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TMI Blog2014 (7) TMI 715X X X X Extracts X X X X X X X X Extracts X X X X ..... ac against the assessee’s whopping turnover of ₹ 59 crore - the turnover of ₹ 86 lac can be compared with that of ₹ 59 crore – Relying upon CIT Versus Agnity India Technologies Pvt. Ltd. [2013 (7) TMI 696 - DELHI HIGH COURT] - a giant company cannot be compared with a captive unit, applies with full force to the instant case as well - the assessee is a giant company and BPO segment of CG-VAK is only a captive one - If a giant company cannot be considered as comparable to a small company, in the like manner, a small company cannot be equally compared with a giant company - the case of CG-VAK cannot be held to be comparable on the strength of its volume of business - the computation of net profit margin realised by the BPO unit of CG-VAK is not adequately workable and it is a captive unit vis-a-vis the assessee. R. Systems International Limited – Held that:- The assessee has adopted the figures of the company for the calendar year ending 31.12.2008 - the assessee is closing its accounts as on 31.3.2009, naturally, the data of R. Systems does not pass the test laid down in sub-rule (4) of Rule 10B - R. Systems International Ltd. has been excluded by the TPO solel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers a relatively longer period to pay their amount which will result into higher interest cost and the resultant less profit - Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it to pay back its suppliers which lowers the interest cost and accelerates profits - To have a level playing field, it is sine qua non that the working capital adjustment should be carried out to bring two otherwise comparable cases at par with each other - the order of the TPO/AO is set aside for examining the assessee’s claim for grant of working capital adjustment on merits and thereafter, allow the same, if it is available. Reduction of amount of deduction u/s 10AA of the Act – Held that:- In computing the total income of an assessee, a deduction of hundred percent of profits and gains `derived from the export’ of the eligible articles or things shall be granted for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the unit begins to manufacture, etc. - a narrow interpretation of the phrase ‘derived from’ would have been applicable - the interest income which falls under Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transactions in Audit Report in Form 3CEB. Whereas two international transactions were accepted by the TPO at arm s length price (ALP), the dispute in the present appeal is on the determination of ALP of the set of international transactions of rendering of IT enabled services to M/s Mercer (US) Inc., for which the assessee was compensated with a sum of ₹ 59,19,89,199/-. In so far as the international transactions under this category are concerned, the factual matrix is that the assessee s AEs undertook contracts and pricing negotiations with the end-customers. The prospective clients were made aware that the services will be provided through an offshore delivery centre in India, i.e., the assessee. The assessee used Transactional Net Margin Method (TNMM) to benchmark this category of international transactions. In the TP study, the assessee arrived at a set of seven comparables with their weighted average profit rate of 19.14% on the basis of multipleyear data. As against this, the assessee s profit margin was declared at 21.54%. In this backdrop of facts, the assessee claimed that its such international transactions were at ALP. The TPO called upon the assessee to submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion in the list of comparables, as were included by the assessee in its list of comparables :- 1. Allsec Technologies Ltd.; 2. CG.-VAK Software and Exports Ltd; and 3. R Systems International Ltd. 6. The assessee is also aggrieved against the inclusion of three cases, which were originally included by the assessee in its TP study on the basis of multiple-year data, but specifically withdrawn by claiming such cases to be not comparable. These cases are: i) Coral Hub Ltd. (earlier known as Vishal Information Technology Ltd.); ii) Cosmic Global Ltd.; and iii) Genesys International Ltd. 7. The assessee has also objection to not being allowed working capital adjustment. 8. Firstly, we will take up such cases one by one to find out if these were rightly excluded/ included by the TPO. Allsec Technologies Limited 9.1. This case was included by the assessee in the list of comparables which was excluded by the TPO on the ground of diminishing sales for the last three years and the export revenues less than 75% of the total turnover. Here, it is relevant to mention that the TPO adopted certain filters which have been mentioned on pages 13 and 14 of his order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sides. 9.2. The exclusion of this case has been done by increasing the limit in filter to 75% as against 25% applied by the assessee because the percentage was 74.45%. If the actual ratio in this case had been more than 75%, and the Revenue hell bent on excluding this case, then it would have resorted to increasing the ceiling in the filter to 80% or still more so as to ensure that it remains outside the limit set by it. As the ratio of 75% is not something which is scientifically proven and the export revenue of Allsec Technologies is 74.45% as against the TPO s filter of 75%, we are of the considered opinion that the same cannot be excluded for such a minuscule difference if it is otherwise comparable. It is patent that the TPO has not disputed the otherwise functional comparability of this case with that of the assessee. If we consider the case of Allsec Technologies on a criteria of preponderance of comparability, we find that the same merits inclusion in the list of comparables. Not only the TPO s reasoning about the declining revenue of Allsec