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TMI Blog2019 (6) TMI 1697X X X X Extracts X X X X X X X X Extracts X X X X ..... A), we find that the discussion on turnover and abnormal profits and losses filter starts at para 156 and till para 164, there a discussion only about turnover filter and no discussion on abnormal profits losses filter. In conclusion CIT(A) has held that abnormally high profits or losses making companies should be excluded. Therefore, the grievance projected by the revenue in ground No.6 needs to be accepted. Functional dissimilarity - 3 companies i.e., Coral Hubs Ltd., Mold-Tek Technologies Ltd. and Eclerx Services Ltd. have to be removed from the final list of comparables chosen by the TPO on functional comparability. Aditya Birla Minacs Worldwide Ltd., Jindal Intellicom Pvt. Ltd. and Allsec Technologies Ltd. - Issue whether abnormal profit or loss should result in exclusion of a company is remitted to the TPO for fresh consideration in the light of law that has evolved since the passing of the order of the TPO. Accentia Technologies Ltd. not to be regarded as comparable company rendering ITeS because of the extra-ordinary events like merger and demerger which had impact on the profit margins of this company. Genesys International Corporation Ltd. - ITAT Bangalore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be allowed on such increased profit - Thus direct the AO to allow deduction u/s. 10A of the Act on the amount disallowed u/s. 40(a)(i) of the Act. Thus, ground No.5 raised by the assessee is allowed. - IT(TP)A No. 697/Bang/2013, IT(TP)A No.842/Bang/2013 - - - Dated:- 28-6-2019 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER For the Assessee : Shri Chavali Narayan, CA For the Revenue : Dr. Shankar Prasad, Addl.CIT(DR)(ITAT), Bengaluru. ORDER Per N.V. Vasudevan, Vice President These are cross appeals by the assessee and revenue directed against the order dated 12.03.2013 of the CIT(Appeals)-IV, Bengaluru relating to assessment year 2008-09. 2. We shall first take up for consideration IT(TP)A No.842/Bang/2013, the appeal by revenue. Grounds No.5 to 13 raised by the revenue are with regard to determination of arm s length price (ALP) in respect of international transaction of rendering Information Technology Enabled Services (ITeS) by the assessee to its Associated Enterprise (AE). Grounds 5 to 13 raised by the revenue read as follows:- 5. The Ld. CIT(A) erred in rejecting the diminishing revenue filter used by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences while rejecting the said companies: Mold-Tek Technologies Limited Eclerx Services Limited 7) The learned CIT(A) has erred in rejecting Coral Hubs Limited (now known as Vishal Information Technologies Limited) only on the basis of abnormal profits and has erred in not considering functional differences on account of outsourcing business model and low employee cost. 4. The additional grounds of appeal raised by the assessee in its appeal is with regard to comparability of certain companies excluded by the CIT(Appeals). It is the plea of the assessee in these additional grounds that these companies are required to be excluded on the basis of functional comparability, apart from its exclusion by the CIT(Appeals) on the ground that the profits shown by these companies were abnormal and did not reflect the normal profit margin in the concerned industry. The additional grounds being a ground on comparability is admitted for adjudication as the issue sought to be raised in the additional ground arises out of order of CIT(Appeals) and has been raised by the Assessee before the CIT(A). 5. As far as the question of determination of ALP of the international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited 8.81% 7 Coral Hubs Limited (Formerly known as Vishal 50.68% 8 Information Technologies Limited) Accentia Technologies Limited 41.77% 9 Acropetal Technologies Limited (Seg.) 35.30% 10 Aditya Birla Minacs Worldwide Limited -4.00% 11 Asit C. Mehta Financial Services Limited 9.42% 12 Crossdomain Solutions Limited 27.30% 13 Datamatics Financial Services Limited 29.11% 14 E4e Healthcare Solutions Limited 18.54% 15 Infosys BPO Limited 19.66% 16 iServices India Private Limited 10.77% 17 Jindal Intellicom Private Limited -10.29% 18 Mold-Tek Technologies Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying diminishing revenue filter and therefore ground No.5 by the revenue has no basis and hence dismissed. 