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TMI Blog2019 (4) TMI 1361X X X X Extracts X X X X X X X X Extracts X X X X ..... CS E Serve International Ltd. - software testing, verification and validation of software are highly technical and require high level of technical expertise for carrying out such type of software relating testing, and therefore, such a function cannot be compared with that of the assessee. Again, in the profit and loss account, the income has been shown as transaction processing and other services which does not give any segmental information with regard to the technical services rendered by this company, therefore, we hold that at the functional level this company cannot be held to be comparable. Omega Healthcare Ltd. - Since the only reason assigned to reject this company is that its financial data is not available in public domain, accordingly, we remand this comparable to the file of the TPO who shall examine the annual report and decide accordingly. Caliber Point Business - if the quarterly results of the relevant financial year of this company are available and margins can be computed proportionately, then same can be adopted; and simply because this company follows different financial years ending, the same cannot be excluded if functionally it is found to be com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilding expenditure of about ₹ 78 crores, whereas assessee does not hold any significant intangibles. Apart from that, it is a substantial selling and marketing expenses which is 6.93% of sales, whereas in case of the assessee, it has not incurred any expenses for business promotion/marketing etc. being a captive service provider. Such a huge brand value and marketing expense has a direct effect in negotiation of prices and impacts profit margins . Thus this company cannot be held to be comparable. Disallowance of deduction u/s.10A on interest income earned from short term deposits - AO considering the same as income from other sources - HELD THAT:- The words derived by undertaking in Section 10A are derived from the words enshrined in Chapter VI A, and therefore, Profits Gains of undertaking including incidental income by way of bank deposits is also entitled for 100% deduction u/s.10A. Keeping in view this principle of law, we remand the issue for a limited purpose to the file of the Assessing Officer to examine the contention of the assessee that, whether the fixed deposits made by the assessee was made for over margin money obtaining bank guarantee; or for making pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as allowed the deduction u/s.10A, then such a disallowance ostensibly will only go to enhance the income of the assessee which again would be subject to deduction u/s.10A. Therefore, such a disallowance in the case of the assessee becomes purely academic. In any case, when this issue has been decided in favour of the assessee in the Assessment Year 2009-10, then on this ground also, we do not find any reason to deviate from such a precedence and accordingly, disallowance made u/s.40A(2)(b) is directed to be deleted. Adjustment u/s 115JB - MAT - provisions for bonus by considering it as unascertained liabilities - HELD THAT:- No detail or working has been given before us in this regard, therefore, we deem it fit to restore this issue to the file of the Assessing Officer who shall examine, whether the provision has been made on the basis of rational or scientific basis or not and assessee shall demonstrate that such a reasonable degree of estimation has been considered while making the provision. If it is found that provision has been made on rational and reasonable basis, then such a provision needs to be allowed and cannot held to be contingent or unascertained. With this direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the transfer pricing grounds, the assessee has challenged the following inclusion/ exclusion of 8 comparables: i) TCS-E Serve International Ltd. (included by the TPO); ii) TCS-E Serve Ltd. (included by the TPO); iii) Omega Healthcare (included by the TPO); iv) R Systems International Ltd. Segmental) (excluded by the TPO); v) Caliber Point Business Solution (excluded by the TPO); vi) C G-VAK Software Export Ltd. (excluded by the TPO); vii) Microgenitics Systems Ltd. (excluded by the TPO); viii) Informed Technologies India (excluded by the TPO). 3. In the Revenue s appeal, the Revenue has challenged exclusion of the following 3 comparable by the ld. CIT(A) which was included by the TPO: (i) M/s. Accentia Technology Pvt. Ltd.; (ii) M/s. I-Gate Global Solution Ltd.; (iii) M/s. Infosys BPO Ltd. 4. We will first take up the transfer pricing issues. The brief facts are that the assessee-company was incorporated on 14th November, 2003 to provide IT Enabled Services (ITeS) to its associates enterprises. It has 100% export-oriented unit under the Software Technology Park Scheme. It had entered into a master service agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cludes setting up new claims, reserves, claims related amendments, making interim and final payments and reconciling statements in accordance with developed process flows. d. GDMS ( Global Data Management Services ) Supporting the onshore staff in maintenance of databases like