Technologies over a period of three years is incorrect, this case is also passing the test of the ratio of export turnover to to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method. One of such methods is TNMM. The modus operandi for the computation of ALP under these five distinct methods has been enshrined in Rule 10B (1). Clause (e) of Rule 10B (1) deals with the determination of ALP under TNMM, the prescription of whose relevant part is as under:- (e) transactional net margin method, by which, (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (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 and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case to that particular extent. When the delegated legislature has employed the word realised in the context of net profit margin of comparables, it must be the amount of net profit reported as realised by such case. Nothing more or less than that can be accepted. The Special Bench of the Tribunal in LG Electronics India Pvt. Ltd. vs. ACIT (2013) 140 ITD 41 (Del) (SB) has held that the procedure prescribed under the relevant Rule must be scrupulously adhered to and it is not permissible to deviate from the same in any circumstance. This manifests that the amount of `net profit realised cannot be substituted with certain other hypothetical arithmetical exercise. 10.7. Coming back to CG-VAK Software Exports Ltd., it is seen that net profit margin realized from the BPO services segment is not separately reported by such company. Thus this case needs to be excluded at the very outset for lack of the availability of the data of the BPO segment. Proceeding further, it is seen that the assessee proceeded to calculate the so called amount of net profit realised at 4.01% of the BPO segment by bifurcating operating income and operating expenses in the ratio of revenue from these s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Reverting to the facts under consideration, we find that the turnover of CG-VAK from BPO services segment is only to the extent of ₹ 86 lac against the assessee s whopping turnover of ₹ 59 crore. By no standard, the turnover of ₹ 86 lac can be compared with that of ₹ 59 crore. The same analogy as approved by the Hon ble High Court in Agnity India Technologies Pvt. Ltd. (supra) that a giant company cannot be compared with a captive unit, applies with full force to the instant case as well. The only difference being, that, whereas in the case of Agnity India, the assessee was a captive unit and the comparable chosen by the TPO was a giant company, the position is converse in the present case inasmuch as the assessee is a giant company and BPO segment of CG-VAK is only a captive one. If a giant company cannot be considered as comparable to a small company, in the like manner, a small company cannot be equally compared with a giant company. In our considered opinion, the case of CG-VAK cannot be held to be comparable on the strength of its volume of business. We want to make it clear that we have desisted from expressing any opinion on the applicability or ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case, we find that the assessee has adopted the figures of this company for the calendar year ending 31.12.2008. Since the assessee is closing its accounts as on 31.3.2009, naturally, the data of R. Systems does not pass the test laid down in sub-rule (4) of Rule 10B. The ld. AR invited our attention towards the Annual accounts of R. Systems available at page 144 of the assessee s paper book. It can be seen from the audited accounts of R. Systems that the data for year ending 31.12.08 has been given under one column and the data for quarter ending 31.3.09 and 31.3.08 (both audited) has been given in the other two columns. This shows that if we take up the yearly data ending 31.12.08 and exclude the results of quarter ending 31.3.08 and include the results of quarter ending 31.3.09, what we get is the data for the financial year ending 31.3.09, being the same financial year in which the instant international transactions were entered into by the assessee. 11.6. The ld. DR relied on an order passed by the Mumbai Bench of the Tribunal in ACIT vs. Hapag Lloyd Global Services Ltd. 2013- TII-68-ITAT-MUM-TP (authored by one of us, namely, the AM) in which it has been held that a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was taken at the stage of the TP study or during the course of proceedings before the authorities below. It goes without saying that the object of assessment is to determine the income in respect of which the assessee is rightly chargeable to tax. As the income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath, any income wrongly included in the total income, which is not otherwise chargeable, should be excluded. There can be no estoppel against the provisions of the Act. Extending this proposition further to the context of the transfer pricing, if the assessee fails to report an otherwise comparable case, then the TPO is obliged to include it in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable case as comparable in its TP study and then later on claims that it should be excluded then, there should be nothing to forbid the assessee from claiming so, provided the TPO is satisfied that the case so originally reported as comparable is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the foregoing discussion, we hold that the assessee cannot be prohibited from demonstrating that this case is incomparable. 13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at ₹ 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at ₹ 9.90 lacs, Translation charges at ₹ 6.99 crore and Accounts BPO at ₹ 27.76 lac. The ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e consider the nature of services provided by Genesys International Corporation Ltd., it comes to the forefront that they are providing full range of geospatial services to its customers. In simple terms, geospatial services means the services relating to the relative position of things on the earth s surface. These basically include 3D mapping, Navigation maps, Image processing, Cadastral mapping, etc. If we take into account the nature of services provided by the assessee, being financial and retirement security, health, productivity of employees and employment relationships and then try to compare them with those rendered by Genesys, it is manifested that both are totally incomparable. 