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TMI Blog2015 (9) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... ort-term deposits and Rs. 7'109,196 being interest on income tax refund as "Income from Other Sources" and in "denying deduction under section 10B/10A of the Act. 4.2. That the Learned CIT(A) has erred on facts and in law in not accepting that interest on short-term deposits and interest on income tax refund is income derived from the business of the undertaking and accordingly eligible for deduction under section 10B/10A of the Act. 4.3. That the Learned CIT(A) has erred on facts and in law in not netting off the interest income against the interest expense." In revenue's appeal (ITA No.1832/Del/2010), the following grounds are taken :- "1) On Relief of Rs. 15,87,61,266/- on account of Arm's Length Price : a) Whether in the facts and circumstances of the case the Ld. CIT(A) was right in rejecting the comparables on the ground of related party transactions? b) Whether in the facts and circumstances of the case the Ld. CIT(A) was right in treating the foreign exchange and miscellaneous income as operating income? c) Whether in the facts and circumstances of the case the Ld. CIT(A) was right in admitting the additional evidence without providing an opportunity to the TPO to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ATIONAL transaction into two categories i.e. Category-I which includes transactions from 1 to 8 of the table above; and Category-II with reference to transactions from Sl. Nos.9 to 13. With reference to Category-II transactions, there was no transfer pricing adjustment and the arm's length price of these transactions was accepted. In benchmarking Category-I transactions, the assessee adopted approach of aggregation of international transactions from 1 to 8 and concluded that Transactional Net Margin Method (TNMM) is most appropriate method to benchmark these international transactions. In TNMM, the assessee has compared its operating margin upon operating cost (OP/TC) for the year under consideration. The assessee in its transfer pricing study had taken 16 comparable companies and arrived at their margin at 14.62% and assessee's margin was calculated at 11%. Thus, the assessee sought to justify its arm's length price with regard to international transactions it had undertaken with its Associated Enterprises in Category-I transactions. The list of comparable companies taken by the assessee are as follows :- SL.No. Name of the Company (i) Ace Software Exports Limited (ii) C S S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and support Rs.3,14,44,46,093/- Add: Difference as above Rs. 36,89,34,440/- Arm's length price of international transaction of export of business processing and support Rs. 3,51,33,80,533/- 9. The arm's length price of the international transactions entered into by the assessee regarding export of business processing and support to its AEs is determined at Rs. 3,51,33,80,533/- in place of Rs. 3,14,44.46,093/-. Since the price charged by the assessee varies by more than 5% from the Arm's Length Price, an adjustment of Rs. 36,89.34,440/- is to be made to the income of the assessee, being the difference between the arm's length price and the price charged by the assessee from its AEs for rendering services to them. i.e. the Assessing Officer shall enhance the income of the assessee by an amount of Rs. 36.89,34,440/- while computing its total income. No exemption u/s. l0B shall be admissible on such adjustment in accordance with proviso of Sub-Section (4) of Section 92C." 5. Aggrieved, the assessee filed an appeal before the first appellate authority. The CIT (A) partly allowed the appeal of the assessee. 6. Against the order of the CIT (A), the assessee is in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation of arithmetic mean of the comparable companies. On this score, we find that the Revenue is aggrieved against the acceptance of additional evidence in respect of this company in violation of Rule 46A. 8. There are two aspects of this issue. First is the question of the very inclusion of this company in the list of comparables and the second is about the calculation of its profit margin. As regards the first issue, we do not find any reason to disturb the view of the ld. CIT(A) because the assessee included it in the list of comparables in its Transfer pricing study. The very comparability of this company was not disputed by the TPO. In that view of the matter, the ld. CIT(A) cannot be faulted with for directing to include the data of a company in the list of comparables, which was originally included by the assessee and not objected to by the TPO. As regards the second aspect of the computation of the profit margin of this company, we find that the ld. CIT(A) accepted the data furnished by the assessee of this company and proceeded to include the same in the list of comparables without affording any opportunity to the TPO for examining the same. We, therefore, find that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hbooks International Pvt. Ltd. (supra) held as under :- "12.2.2. Having heard both the sides on this issue, we find that the TPO has accepted the functional comparability of this company on segmental level. The ld. DR was also fair enough to candidly accept the functional similarity of the relevant segment of this company. In such circumstances, the question arises as to whether the relevant segment of this company can be excluded from the list of comparables merely on the ground that the revenue from this segment is only Rs. 83 lacs? In our considered opinion, the quantum of