GENIUS, WINS, PeopleSoft etc. e. Re-insurance Administration Re-insurance administration includes performing various activities like calculating and initiating recover request of re-insurance claims, calculating the premiums to be paid to the reinsures, settlement of accounts for inward premium, recording of additional or reversal premium entries. f. Service Commitment Global Programs: Tracking the process/progress of critical accounts identified on the basis of certain business conditions. The team in India also updates country guides, Service fronting manuals and provide other reporting and administrative support. g. Investment Reconciliation and reporting: Reconciliation of investment data between the accounting system and PACE, perform data checks in PACE and preparation of various investment data reports. 5. During the year under consideration, the assessee has entered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered 4 comparables of the assessee also, namely, i) Cosmic Global Limited; ii) E4e Healthcare; iii) Jindal Intellicom Pvt. Ltd.; and iv) Fortune Infotech Ltd. Since the average PLI of the comparables selected by the TPO was arrived at 31.33%. accordingly, adjustment of ₹ 67,87,84,800/- was made. 8. Now we shall take up various comparables which has been contested by the assessee. i) TCS E Serve Ltd.: 8.1 Before the TPO, the assessee had raised his objection that, firstly, there is no separate segmental information in respect of ITES and Software Development Services; and secondly, it is functionally dissimilar with the assessee company. However, the TPO after detail discussion has rejected the assessee s objection and included it for the purpose of comparability analysis. Ld. CIT(A) in so far as the assessee s contention are that this company is also involved in software testing and verification, held that these services are not separate software development but had done at the time of implementing the data center management activities at the time of execution of BPO services, therefore, these technical services are not independent software development serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that during the year there is extraordinary growth in revenue and profit of this company. Therefore, he attributed some special reason for such exponential increase. In any view, unless, Ld AR points out any exceptional reason for the increase in revenue profit of this company, this rise in turnover 8s profit itself would not constitute special reasons for disqualification as good comparable. Accordingly, this company will remain in the final list of the comparables. Ld AR has further argued that this company was takeover by Tata Consultancy Services Ltd earlier year. This is the first full year of operation after takeover by TCS Ltd. The company has used customer base of name of TCS to optimize its profit. I have considered this argument of Ld. AR. Firstly, this company was not taken over by TCS Ltd. during this year. Secondly, as reproduced in earlier paragraph. The appellant has provided ITES to City Group only. Therefore, the use of synergy of TCS name and use of its customer base is factually incorrect. The Ld. AR has not provided any evidence that this company is using software or technical expertise of TCS Ltd. in its operation. Therefore, the arguments of Ld AR is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee based on same argument as in case of TCSI. Annual Report of TCS E Serve does not show any significant difference in the functions being performed by TCS E Serve and TCSI as both provide transactional processing services to its client. For both the companies their main client is Citigroup entities. Also the technical services are part of the entire gamut of services provided by the assessee as well as TCS E Serve and therefore the segmental information relating to the technical services may not be relevant. This does not involve any software development activity only verification and validation of software for ITeS operation. Thus, since the transactions relating to the transactional processing and technical services (Provision of ITeS) are inter connected and continuous transactions therefore these can be evaluated and compared on aggregate basis. Regarding the brand value relating to TCS it is submitted that the entire revenue of TCS e-Serve is from Citigroup entities therefore it can be said that the revenue of the TCS is not effected by Tata Brand. 9. We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the products given development phase satisfy the condition imposed at the start of that phase; and Validation is the process of evaluating the system or component during or at the end of the development process to determine whether it is satisfying specific requirement. The verification and validation process again require high technical expertise and methods for testing the software quality. All such functions are akin to software development. These technical services ostensibly cannot be held to be simple ITES/BPO services if compared to the assessee s functions. We find that assessee is mostly into finance operation which includes report preparation, reconciliation, booking of account entries, reinsurance operation tax; and actuarial analysis; and its operation consist of