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TMI Blog2020 (6) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany, it is not a comparable company so far Segment Reporting is concerned. The eClerx Services limited operates under a single primary segment i.e. data analytics and process outsourcing services therefore different from the assessee company. The eClerx Services limited, is engaged in providing KPO services to global clients. Besides, due to high turnover with significant fluctuations in revenues and profits, the eClerx Services limited should not be selected as comparable company. Therefore, we direct the TPO/AO to exclude the eClerx Services limited, as this company is not a comparable company, as explained above, hence it requires to be excluded. TCS eServe International Limited (TCS eServe) had a high brand value and, therefore, was able to command greater profits, besides, it operated on economic upscale. The TCS eServe International is engaged in the business of software testing, verification and validation and thus not comparable, therefore, we direct the ld TPO/AO to exclude the TCS eServe International, as this company is not a comparable company with the assessee, as explained above, hence it requires to be excluded. Denial of claim of exemption of interest u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prays the Bench that additional evidences relating to working capital adjustments may be admitted and ld TPO may be directed to consider the same to compute the transfer pricing adjustments, if any. 3. The additional evidences submitted by the assessee by its letter dated 30.04.2019, are reproduced below: 1. The instant appeal for the Assessment Year 2011-12 was filed by your petitioner against an order dated July 27, 2017 passed by the Deputy Commissioner of Income Tax (Appeals) 12(1), Kolkata made under section 144C of the Income-tax Act, 1961 (hereinafter referred to as the Act ). 2. Your petitioner states that during the proceedings before the Dispute Resolution Panel (hereinafter referred to as the DRP ), it had contended that the adjustment of working capital of the tested party and the comparables should be made in the computation of the margins of the tested party and the comparables. Your petitioner was of the bona fide belief that providing for working capital adjustment is a settled position of law and generally the DRP remits the issue to the file of the Ld. Transfer Pricing Officer for factual verification. Your petitioner states that it had prepared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al evidences should not be admitted. 5.Per contra, ld Counsel submitted before us that the assessee wanted to submit these additional evidences before ld DRP but it was beyond his control, as the information/data were not readily available with the assessee and therefore the assessee was prevented by sufficient cause from producing these additional evidences during the DRP proceedings. The ld Counsel also pointed out that the omission of the detailed computation of working capital before the Hon'ble DRP was not willful or unreasonable. The assessee had kept the summary of the margin of the tested party and comparables, detailed computation of the working capital and the arm's length range of working capital adjusted margin was ready and was of the bona fide belief that the factual verification of the computations/workings would be done by the Transfer Pricing Officer, as the allowability of working capital adjustment was not in doubt. Hence, ld Counsel prays the Bench that these additional evidences may be admitted. 6. We have heard both the parties and perused the additional evidences submitted by the assessee, as noted above. First of all, let us examine the finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the tested party, then it shows that the comparables were in effect, also providing a valuable financing function to their customers which would be compensated through higher prices. In such a situation the comparables are carrying out more value added functions than the tested party, therefore, the margins of the comparables should be adjusted downwards to enable a better comparison with the margins of the tested party. On the other hand, if the comparables have a higher level of accounts payable to sales relative to the tested party then this shows that these comparables were receiving a valuable financing function from their suppliers and would have paid a higher price to their suppliers. In such a situation, these comparables are receiving a valuable financing function from their suppliers therefore, the margins of the comparables should be adjusted upwards to enable a better comparison with the margins of the tested party. Working capital requirements affect the margins and costs because this is an implicit cost which is recovered/recoverable from the customers. Considering Rule 10B(3) and the facts in this case, working capital adjustment should be made provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above findings of the ld DRP, it is abundantly clear that during the DRP proceedings the assessee company could not furnish the data relating to working capital adjustments therefore ld DRP could not direct the TPO to consider working capital adjustments to compute the arm`s length price (ALP) of assessee`s transactions. 8. Now, the assessee has submitted the relevant information/ data for working capital adjustments, before the Bench by way additional evidences in the form of Annexure-A, which is reproduced below: Annexure-A 9. Now the question before us is that whether these additional evidences relating to working capital adjustments should be admitted or not? We note that Rule 29 and Rule 30 of the Income Tax Appellate Tribunal Rules provide for production of additional evidences and admission thereof, these are reproduced below: Production of additional evidence before the Tribunal. 29. The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any document to be produced or any witness to be examined or any affidavit to be filed to enable it to pass ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correct transfer pricing adjustments (ALP-adjustments) and as a result there will not be correct determination of tax liability of the assessee company. Therefore, we have to admit these additional evidences. In the light of the facts and circumstances, as explained above, and in the interest of justice and fair play, we admit these additional evidences (relating to working capital adjustments) filed before us and we remit these additional evidences to the file of ld TPO with the direction to examine these additional evidences and adjudicate the issue in accordance with law. For statistical purposes, the ground raised by the assessee is allowed. 