9911796707
TMI Blog2011 (7) TMI 509X X X X Extracts X X X X X X X X Extracts X X X X ..... ing any adjustment." 3. The assessee is a company engaged in providing information technology services such as call centre, back office operation etc. The assessee was incorporated in March, 1999 and commenced its business in April, 2003. The assessee is subsidiary of HTS Mauritius which in turn is subsidiary of M/s. Hutchinson Whampoa Ltd. Hongkong (HWL). It is a BPO centre providing services to two other fellow subsidiaries of its parent company i.e. M/s. Hutchison 3 G Australia Pvt. Ltd. (H3GA), Australia and Hutchison 3G UK Ltd., UK (H3GUK). The assessee provided IT services to Hutchison Australia Pvt. Ltd. and Hutchison 3G UK Ltd., UK. The aforesaid two companies were associated enterprises and in terms of the provisions of section 92CA of the Act the Arms Length Price (ALP) of the international transaction between the assessee and its associated enterprise had to be determined. The Assessing Officer referred to the TPO under section 92CA(1) of the Act the computation of ALP in relation to international transaction referred to above. 4. During the relevant year the assessee has provided I.T. enabled services (ITES) to its AEs- H3GA, Australia at Rs. 50,59,00,694 and H3GUK, U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve Ltd. -15.21 8. Nipuna Services Ltd. - 7.33 9. Rev IT Systems Pvt. Ltd. - 7.33 10. Transwork Information Services Ltd. 5.69 11. Wipro BPO Solutions Ltd. 28.43 12. Hinduja TMT Ltd. (Segment) 62.25 13. Mpphasis Ltd. (Segment) 38.26 Arithmetic mean 6.93 The net margin of assessee worked out to 11.63 per cent and thus the assessee justified the price it charged the AEs as proper and calling for no adjustment by the TP. 8. The TPO (on a reference made by the Assessing Officer to determine the ALP) was of the view that the comparables selected by the assessee cannot be accepted as being comparable to assessee due to following reasons: Sl.No. Name of the company Reasons for rejection 1. M/s. Ask Me Info Hubs Ltd. Chronically loss making 2. B2K Corpn Pvt. Ltd. Chronically loss making 3. Citigroup Global Services Ltd. Related party transactions with foreign parent hence not uncontrolled transaction 4. Godrej Upstream Ltd. Chronically loss making 5. Nipuna Services Ltd. Chronically loss making & negative net worth 6. NIIT Smartserve Ltd. Chronically loss making & negative net worth 7. Rev IT Systems Pvt. Ltd. Chronically loss making. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... U.K respectively. The assessee operates Contact Centre Services in India and is to provide a Contact Centre and Services the assessee is being paid certain charges in accordance with the agreement. (b) The TPO referred to clause 8.2 of the Agreement between the assessee and deliverables which reads as under: "8.2 As between GSPL and Hutchison, all Intellectual Property Rights in any Deliverable, and in any software or anything created or developed by GSPL or any third party acting on its behalf, in compliance or purported compliance with its obligations under this Agreement (including GSPL Materials) solely for the benefit of Hutchison under this Agreement (the "Works"), shall vest legally and beneficially in Hutchison. The parties further agree that all Intellectual Property Rights in any Deliverable, and in any software or anything created or developed by GSPL or any third party acting on its behalf, in compliance or purported compliance with its obligation under this Agreement and the Related Agreement (including the GSPL Materials) for the joint benefit of Hutchison and Hutchison 3G UK Limited ("Joint Material") shall vest legally and beneficially in Hutchison and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ird party insurance covering the legal liability of the assessee to any injury to persons or loss or damage to property arising out of the performance of this agreement. This shows that the assessee is bearing the risks to a large extent arising from the performance of the contracts. 12. The TPO thereafter referred to the website of the Assessee "WWW.3globalservices.com" and found that the Assessee has described itself as providing the following services: (a) Post sales-Mobile Number Porting (MNP)/Activation/Provisioning. (b) Sales-Direct Selling/Campaign Management (c) Collections-Consumer/Commercial. (d) Value Added Service-Content Selling. (e) Customer Care-Queries/complaints/Billing requests/Technical issues/Delivery Enquiries Services Change Request. (f) Customer Retention-Inbound /Handset upgrade (g) Channel Support Retail Support. The TPO also held that the assessee company has over four million customers in Australia & U.K. That the Assessee provides end-to-end customer relationship management solutions to customers and the third generation mobile telephony - 3 which has pioneere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. 14. Thereafter the TPO took up nine comparable cases and also 6 comparable cases given by the assessee. Thus the 15 comparables including 6 selected by the assessee and nine selected by the TPO are as under:- Sl.No. Comparable companies OP/TC (%) 1. Allsec Technologies Ltd 28.07 2. WIPRO BPO Solutions Ltd. 28.43 3. Transworks Information Services Ltd. 5.69 4. Hinduja TMT Ltd. 62.25 5. Mphasis Ltd. 38.26 6. Firstsource Solutions Ltd. 4.84 7. Tulsyan Technologies Ltd. (Cosmic Global) 19.08 8. Saffron Global 24.89 9. Vishal Information Technologies Ltd. 45.65 10. Ace Software Exports Ltd. 15.46 11. Nucleus Netsof & GIS India Ltd. 40.6 12. Asian Cerc Information Technology Ltd.