turnover can be no reason for the exclusion of a company which is otherwise comparable. We have noticed above the judgment of the Hon'ble jurisdictional High Court in the case of ChrysCapital Investment Advisors (India) P. Ltd (supra) in which it has been held that high turnover or high profit can be no reason to eliminate an otherwise comparable company. The same applies with full force in the converse manner as well to a low turnover/low profit company. We, therefore, hold that a company cannot be excluded from the list of comparables on the ground of its low turnover. In principle, we direct the inclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Datamatics Technologies Limited, which is at 39% (page 49 of the Paper Book submitted by the assessee). This aspect has not been considered by the CIT (A). The Tribunal in the case of Nokia India (P) Ltd. (supra) has held as follows :- "16. We find that this submission has two components, viz., the composition of numerator and denominator and the percentage of such numerator to the denominator. We agree in principle that if any company though functionally comparable, but, has more than a specific percentage of the RPTs, then, the same should be ignored by treating it as a controlled transaction. However, the percentage of RPTs to make a company as ineligible for comparison, in our considered opinion, should be taken as more than 25% and not 15% as suggested on behalf of the assessee. The view adopting more than 25% RPTs making a company incomparable has been taken by various benches of tribunal including Aglient Technologies International P. Ltd. VS. ACIT (2013) 36 CCH 187 Del Trib; Stream International Services Pvt. Ltd. VS. ADIT (IT) (2013) 152 TTJ (Mumbai) 553 ; and Actis Advisers Pvt.Ltd. VS. DCIT (2012) 20 ITR (Trib) 138 (Delhi). We, therefore, hold that a company can be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to". Such second degree income would constitute independent source of income beyond the first degree nexus between profit and the industrial undertaking. Therefore the interest income from other sources doesn't qualify for deduction. Therefore this ground is rejected." 11.2 Before us, the ld. AR submitted that interest income earned on short term deposit is eligible for deduction u/s 10A/10B of the Act. For the above proposition, the ld. AR relied on assessee's own case in ITA No.1016/Del/2001 for AY 2002-03. It was further submitted that the issue in question is squarely covered by the following judgments/orders of the Hon'ble High Court and the Tribunal :- (i) CIT vs. Motorola India Electronics (P) Ltd. - ITA No.428 and 447 of 2007 (Karnataka High Court); (ii) CIT vs. Hritnik Exports Pvt. Ltd. - ITA No.219 and 239 of 2014 (Delhi High Court); and (iii) Mercer Consulting (India0 Private Limited vs. DCIT - ITA No.966/Del/2014 (Delhi ITAT). 11.3 It was also submitted in this context that the judgment of Hon'ble jurisdictional High Court in the case of Hritnik Exports delivered on November 2014 refers to and relies upon decision of Hon'ble Karnataka High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Based on the above calculations, it is clear that the company has significant percentage of related party transactions (total value of related party transactions/ total operating expense is close to 68%) hence, I hold that Hinduja TMT is not to be used as a comparable company on account of significant related party transactions." 13.2 The revenue, being aggrieved, is in appeal before us. 13.3 Having heard rival submissions, we notice that this company is having high related party transactions to the extent of 68%. This categorical finding of the CIT(A) has not been challenged by the revenue in its grounds The various orders of the Tribunal have held that the companies having related party transactions in excess of 25% are to be excluded from the comparable list. Following the orders of the Tribunal which have held so, i.e., Nokia India (P) Ltd. Vs. DCIT (supra) and ACIT vs. Convergys India Service (P) Ltd. (supra), we hold that the CIT (A) is justified in excluding the same from the list of comparables. WHETHER FOREIGN EXCHANGE INCOME AND MISC. INCOME ARE OPERATING INCOME 14. The TPO has not considered certain items as operating. The assessee before the CIT (A) submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue was decided against the assessee in the preceding year. In view of facts of the case and following the decision given by my predecessor for AY 2003-04, I am satisfied that business of AEGSC Unit (Regd as STP Unit) as having been created by splitting/ expansion of the existing business of FCE Unit which is already enjoying the benefit of Section 10B of the Act. Hence, as a natural corollary to above; the assessee's eligibility for exemption u/s 10A for the newly set up AEGSC unit is rejected." 15.1 The CIT (A) decided the issue in favour of the assessee by following his predecessor's order. The CIT (A) held that new unit was not set up by splitting up or existing business and, therefore, it was entitled to deduction u/s 10A of the Act. The relevant finding of the CIT (A) reads as follows :- "17.3 I have carefully considered the submissions made by the appellant and the observations of the Assessing Officer as well as that of the Additional Commissioner of Income Tax. I have also gone through the observations of my predecessor for the Assessment Year 2003-2004 i.e. the first year of claim of deduction under section 10A. This is not denied that the turnover of both the units ..... X X X X Extracts X X X X X X X X Extracts X X X X
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