credit control under writing, claims, global data management services, investment, reconciliation, reporting etc. Though these services may be slightly more than BPO services and at par with high end IT enabled services, but none of these activities can be reckoned to be in realm of highly technical software services which require high technical expertise/ skills and methods for conducting software testi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data center management activities. Thus, the functions of this company are similar to what has been discussed above. Ld. CIT(A) too has given exactly the similar finding and the contention of the learned Department Representative are again the same. 11. After hearing both the parties, we find that this company is also rendering almost similar kind of services as provided by TCS E Serve Ltd. Thus, this company too apart from transaction processing services is also providing technical services which involves software testing, verification and validation of software at the time of implementation of data management activity services. While analysing the functions of TCS E Serve, we have already held that software testing, verification and validation of software are highly technical and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the information and annual report of the company is available in public domain or not and if it is available the same should be included. Before us, the ld. Counsel has provided the annual report which is appearing at pages 658 to 674 of the annual report compilation. 15. Since the only reason assigned to reject this company is that its financial data is not available in public domain, accordingly, we remand this comparable to the file of the TPO who shall examine the annual report and decide accordingly. iv) Caliber Point Business: 16. This company has been rejected by the TPO and ld. CIT(A) on the ground that this company follows the different financial year ending but there has been no comment as to whether this company is functionally comparable or not. 17. Before us, the learned counsel submitted that quarterly results for different financial years are available and now there are various judgments including that of Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India Pvt. Ltd., ITA No.217/2014 and Techbooks International Pvt. Ltd., ITA No.343/Del/2017, wherein it has been held that if quarterly results are available then profit m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alendar year). Though a comparable company following a different financial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period is available then it cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Ld. Counsel before us submitted that the audited accounts of R- Systems for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.03 2009 can easily be deduced. If there are no major incident of factors disturbing the profit margin in that quarter, whose results are being worked out and the transactions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- 10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus, so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R-Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover filter. 25. Now we will come to three comparables as contested by the Department in the grounds of appeal; namely, i) Accentia Technology Pvt. Ltd.; ii) I-Gate Global Solution Ltd.; and iii) M/s. Infosys BPO Ltd. i) Accentia Technologies Pvt. Ltd.: 26. In so far as Accentia Technology Pvt. Ltd. is concern, the learned TPO has included the said company as comparable, because, this company is into ITES and rejected the assessee s submission that, since there was a merger with Asscent Info Serve Ltd., in this year, therefore, due to such extraordinary event, this company cannot be held to be comparable. The TPO held that such an acquisition does not construe or become extraordinary events as there is nothing to suggest company s functions have changed substantially after the acquisition and it does not affect any normal operation of the business. He also compared the comparative income and Operating Profit of three financial years from 2007-08 to 2009-10 and held that there is not much difference in the operating profit. In so far as the assessee s contention that this company operates in a healthcare receivable management and its income is from medical prescript ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant findings given in the impugned order as well as material referred to before us, we find that this company is engaged in providing healthcare receivables cycle management services. It is not in dispute that in pursuance of scheme amalgamation of erstwhile company, Ascent Info Serve Pvt. Ltd. with the assessee company, this company was amalgamated with the assessee company during the relevant financial year and hence there is an extraordinary event during the year. Apart from the functions and services provided by this company has been held to be high level KPO services providing company which now has been held to be functionally different from the company providing BPO Services. In the case of Cadence Designs Supra this comparable has been discussed and excluded in the following manner: - 14.3 We have considered the rival