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TMI Blog2018 (2) TMI 1084X X X X Extracts X X X X X X X X Extracts X X X X ..... puty Commissioner of Income-tax, Circle 18(1), New Delhi (hereinafter referred to as 'the learned AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel - II (hereinafter referred to as 'the Hon'ble DRP') under section 143(3) read with section 144C of the Income-tax Act, 1961 ('Act'), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio. 2. That, without prejudice, the learned AO has grossly erred in making a transfer pricing addition of Rs. 277,999,266/- and a corporate tax addition of Rs. 14,857,889 while computing the income of the Appellant. The addition made to the returned income is highly unjustified and also suffers from mistakes apparent from record. 3. That the Hon'ble DRP has committed gross errors in confirming the order passed u/s 92CA(3) of the Act by the learned Transfer Pricing officer (the learned TPO') proposing a transfer pricing adjustment to the actual value of the international transactions of the Appellant with its associated enterprises and only granting a partial relief thereof. 4. That on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onomic analysis for the determination of the ALP of the Appellant's international transactions and holding that the international transactions are not at arm's length. 10.1 That on the facts and circumstances of the case and in law, the learned TPO / Hon'ble DRP has erred in rejecting the Appellant's claim to use multiple year data for computing the arm's length price and, instead, has adhered to the use of single year updated data to conclude the ALP of the international transactions. 10.2 Even as otherwise, on the assumption adopted by the learned TPO and without prejudice to Ground 10.1 above, even if single year updated data of the comparables selected in the transfer pricing documentation is considered, then also no transfer pricing adjustment could have been made to the income of the Appellant. 10.3 That on the facts and the circumstances of the case and in law, the learned TPO/ Hon'ble DRP has erred in selection of functional non comparable companies and application of arbitrary filters for the purpose of determination of arm's length price of the international transactions pertaining to provision of IT and IT enabled services by the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 144C of the Income-tax Act, 1961 (for short 'the Act') qua the assessment year 2009-10 on the grounds inter alia that :- "i. That the Ld. DRP-II erred in law and facts in allowing part relief of Rs. 4,24,45,874/- to the assessee in the computation of Arm Length Prices of the International Transactions pertaining to the "Provision of ITES" and "Software Development Services". ii. That the Ld. DRP-II erred in law and facts in accepting the contention of the assessee regarding exclusion of M/s. Aricent Tech., M/s. Bodhtree Consulting and M/s. Cat Technologies (Provision for Software Development Services) without appreciating the reasons given by TPO and without considering that the TPO had selected the comparables keeping in view the broad comparability under TNMM. iii. That the Ld. DRP-II erred in law and facts in accepting the contention of the assessee regarding exclusion of M/s Coral Hub (Provision tor ITES) without appreciating the reasons given by TPO and without considering that the TPO had selected the comparables keeping in view the broad comparability under TNMM. iv. That the Ld. DRP-II erred in law and facts in not appreciating the fact that the assessee had cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions viz. Information Technology Enabled Services (ITES) and Software Development services. The taxpayer in its Transfer Pricing Study used Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) for both the segments and computed its margin at 13.83% and 13.23% in ITES and Software Development services respectively. 6. Ld. Transfer Pricing Officer (TPO), after examining the TP study made by the taxpayer and on the basis of various filters, described in para 3.2 of the TP order made its own TP analysis by selecting 8 comparables for ITES segment and 18 comparables in software development segment and calculated their margin at 34.29% and 28.88% respectively and computed the cumulative adjustment in both the segments to the tune of Rs. 32,04,45,140. 7. Ld. DRP who has given part relief by excluding Bodhtree Consulting, CAT Technologies and Aricent Technologies from the final set of comparables qua software development services and by excluding Coral Hub qua ITES segment for benchmarking the international transaction. Feeling aggrieved, the taxpayer has come up before the Tribunal seeking exclusion of 5 comparables and 3 comparables qua software development s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.98% Adjustment proposed 17,29,92,770 Based on this analysis, adjustment amount Rs. 17,29,92,770 is proposed for ITES Segment. Total Adjustment Amount : Rs. 27,79,99,266" TRANSFER PRICING ISSUES 10. Undisputedly, there is no dispute as to the TNMM used by the taxpayer as MAM for benchmarking the international transactions. It is also not in dispute that the taxpayer is a captive service provider to its AE to provide software development services and ITES services. There is also no change in the business model of the taxpayer as compared to the preceding years. 