(seg) 37.4 13. Airline Financial Support Services (I) Ltd. 26.54 14. Goldstone Teleservices Ltd. (Seg) 15.95 15. Cepha Imaging Pvt. Ltd. 47.7 Total 440.81 Average 29.38 The arithmetic mean of the net margin (PBIT) on total costs for these 15 comparables was 29.38 per cent. 15. The net margin of the assessee was calculated as under: Total Expenditure as per P/L account 125,00,96,000 Less 1. Loss on sale of fixed assets & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct, software, interface, design, report, document, specification or other item or any combination thereof to be developed, created or provided by GSPL in the course of or arising out of the supply of services under the this agreement. It was submitted that the term "Deliverables" is used only in relation to any software etc. that may get developed in the course of rendering the "Services", being the services of a call centre as explained above. The assessee is not engaged in the business of supplying "Deliverables" as presumed by Assessing Officer. The word 'Deliverables' is used only in Clause 8.2 which reads as under: "8.2 As between GSPL and Hutchison, all Intellectual Property Rights in any Deliverable, and in any software or anything created or developed by GSPL or any third party acting on its behalf, in compliance or purported compliance with its obligations under this Agreement (including GSPL Materials) solely for the benefit of Hutchison under this Agreement (the "Works"), shall vest legally and beneficially in Hutchison. The parties further agree that all Intellectual Property Rights in any Deliverable, and in any software or anything created or developed by GSPL or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces the assessee renders. 18. The TPO passed an order under section 154 wherein he expressed the opinion that the comparable selected by him are broadly similar to the functions performed by the assessee. Thus the TPO in his original order took the view that the services rendered by the Assessee were much sophisticated and technical than a mere call centre. In the order under section 154 of the Act, he did not deny the plea of the Assessee as set out in the application under section154 of the Act but took a stand that the comparable cases relied by TPO, similar services were being rendered as the one claimed by the assessee. 19. On appeal by the assessee the CIT(A) deleted the addition made by the Assessing Officer for the following reasons: (a) The TPO has proceeded on an incorrect understanding of the Assessee's business and that such misconception has resulted from an erroneous reading of the various clauses of the relevant agreement with the A.E. (b) The Assessee was a mere call centre and not engaged in other high end ITES like software development etc. Copies of the approval from the Department of Telecommunications as also the approval from the Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were at the start-up stage may make losses and, therefore, cannot be brushed aside from the sample of comparable companies. He held that these cannot be regarded as "chronically" loss making since they are just at the start-up stage. Balance one company, namely, Ask Me Info Hub Ltd. being a loss making company included in the list of comparable of the assessee but rejected by the TPO is, no doubt, established in the year 1962. However, on a perusal of its Profit and Loss Account, it cannot be lablled as "chronically" loss making since in the financial years 2005-06 and 2006-07 this company has turned around and has earned small profits. The companies selected by the assessee, though loss making during the relevant year, cannot be removed from the list of comparables in view of the fact that these are, like the Assessee itself, start-up companies and these companies are undoubtedly engaged in voice based call centre services. (i) With regard to the 9 new additional companies selected by the TPO (except Saffron Global) the CIT(A) held that these companies are not engaged in Plain Vanila Voice Based Call Centre and engaged in higher end ITES. Also since these are not st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r who pays him after a credit period. There can be no two views on the proposition that the pricing of the trader would differ in these situations, everything else remaining the same. It is also quite common to hear about cash discount being offered by traders to induce the customer to make early payments. In view of this common business understanding and practice it will be fair and reasonable in accepting the claim of the appellant since the companies selected by him or by the TPO provide an average credit period of 3 months as against the Appellant obtaining advances from its customers which are periodically adjusted against the billing." (k) The CIT(A) also held that in Assessee's case in the earlier year, being the first year of operations, the Assessee charged