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TMI Blog2020 (7) TMI 719X X X X Extracts X X X X X X X X Extracts X X X X ..... e construed as a set aside of the issue to the TPO/AO, we find no merits in Gr.No.2 raised by the revenue. Companies functionally dissimilar with that of assessee need to be deselected from final list who is into provision of low end IT enabled services. Gains/loss arising from fluctuation of foreign currency as being operating in nature - HELD THAT:- The Hon ble Delhi High Court in the case of PCIT Vs. B.C.Management Services (P) Ltd.[ 2017 (12) TMI 255 - DELHI HIGH COURT] held that foreign exchange gain has to be regarded as part of operating income by following its own order in Pr. CIT v. Cashedge India (P.) Ltd. [ 2016 (5) TMI 1348 - DELHI HIGH COURT] .Respectfully following the said decision, we uphold the directions of the DRP and dismiss ground raised by the revenue. Working capital adjustment - HELD THAT:- On going through the TPO's order as well as annexure D referred to in the transfer pricing order on working capital adjustment, we find that the AO has not given any basis for restricting the adjustment to 1.71%. In all the cases relating to transfer pricing adjustment, this Tribunal has been directing to give working capital adjustment on actual basis a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (a) Transfer pricing adjustment ( TP adjustment ) of ₹ 5,62,77,751/- made by the Transfer Pricing Officer ( the TPO for short) towards the international transaction of provision of Information Technology Enabled Services ( ITES ) to the Appellant s Associated Enterprise ( AE ), which was subsequently enhanced to ₹ 6,07,73,624/- in the final assessment order passed by the Assessing Officer ( AO ) under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ( the Act ); (b) Re-computation of deduction claimed under Section 10A of the Act; (c) Non-grant of credit of entire TDS deducted on the basis of Form 16A and consequent erroneous levy of interest under Sections 234B and C of the Act; and (d) Non-grant of interest under Section 244A of the Act. 3. As far as the issue with regard to Transfer Pricing Adjustment and consequent addition to the total income in respect of an international transaction between the Assessee and its Associate Enterprise is concerned, the facts and circumstances under which the said issue arises for consideration are that the Assessee is a company incorporated under the provisions of the Companies Act, 1956 and is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies with the Assessee. Thus a final set of10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows: Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the Company Mark-up on Total Costs (WC unadj) (in %) Mark-up on Total Costs (WC adj) (in %) 1. Accentia Technologies Ltd. 43.06 39.17 2. Acropetal Technologies Ltd. (Seg) 22.27 17.67 3. E-Clerx Services Ltd. 55.97 52.98 4. Fortune Infotech Ltd. 22.80 20.05 5. ICRA Online Ltd. (Seg) 43.39 40.72 6. Informed Technologies India Ltd. 26.15 25.94 7. Infosy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth Price - 126.64% of Operating Cost ₹ 66,98,32,179/- Price Received ₹ 61,35,54,428/- Short fall being adjustment u/S. 92CA ₹ 5,62,77,751/- 9. Aggrieved by the addition to the total income by the AO in the draft order of Assessment, as was suggested by the TPO, the Assessee filed objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act. The DRP issued directions to the AO to exclude Acropetal Technologies Ltd., E-Clerx Services Ltd., ICRA Online Ltd., and Infosys BPO Ltd., from the list of final comparable companies chosen by the TPO. The DRP also suo moto directed the exclusion of Sundaram Business Services Ltd., from the list of final comparable companies chosen by the TPO. The DRP did not accept the contention of the Assessee with respect to the exclusion of Accentia Technologies Ltd. The DRP accepted the contentions of the Assessee and directed the AO to treat the gains/loss arising from fluctuation of foreign currency as operating in nature and consequently directed the same to be taken into consideration while computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DRP under the provision of Section 144C as the DRP is not empowered to set aside the issue in terms of Section 144C(8) of the Act. 4. The DRP erred in directing the AO to exclude M/s. Eclerx Services Ltd., M/s. Infosys BPO Ltd., M/s. ICRA Online Ltd from the list of comparables in ITES segment as being functionally different without appreciating the fact that companies qualify all the qualitative and quantitative filters applied by the TPO. 5. The DRP erred in holding that M/s. Infosys Ltd. cannot be taken as comparable, being functionally different, big brand value by relying on the decision of ITAT Bangalore in the case of Symphony Marketing Solutions India Pvt. Ltd. in ITA No.1316/Bang/2012 and Hyderabad ITAT in the case of Market Tools Research Pvt. Ltd. in ITA No.2066/HYD/2011 