11. The ld. AR for the taxpayer to cut short the controversy sought exclusion of 5 comparables, viz., Infosys Technologies Ltd., Persistent Systems Ltd., Tata Consultancy Services Ltd. (Consolidated), Thirdware Solutions Ltd. & Wipro Ltd. for benchmarking the international transactions qua software development and inclusion of Quintegra Solutions Ltd. qua software development and sought exclusion of Accentia Technologies Ltd., Cosmic Global Ltd. & eClerx Services and sought inclusion of Microland Ltd., R Systems & CG Vak Software & Exports Ltd. for benchmarking the international transactions qua ITES segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D and is a full-fledged risk taking company. More so, Infosys was ordered to be excluded in taxpayer's own case for AY 2008-09 (supra). In these circumstances, Infosys is not a suitable comparable vis-à-vis the taxpayer for benchmarking the international transactions, hence we order to exclude it. PERSISTENT SYSTEMS LTD. (PERSISTENT) 18. The taxpayer sought exclusion of Persistent on the grounds inter alia that it is outsourcing its services; that it is also engaged in development of products with no segmental data available; and that it is expending around 1% of its total income of Rs. 56.1 million on R&D activities. Undisputedly, Persistent has not been contested by the taxpayer before ld. TPO as well as ld. DRP. In the given circumstances, we are of the considered view that if something new is to be examined let it be examined by the ld. TPO first as the taxpayer has preferred not to contest Persistent before the ld. TPO as well as DRP. So, this issue is set aside to the ld. TPO to examine afresh after providing an opportunity of being heard to the taxpayer. TATA CONSULTANCY SERVICES LTD. (TATA) 19. The taxpayer sought exclusion of Tata on ground of functional dis-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional dis-similarity on the ground that its segmental information is not available and that company is also into sale of user licence for software application and relied upon SunLife India Services Centre Pvt. Ltd. in ITA No.1489/Del/2014 for AY 2009- 10 & St. Ericsson India (P.) Ltd. vs. Addl. CIT in ITA No.1672/Del/2014 for AY 2009-10. 23. However, the ld. DR for the Revenue opposed the exclusion of Thirdware on the ground that the taxpayer has not contested Thirdware either before the ld. TPO or before ld. DRP. 24. The coordinate Bench of the Tribunal in case of St. Ericsson India (P.) Ltd. (supra) while examining the comparability of Thirdware ordered to exclude Thirdware as a comparable vis-à-vis St. Ericsson from a routine captive software development provider working on cost plus basis on the ground that the substantial revenue of this company is from sales and operating sales of licence, software services, export form SEZ unit, export from STPI unit and revenue from subscription. 25. All these facts are available in the annual report page 1537 of the annual report compendium. So, in these circumstances, we are of the considered view that let the TPO examined the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as is evident from consolidated balance sheet schedule V, available at page 1659 of the annual report compendium, to the tune of Rs. 28213 million. 30. So keeping in view the functions, assets and risk profile of Wipro and which is a fully risk bearing company, we are of the considered view that it is not a suitable comparable vis-à-vis the taxpayer which is a routine captive software development service provider working on cost plus mark up model of business. Applying the ratio of the decision rendered by Hon'ble High Court in Agnity India Technologies Pvt. Ltd. (supra), we are of the considered view that Wipro being a giant company in the area of development of software assuming full-fledged risk leading to higher profit, having huge intangibles and R&D activities is not a suitable comparable to the taxpayer being a captive software development service provider working on cost plus basis having no R&D activities and is a risk insulated company. So, we order to exclude Wipro from the final set of comparables. COMPANIES SOUGHT TO BE INCLUDED QUINTEGRA SOLUTIONS (QUINTEGRA) 31. Primarily, the ld. TPO has rejected Quintegra as a comparable on the ground that this comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nture on grounds of its functional dis-similarity; that Accenture has undergone extra ordinary events during the year under assessment and that its segmental data is not available in the public domain and relied upon the taxpayer's own case in ITA No.1038/Del/2015 for AY 2010-11, Ameriprise India Pvt. Ltd. vs. ACIT in ITA No.2010/Del/2014 for AY 2009-10, Capital IQ Information Systems vs. ACIT in ITA No.124/Hyd/2014 for AY 2009-10 and Macquarie Global Services Pvt. Ltd. vs. DCIT in ITA No.6803/Del/2013 for AY 2009-10. 37. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the AO/DRP. 38. The taxpayer raised objection for inclusion of Accenture before the ld. TPO that it is functionally dis-similar and is into diversified business and has acquired Oak Technologies Inc. and, therefore, fails the filter of some peculiar circumstances but TPO has not discussed the objection of functional dis-similarity and has retained Accenture as comparable on the ground that its acquisition was completed by 31.03.2009 and it has no impact on the revenue of the company during the year under assessment. Ld. DRP retained Accenture by simply agreeing with ld. TPO and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only Rs. 9,90,737/- whereas the major chunk of the business are from translation charges i.e. Rs. 6,99,35,756/- and income from BPO is Rs. 27,76,090/-. 45. Moreover, perusal of the P&L account further shows that the taxpayer has outsourced 56% of its activities and its outsourcing expenses are 56% of its revenue which makes its business model different from the taxpayer. So, we can safely conclude that Cosmic is into translation business which is not comparable to the taxpayer which is providing insurance claim processing services to its AE under ITES segment. 46. Cosmic was examined as a comparable in taxpayer's own case for AY 2008-09 and was ordered to be excluded being functionally dissimilar vide order dated 28.08.2014 passed in ITA No.6312/Del/2012. Cosmic was also ordered to be excluded as a comparable by the coordinate Bench of the Tribunal in ITA No.6803/Del/2013 vide order dated 22.01.2015 vi-a-vis Macquarie Global Services Pvt. Ltd. which was also into providing ITES services to its AE on ground of its functional dis-similarity by relying upon Mercer Consulting (India) Pvt. Ltd. vs. DCIT (ITA No.966/Del/2014) on the ground that Cosmic outsources its major activities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settlement etc. and cannot be compared with Macquaire Global Services Pvt. Ltd. (supra) which is also a captive unit rendering services to its AE without any intangibles. 51. So, in view of the matter, we are of the considered view that E-Clerx is not a suitable comparable vis-à-vis the taxpayer who is ordered to be excluded. COMPARABLES SOUGHT TO BE INCLUDED BY THE TAXPAYER MICROLAND LIMITED (MICROLAND) 52. Undisputedly, Microland was taken as a comparable first time by the taxpayer before the ld. DRP. The ld. AR for the taxpayer submitted that Microland passes all the filters applied by the TPO. The ld. DRP have not given any finding on this comparable. In the given circumstances, when Microland passes all the filters applied by the TPO, the TPO is directed to examine its comparability for the purpose of benchmarking the international transactions. CG VAK SOFTWARE & EXPORTS LTD. & R. SYSTEMS (CG VAK) (R. SYSTEMS) 53. The ld. TPO rejected CG Vak Software & Exports Ltd. as a comparable on the ground that significant income of this company is from "software development" and that income from BPO operation is only Rs. 86,00,000/-. TPO has applied segment while examinin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign exchange gain/loss as non-operating item while operating arm's length price of international transaction of the taxpayer in AYs 2008-09 and 2010-11. 59. Hon'ble High Court of Delhi in case cited as Pr. CIT-02 VS. M/s. Cashedge India Pvt. Ltd. in ITA 279/2016 order dated 04.05.2016 while upholding the decision rendered by the Tribunal held that Safe Harbour Rule is not applicable to AY 2008-09 as it came into force w.e.f. 18.09.2013 since the ld. DRP has primarily relied upon Safe Harbour Rule while upholding the decision of ld. DRP in treating the foreign exchange fluctuation gain/loss as nonoperating item, the findings are not sustainable. 60. The coordinate Bench of the Tribunal decided the identical issue in case of Westfalia Separator India Pvt. Ltd. vs. ACIT in ITA No.4446/Del/2002 for AY 2003-04 by returning following findings :- "We have heard the rival submissions and perused the relevant material on record. The forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account on the basis of rate of foreign exchange then prevailing and the amount actually paid or received at the rate of foreign exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideration." 61. So, we are of the considered view that foreign exchange gain/loss cannot be treated as non-operating items while calculating the margin of the taxpayer as well as comparables. So, we direct to treat the foreign exchange gain/loss as non-operating margin as non-operating items while benchmarking the international transactions. Consequently, ground no.4 is determined in favour of the taxpayer. GROUND NO.5 62. Ld. AO/TPO/DRP have not made appropriate adjustment on account of working capital differences between the taxpayer vis-àvis comparable companies, which are under challenge before the Tribunal. Ld. DRP denied appropriate adjustment on account of difference in working capital employed on the ground that the onus is on the taxpayer to demonstrate the reason and calculation of working capital adjustment and the ld. TPO has rightly denied the same to the taxpayer. 