ITAT Bangalore Ruling on Transfer Pricing and Corporate Tax for Captive BPO Service Provider: Detailed Summary

This write-up presents a comprehensive summary and analysis of the order of the Income Tax Appellate Tribunal, Bangalore Bench, in the case of ExxonMobil Services And Technology Pvt. Ltd. Vs DCIT for AY 2021–22. The Tribunal dealt with multiple contentious issues in the domains of transfer pricing and corporate tax, including selection of comparables, working capital adjustment, notional interest on receivables, Section 43B disallowance, and levy of interest under Section 234A and Section 234C.

The assessee is a captive service company providing back-office support / ITES to its associated enterprises (AEs) on a cost-plus basis and had benchmarked its international transactions using TNMM with OP/OC as the Profit Level Indicator.

1. Background of the Assessment and TP Proceedings

1.1 Assessee’s Business and TP Methodology

The assessee, a private limited company, rendered:
- BPO services; and
- Technical Support Services (CTSS) (not in dispute in this appeal).
For the BPO segment, the assessee:
- Applied TNMM as the most appropriate method.
- Adopted OP/OC as PLI with its own margin at 18.51%.
- Identified 17 comparables, with:
  - Median margin: 9.58%
  - 35th percentile: 7.26%
  - 65th percentile: 11.59%

1.2 TPO’s Approach and Resultant Adjustment

The Transfer Pricing Officer:
- Accepted only 3 out of 17 comparables chosen by the assessee:
  1. Sundaram Business Services Limited
  2. CES Limited
  3. Tech Mahindra Business Services Limited
- Applied his own filters and search process and arrived at a final set of 13 comparables (including the above three). These included:
  - I Services India Private Limited
  - Anderson Business Solutions Private Limited
  - Suprawin Technologies Limited
  - E Care India Private Limited
  - Ultramarine (segmental)
  - Vitae International Accounting Services Private Limited
  - Inteq BPO Services Private Limited
  - Savitriya Technologies Private Limited
  - Datamatics Business Solutions Limited
  - TTEC India Customer Solutions Private Limited, etc.
The TPO computed an average margin of 21.84% for the final comparable set and made a transfer pricing adjustment of Rs. 12,36,16,032/- for the BPO segment.

The assessee took objections before the DRP, and subsequently filed appeal before the ITAT on various TP as well as non-TP issues.

2. Transfer Pricing – Inclusion / Exclusion of Comparables

The primary disputes concerned three companies:

Datamatics Business Solutions Limited
R Systems International Limited
Micro Land Limited

2.1 Datamatics Business Solutions Limited – Excluded as KPO / Functionally Different

Assessee’s contentions:

The assessee is a captive, routine BPO/ITES provider offering back-office support; it does not perform high-end knowledge-intensive work.
Datamatics is engaged in IT-enabled services and Business Process Management (BPM) involving:
- High-end KPO-type services
- Business intelligence solutions
- Business process transformation
- Technology solutions and sale of business solutions (which may include software components)
No reliable segmental break-up is available to isolate margins relating only to BPO-type services.
Datamatics was already excluded as a comparable in the assessee’s own case for AY 2017–18 by the Bangalore Bench in Exxonmobil Services and Technology (P.) Ltd. vs. Deputy Commissioner of Income-tax [2023] 154 taxmann.com 507 on the ground that it functioned as a KPO. No material change in functions had been shown for the year under appeal.
Judicial precedents such as Morgan Stanley Advantage Services Private Limited and Dialogic Networks India Private Limited were relied upon to show that Datamatics is a typical KPO and not comparable to a routine ITES provider.

DRP’s view:

The DRP held that Datamatics derived 100% revenue from IT enabled services, and high margins/fluctuations in profit do not automatically disqualify a company if it is otherwise comparable.
Further, it rejected reliance on earlier years’ treatment solely on grounds of year-wise comparability being required in TP matters.

ITAT’s findings:

From the annual report, the Tribunal noted that Datamatics:
- Offers high-end knowledge-based services, business intelligence, business process transformation, technology solutions and sale of solutions (including possible software).
- Is functionally distinct from a captive back-office support provider like the assessee.
The Tribunal relied on its own prior decision in AY 2017–18 in the assessee’s case, where Datamatics had been excluded as a KPO company:

“Accordingly, we direct the AO to exclude this company M/s. Datamatics Business Solutions Ltd. from the list of comparables as this company is a KPO company and not comparable to assessee company.”
No evidence was led by the Revenue to show any change in functional profile of Datamatics.
Absence of clear segmental data further supported exclusion.

Direction:

Datamatics Business Solutions Limited is to be excluded from the final set of comparables for the BPO segment.

2.2 R Systems International Limited – Different Financial Year Not a Valid Standalone Ground

Assessee’s position:

R Systems is engaged in IT services and BPO services, functionally similar to the assessee.
It satisfies all quantitative filters used by the TPO.
The TPO rejected it only because it follows a different financial year.
Being a listed company, it publishes quarterly audited results in the public domain, which can be used to reconstruct the relevant April–March financial data base for comparability.
Reliance was placed on:
- Schneider Electric IT Business India Private Limited vs. ACIT (133 taxmann.com 215)
- Conneqt Business Solutions Ltd. (180 taxmann.com 447)
- Goldman Sachs (India) Securities Pvt. Ltd. (177 taxmann.com 28)
- Capita India Pvt. Ltd. and Marlabs Innovation Pvt. Ltd.