submissions and also perused relevant finding given in the impugned order. Accentia Technologies Ltd. has two main business areas namely, health care receivable cycle management services and software products for BPOs. It earns substantial part of its income from coding activities which is primarily related to e-software development. Various streams of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company during the relevant financial year and on that basis also ld. CIT(A) has held to be non-comparable. Under these facts and circumstances of the case, once there is no segmental information with regard to the information technical services, i.e., development of software products and also there is an extraordinary event of amalgamation, therefore, this company has rightly been excluded by the ld. CIT(A). Infosys BPO Ltd. 33. The TPO has included this company as a comparable and this company is engaged in ITES Segment, and therefore, this company is functionally similar to that of the assessee. He rejected the assessee s contention that assessee has acquired membership interest in mechanic system analysis which is extraordinary event. However, the ld. CIT(A) had excluded this company by following the judgment of Hon'ble Delhi High Court in the case of Magnet India Technology Pvt. Ltd. on the ground that this company had substantial intangible in the form of goodwill and had different risk factors, and therefore, same cannot be included. 39. After considering the rival submissions and on perusal the relevant findings given in the impugned order as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37. Before the ld. CIT(A), the assessee submitted that the assessee has outstanding external commercial borrowings (ECB) amounting to ₹ 2,28,55,000/-. It was pointed out that assessee has filed an application before RBI for obtaining ECB on 16th January, 2005, which was granted by RBI on 19th January, 2005 to draw ECB with first repayment installment schedule on 31st December, 2012. On 29th January, 2009 considering the availability of business funds with the assessee, it filed an application with Citi Bank for prepayment of ECB which was duly approved on 17th May, 2010 and on 30th July, 2010, assessee repaid the ECB loan. During the pendency of the approval from the requisite authority, the assessee temporarily park its business fund with the bank and also paid applicable interest on such outstanding ECB till its payment. However, ld. CIT(A) held that the assessee could not provide the details of the dates when the funds were kept for fixed deposits and whether these fixed deposits were made prior to the 29th January, 2009 when application was filed for prepayment of ECB; and thus, in absence of any data it is difficult to examine whether the fixed deposits was made for sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10B on the ground that the profits of business of undertaking would include its entire business income including receipts on account of interest. Following these judgments, now there are various decisions of the Tribunals including that of ITAT Delhi Bench holding this issue in favour of the assessee. Thus, he submitted that earlier judgment in the case of the assessee will have not any binding judicial precedence especially when the Hon'ble Jurisdictional High Court on similar issue has decided the matter in favour the assessee. 39. On the other hand, learned Department Representative has strongly relied upon the order of the ld. CIT(A) and submitted that, whence in assessee s own case this issue has been decided against the assessee from the stage of the Hon'ble High Court, then, same view should be followed. 40. We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as cases referred to before us. The assessee has earned interest on short term fixed deposits amounting to ₹ 63,67,249/-. The assessee s contention has been that it had parked its funds generated out business activities in a short-term fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any other business purpose. In this year, the assessee has given the explanation as to why the FDRs were placed to mitigate the interest cost and was kept as margin money obtaining bank guarantee and also for making prepayment of ECB pending approval from the liquidator authority. Since, ld. CIT(A) in a very cursory manner has rejected this contention on the ground that no details of dates have been given when the funds were kept for FDR. The Assessing Officer without examining the correct provision of law especially enshrined in sub section (4) of Section 10A has blanketly held that interest on FDRs is income from other sources which is not allowable for deduction u/s.10A. Now there are catena of judgment of Hon'ble High Court including that of Hon'ble Jurisdictional High Court in the case of CIT vs. Hrithnik Export Pvt. Ltd. (supra) and Full Bench judgment of Hon ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd. (supra). First of all, we find that Hon'ble Delhi High Court in the case of XLNC Fashions, ITA No. 438/2014, vide judgment dated 1st September, 2014 dealing with similar formula laid down in sub Section (4) of Section 10B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such Undertakings doing such special business activity. 