9911796707
TMI Blog2013 (11) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... specific reason for the comparable company's profits to be abnormal in Assessment Year 2004-05 which could adversely affect its comparability. It is also seen that company has a clearly demarcated call centre segment and segmental results are available in the Annual Reports / audited financial statements of the company and TPO has allocated the unallocated expenses in the ratio of sales, which also cannot be faulted - action of the TPO in rejecting these two companies as comparables in the case on hand for Assessment Year 2004-05 is upheld - Following decision of 24/7 Customer. Com (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle 11(2), Bangalore [2013 (1) TMI 45 - ITAT BANGALORE] - Decided in favour of Revenue. Deduction u/s 10A/10B - Set off of brought forward business loss - Held that:- After making all such computation the assessee would be entitled to the benefit of set off or carry forward of loss as provided u/s 72 of the Act. That is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carrying on. The said benefit is available even to undertakings u/s 10B of the Act. The expression "deduction of such prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by AE : Rs. 1,06,13,403 (iii) Expenses reimbursed to AE : Rs. 1,49,88,146 The TPO after examination of the international transactions passed an order u/s.92CA of the Act vide order dt.15.12.2006 proposing an adjustment of Rs. 2,03,04,850 in respect of the international transactions pertaining to the assessee's BPO services rendered to group companies (viz. AEs). After receipt of the order of the TPO, the Assessing Officer completed the assessment by an order u/s.143(3) of the Act dt.27.12.2006 determining the income of the assessee at Rs. 2,63,22,680. 2.2 Aggrieved by the order of assessment for A.Y. 2004-05 dt.27.12.2006, the assessee preferred an appeal before the CIT(A)-IV, Bangalore. The learned CIT(A) disposed of the assessee's appeal by order dt.1.3.2011 allowing the assessee partial relief. 3.0 Aggrieved by the order of the CIT (Appeals)-IV, Bangalore for Assessment Year 2004-05 dt.1.3.2011, both the assessee and revenue are before us in appeal raising various grounds. 3.1 The grounds raised by the assessee in its appeal in ITA No.661/Bang/2011 are as under : "I. Transfer Pricing Adjustment. 1. The Hon'ble CIT (Appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he arithmetical mean of the profit margin of the comparables under the proviso to section 92C(2) of the IT Act, 1961 while computing the arm's length price.(ALP). 6. The learned CIT (Appeals) has erred in interpreting the second limb of the proviso to section 92C(2) of the IT Act, 1961 as it stood prior to the amendment brought about by the Finance (No.2) Act,2009 with effect from 01.10.2009 without taking into consideration the ITAT decision in the case of DCIT v. Global Vantage Pvt. Ltd. (2010-TIOL-24-ITAT-DEL). 7. The learned CIT (Appeals) has erred in relying on the CBDT Circular No.5/2010 dated 3.6.2010 where it has been clarified that the second proviso to section 92C(2) was applicable for the assessment year 2009-10 onwards which was subsequently modified by CBDT by way of a corrigendum dt.30.9.2010. 8. The learned CIT (Appeals) has erred in directing the Assessing Officer to exclude 2 (two) comparable companies as being super profit making cases and companies making profits at wide variance with the arithmetic mean of the PLI of the comparables, without appreciating the detailed reasons recorded in the TPO's order for the selection of such companies as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ('TNMM'). It adopted "Operating profit to total cost" as the Profit Level Indicator ('PLI'). The assessee conducted a search on prowess data base and identified the following companies as comparables to justify the arms length nature of its international transactions with its AEs in its transfer pricing study report : S.No. Company's Name Margin on cost (%) 1. Ace Software Ltd. 14.90 2. Karvy Computershare Pvt. Ltd. 12.95 3. MCS Limited 6.81 4. Max Healthscribe Ltd. 12.95 5. Allsec Technology Ltd. 15.08 6. Tata Share Registry 11.56 Arithmetic Mean : 11.87 As the assessee had shown net margin on cost at 14.84% which is more than the average net margin on cost of comparable companies, the assessee concluded that its international transactions were at arm's length. 4.2 The TPO rejected the Transfer Pricing Study submitted by the assessee for the detailed reasons given in her order u/s.92CA of the Act. Thereafter, the TPO conducted her own search applying certain parameters and identified 8 companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. We, therefore, now proceed to examine the individual companies chosen by the TPO as comparables. 5.2 Nucleus Net Soft GIS India Ltd. In respect of this company, there is no dispute between the assessee and TPO since both agree that this company is to be taken as a comparable company. 