cost plus 4 per cent mark up plus depreciation on actual basis to the AEs. That year's appeal was decided in favour of the assessee vide order dated 6th January, 2009 and the Revenue's appeal thereagainst has since been dismissed by the "L" Bench of the ITAT in ITA No. 1812/Mum./2009, dated 18th February, 2010. In the current year, the assessee has charged 7 per cent mark up not only on all costs but also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 7 of the 13 comparables selected by the assessee in its TP Study. The Assessing Officer had on his own collected the data of 9 companies and considered the 6 companies selected by the assessee and arrived at a data base of 15 comparable cases. The assessee had objected before the Assessing Officer that 8 out of the 9 comparable cases cited by the Assessing Officer cannot be considered at all because they were in a totally different business. The objections with regard to the 8 parties out of the 9 considered by the Assessing Officer was as follows: Sl. No. Name of the company Reason for Non-comparison with Appellant's business as described in Company's own website Remarks if any. 1. Cepha Imaging Private Limited CEPHA is a complete service provider for all publishing needs in the contemporary electronic era. Our primary markets are Scientific, Technical, Medical, Scholarly, Reference, and College publishing. The core of business is Typesetting/ Composition and also provides Project Management Service and extended value added products-Multimedia Solutions. Refer Profile from Website at Pg.223 of PB 2. Vishal Information Technologies Ltd. Vishal is in the business for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transformation initiates. With a vast worldwide network, we use a low-risk Global Delivery Model (GDM), to accelerate schedules with a high degree of time and cost predictability. High-end Technical Services, Refer profile for Description of nature of business at page No. 224 of PB 25. It was the plea of the Assessee before the TPO that the Services rendered by IT Industry (ITES-BPO) are classified into various segments are as under: - Customer care (Voice and non-voice) includes inbound and outbound calls, telemarketing, email support, market surveys, web sales, advertising & PR; - HR includes benefits administration, recruiting, education and training payroll and records management; - Finance and accounting includes accounting transactions, tax consulting and management, risk management, financial analysis and reporting; - Payment services includes processing and collection of claims, credit/debit cards, loans and cheques and Electronic Data Interchange; - Content Development includes Animation, Gaming, business and Corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with regard to the characteristics of the services provided by it and the 8 comparable cases considered by the TPO. 28. It has been the stand of the TPO that the assessee was not performing merely the services of a call centre and was providing services which were much more than an ordinary call centre. In this regard the Assessing Officer has pointed out certain facts which emerges from the agreement between the assessee and the AE. According to the assessee these facts were not confronted to the assessee by the TPO and the assessee came to know about the observation of the TPO only after receipt of the order of the TPO. The assessee filed an application under section 154 of the Act before the TPO. In this application the assessee had specifically pointed out that the conclusions of the TPO that the assessee also provided and delivered project software design reports is not factually correct. In this regard the assessee submitted "Deliverables" means any product, software, interface, design, report, document, specification or other item or any combination thereof to be developed, created or provided by GSPL in the course of or arising out of the supply of services under the this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time which are to be agreed between the parties.' The service schedule has been defined as follows: ' "Service Schedule" means the Schedule to be agreed between the parties setting out the Services to be provided by GSPL as amended or replaced by Hutchison from time to time and notified to GSPL.' On a careful perusal of the agreement we find that there is no exact description of the nature of services to be rendered. That can be verified only from the schedule agreed between the parties setting out the services to be provided. The ld. counsel for the assessee submitted before us that in the earlier assessment year the assessee has been accepted to be performing the services of a call centre. It was also pointed out that the registration certificate of the assessee under Bombay Shop and Establishment Act, 1948 the assessee has been described as a call centre. It has also been pointed out that the approval from Department of Telecommunication also supports the claim of the assessee that it is call centre. 