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TMI Blog2020 (10) TMI 1075X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue generation from BPO segment. The financial information clearly indicate that this company has BPO segment and declared their financial results segment-wise. Thus this company is functionally comparable with this assessee company. The separate BPO segment financial results is available for the period January to December. Since the financial results are available only for Jan-December, we notice from the decisions of the coordinate benches that it has consistently approved the method of working out the segmental data from the existing records and obtaining last quarter i.e., January to March from R Systems to compile the data for the period April to March and then directing the TPO to make the analysis of comparability study by including this company as comparable company - refer this issue back to TPO/AO to include this company as comparable company and work out the segmental data for the period April to March 2010. Risk adjustment - Whether the assessee has any marketing and technical risk compared to comparables ?- HELD THAT:- Assessee is a captive service provider and earned income out of the transaction by cost plus basis. It can be seen that the assessee has encountere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frozen breads and trading in Canned corn nib lets, cream style sweet corn and asparagus spears, sold under the brand name Green Giant. GMIPL also provides software development services and business process services to its associated enterprises. The assessee is 100% subsidiary of General Mills Mauritius Inc. 5. During the year, assessee has reported operating income, operating profit and operating margins from various segments as under: S.No. Segments Operating Income/Cost (Rs. in Crores) Operating Profit/ Gross profit (Rs in Crores)^ Operating Margin (%) 1 Import of food products for resale ('Trading') 29.15 0.09 0.30 2 Export of semi-processed food products ('Manufacturing') 19.97 0.51 2.60 3 Provision of software development services 9.77 1.95 20% 4 Provision of business process services 40.94 8.19 20% 5 Provision of procurement support services 0.72 0.14 20% 5.1 The assessee has reported following international transactions in Form 3CEB as under: Sr. No. Nature of Transaction Amount of transaction (Rs in crores) Method used by assessee to determine ALP AY 10-11 AY 09- 10 AY 10-11 AY 09- 10 1. Import and resale of food p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arnings from exports rejected g) companies with persistent losses/diminishing revenues are rejected h) companies with related party transactions more than 25% of the revenue are rejected i) companies with peculiar economic circumstances are rejected 7. Further, the TPO rejected 6 comparables out of 9 comparables selected by the assessee by applying above said filters. Since the assessee is in appeal before us objecting the rejection of 2 comparables viz., CG - VAK Software and Exports Ltd (segmental) and R Systems International Ltd, we extract below the reasons for rejecting only for these companies by the TPO. SI. No. Name of the comparable Remarks 1 CG-VAK Software & Exports Ltd., (Segmental) However on examination of the annual report it is seen that the company is predominantly an IT services company. Page 4 of the annual report contains the comments of the director and mentions clearly that software services contributed 86% and the BPO services contributed only 14% to the operations of the company. Further, on going through the P&L A/c it is seen that the ITES services contributed ₹ 82 lacs out of the total IT /ITES income of ₹ 594 lacs. Hence the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onomies of scale. • Further, where a particular company is functionally comparable, turnover should not be a relevant criterion for acceptance / rejection of such a company. • Accordingly, it is submitted that no turnover filter should be applied for selection of comparables in the assessee's case. Based on the above, it is submitted that this company should be considered as a comparable. b) R Systems International Limited The company is engaged in provision of IT enabled services and hence is functionally similar to the assessee. However, your goodself has proposed to reject this company as a comparable on the basis that the company is engaged in outsourced product development and customer support services and hence is not engaged in ITES services. In this context, we would like to submit as follows: i) Separate segmental data is available for Business Processing Outsourcing ('BPO') segment • While the company is engaged in rendering both software services as well as BPO services, the company has provided the segmental information in respect of the same on page 24 of its Annual Report for the financial year ending 31 March 2010 (attached as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons it is stated as follows: "The Company is a leading global provider of IT solutions and Business Process Outsourcing (BPO) services. The Company's primary focus is to provide full service IT solutions, software engineering services, technical support, customer care and other IT enabled services to the high technology sector, independent software vendors (ISV's), banks, financial services companies and health care sector." On page 99 of the Annual Report, under the head 'Segmental Information' in the Notes to Accounts, it is clearly stated that the company operates under two segments viz Software development and customisation services and Business Process Outsourcing Services. Further, segmental break up of revenues arising from the BPO segment are given on page 100 of the Annual Report. - On page 96, in point) of schedule 17 notes to accounts, it is stated that revenue associated with software development and maintenance services/ customization of products and business process outsourcing services rendered on time and material basis is recognized when services are rendered. Your goodself has proposed to reject this company stating that it is fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee filed detailed submissions before DRP and DRP rejected the submissions of the assessee. The DRP considered the objections only on setting off of losses of non-STPI unit against the profit of STPI unit and by relying in the case of Black and Veatch Consulting P Ltd (348 ITR 72) allowed the contention of the assessee. 14. Against the above order, both revenue as well as assessee is in appeal before us. The respective grounds of appeal filed by Revenue and Assessee are reproduced below:- Grounds of appeals filed by the revenue:- 1 " On the facts and in the circumstances of the case and in law, the Dispute Resolution Panel erred in directing the AO to allow section 10A deduction without set off loss of non-eligible unit." 2. 