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TMI Blog2020 (9) TMI 575X X X X Extracts X X X X X X X X Extracts X X X X ..... nover filter and decide afresh the inclusion or otherwise of this company in the final set of compatibles. Grounds relating to TP adjustments are decided accordingly. Denial of deduction u/s 10A on additional receipts claimed by filing the revised return of income - HELD THAT:- Since the assessee has been allowed deduction under section 10A of the Act by the first appellate authority [against which revenue is in appeal] the assessee is entitled for claim of deduction under section 10A of the Act on additional receipts claimed by filing revised Return of income. We, accordingly, direct the Assessing Officer to allow deduction under section 10A of the Act on additional receipts. Interest income on fixed deposits and miscellaneous income - denied for deduction under section on the ground that such income does not constitute business income as envisaged under section 10A - As decided in M/S. HEWLETT PACKARD GLOBAL SOFT LTD. [ 2017 (11) TMI 205 - KARNATAKA HIGH COURT] we direct the Assessing Officer to allow claim of deduction under section 10A of the Act on interest income. No details of miscellaneous income has been given and, therefore, we are not in a position to exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and brevity. 2. We will first take up assessee s appeal in ITA No. 3892/DEL/2017. 3. At the very outset, let us understand the business profile of the assessee.The main function performed by the assessee pertains to making outbound collection calls to debtors for recovery of US consumer debts while adhering to the necessary laws and regulations that are relevant to debt collection activities. Further, the assessee also renders services for the bankruptcy vertical of Encore US and undertakes certain tasks pertaining to bankruptcy management services rendered by Encore US. 4. International transactions reported by the assessee are as under: i) Provision of ITES ₹ 6,53,19,30,694/- ii) Purchase of fixed asset and other goods ₹ 38,63,381/- 5. The assessee has used TNMM with OP/TC as the PLI and has arrived at a set of 7 companies under ITES segment with an average margin of 7.41%. The assessee workedout its own margin at 21.87%. Based on the analysis, international transaction was reported at arm's length. 6. During the transfer pricing assessment proceedings, the Assessing Officer rejected the following comparables used by the assessee: 1. R S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 65,32,24,145/- Proposed Adjustment u/s 92CA ₹ 7,54,39,774/- 9. Proceeding further, the claim of deduction under section 10A of the Act was denied by the Assessing Officer on the ground that the assessee s business is not eligible for the claim of deduction under section 10A of the Act. The Assessing Officer further denied the claim of interest income and miscellaneous income on the ground that such income does not constitute business income, as envisaged under section 10A of the Act and simultaneously, adjustments were made in the book profit under section 115JB of the Act. 10. The assessee carried the matter before the CITA. 11. The ld. CIT(A) directed for exclusion of the company Accentia Technology Private Limited and rejected the claim of inclusion of R Systems International Ltd, CG VAK Software Technologies Ltd but accepted the inclusion of Micro Land Ltd. The ld. CIT(A) further allowed the claim of deduction u/s 10A of the Act. 12. Aggrieved by this, both the parties are before us. 13. Before us, the counsel for the assessee argued for the exclusion of TCS E-Serve Ltd and TCS E-Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgments noticed above, shows that functional analysis seeks to identify and compare the economically significant activities and responsibilities undertaken, assets used and risks assumed by the parties to the transaction. Quantitative and qualitative filters/criteria have been used in different cases to include or exclude comparables. The intuitive logic for excluding big companies from the list of comparables while undertaking the FAR analysis of a smaller company is attractive, given that such big companies provide services to diverse clientele, perform multifarious functions, often assume risks and employ intangible assets which are specially designed, unlike in the case of smaller companies. The bigger companies have an 9 ITA 532/2019 Page 10 of 21 established reputation in the segment, are well known and employ economies of scale to a telling end. On the other hand, these obvious - and apparent features should not blind the TPO from the obligation to carry out the transfer pricing exercise within the strict mandate of Section 92 C and Rules 10-A to 10-E. 31. Arm's length price determination, in respect of an international transaction has necessarily to confirm to the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the use of the expression: none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, .. such transactions in the open market. The other exercise which the TPO has to necessarily perform is that if there are some differences, an attempt to adjust them to eliminate the material effects should be made: (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 33. Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile - in respect of the activity in question can be viewed independently from other activities- cannot be subject to a per se standard of loss making company or an abnormal profit making concern or huge or mega turnover company. As explained earlier, Rule 10B (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B(1), while judging comparability. Rule 10B (3) on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transfer pricing mechanism provided in the Act and the Rules prescribes that while 12 ITA 532/2019 Page 13 of 21 determining the ALP, the arithmetic mean of all comparables is to be adopted. This is to offset the consequence of any extreme margins that comparables may have and arrive at a balanced price. Similarly, the wide fluctuations in profit margins of the same entity on a year-to-year basis would be offset by taking the arithmetic mean of all comparables for the assessment year in question. In any case, in the event that the volatility is on account of a materially different aspect incapable of being accounted for, the analysis under would Rule 10B (3) would exclude such an entity from being considered as a comparable. Secondly, as regards the manner of using previous years‟ data, the assessee has taken the arithmetic mean of the comparables‟ profit margins for the assessment year in question and two previous years. This Court disagrees. The proviso to Rule 10B(4), read with the