10. The assessee has challenged before the Bench two comparable companies stating that these companies are functional different from the assessee company therefore these should be excluded. These companies are as follows: (i). eClerx Services Limited (eClerx), and (ii). TCS eServe International Limited (TCS eServe). Now, we shall take these comparable companies one by one 11. eClerx Services Limited (eClerx). This company contains margin of 69.25%. The Ld. TPO has considered the company as functionally comparable. ( PB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT teams allow assessee to deconstruct, design, and automate functions leading to control and efficiency. [PB Pg. No. 215] The eClerx powers the operations of the Sales Marketing divisions of some of the largest Fortune/ Financial Times/Internet Retailer 500 scale companies globally, augmenting bandwidth to drive greater quality and control to their digital operations, data management and analytics needs. Some of the key Sales Marketing functions assessee supports includes web content management merchandising execution, web analytics, social media moderation and analytics, search engine analytics support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting. [PB Pg. No. 217] 14. Ld Counsel submits that so far Segment Reporting is concerned, the eClerx Services limited should not be accepted as comparable. The Company operates under a single primary segment i.e. data analytics and process outsourcing services.Details of secondary segments i.e. geographical segments are as under: (Rupees in milion) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services limited is not a comparable company so far Segment Reporting is concerned. The eClerx Services limited operates under a single primary segment i.e. data analytics and process outsourcing services therefore different from the assessee company. Besides, due to high turnover with significant fluctuations in revenues and profits, the eClerx Services limited should not be selected as comparable company. For that we rely on the following precedents wherein the eClerx Services limited was rejected as a comparable company: (i). Pr. CIT vs. B. C. Management Services Pvt. Ltd (AY 2011-12) [ITA 1064/2017 CM No. 43177/2017] wherein the hon`ble Delhi High Court upheld ITAT decision of excluding eClerx services on account of functional dissimilarity and absence of segmental data. Earlier the ITAT had held that the Assessee provides IT enabled services in infrastructure development and testing, system and performance operations management and support etc. while eClerx provided high value financial services relating to consultancy business and solution testing besides the web content management merchandising execution, web analytics etc and thus excluded it as a comparable. (ii). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as comparable company. Therefore, we direct the TPO/AO to exclude the eClerx Services limited, as this company is not a comparable company, as explained above, hence it requires to be excluded. 17. TCS eServe International Limited (TCS eServe). This company contains margin of 53.89%. The Ld. TPO has considered this company as functionally comparable (Vide pb170). Aggrieved by the order of the ld TPO, the assessee filed the objections before the ld DRP. The ld DRP examined the issue and held as follows: (1). The Function, Asset and Risk (FAR) of TCS eServe International Limited (TCS eServe) is similar to that of the Assessee. (2). High profits do not render an entity excludible. Only differences on account of FAR are material. (3). Taxpayer has not shown how payment of Tata Brand Equity and ownership of high profit margin is leading to high profit margin. Therefore, ld DRP retained TCS eServe International Limited (TCS eServe) as comparable company. 18. Aggrieved by the order of the ld DRP/TPO, the assessee is in appeal before us. 19. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng income by 67% in comparison to previous year while its profits increased by an abnormal percentage of 117% over the preceding year. TCS E-serve Ltd. has super normal profits of about 54% during the year. This increase was mainly attributed to its starting of operations in Chennai and this being the second year of acquisition by TCS.[PB Pg. No 346]. Therefore, the TCS eServe International Limited (TCS eServe) should not be treated as comparable company. 21. We note that following are the precedents, where the TCS eServe International Limited (TCS eServe) company was rejected as a comparable. (i). Pr.CIT vs. Evalueserve SEZ (Gurgaon) Pvt. Ltd (AY 2010-11) [ITA 241/2018] wherein the Hon`ble Delhi High Court upheld ITAT's decision of excluding TCS eServe International and noted that it had a high brand value and, therefore, was able to command greater profits, besides, it operated on economic upscale. The ITAT [ITA No. 1467/Del/2017] in its order had directed the exclusion of TCS eServe International considering that the company is engaged in the business of software testing, verification and validation and thus not comparable. (ii). Evalueserve SEZ (Gurgaon) Pvt. Ltd v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground that profits of business of undertaking would include its entire business income, including receipt on account of interest. For that ld Counsel relied on the judgment of the Hon`ble High Court of Calcutta in the case of Hindustan Gum Chemicals Ltd, [2016] 72 taxmann.com 90(Cal), wherein it was held as follows: 4. Mr. Dudhoria, learned Advocate appearing for the revenue drew our attention to a judgment of the Madras High Court in the case of International Components India Ltd. v. Asstt. CIT [2015] 372 ITR 190/59 taxmann.com 32 wherein the following view was taken : In the light of the above said decision, we are of the firm view that the interest earned from deposits with Corporation Bank, Electricity Board and on staff advances does not have direct or immediate nexus with the business of the assessee's undertaking and, consequently, they are not eligible for grant of deduction under Section 10B of the Act, which is akin to Section 80HH of the Act dealt with in the decision referred supra. 5. Mr. R.N. Bajoria, Learned senior advocate rightly pointed out that the judgment of the Madras High Court is of no relevance for the simple reason that sub-sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, dismissed. We note that Hon`ble High Court of Calcutta in the case of Hindustan Gum Chemicals Ltd (supra) held that in order to compute deduction under section 10B of the Act, the profits of the business of the undertaking would include its entire business income including interest income on fixed deposits. We note that judgment of the Hon`ble High Court of Calcutta (supra) is in the context of section 10B of the Act but the ratio of this judgment is squarely applicable to section 10A deduction. Therefore, respectfully following the judgment of the Hon`ble High Court of Calcutta in the case of Hindustan Gum Chemicals Ltd (supra), we direct the AO/TPO to allow deduction under section 10A in respect of interest income of fixed deposits of ₹ 61,63,346/-. 25. Learned Counsel, during the course of hearing, has pressed the ground relating to additional evidences, ground relating to two comparable companies, viz:(i). eClerx Services Limited (eClerx), and (ii). TCS eServe International Limited (TCS eServe) and ground No.5, which we have adjudicated in our earlier paras. Other remaining grounds raised in form No. 36, were not pressed therefore, we do not adjudicate the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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