35. The Scheme of Deductions under Chapter VI-A in Sections 80HH, 80-HHC, 80-IB, etc from the 'Gross Total Income of the Undertaking', which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI-A under Section 80-HH, etc. The computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Profits and Gains of Business as per S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words enshrined in Chapter VI A, and therefore, Profits Gains of undertaking including incidental income by way of bank deposits is also entitled for 100% deduction u/s.10A. Keeping in view this principle of law, we remand the issue for a limited purpose to the file of the Assessing Officer to examine the contention of the assessee that, whether the fixed deposits made by the assessee was made for over margin money obtaining bank guarantee; or for making prepayment of ECB for which funds were parked on temporary basis pending approval from the requisite authorities; or is in any manner inextricably linked with the assessee s business. If the contention of the assessee is found to be correct on facts then deduction of such an interest has to be allowed while computing the profits u/s.10A. With this limited direction, the matter is restored back to the file of the Assessing Officer who shall decide after giving due opportunity to the assessee. Thus, grounds no.4 to 4.2 is treated as partly allowed for statistical purposes. 43. The next issue relates to reconciliation of interest with TDS certificates. The learned Assessing Officer has noted that assessee has declared interest i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of computing the export turnover and whether sundry debtors amounting to ₹ 2,59,241/- were to be excluded from the export turnover. The Assessing Officer has reduced the export turnover of assessee to the tune of ₹ 52,18,911 alleging that assessee has failed to realize unbilled revenue of ₹ 49,59,670/- and amount receivable to the tune ₹ 2,59,241/- within six months, i.e., time stipulated for deduction u/s.10A. 50. Before the ld. CIT(A), it was submitted that entire details of outstanding amount in respect of export sales was realized within the period of six months from the end of the financial year 2009-10. Ld. CIT(A) accordingly directed the AO to verify the record and if the amount has been realized within the stipulated period of six months then exemption has to be allowed. 51. The grievance of the assessee before us is that, instead of ld. CIT(A) holding that exemption can be disallowed it should have been read as exemption can be allowed. 52. After considering the submissions made by the learned counsel and on perusal of the relevant findings in the impugned order, we find that assessee has filed relevant FIRC evidencing the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f each and every service delivered by Appellant Create a culture of continuous improvement and ensure that Appellant operates as a fully integrated component of XL Group Manage various teams to ensure smooth service deliver by Appellant Look after functions and supervise activities performed by Appellant. Philippe Lutgen worked exclusively for the assessee so as to ensure that service delivery standards of the assessee meet the global standards. Further, remuneration paid to Rahul Bhattacharya and Priti Singh is justified looking to their significant role played in the business of the assessee. In light of above facts, the remuneration paid by the assessee to its employees including Philippe Lutgen is fully allowable on account of commercial expediency for the business of the appellant. Various judicial precedents were relied upon to contend that the expenditure must first be proved as excessive and unreasonable from the point of commercial expediency of the business of the assessee in order to be disallowed u/s.40A(2)(b) of the Act. Apart from that, it was also submitted that the assessee is operating on cost plus mark up on the service income, wherein all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has allowed the deduction u/s.10A, then such a disallowance ostensibly will only go to enhance the income of the assessee which again would be subject to deduction u/s.10A. Therefore, such a disallowance in the case of the assessee becomes purely academic. In any case, when this issue has been decided in favour of the assessee in the Assessment Year 2009-10, then on this ground also, we do not find any reason to deviate from such a precedence and accordingly, disallowance made u/s.40A(2)(b) is directed to be deleted. 57. The next issue relates to disallowance of provisions for bonus by considering it as unascertained liabilities at ₹ 3,08,21,090/- for the purpose of computing the book profits u/s.115JB. The Assessing Officer noted that assessee has declared book profit of ₹ 10,24,90,804/- and found that assessee has not added amount of ₹ 3,08,21,090/- being provision for bonus created during the year. Since bonus has been paid next year, therefore, the exact liability is ascertained at the time of payment. Accordingly, he treated it to be unascertained liability and added back while computing the book profit u/s.115JB. 58. Ld. CIT(A) too confirmed the said a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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