31. We have, on a carefully consideration of the rival submissions, come to the conclusion that it is necessary to find out the exact nature of services rendered by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B(3) lays down that an uncontrolled transaction shall be comparable to an international 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. In the set aside proceedings, the Assessing Officer will consider the issue in the light of the rules set out above. The Assessee has set out in pages 337 to 340 of his paper book as to how working capital adjustments have to be made. In pages 183 to 186 and 191 to 202 of the paper book the Assessee has also highlighted the other adjustments that are required to be made to eliminate material effects of the differences between the international transaction and the comparable uncontrolled transactions. These aspects will also be considered by the Assessing Officer in the set aside proceedings. It was also submitted by the learned counsel for the Assessee that in terms of Rule 10B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already extracted the explanation of the Assessee before the TPO in this regard. The TPO has ignored the plea of the Assessee and has not given any reasons for doing so. The TPO has merely said the comparable instances were performing identical job as performed by the Assessee. In our view such rejection of the Assessee without assigning any reason is arbitrary. 33. Another aspect which we notice in the TPO's order is that he had carried out FAR analysis and has alleged that the Assessee was performing services that are much more technical than what an ordinary call centre performs. The TPO has not spelt out as to how in the comparative uncontrolled transaction considered by the TPO, the nature of services rendered is similar to the one rendered by the assessee. 34. One of the submission made by the learned counsel for the Assessee was that, if for any reason, the Tribunal remands the issue of determination of ALP to the Assessing Officer, then, a direction should be given that the TPO will not look afresh into data that is available in the public domain. According to him, the TP study is required to be done on the basis of data available in the public domain at the point of time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Appellate Authorities and all other submissions/arguments of the Appellant. 2. The appellant, therefore, humbly prays that the addition under section 92 be deleted. 38. In this assessment year the assessee has challenged the adjustment made by the TPO to the ALP. In this assessment year the facts are almost identical. The TPO in his order under section 92C has determined the ALP in the following manner. The assessee had given 11 comparable instances. The assessee on his own only pressed for 7 of the comparables selected by it. The TPO rejected these comparables for the following reasons: Sl. No. Name of the comparable Reasons for rejection. 1. Ask Me Info Hubs Ltd. The company is chronically loss making, hence rejected. 2. B 2K Corp. Pvt. Ltd. Company operates in the area of rendering business process outsourcing services. The company is chronically loss making with loss in FY 2005-06, hence rejected. 3. Godrej Upstream Ltd. Company is engaged in business of ITES services. Main income from call centre operation. Chronically loss making company. Approx. 28 per cent of total services to related parties. 4. Optimus Global Services Ltd. Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out that the 10 out of the 11 companies were functionally not comparable at all and the other company viz., Spanco Ltd. earned export revenues of less than 25 per cent of its total revenue. The Assessee pointed out that the 10 companies fell under the higher strata of services with some getting classified under content development and KPO. Thus they were functionally not comparable at all. The details in this regard are contained at page-204 of the Assessee paper book in the form of annexure-1 to the reply filed by the Assessee before the TPO vide its letter dated 21-10-2009 filed before the TPO. Apart from the above, the Assessee also submitted reconciliation of margin working, submission as to why the comparable transactions relied upon by the Assessee cannot be rejected, reasons as to why saving on account of link cost, recovery of reimbursement of expenses should be considered while working ALP. No valid reasons have been assigned by the TPO while ignoring these submissions. The TPO has merely observed at page-3 last two paras of his order that the comparables selected by the TPO are comparable. As regards the link cost, the TPO has merely observed that the saving of li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me for assessment year 2005-06 on 28-10-2005 declaring total income of Rs. 15,71,120 after claiming deduction under section10A of the Act of Rs. 11,29,06,385. The sum of Rs. 15,71,120 was interest income which was offered to tax. On 9-2-2007, the Assessee filed a revised return of income of Rs. Nil . The Assessee had brought forward depreciation loss of Rs. 3,85,20,781. In this revised return of income the Assessee set off against the interest income brought forward depreciation loss and claimed carry forward of the remaining depreciation loss of Rs. 3,69,49,662. The Assessing Officer however held that under section 32 of the Act, as applicable to the assessment year in question, unabsorbed brought forward depreciation