and Zavata India Pvt. Ltd. in ITA No.1781/HYD/2011 without appreciating the fact that the company qualify all the qualitative and quantitative filters applied by the TPO. 6. The DRP erred in holding that foreign exchange loss / gain is operating in nature without ascertaining the nexus of the forex gain / loss with the business activity of the taxpayer and without appreciating that such loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts to setting aside the issue which is outside the purview of the DRP under the provisions of Section 144C of the Act as the DRP is not empowered to set aside the issue in terms of Section 144C(8) of the Act. Similarly, the DRP erred in directing the TPO to apply 75% export earning filter and directed to exclude ICRA Online Ltd., and Sundaram Business Services Ltd. (Ground Nos. 2 and 3) (b) The DRP erred in directing the AO to exclude ICRA Online Ltd., Infosys BPO Ltd., and Eclerx Services Ltd. as being functionally different without appreciating that the companies pass all the filters (Ground Nos. 4 and 5).; (c) The DRP erred in holding that foreign exchange loss/gain is operating in nature without ascertaining the nexus of the forex gain/loss with the business activity without appreciating that such loss/gain though attributable to the operating activity is not derived from the operating activity (Ground Nos. 6 and 7). (d) The DRP erred in directing the AO to carry out the working capital adjustment without putting any cap on the ground that there is time value of money without appreciating that the TPO had put a cap on the basis of the average working capital of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company from the list of comparables does not figure in the objection of the Assessee at all. However, this aspect has not been highlighted or taken as a ground of appeal by the revenue in its appeal. Therefore the only ground of appeal of the revenue against the directions of the DRP is that the directions of the DRP amount to a set aside of the issue to the TPO/AO. Since we have come to the conclusion that the directions of the DRP cannot be construed as a set aside of the issue to the TPO/AO, we find no merits in Gr.No.2 raised by the revenue. 15. As far as Gr.No.3 raised by the revenue is concerned, the grievance of the revenue is similar to Gr.No.2 i.e., the the DRP has set side issue for consideration to the AO/TPO and in terms of Sec.144C(8) of the Act, the DRP has to decide issues before it and cannot set aside issues to AO/TPO. The DRP has excluded these two companies by applying the filter of the foreign currency revenue is less than 75% of the total revenue. As far as ICRA Online Ltd., (ICRA) is concerned, the objection of the Assessee before DRP was that this company was not functionally comparable with the Assessee (vide page-53 of Form No.35-A of objection bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company came to be upheld/the company was directed to be excluded. The learned DR reiterated the stand of the revenue as reflected the grounds of appeal of the revenue. 19. We have carefully considered the rival submissions. In the case of Outsources Partners International (P) Ltd.,(supra), this Tribunal has adjudicated identical issue and held that this company was not functionally comparable to an ITeS company such as the Assessee and for the reason that this company fails the export earning filter. Respectfully following the said decision, we uphold exclusion of this company from the list of comparable companies for the reasons given in this paragraph. 20. As far as exclusion of Infosys BPO Ltd., is concerned, the said company was excluded on the ground that the company is engaged in providing high-end integrated services, and whereas, the Assessee is engaged in providing low level back-office support services. Further, the company has huge brand name and owns significant intangibles. It is submitted that the brand name that is associated with Infosys Technologies Ltd. has an impact on the business operations of Infosys BPO. Also, during the financial year 2009-10, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Centre (P) Ltd. (supra), this company was excluded from the list of comparable companies in the case of a company rendering ITeS similar to the services rendered by the Assessee in this appeal, observing as follows: 37. Eclerx Services Ltd. : In this regard, the ld. counsel for the assessee has contended that this company's function is dissimilar with the assessee company as it provides industry specialised services like data analytics, operations management and audits reconciliation services which cannot be compared to a BPO or IT Offshoring company. It was further contended that this company has abnormal profits and sales for the year. The ld. counsel further contended that this company was examined by the Tribunal in the case of Stream International Services (P) Ltd. ( supra )and the Tribunal has held that even the company's functions are