14.3. The TPO on page 48 of his order has examined CBDT Circular SO 890 (E) dated 26.9.2000 which provides a detailed list of products or services that can be covered under the ITES for the purposes of Section 10A and 10B of the Act. In this Circular, the Information Technology Enabled Products/Services have been divided into fifteen categories, starting with Bank Office operations, Call centres etc. and ending with Website services. From the very description of such services, it is palpable th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ML conversions and multimedia services provided to publishers of books and journals. When we consider the nature of services provided by Cepha Imaging vis-a-vis those rendered by the assessee, which are basically in the nature of human resources or payroll, we find that the same are not comparable. The view taken by the TPO in excluding this case from the list of comparables is upheld. 15.2. In so far as the case of Micro Genetics Systems Ltd. is concerned, we find from a perusal of their Annual accounts of, a copy of which is available on pages 719 onwards of the paper book, that this company is basically engaged in rendering Medical transcription services. We are at loss to appreciate as to how medical transcription services can be compared with the human resources and payroll services provided by the assessee to the clients of its AEs. The reasons which led to the exclusion of the case of Genesys International Corporation Ltd. from the list of comparables drawn by the TPO, fully apply against the noninclusion of the case of Micro Genetics Systems Ltd., which is operating in an altogether different line of activity making it totally incomparable with that of the assessee. We, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atively longer period available to it to pay back its suppliers which lowers the interest cost and accelerates profits. To have a level playing field, it is sine qua non that the working capital adjustment should be carried out to bring two otherwise comparable cases at par with each other. We are unable to comprehend any reason or rhyme to restrict the grant of working capital adjustment only in the case of manufacturers or traders. What is true for these categories of businesses, is fully true for a service provider as well. It is a different matter that in the case of service provider, no working capital adjustment would be required towards higher or lower inventory, but the same may be warranted in respect of higher or lower trade receivables/payables. Since the authorities below have rejected the assessee s contention for grant of working capital adjustment at the threshold, which in our considered opinion is not correct, we set aside the impugned order and remit the matter to the file of the TPO/AO for examining the assessee s claim for grant of working capital adjustment on merits and thereafter, allow the same, if it is available. Needless to say, the assessee will be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising there from. Even if the relation between the income and business is indirect, that would also qualify as business profit. But there must be relation between the income and business. Such income to be eligible for inclusion must have some direct or indirect relation with the business. Once the position is so, we fail to understand as to how interest income which is if otherwise in the nature of business income, can be excluded from the eligible qualifying income for the purposes of deduction u/s 10AA. The position would have been different if the legislature had not incorporated sub-section (7) to give meaning to the expression profits derived from the export of articles , etc., as given in sub-section (1). In that case, a narrow interpretation of the phrase derived from would have been applicable. The reliance of the ld. DR on the case of Pandian Chemicals Vs. CIT (2003) 262 ITR 278 (SC) urging us to exclude the amount of interest income from the eligible profits, is misplaced. In that case, the question under consideration was whether interest earned by industrial undertaking on deposits with Electricity Board qualifies for relief under section 80HH. The Hon ble Apex Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary details about the nature of interest income are not available on record, we deem it expedient to set aside the impugned order and remit the matter to the file of the AO for firstly, deciding as to whether the items of interest income fall under the head Profits and gains of business or profession. If the answer is in affirmative, then, deduction should be allowed on such interest income u/s 10AA. 17.3.1. The only other aspect is the reduction of communication expenses incurred in foreign currency from the computation of export turnover u/s 10AA of the Act. The AO observed that communication expenses amounting to ₹ 57,02,875/- were in the nature of telecommunication charges incurred in foreign currency attributable to delivery of computer software outside India. Relying on sub-section 1(i) of Section 10AA, the AO held that such expenditure in foreign currency was required to be reduced from the amount of export turnover. That is how, he brought down the amount of export turnover to ₹ 58.61 crore from the original amount of ₹ 59.18 crore, while keeping the figure of export turnover at ₹ 59.18 crore. 17.3.2. We have heard both the sides on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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