has to be added to the current years depreciation and shall be deemed to be part of depreciation allowance and so on for succeeding previous years. Thus the brought forward unabsorbed depreciation was added to the current year's depreciation and the Assessing Officer held that the same can be allowed as deduction while computing business income i.e., under the head "Profits and gains of business/profession". The Assessing Officer held that since there was no unabsorb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income of such undertaking. Section 72(2) clearly and specifically provides that where any allowance or part thereof under sub-section (2) of section 32 is to be carried forward, effect shall first be given to the provisions of section 72(2). Thus, there is no reference to the set-off of business losses and unabsorbed depreciation. The view is also supported by decision of Chennai Tribunal in the case of Changepond Technologies (P) Ltd. v. Asstt. CIT [2008] 22 SOT 220 wherein it was held as under: "The Commissioner (Appeals) was not correct in setting off of carried forward losses before giving the exemption under section 10A. There is no provision in the Act by which the deduction should be restricted to the total income of the assessee computed under the provisions of the Act before allowing such deduction. Wherever the Legislature intends so to restrict the deduction, the same is provided in the Act itself. Therefore, there is no scope for any interpretation that the profits and gains of the specified undertaking should be computed under the normal course as per the provisions of the Act and not under the special provisions of section 10A. Accordingly the deduction under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 3,19,32,434 . The foreign exchange gain earned by the Assessee and its accounting was explained by the assessee as follows: The assessee say receives an advance of 1000 US$ on 15-3-2004 from AE (Exchange rate difference on the date of receipt 1 US$ = Rs. 44.00). This advance will get adjusted against subsequent billing on AE. Entry passed at the time of receipt on 15-3-2004 will be: Bank A/C. Dr. Rs. 44,000 To AE Cr. Rs. 44,000 On 31-3-2004, (1 US$ = Rs. 47.00) revaluation of foreign currency liability, the entry passed will be: Foreign Exchange loss A/c. Dr. Rs. 3,000 To AE Cr. Rs. 3,000 On 31-3-2004, the effect of the above transaction in the books of account will be: Bank Balance (Asset side) Rs. 44,000 AE Balance (liability) Rs. 47,000 Foreign Exchange loss Rs. 3,000 In the next year i.e., financial year 2004-05 relevant to assessment year 2005-06, the advance received will be adjusted against bill of US 1000. The exchange rate on the date of billing is 1 US$ = Rs. 41. The entry passed will be: AE A/C. Dr. Rs. 47,000 To sales Cr. Rs. 41,000 To Foreign Exchange gain Cr. Rs. 6,000 As on 31-3-2005 will be: Sales Income Rs. 41,000 Foreign Exchange Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pheld. In the case of Changepond Technologies (P.) Ltd. (supra), the Chennai Bench of ITAT dealt with identical issue and held as follows: "The gain from the fluctuation of foreign exchange was directly related to the export activities and should be considered as income derived from export activities. Such gain due to fluctuation of foreign exchange arose only due to the export and not due to other activities of the Assessee. If the Assessee has not exported any article, then the question of any gain or loss due to foreign exchange did not arise. Therefore, the gain on foreign exchange would be included in the total turnover while computing the deduction under section 10A." We are of the view that the CIT(A) has rightly decided the issue in line with the law on the issue. We therefore uphold the order of CIT(A) and dismiss ground No. 3 raised by the revenue. 52. In the result, ITA No. 5887/Mum./10 is partly allowed for statistical purposes. ITA No. 7125/Mum./10 (For AY 2006-07) 53. This is an appeal by the Assessee against the order of the DCIT, Circle-3(3), Mumbai, passed under section 143(3) of the Act, read with section 144C of the Act. 54. Ground No. 1 has already been de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order) to the eligible assessee, if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. For the purpose of section 144C of the Act, Eligible assessee has been defined under section 144C(15) to (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA ; and (ii) any foreign company. Admittedly in the case of the Assessee there was reference to the TPO under section 92CA of the Act, for determination of ALP of international transaction between the Assessee and its AE. Therefore the Assessee is an eligible assessee to whom the provisions of section 144C of the Act, will apply. In the case of assessments in the case of eligible assessee, section 144C of the Act prescribes procedure where the Assessing Officer proposes variation to the income or loss returned by the eligible Assessee. The Assessing Officer has to first pass a draft assessment order. The copy of the draft assessment order is served on the Assessee and if the Assessee objects to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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