11. As regards ground No.6, the CIT(Appeals) took the view that size and turnover of a company are material for deciding the comparability. The assessee s turnover was Rs.26.24 crores. The CIT(Appeals) took the view that companies whose turnover was more than Rs.200 crores have to be regarded as large size companies and hence not comparable to the assessee. By doing so, he had excluded Infosys BPO Ltd. and Wipro Ltd. from the list of comparable companies chosen by the TPO. The revenue is aggrieved by the aforesaid action of the CIT(A) and has raised ground No.6 before the Tribunal. 12. As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of Autodesk India Pvt. Ltd. v. DCIT in IT(TP)A No.540 541/Bang/2013, order dated 06.07.2018. The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon ble Bombay High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal has considered the comparability of these companies and came to the conclusion that Coral Hubs Ltd. cannot be regarded as a comparable company, as the business model of this company was sub-contracting and outsourcing. As far as Mold-Tek Technologies Ltd. is concerned, in para 19 of this aforesaid order, this company was regarded as functionally not comparable as it provided engineering services like civil and structural engineering and GIS services. As far as Eclerx Services Ltd. is concerned, the Tribunal came to the conclusion that extra-ordinary events and peculiar circumstances prevailed in the relevant previous year of this company which had an impact on the profit margins and therefore this company had to be excluded from the list of comparable companies. Following the aforesaid decision, we hold that the aforesaid 3 companies i.e., Coral Hubs Ltd., Mold-Tek Technologies Ltd. and Eclerx Services Ltd. have to be removed from the final list of comparables chosen by the TPO on functional comparability. 16. As far as the remaining 3 companies i.e., Aditya Birla Minacs Worldwide Ltd., Jindal Intellicom Pvt. Ltd. and Allsec Technologies Ltd. are concerned, the issue; wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - and foreign currency incurred for foreign travel amounting to Rs.4,80,079/- from the total turnover also. 3. The Ld.CIT(A) ought to have appreciated that there is no provision in section 10A which requires the concerned expenses, which are required to be reduced from the export turnover as per clause (iv) of the Explanation to Section 10A to be reduced from the total turnover also. 4. The Ld.CIT(A) ought to have considered the fact that the jurisdictional High Court decision relied upon by him has not been accepted by the department and SLP has been filed before the Hon'ble Supreme Court which is still pending. 22. The issue raised in the above grounds is with regard to excluding internet charges of Rs.27,27,786 and expenditure incurred in foreign currency for travel amounting to Rs.4,80,079 from the export turnover as well as total turnover. 23. We have considered the rival submissions. 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 internet charges and expenditure incurred in foreign currency for travel should be excluded both from expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tanding on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794, dated 9-8-2000. If the specific provisions of the Act provide [first proviso to sections 10A(1); 10A(1A) and 10A(4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 9-8-2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 would be premature for application. The deductions under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined, the addition made consequent to such disallowance will go to increase the profits of the unit which is entitled to claim deduction on such profits u/s. 10A of the Act and therefore the impugned addition even if sustained, will be tax neutral. In other words, the assessee claims that even on the addition made consequent to disallowance u/s. 40(a)(i) of the Act, deduction u/s. 10A should be allowed. 32. In this regard, the dl. Counsel for the assessee has placed reliance on the decision of two High Courts viz., Hon ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (2010) 194 Taxman 192 (Bom) and Hon ble Gujarat High Court in the case of ITO v. Kewal Construction, 354 ITR 13 (Guj). In the decision of the Hon ble Gujarat High Court, it was held that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. This position has also been now confirmed by the CBDT in its Circular No.37/2016 dated 02.11.2016 wherein the Board has observed as follows:- 3. In view of the above, the Board has accepted the se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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