63. Identical issue has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and then decide its allowability as per law." 64. Following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that the taxpayer is entitled for working capital adjustment to be on the same page with the comparables. So, the taxpayer is entitled for working capital adjustment, the quantum of which is to be checked by the ld. TPO who has to proceed on the lines of the decision rendered by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2008-09, Consequently, Ground No.5 is determined in favour of the taxpayer. GROUNDS NO. 6, 7, 8, 9 &10 65. Grounds No.6, 7, 8, 9 &10 are general in nature more specifically elaborated in the subsequent grounds, need no adjudication. GROUNDS NO.11 & 11.1 66. The AO in the draft order, available at pages 140 to 147, denied the deduction of Rs. 125,71,932/- and Rs. 22,85,957/- claimed u/s 10A of the Act being the interest on FDR and misc. income respectively on the ground that the same is not related to exports. Ld. DRP also upheld the findings of the AO by observing that the interest income cannot be termed as profit derived from an undertaking and has also not followed the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 10B were concerned. 10. In Motorola India Electronics (P.) Ltd. (supra) reference was made to the decision of the Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 which dealt with Section 80HH and Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC), which interpreted Section 801B of the Act. Reference was also made to the decision of CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 (SC), which interpreted Section 80HH and the decision of the Madras High Court in CIT v. Menon Impex (P.) Ltd. [2003] 259 ITR 403/128 Taxman 11 which interpreted Section 10A of the Act. The Karnataka High Court in Motorola India Electronics (P.) Ltd. (supra), after noticing the above decisions, held that "it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking". Specific to the question of interest earned by the EOU on the FDRs placed by it and interest earned from the loans given to sister concerns, it was held that although it did not partake the character of profit and gains from the sale of an article "it is income which is derived from the considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ism for computing the "profits of the business" eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. The CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goods. I.T.A.T., Special Bench in the case of International Research Park Laboratories v. ACIT, 212 ITR (AT) 1, after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case ofP.R. Prabhakar; 284 ITR 584 had approved the principle laid down in the Special Bench decision in International Research Park Laboratories v.ACIT (supra). In the assessee's own case the I.T.A.T. in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the present case, the Assessee has stated that the interest on FDRs was received on "margin kept in the bank for utilization of letter of credit and bank guarantee limits". In those circumstances, the decision of the ITAT that such interest bears the requisite characteristic of business income and has nexus to the business activities of the Assessee cannot be faulted. In other words, interest earned on the FDRs would form part of the "profits of the business of the undertaking" for the purposes of computation of the profits derived from export by applying formula under Section 10B(4) of the Act.' 13. Mr. Ashok Manchanda, learned Senior standing counsel for the Revenue, urged that none of the earlier decisions of the High Courts have considered the effect of Sections 80I, 801A and 801B of the Act which occur in Chapter VIA of the Act. He referred in particular to Section 80A(4) of the Act, which reads as under: '4) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C-Deductions in respect of certain incomes", where, in the case of an assessee, any amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 80A, and the other provisions in Chapter VIA, are independent of Sections 10A and 10B of the Act. It appears that the object of Section 80A(4) was to ensure that a unit which has availed of the benefit under Section 10B will not be allowed to further claim relief under Section 80IA or 80IB read with Section 80A(4). The intention does not appear to be to deny relief under Section 10B(1) read with Section 10B(4) or to whittle down the ambit of those provisions as is sought to be suggested by Mr. Manchanda. Also, he is not right in contending that the decisions of the High Courts referred to above have not noticed the decision of the Supreme Court in Liberty India. The Karnataka High Court in Motorola India Electronics (P.) Ltd. (supra) makes a reference to the said decision. That decision of the Karnataka High Court has been cited with approval by this Court in Hritnik Exports (P.) Ltd. (supra) and Universal Precision Screws (supra). In Hritnik Exports (P.) Ltd. (supra) the Court quoted with approval the observations of the Special Bench of the ITAT in Maral Overseas Ltd. (supra) that "Section 10A/10B of the Act is a complete code providing the mechanism for computing the &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest earned on fixed deposit receipts to the tune of Rs. 125,71,932/- and Rs. 22,85,957/-. 