as
discussed above, we are of the view that the potential comparables
cannot be excluded merely on the ground that their profit is abnormally
high. In our opinion, the matter in such case would require further
investigation to ascertain the reasons for unusual high profit and in
order to establish whether the entities with such high profit can be taken
as comparables or not.
99. The question No. 2 referred to this Special Bench is as to whether,

in the facts and circumstances of the case, companies earning
abnormally high profit margin should be included in the list of
comparable cases for the purpose of determining arm’s length price of an
international transaction. As already observed, the issue involved in this
question has become infructuous in so far as the case of the assessee
before the Special Bench is concerned and the same therefore no more
survives for consideration in the present case. In generality, we are of the
view that the answer to this question will depend on the facts and
circumstances of each case inasmuch as potential comparable earning
abnormally high profit margin should trigger further investigation in
order to establish whether it can be taken as comparable or not. Such
investigation should be to ascertain as to whether earning of high profit
reflects a normal business condition or whether it is the result of some

abnormal conditions prevailing in the relevant year. The profit margin
earned by such entity in the immediately preceding year/s may also be
taken into consideration to find out whether the high profit margin
represents the normal business trend. The FAR analysis in such case
may be reviewed to ensure that the potential comparable earning high
profit satisfies the comparability conditions. If it is found on such
investigation that the high margin profit making company does not
satisfy the comparability analysis and or the high profit margin earned
by it does not reflect the normal business condition, we are of the view
that the high profit margin making entity should not be included in the
list of comparable for the purpose of determining the arm’s length price
of an international transaction. Otherwise, the entity satisfying the
comparability analysis with its high profit margin reflecting normal
business condition should not be rejected solely on the basis of such
abnormal high profit margin. Question No. 2 referred to this special
bench is answered accordingly
100. As regards the issue raised in ground No. 9 relating to the

assessee’s claim for credit of Rs. 6,12,400/- on account of TDS credit,
Shri Porus Kaka has sought only a direction to the A.O. to verify the
claim of the assessee on this issue and allow the credit for TDS on such
verification. Since Shri Ajeet Kumar Jain, the ld. CIT(DR) has also not
raised any objection in this regard, we restore this issue to the file of the
A.O. with a direction to allow the claim of the assessee for TDS credit
after necessary verification.
101. The issue raised in ground No. 10 relating to initiation of penalty

proceedings u/s 271(1)(c) of the Act is pre-matured requiring no decision
from us at this stage. Ground No. 10 is accordingly dismissed.
102. The issue raised in ground No. 11 relating to interest charged u/s
234B is consequential in nature and the A.O. is accordingly directed to
allow consequential relief to the assessee on this issue.
103. Before parting, we may clarify that the various decisions of the
Tribunal referred to by the ld. Representatives of both the sides during
the course of their arguments have been considered and deliberated
upon by us while arriving at our conclusions. All of them, however, are
not specifically mentioned or discussed in the order for the reason that
this Special Bench has been constituted to resolve the controversy
arising from the different/contrary views expressed therein on the issues
which have been referred to this Special Bench. We take this opportunity
to place on record our appreciation for the assistance provided by the ld.
Representatives of both the sides by making elaborate submissions
which helped us to analyse the legal position emanating from the
interpretation of the relevant provisions of the domestic law as well as
the relevant OECD Transfer Pricing Guidelines and apply the same to
decide the issues referred to this Special Bench.
104. In the result, appeal of the assessee is partly allowed.

Order pronounced in the open court on 07.03.2014.
आदे श क) घोषणा खुले यायालय म/ 0दनांकः 07.03.2014 को क) गई ।
Sd/- Sd/- Sd/-
(D. MANMOHAN) (B.R. MITAL) (P.M. JAGTAP)

VICE PRESIDENT JUDICIAL MEMBER ACCOUNTANT MEMBER
मब
ंु ई Mumbai; 0दनांक Dated
व.न.स./ RK , Sr. PS
आदे श क! "त$ल%प अ&े%षत/Copy of the Order forwarded to :
1. अपीलाथ2 / The Appellant

2. 3यथ2 / The Respondent.
3. आयकर आयु4त(अपील) / The CIT(A)—Concerned, Mumbai.
4. आयकर आयु4त / CIT – Concerned,, Mumbai
5. 5वभागीय 3तन7ध, आयकर अपील*य अ7धकरण, मुंबई / DR, ITAT, Mumbai K Bench
6. गाड9 फाईल / Guard file.

