TMI Blog2013 (9) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... a and inter office services and how much is for delivery of services has not been examined by the Assessing Officer - In case any amounts are to be excluded as attributable to delivery of services outside India, the same should be excluded both from export and total turnover, while computing deduction under S.10A. Non-consideration of profits of overseas branch of the assessee as arising from export of ITES. - For allowing the deduction under S.10A/10B, other conditions are required to be satisfied, including the questions (a) whether the branch is rendering any BPO services; (b) whether the functions are similar; and (c) whether the incomes can be considered as income of STPI eligible for deduction. - matter remanded back for reconsideration. - ITA No.1623/Hyd/2010, ITA No.1677/Hyd/2010, Cross Objection No.17/Hyd/2011 - - - Dated:- 28-6-2013 - Shri B. Ramakotaiah And Shri Saktijit Dey,JJ. For the Petitioner : Shri Rajan Vora For the Respondent : Shri D. Sudhakara Rao, DR ORDER Per B. Ramakotaiah, Accountant Member: These are cross appeals directed against the order of the CIT(A) III, Hyderabad dated 14.10.2010 for the assessment year 2005-06. against the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee with AEs are at Arm's Length. In the report, the assessee admits that it was categorized as risk mitigated contract service provider and TNMM was most appropriate method and operating margin i.e. operating profit/operating cost was selected as the Profit Level Indicator (PLI)for the purpose of determining the ALP. It has also undertaken multiple year data of the comparable companies and arrived at 13 comparables with weighted average arithmetic mean of 10.25%. Even though there are functional and risk differences between the assessee and comparables, no adjustments were undertaken in the TP Report, since the assessee's net margin from the provision of services to its AEs was 8.87%, which was within the arm's length range determined. It is also its contention that the assessee company has unutilized surplus capacity in the year, and on making adjustments for the cost of the unutilised facilities, the net margin earned by the assessee form the services to the AEs is 12.76%. The Transfer pricing Officer accepted the TNMM method as the most appropriate method and the PLI (operating profit/operating cost) adopted therein, but rejected the TP report of the assessee and has conducte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the annual turnover of these three companies, which are as below- Company Turnover (in Rs.Crores) (1) HCL Comnet Systems Services Limited 260.19 (2) Infosys BPO Limited 649.57 (3) Wipro Limited 939.78 It is the contention of the assessee that these three companies are industrial giants in the area of software development and since these companies assume all risks, they earn higher amount of revenue resulting in higher profit, whereas the assessee being a captive unit of its parent company in the USA, it operates in a risk mitigated environment. Therefore, the margin of profit is also less. In this context, the learned Authorised Representative for the assessee relied upon the decision of the ITAT Delhi Bench in the case of Agnity India Technologies P. Ltd. V/s. ITO in ITA No.3856/Del/2010 dated 4th November, 2010 and in the case of Triniti Advanced Software Labs(P)Ltd.(2011-TII-92- ITAT-HYD- TP). The Authorised Representative for the assessee further contended that when the TPO has rejected companies with turnover of less than Rs.one crore, by stating that these companies may not be representing the industry trend, by applying the very same logic, he should not have als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Tribunal has observed in the following manner- "9. Having heard both the parties and having considered the rival contentions and also the juridical precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain for the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata of Wipro BPO Solutions, furnish the same to the assessee, call for objections and then decide the issue afresh by arriving at operating profits vis-a-vis costs of that company, so as to include it in the comparables. With these observations, the issue is partly allowed for statistical purposes. 12. Next issue to be considered is about the following comparables rejected by the TPO, which according to the assessee was done without any discussion. (a) Apex Advanced Technology Pvt. Ltd. (b) Pantasoft Technologies Ltd. (c) Goldstone Tele Services Ltd. (d) Gold Stone Technologies Ltd. (e) R.Systems International Ltd. 13. As for Apex Advanced Technology Pvt. Ltd.(14.44%), it is submitted that this comparable was selected for assessment years 2006-07 and 2007-08. Since this comparable is selected in later two years, we are unable to understand why the same is not acceptable to the TPO in this assessment year 2005-06. Assessing Officer is directed to examine this comparable afresh, and if it is found that this comparable is functionally same along with the reliability of the data available, the same can be considered as comparable for this year also. 14. As for M/s Panta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments under the TP provisions, the working capital adjustment of 0.56% was accepted by the TPO, whereas the assessee is seeking depreciation adjustment and risk adjustment. These issues were elaborately discussed in our separate order of even date for assessment year 2006-07, in appeal, ITA No.1624/Hyd/2010. Consistent with the view taken therein, we direct the Assessing Officer /TPO to examine this issue and allow necessary adjustments after giving due opportunity of hearing to the assessee. Accordingly, these issues are also restored to the file of the Assessing Officer/TPO for appropriate adjustments in the light of the directions given in our order of even date for assessment year 2006-07 noted above. 20. Ground No.13 of the assessee in this appeal is against non- consideration of the foreign exchange gain as earned from business operations of the STPI undertaking assessee eligible for deduction under S.10A of the Act. The issue involved in this ground is similar to the one in assessee's own case for the assessment year 2006-07, and the same was decided in favour of the assessee, vide our order of even date in ITA No.1623/Hyd/2010. Facts and circumstances of the case for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 2005-06 being similar, consistent with the view taken as above for the assessment year 2006-07, we hold that the assessee, in principle, is entitled to claim, even in the course of an appellate proceedings, for inclusion of its profits of the overseas branch as arising from export of ITES. However, for allowing the deduction under S.10A/10B, other conditions are required to be satisfied, including the questions (a) whether the branch is rendering any BPO services; (b) whether the functions are similar; and (c) whether the incomes can be considered as income of STPI eligible for deduction, and for this purpose, we are of the opinion that the issue has to be considered on merits by the Assessing Officer. Therefore, while allowing this ground on the legal principle, for the purpose of verifying and quantifying the deduction, the matter is restored to the file of the Assessing Officer who should examine and consider deduction afresh in accordance with law, after giving due opportunity of hearing to the assessee. This ground is allowed for statistical purposes. 23. The next ground of the assessee in this appeal is against non-allowance of credit for the UK income tax amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation under S.10A was accepted, Vide para 6.3 of the order of the CIT(A), following the decision of the coordinate bench of the Tribunal in the case of DE Block India Software P. Ltd. (ITA Nos.983 and 984/Hyd/20096) and Four Soft Pvt. Ltd.(ITA No.1178/Hyd/2006 dated 26th September, 2008). He directed the Assessing Officer to exclude communication expenses claimed both from export turnover as well as the total turnover. Revenue is aggrieved. 27. For the reasons discussed by the CIT(A), we agree with his order on his issue. The assessee, as considered earlier while dealing with the assessee's appeal on this very issue, is challenging the very nature of communication charges considered by the Assessing Officer, and this issue was restored to the Assessing Officer to examine whether these charges can be considered as communication charges so as to exclude them. It is also clearly stated therein that in case these expenses are considered as communication charges for delivery outside India of services, then following the decisions of the coordinate benches and also the decisions of the Karnataka and Bombay High Courts noted in that context, the Assessing Officer has to exclude the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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