5.3.1 Wipro BPO Limited The learned A.R. submitted that this company should be removed from the set of comparables. It is submitted that the ITES industry is demarcated based on size and that the assessee cannot be compared to companies having sales disproportionate to the sales generated by the assessee. The turnover of Wipro for the financial year 2003-04 is Rs. 430 Crores whereas that of the assessee is Rs. 11.86 Crores. Based on the principles enunciated by the Bangalore ITAT in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159 Wipro BPO should be rejected on the basis of its turnover being in excess of Rs. 200 Crores. 5.3.2 We have carefully considered the submissions of both parties and perused and considered the material on record and the judicial decisions relied on. A co-ordinate bench of this Tribunal in the case of Genisys Integrating Sys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that the decision of the co-ordinate bench in the case of 24/7 Customer.Com (P.) Ltd. (supra) to which both of us are party, on the issue of excluding VITL as a comparable, squarely applies and therefore direct the A.O. / TPO to exclude Vishal Informational Technologies Limited from the list of comparables. 5.5.1 Tricom India Ltd . The learned Authorised Representative submitted that this company should be removed from the list of comparables for the following reasons : (i) This company operates in the field of Title Plant Maintenance and Electronic data where it faces no competitors giving it a clear and distinct edge; (ii) This company enjoys scalability of operations and presence of differentiating intangibles due to its operating in a niche area. (iii) This company has developed unique in-house software to provide BPO services. In this regard, the learned Authorised Representative referred to the Annual Report of this company for Fin. Year 2003-04. It is submitted that the business of the assessee would fall under the IT Enabled Services (ITES) sector and while the assessee does not own any brand intangibles, M/s. Tricom India Ltd., the compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee and accordingly direct the Assessing Officer / TPO to exclude it from the list of comparables in this case." Respectfully following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra). We direct the assessment proceedings / TPO to exclude Tricom India Ltd from the list of comparable companies for the case on hand for Assessment Year 2004-05. 5.6.1 Fortune Infotech Limited The learned A.R. submitted that this company should be excluded from the list of comparables, in the case on hand, for the following reasons :- (i) The company has developed its own, unique, web based software Suite called "Finetran" for providing medical transcription services. (ii) Scale of operations of this company is such that it is to be rejected on grounds of diminishing revenues. It is submitted by the learned AR that the assessee's business is purely in ITES sector and it has no intangibles, whereas Fortune Infotech Ltd., the comparable adopted by the TPO, has developed its own web based software suits called 'Finetran' for providing medical transcription services. The learned A.R. cite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect the Assessing Officer / TPO to exclude it from the list of comparables in this case." Respectfully following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra), we direct the Assessing Officer / TPO to exclude Fortune Infotech Limited from the list of comparable companies for the case on hand for Asst. Year 2004-05. 5.7.1 Spanco Telesystems Solutions Limited The learned A.R. submitted that this company should be excluded from the list of comparables for the following reasons :- (i) This company is engaged in not only provision of call centre services but also telecom and other services. (ii) The TPO has considered the segmental margin for the call centre activity while determining the comparability with the tax payer / assessee. (iii) Further, this company has certain unallocated expenses and the TPO while computing the segmental margins has arbitrarily allocated these expenses, based on sales. The said allocation is not rational as the ITES industry, is driven by man power and therefore allocation ought to have been based on head count of employees. (iv) It is submitted that co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany where profits were at vide variation with the arithmetic mean of the PLI of comparables and wrongly following the order of the Tribunal in the case of SAP LABS India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156 without examining whether the facts and circumstances of the assessee's case warranted such a finding. The learned Departmental Representative submitted that the co-ordinate bench of the Bangalore Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra), for the very same Assessment Year 2004-05, elaborately discussed the issue of super profits or abnormal profits and held