ु ार/ BY ORDER,
आदे शानस
सया5पत 3त //True Copy//
उप/सहायक पंजीकार (Dy./Asstt. Registrar)

आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai
Draft dictated on 3/2/14, Sr PS

4/2/14
5/2/14
6/2/14
7/2/14
10/2/14
11/2/14
12/2/14
14/2/14
3-3-14
4-3-14
5-3-14
2 Draft placed before Author on Sr PS
19-2-14
4-3-14
5-3-14
5-3-14
3 Draft proposed & Place before the 2nd JM/AM

member
4 Draft discussed/approved by 2nd Member JM/AM
5 Approved draft comes to the Sr PS Sr.PS
6 Kept for pronouncement on Sr PS
7 File sent to the Bench Clerk Sr PS
8 Date on which file goes to the Head Clerk
9 Date on which file goes to the AR
10 Date of dispatch Sr PS

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आयकर अपील य अ धकरण “ K ” (SPECIAL BENCH) यायपीठ मब

Appellant by : Shri Porus Kaka

PER P.M. JAGTAP, A.M. :

This Special Bench has been constituted by the Hon’ble President

Act, 1961 in pursuance of the directions given by the Dispute Resolution

2) Whether, in the facts of the assessee’s case, companies earning

2. The assessee in the present case is a company incorporated in

3. In the TP study report submitted by the assessee, the Arm’s Length

4. After a careful study and analysis of the T.P. study report

“1. As per Rule 10B(4), it is mandatory to the use the current

2. The taxpayer used earlier two years data without justifying

3. The taxpayer considered following companies with

Sl No. Name of the company

4. The taxpayer considered following companies with domestic

Sl No. Name of the company

5. As discussed above, some of the taxpayer’s comparables do

6. Some companies like Eclerx Services Ltd., though is into

6. Having held that the services rendered by the assessee company to

Sl. Name of the comparable Remarks

1 Allsec Technologies Ltd. The annual report of the company is

4. Fortune Infotech Ltd. The Company has related party transactions

5 ICRA Online Ltd. The company is a subsidiary of ICRA Ltd. As

6 ICRA Techno Analytics The annual report does not contain

software development services and IT

7 Informed Technologies The company has exports to the extent of

8 KPIT Commins Global The company is a subsidiary of KPIT

10 R System International The company is not into KPO services and

11 Spanco Telesystems and Now the company is known as Spanco Ltd.

12 Triton Corp Ltd. The company is into KPO services and

Sl No. Particulars Remark of the TPO

8. In addition to some of the filters found to be appropriate by him as

“- Companies whose data is not available for the FY 2007-08 were

- Companies with IT enabled service income of less than Rs. 10 Cr

- Companies whose IT enabled service revenue is less than 75% of

- Companies who have more than 25% related party transactions

- Companies who have less than 75% of the revenues as export

- Companies who have diminishing revenues/persistent losses for

- Companies having different financial year ending (i.e. not March

- Companies that are functionally different from that of taxpayer or

- Companies that are not mainly engaged in KPO services were

Sl Name of the comparable Functional Lines

9. The TNMM adopted by the assessee for benchmarking the relevant

nature such as donations, preliminary expenses etc. were not considered

11. The arithmetic mean of the OP/TC of the above comparables

adjustment required to be made in the case of the assessee in respect of

different services and their profitability, the DRP considered it proper in

13. As regards the seven comparables selected by the TPO, the

“Acropetal Technologies Ltd.— It has been pointed out by the

14. The objection of the assessee regarding other two comparables

“Eclerx Services Limited – assessee’s argument is not acceptable

Mold-Tek Technologies Ltd.- The assessee has objected to the fact

We find that this comparable’s services fall within the category of

As far as not taking provision for derivative losses as an operating

From the Annual Report submitted by the assessee it is not clear

15. The three comparables selected by the TPO namely Mold-Tek

1. Caliber Point Business Solutions Ltd.

“Market Risk/Business Risk: The taxpayer’s claim that it does not

other customers or other markets. Thus, there is more risk in the

i. The loss of realization of the debt for the services