sub-rule, itself indicates that the purpose for which previous years data may be considered is - analysing the comparability of an uncontrolled transaction with an international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action, it would be essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in all material aspects that have any bearing on the value or the profitability, as the case may be of the transaction. Any factor, which has an influence on the PLI, would be material and it would be necessary to ensure that the comparables are also equally subjected to the influence of such factors as the tested party. This would, obviously, include business environment; the nature and functions performed by the tested party and the comparable entities; the value addition in respect of products and services provided by parties; the business model; and the assets and resources employed. It cannot be disputed that the functions performed by an entity would have a material bearing on the value and profitability of the entity. It is, therefore, obvious that the comparables selected 14 ITA 532/2019 Page 15 of 21 and the tested party must be functionally similar for ascertaining a reliable ALP by TNMM. Rule 10B (2) of the Income Tax Rules, 1962 also clearly indicates that the comparability of controlled transactions would be judged with reference to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value: that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld. 19. The same decision also noted that one reason for exclusion was the unavailability of the segmental data for the above comparable. 20. In M/s. Oracle (OFSS) BPO Services Pvt. Ltd. (decision dated 5th February 2018 in ITA 124 of 2018) while upholding the exclusion of M/s.Wipro Ltd. from the list of comparables it was noted that the ITAT took into account the Related Party Transactions ( RPT‟).The filter adopted was to exclude comparables with unrelated party transactions equal to or in excess of 75% of their business. The ITAT did that on the basis that Wipro 16 ITA 532/2019 Page 17 of 21 Ltd. had a significant brand presence in the market and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is functionally similar to that of the assessee but its turnover is less than ₹ 5 crores and does not pass the turnover filter. However, before us the learned counsel for the assessee stated that this company passes turnover figure as the entity wide turnover of ₹ 594 crores and segments are reported to comply with requirements of AS-17. The learned counsel further pointed out that this company was accepted by the TPO in A.Y 2009 10. We are of the considered view that the TPO should look into the financials of this company once again and decide whether it passes the turnover filter and decide afresh the inclusion or otherwise of this company in the final set of compatibles. Grounds relating to TP adjustments are decided accordingly. 21. Next grievance raised relates to denial of deduction under section 10A of the Act on additional receipts claimed by filing the revised return of income. 22. Facts on record show that after the closure of accounts for the year under consideration, during the course of audit, it was brought to the notice of the assessee that certain invoices raised in subsequent year pertains to F.Y. 2009-10 and since income has accrued in 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional receipts. 27. Second grievance relating to this issue is that interest income on fixed deposits amounting to ₹ 59,664/- and miscellaneous income of ₹ 30,451/- were denied for deduction under section 10A of the Act on the ground that such income does not constitute business income as envisaged under section 10A of the Act. 28. The Hon'ble High Court of Delhi in the case of Riviera Home Furnishings in 9 ITR OL 401 has allowed the interest earned on Fixed Deposit as eligible for deduction under section 10A of the Act, where the assessee showed that the Fixed Deposit receipts were under lien to the bank for facilitating letter of credit and bank guarantee facilities. 29. The Hon'ble High Court of Karnataka in the case of Hewlett Packard Global Soft Ltd 403 ITR 453 had the occasion to consider a similar claim and held in favour of the assessee the relevant findings of the Hon'ble High Court read as under: The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36. Grounds relating to TP adjustments are, accordingly, dismissed. 37. Next grievance of the revenue relates to allowing the claim of deduction under section 10A of the Act. 38. Claim was denied by the Assessing Officer on the ground that the assessee is running call centre for parent company and there is no export of computer software or ITES. We are of the considered view that the Assessing Officer has blown hot and cold in the same breath. The TPO completed the TP proceedings treating the assessee under the ITES segment. The Assessing Officer himself has assessed the assessee under the ITES segment and when it came to the claim of deduction under section 10A of the Act the Assessing Officer says that the assessee is merely running a call centre. 39. In Notification No. SO 890E dated 26.09.2000, it has been mentioned that ITES include call centres and, therefore, we do not find any reason why the assessee was denied deduction under section 10A of the Act by the Assessing Officer. However the ld CIT(A) has rightly considered the facts of the case in true perspective and allowed the claim and, therefore, we do not any reason to interfere with the findings of the ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or relief should be interpreted www.taxguru.in 11 TXA17 18-13 dt.28.02.2020 liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. Further, the interpretation cannot go to the extent of reading something that is not stated in the provision [See AGS Tiber Vs CIT 233 ITR 207]. 22. Applying the aforesaid principles, we find that the legislature, in Section 40(a)(ii) has provided that any rate or tax levied on profits and gains of business or profession shall not be deducted in computing the income chargeable under the head profits and gains of business or profession . There is no reference to any cess . Obviously therefore, there is no scope to accept Ms. Linhares's contention that cess being in the nature of a Tax is equally not deductable in computing the income chargeable under the head profits and gains of business or profession . Acceptance of such a contention will amount to reading something in the text of the provision which is not to be found in the text of the provision in Section 40(a)(ii) of the IT Act. 23. If the legislature intended to prohibit the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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