that merely because the profits of the comparable company are high, the assessee has to demonstrate that there are specific or special reasons for this company earning such profits to render it abnormal which the assessee, in the case on hand, has failed to do. In these factual circumstances and relying on the principle laid down by this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra), the learned Departmental Representative prayed that the order of the learned CIT (Appeals) be reversed and the TPO's action be upheld by including Ultramarine Pigments Ltd. as a comparable in the case on h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained for comparability thereby automatically eliminating outliners whereas in the Arithmetic Mean Method all companies that are in the sample are considered, without exception, and the average of al the companies are considered as ALP. Therefore as a general rule that companies with abnormal profits should be excluded may be in line with the principles enumerated in the OECD guidelines, but cannot be said to be in tune with Indian TP regulations. The assessee has not been able to establish or demonstrate with any evidence any reason to support the proposition that the profit of the comparable company was abnormally high. It must not be overlooked that high profits reflect better business sense and practices also. The net Arithmetic Mean margin of 36.49% was arrived at after taking into account both 63.27% and also 3.44% which is the lowest in the relevant ITES industry. We also find from the material on record that this company has a clearly demarcated call centre segment and segmental results are available in the audited financial statements of the company. We, therefore, see no reason why the M/s. Ultra Marine Pigments Ltd should not be considered as a comparable and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of comparable companies. The learned Departmental Representative contended that the inclusion of this comparable being agreed to both by the assessee and TPO, and the inclusion thereof not being challenged by the assessee in the grounds of appeal raised before the learned CIT (Appeals), the learned CIT (Appeals) had no jurisdiction to adjudicate on its exclusion as a comparable and his doing so has rendered his action both erroneous and beyond jurisdiction. In these circumstances, the learned Departmental Representative argues, the action of the learned CIT (Appeals) ought to be reversed. 5.9.2 We have heard both parties on this issue of treating this company as a comparable to the case of the assessee for Assessment Year 2004-05. There is no dispute to the fact that both the assessee and the TPO agree, that this company is to be included in the list of comparables in the case on hand for the period under consideration. As pointed out by the learned Departmental Representative, a perusal of the grounds of appeal raised by the assessee before the learned CIT (Appeals) reveal that though the assessee has challenged the inclusion of certain comparables by the TPO and the exclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct in rejecting this as a comparable company." Respectfully following the aforesaid decision in the case of 24/7 Customer.Com (P.) Ltd. (supra), we uphold the action of the TPO in excluding this company from the list of comparables in the assessee's case for Assessment Year 2004-05. 6.2.1 MCS Limited and Tata Share Registry Ltd. The learned Authorised Representative contended that these two companies ought to be accepted as comparables in the assessee's case for the following reasons : (i) MCS Ltd., and Tata Share Registry Ltd. act as share transfer agents and are engaged in providing data processing activities which are in the nature of ITES activity. (ii) The TPO erred in rejecting both these companies from the list of comparables on the ground that they had no export turnover and therefore no foreign exchange earnings and consequently would not pass the export filter. It is the contention of the assessee that export turnover v. domestic turnover has no bearing on the application of TNMM and hence this reasoning cannot be used as a criterion for rejecting any comparable. 6.2.2 We have heard both parties and considered the material on record. The co-ordinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. The learned Authorised Representative contended that this issue is covered in favour of the assessee and in this regard he relied on the decision of the co-ordinate bench of this Tribunal in the case of Symphony Services Corpn. (I) (P.) Ltd. [IT Appeal No. 1187 (Bang.) of 2012, dated 28-9-2012]. In this cited case, the Tribunal had followed the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Yokogawa India Ltd. [2012] 341 ITR 385. The learned Authorised Representative cited these rulings in support of the proposition that the deduction under section 10A of the Act is to be calculated without setting off the carried forward business loss of the assessee in respect of earlier assessment years as had been claimed by the assessee. 