different, therefore it cannot be considered as comparable, following the order of the Mumbai Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt. CIT [2014] 43 taxmann.com 100/147 ITD 83 (Mum.) (SB). Therefore, this company may be excluded from the list of comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue has challenged the action of the DRP in directing the AO to consider the gains/loss arising from fluctuation of foreign currency as being operating in nature. In this regard it was submitted that the gains on account of fluctuation in foreign currency has arisen from the international transaction of provision of ITE services. The gains are inextricably related to rendering of the main services and are not derived independently. As the gains relate to the rendering of the main service, the same ought to be treated as operating in nature. Reliance in this regard was placed on the following decisions: - Assessee s own case for the assessment year 2006-07 ([2016] 74 taxmann.com 188 (Bangalore - Trib.), at para 48) - SAP LABS India (P.) Ltd. v. ACIT ([2011] 44 SOT 156 (Bangalore) at para 42); - PCIT v. B.C. Management Services (P.) Ltd. ([2018] 89 taxmann.com 68 (Delhi), at paras 7 and 8); - PCIT v. Ameriprise India Pvt. Ltd. (Order dated 23.03.2016 passed in ITA No. 206/2016 at paras 3 and 4) The learned DR reiterated the stand of the revenue as reflected in the grounds of appeal raised by the revenue in this regard. 26. We have carefully considered the riv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the relevant observations: 24. Now coming to the issue of working capital adjustment, findings of the TPO in this regard as it appears at para 3.7, reads as under : 3.7 Working Capital Adjustment: The working capital adjustment is computed as per the formula given in Annexure to the OECD Guidelines, 2009. In this case, the average PLR adopted by SBI, the largest scheduled bank, for short term working capital loans for the relevant FY 2008-09 is considered. The average PLR of 12.50% p.a was adopted by the TPO while computing the working capital adjustment. The working capital adjustment is restricted to the average cost of capital computed at 1.71% in the case of the uncontrolled comparables selected by the TPO. Hence, the working capital adjustment in the case of the taxpayer is allowed as per the calculation in annexure-C or the average cost of capital to the comparables whichever is the least. The detailed discussion on this is given in the Annexure-D to the order. The computation of the working capital adjustment is annexed to this order as Annexure C. TPO had restricted the cost of capital to 1.71%. Rationality for such an upper limit being placed on wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that in the event the DRPs directions are given effect to properly, the arithmetical mean of the working capital adjusted rectified margins of the above comparables would be within +/- 5% of the Assessee s margin for provision of the ITE services. Consequently, the international transaction of provision of ITEs services by the Assessee to its AE in FY 2010-11 can be concluded as being at arm s length. It was submitted that the action of the AO in passing the final assessment order contrary to the DRP s directions is erroneous and unsustainable. It was submitted that the directions issued by the DRP are binding on the AO in terms of Section 144C(5) of the Act and therefore the same ought to have been given effect to. The final assessment order passed contrary to the binding directions of the DRP would render it null and void. Reliance in this regard was placed on the following decisions: - Software Paradigms Infotech (P.) Ltd. v. ACIT ([2018] 89taxmann.com 339, at paras 3.3.1 and 3.3.2 ); - Flextronics Technologies (India) Pvt. Ltd. v. ACIT (Order dated 31.12.2018 passed by the Hon ble Tribunal in IT(TP)A No. 832/Bang/2017, at paras 9 and 10); and - July Systems and Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee to exclude the expenses in question both from the export turnover and total turnover while computing deduction u/s.10A of the Act. CIT(A) however upheld the order of the AO. 31. Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn) , we are of the view that communication charges and expenses incurred in foreign exchange should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon ble Karnataka High Court has been upheld by the Hon ble Supreme Court in the case of CIT v. HCL Technologies Ltd. in Civil Appeal No.8489-98490 of 2013 Ors. dated 24.04.2018. The grounds are decided accordingly dismissed. 32. The other corporate tax grounds that remain for consideration are Gr.No. 4 5 in the Assessee s appeal. Vide these grounds, the Assessee has challenged the actions of the AO in (i) not granting full credit of TDS deducted and consequently levying interest under Section 234B and C of the Act; ..... X X X X Extracts X X X X X X X X Extracts X X X X
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