69. Similar view as to allowing the deduction u/s 10A of the Act on excess provision returned back amounting to Rs. 7,42,769/- has been expressed by the coordinate Bench of the Tribunal in Birlasoft (India) Ltd. vs. DCIT 44 SOT 664 (Delhi). Following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that notice pay recoveries from the employees is also part of the business profit of the taxpayer on which the taxpayer is also eligible for deduction u/s 10A of the Act. Consequently, grounds no.11 & 11.1 are also determined in favour of the taxpayer. GROUND NO.12 70. The AO has not given credit of tax deducted at source of Rs. 58,922/- to the taxpayer. AO is directed to provide the credit to the taxpayer qua the tax deducted at source after due verification. GROUND NO.13 71. The AO has also not given credit of advance tax of Rs. 27,50,000/- deposited by the taxpayer during the year under assessment. The taxpayer is entitled for credit of advance tax subject to verification by the AO. So, the AO is directed to proceed accordingly. GROUND N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based assessment services ) and Mobile Classified space (mobile search and classified advertising platform for the used car industry in Malaysia) into Pressmart Media Limited, Learn Smart (India) Pvt. Ltd. and Trylah SDN Bhd respectively. It is also mentioned that the company has software solutions of its own (Hygia 2.3 - Enterprise Data Quality Solution, Busin Essence 4.0 - Business Intelligence Dashboard Solution, DigiDoc - Document Management framework) and Sevices (Web Services and Customized IT Professional Services. 78. However, TPO retained Bodhtree as a comparable on the ground that the company has shown fixed assets in the form of computer software of Rs. 96,03,610/- only which is insignificant and there is no capitalized expenditure on software development on software products and as such, it does not have any significant product business. 79. However, the ld. DRP excluded Bodhtree on the ground of abnormal results during this year by tabulating the margin of this company of earlier and subsequent years as under :- Company Name 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 OP/TC Margin Bodhtree Consulting Limited 14.66% 33.20% 20.86% 64.04% 34.39% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the end of the year. Apparently, we could not find out any such capitalized value of work-inprogress in the balance sheet of the company on standalone basis. We directed the ld. DR to examine the Annual report of this company and point out the amount of expenses capitalized in respect of incomplete work at the end of the year. On the next date of hearing, the ld. DR failed to specifically point out any amount of such capitalized expenses with the opening or closing balance. This prima facie shows that the expenses incurred in respect of incomplete projects of software development at the end of the year, but billed in the subsequent year, were, in fact, treated as expenses for the current year alone. In the same manner, expenses incurred in the preceding year for the contracts of software development remaining incomplete at the end of the year, also must have been included in the expenses of the last year alone, but, the income getting recognized on the raising of bills in the current year. This albeit, patently deforms the correct profitability on year to year basis, yet, but we cannot help the situation. When the position of accounts of Bodhtree is such that it does not properly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio. Both these objections have been overruled by the ld. TPO. 87. However, the ld. DRP rejected Coral Hub as a comparable on ground of its outsourcing activities. Perusal of annual report, available at page 945 (P&L account for the year ending June, 2010), shows that Coral has outsourced its activities to the extent of 90% and its operating expenses on account of data entry charges, vendor payment and expenses on conversion of books into POD titles is to the tune of about Rs. 56 crores. 88. Coral Hub has been ordered to be excluded on ground of functional dis-similarity by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2008-09. The relevant findings returned by the coordinate Bench of the Tribunal are reproduced as under :- "12.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it is mainly engaged in e-publishing business. It has more than 10,000 classic books to its credit which are also converted into large font titles for visually challenged. Apart from e-publishing, this company is also engaged in Documents scanning & Indexing. It can be seen from the financial result ..... X X X X Extracts X X X X X X X X Extracts X X X X
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