'The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal. 3. The appellant prays that the order of CIT(A) on the above ground be set-aside and that of the assessing officer be restored. Grounds of appeals filed by the assessee:- Transfer pricing adjustment 1. erred in making transfer pricing adjustment of ₹ 4,86,45,217 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected by assessee as comparable companies in its studies. With regard to CG Vak, he brought to notice page 17 of TPO order, in which TPO observed that CG Vak is pre-dominantly an IT services company and it has other services which contributed 86% and BPO services has contributed only 14%. From the ITeS services it has earned only 82 lakhs out of total IT/ITeS as total earnings of ₹ 594 lakhs. Therefore, this company is rejected as comparable for the assessment year 2010-11. Ld AR submitted that assessee has considered only the segmental results declared by the company and made the analysis. Further it is submitted that the TPO has accepted this company as comparable in assessment year 2009- 10 and 2011-12. He brought to notice page 285 of the paper book which is TPO order for the assessment year 2009-10 in which the assessing officer has accepted the arms length price reported by the assessee along with its TP study. He also brought to notice page 291 and page 293 of the paper book in which assessee has submitted TP study before TPO in which assessee has declared price margin of 20% in provision of business process services and assessee has adopted arithmetic mean margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is April to March, the three-month data from January to March can be worked out by obtaining the audited financial statement from this company. In this regard he relied on the case law which directed the TPO to obtain the last quarter data and workout the financial results for the year and include this company as comparable company in those respective cases. The respective decisions are given below: i) Maersk Global Service P Ltd ITA no 2594/mum/2014 ii) Willis Processing Services ITA No 1890/mum/2015 ii) Aegis Limited ITA No 1213/mum/2014 iv) Mercer Consulting India P Ltd ITA no 966/Del/2014 18. Further he submitted that TPO has accepted R System as comparable company in the assessment years 2009 - 10 and 2011 - 12. 19. With regard to ground No. 6 and 7, Ld AR submitted that TPO has not even discussed about the working capital adjustment and risk adjustment. He brought to notice page 6 of the DRP order in which DRP has rejected the contention of the assessee. He brought to our notice page 48 of appeal papers, in which assessee has submitted the legality of allowing working capital adjustment and various decisions of the courts which has allowed the working capital adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance range of turnover while selecting the comparable companies. (Para 8) Argument no. 2 1. CG Vak has continuously declining turnover and losses over the years. (Figures in Lac) A.Y. Turnover from BPO Service PBT (of BPO Service) 2009-10 86.10 (-) 3.43 2010-11 82.79 (-) 2.21 2011-12 63.18 (-) 15.34 2012-13 20.20 (-) 14.91 2. Hon'ble Delhi High Court in case of SteriaIndia Ltd. Vs DCIT (2018) 92 taxmann.com 120 (Delhi) has found CG Vak Software & Exports Ltd., not a valid comparable for AY 2010-11 in para 12,13 & 14. Although the observation is related to Software Services Segments and employee cost filter, the ratio is equally applicable to ITES/BPO segment too. In para 16, Hon'ble High Court while discussing another company has held that "Persistent losses coupled with declining turnover over the period indicated abnormal functional circumstances, which rendered it non-comparable and justified the exclusion of such companies from the list of comparables." Conclusion- Hence, CG Vak Software & Export Limited deserved to be excluded. 2. Why R System is not a valid comparable for A.Y. 2010-11 Argument no. 1 1. R System follows different FY ending on 31s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. is eliminated for the reason that the BPO services contributed only 14% to the total earnings of the company and also revenue generated by this division is only ₹ 82 lakhs. The observation of the TPO is, it fails on turnover filter and it is not a predominantly an IT service company. It is fact that TPO has applied turnover filter and assessee has objected to the same. We further notice that the BPO segment of the CG Vak company is declining from ₹ 86.10 crores to ₹ 20.20 crores from assessment year 2009 - 10 to 2012 - 13 respectively and we also noticed that this company is consistently incurring loss over the years, it is pertinent to note that TPO has applied one of the filter for consistent losses. Ld AR brought to our notice modified profit calculation made for this assessment year by the assessee for the BPO segment which comes to 0.29%. The assessee has reworked the calculation by observing that the company has other un-allocable income to the extent of ₹ 25.53 lakhs, which it has allocated based on turnover. We do not agree with the assessee that unallocated income which CG Vak has not allocated, may be because of non-available of proper data. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR in his submission and cases are part of paper book. Therefore, we are inclined to refer this issue back to TPO/AO to include this company as comparable company and work out the segmental data for the period April to March'2010. Accordingly, the ground raised by the assessee is allowed for statistical purpose. 25. With regard to Ground Nos 6 and 7, we notice that TPO has not even considered to determine whether the assessee has any marketing and technical risk compared to comparables. It is fact that assessee is a captive service provider and earned income out of the transaction by cost plus basis. It can be seen that the assessee has encountered the risk of having a single customer, whereas the same cannot be said with regard to comparables. The comparables may be dealing in market and therefore they were prone to the marketing and technical risks. They may have incurred certain expenditure on marketing in order to mitigate the risk. Therefore, the risk encountered by the assessee cannot be said to be equal risk attached to the comparables in such a situation. TPO output to have calculated the risk adjustment. 26. With regard to working capital adjustment, the business module ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee from the gross total income. The somewhat discordant use of the expression "total income of the assessee" in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in Section 10A as 'total income of the undertaking'. 18. For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. All the appeals shall stand disposed of accordingly. 30. Therefore, respectfully following the above decision of Hon'ble Supreme Court, which is applicable mutatis mutandis in the present case, we are inclined to dismiss the grounds raised by the revenue. 31. In the net result, the appeal filed by the assessee is allowed for statistical purposes and appeal filed by the revenue is dism ..... X X X X Extracts X X X X X X X X Extracts X X X X
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