7.2 Per contra, the learned Departmental Representative supported the decision of the learned CIT (Appeals) and sought the dismissal of the grounds raised by the assessee on this issue. 7.3 We have heard the rival submissions and perused and carefully considered the material available on record. The Hon'ble jurisdictional High Court in the case of Yokogawa India Ltd. (supra) had held that deduction u/s 10B is allowable wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward of loss as provided u/s 72 of the Act. That is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carrying on. The said benefit is available even to undertakings u/s 10B of the Act. The expression "deduction of such profits and gains as derived by an undertaking shall be allowed from the total income of the assessee", has to be understood in the context with which the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarifies this position. It provides that the profits derived from export of articles or things from computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Therefore, it is clear that though the assessee may be having more than one undertaking for the purpose of section 10A it is the profit derived from export of articles or things or computer software from the business of the undertaking alone that has to be taken into consideration and such profit is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f law is answered in favour of the assessees and against the revenue". 7.5 Respectfully following the dictum laid down by the Hon'ble jurisdictional High Court in the case of Yokogawa India Ltd. (supra), we hold that the deduction u/s 10A/10B of the Act is to be computed without setting off of the carried forward business loss of the assessee in respect of the earlier assessment years. It is ordered accordingly. Hence, Ground No.2 is allowed. 8.0 In the ground at S.No.3, the assessee challenged the order of the learned CIT (Appeals) upholding the action of the Assessing Officer in charging the assessee interest under section 234B of the Act. The charging of interest being consequential and mandatory, the Assessing Officer has no discretion in the matter and therefore we uphold his action in charging the said interest under section 234B of the Act to be in order. The Assessing Officer is, however, directed to recompute the interest chargeable under section 234B of the Act, if any, while giving effect to this order. 9. In the result, the assessee's appeal is partly allowed. Revenue's Appeal in ITA No.602/Bang/2011 (Assessment Year 2004-05) 10. On perusal, we find the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, the word total turnover is not defined for the purpose of this section. It is because of this omission to define 'total turnover', the word 'total turnover' falls for interpretation by this Court; .In section 10A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange in providing the technical services outside India, from the export turnover without corresponding reduction from total turnover, thereby reducing the deduction claimed by the assessment u/s 10B of the Act. 11.3.4 In light of the above facts, the Special Bench held as under:- "For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of section 10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. The appeals filed by the department are thus dismissed". 11.3.5 In the light of the above reasoning, we are of the view that the order of the CIT(A) is correct and in accordance with law and he is justified in directing the AO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while calculating deduction u/s 10A of the Act. 11.3.6 In the result, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% from the price charged in the international transactions, then the assessee does not have any option referred to in section 92C(2). Thus, as per the above amendment, it is clear that the + / - 5% variation is allowed only to justify the price charged in the international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly the 5% benefit is not allowable in the assessee's case. The various judicial decisions cited pertain to the period prior to the retrospective amendment in section 92C(2A) of the Act and are not applicable to the facts of the assessee's case. In this view of matter, we reverse the order of the learned CIT (Appeals) allowing the assessee 5% standard deduction from the arithmetic mean margin of profit of the comparables. It is ordered accordingly. 13. The grounds raised by revenue at S.Nos.8 to 10, challenging the learned CIT (Appeals)'s action in directing the exclusion of two comparable companies (i) Ultramarine Pigments Ltd. and (ii) Allsec Technologies Ltd. from the list of comparables has already been considered and adjudicated upon at paras 5.8.1 to 5.8.3 and 5.9.1 to 5.9.2 of this order. Therein, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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