TMI Blog2011 (7) TMI 509X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of functionally, submission as to why the comparable transactions relied upon by the assessee cannot be rejected, reasons as to why saving on account of link cost, recovery of reimbursement of expenses should be considered while working ALP Deduction u/s 10A before setting off of unabsorbed depreciation - Held that:- Deduction u/s 10A has to be allowed on profits of the undertaking before set-off of unabsorbed depreciation. Unabsorbed depreciation has therefore to be allowed to be adjusted against interest income - Decided against the revenue. Treatment of 'exchange rate gain' - Business Income or Income from other sources - Held that:- CIT(A) rightly held that exchange rate gain is integral part of the exports and hence part of "Business Income" and cannot be treated as "Income from other sources." Interest on L/C Margin & Bank Guarantee - assessee contended that AO erred in treating said interest as "Income from Other Sources" as against "Business Income" of the eligible 10A unit for the first time in his final assessment order without having considered so in his draft assessment order u/s 144C and accordingly, erred in denying deduction u/s 10A in respect of such int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d services (ITES) to its AEs- H3GA, Australia at Rs. 50,59,00,694 and H3GUK, UK at Rs. 83,16,10,735. As per the 3CEB report, the method used for benchmarking this transaction by the assessee was Cost Plus Method. 3GS had charged H3G AEs on the basis of the following formula- (a) Operating Cost, depreciation and amortization for the period. (b) 7 per cent mark up on (a) above. 5. During the F.Y. 2003-04 (AY. 2004-05), the assessee had charged a mark up of 4 per cent on the operating cost, depreciation and amortization. This was increased to 7 per cent for the previous year. In assessment year 2004-05, the assessee had selected CUP method as the most appropriate method for bench marking this transaction. In this method the assessee had relied for the purpose of benchmarking its transfer price on the rates published by NASSCOM. The then TPO had observed in its order for the A.Y. 2004-05 that the rates relied upon by the assessee are "General Industry rates" and therefore cannot be considered as comparable to the assessee's transaction. He considered in the facts of the case and considering the data available, TNMM as the most appropriate method. 6. During the relevant year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Ltd. Chronically loss making 3. Citigroup Global Services Ltd. Related party transactions with foreign parent hence not uncontrolled transaction 4. Godrej Upstream Ltd. Chronically loss making 5. Nipuna Services Ltd. Chronically loss making negative net worth 6. NIIT Smartserve Ltd. Chronically loss making negative net worth 7. Rev IT Systems Pvt. Ltd. Chronically loss making. . 9. The TPO on his own obtained data available in public domain and was of the view that the following companies were operating at better margin than the assessee: Sl.No. Comparable companies OP/TC (%) 1. Allsec Technologies Ltd 28.07 2. WIPRO BPO Solutions Ltd. 28.43 3. Transworks Information Services Ltd. 5.69 4. Hinduja TMT Ltd. 62.25 5. Mphasis Ltd. 38.26 6. Firstsource Solutions Ltd 4.84 7. Tulsyan Technologies Ltd. (Cosmic Global) 19.08 8. Saffron Global 24.89 9. Vishal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing created or developed by GSPL or any third party acting on its behalf, in compliance or purported compliance with its obligations under this Agreement (including GSPL Materials) solely for the benefit of Hutchison under this Agreement (the "Works"), shall vest legally and beneficially in Hutchison. The parties further agree that all Intellectual Property Rights in any Deliverable, and in any software or anything created or developed by GSPL or any third party acting on its behalf, in compliance or purported compliance with its obligation under this Agreement and the Related Agreement (including the GSPL Materials) for the joint benefit of Hutchison and Hutchison 3G UK Limited ("Joint Material") shall vest legally and beneficially in Hutchison and Hutchison 3G UK Limited." Based on the above clause, the TPO concluded that in the course of rendering services the Assessee delivers project software, design, report, document, specifications or other item or in combination thereof, which may be developed or created or provided by the assessee arising out of the supply of services to these companies. (c) Referring to the definition of Management personnel, operating procedure, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales-Mobile Number Porting (MNP)/Activation/Provisioning. (b) Sales-Direct Selling/Campaign Management (c) Collections-Consumer/Commercial. (d) Value Added Service-Content Selling. (e) Customer Care-Queries/complaints/Billing requests/Technical issues/Delivery Enquiries Services Change Request. (f) Customer Retention-Inbound /Handset upgrade (g) Channel Support Retail Support. The TPO also held that the assessee company has over four million customers in Australia U.K. That the Assessee provides end-to-end customer relationship management solutions to customers and the third generation mobile telephony - 3 which has pioneered revolutionary 3 G mobile technology. That the assessee's operations assumes importance since it is forms the back support system for the core functions performance by the H3G companies. The TPO was also of the view that 3G technology facilitates the convergence of communication, information and entertainment. Customers can make a video call, download and watch music videos, watch live sports action and live video messages. According to the TPO the terms of the Agreement between the Assessee and the AEs clearly show that the quali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38.26 6. Firstsource Solutions Ltd. 4.84 7. Tulsyan Technologies Ltd. (Cosmic Global) 19.08 8. Saffron Global 24.89 9. Vishal Information Technologies Ltd. 45.65 10. Ace Software Exports Ltd. 15.46 11. Nucleus Netsof GIS India Ltd. 40.6 12. Asian Cerc Information Technology Ltd.(seg) 37.4 13. Airline Financial Support Services (I) Ltd. 26.54 14. Goldstone Teleservices Ltd. (Seg) 15.95 15. Cepha Imaging Pvt. Ltd. 47.7 Total 440.81 Average 29.38 The arithmetic mean of the net margin (PBIT) on total costs for these 15 comparables was 29.38 per cent. 15. The net margin of the assessee was calculated as under: Total Expenditure as per P/L account 125,00,96,000 Less 1. Loss on sale of fixed assets 2. Misc exp. w/o. 7000 2000 Total cost 125,00,87,000 PBT as per P/L account 12,10,96,000 Less Bank interest 17,49,000 Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, specification or other item or any combination thereof to be developed, created or provided by GSPL in the course of or arising out of the supply of services under the this agreement. It was submitted that the term "Deliverables" is used only in relation to any software etc. that may get developed in the course of rendering the "Services", being the services of a call centre as explained above. The assessee is not engaged in the business of supplying "Deliverables" as presumed by Assessing Officer. The word 'Deliverables' is used only in Clause 8.2 which reads as under: "8.2 As between GSPL and Hutchison, all Intellectual Property Rights in any Deliverable, and in any software or anything created or developed by GSPL or any third party acting on its behalf, in compliance or purported compliance with its obligations under this Agreement (including GSPL Materials) solely for the benefit of Hutchison under this Agreement (the "Works"), shall vest legally and beneficially in Hutchison. The parties further agree that all Intellectual Property Rights in any Deliverable, and in any software or anything created or developed by GSPL or any third party acting on its behalf, in compli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an order under section 154 wherein he expressed the opinion that the comparable selected by him are broadly similar to the functions performed by the assessee. Thus the TPO in his original order took the view that the services rendered by the Assessee were much sophisticated and technical than a mere call centre. In the order under section 154 of the Act, he did not deny the plea of the Assessee as set out in the application under section154 of the Act but took a stand that the comparable cases relied by TPO, similar services were being rendered as the one claimed by the assessee. 19. On appeal by the assessee the CIT(A) deleted the addition made by the Assessing Officer for the following reasons: (a) The TPO has proceeded on an incorrect understanding of the Assessee's business and that such misconception has resulted from an erroneous reading of the various clauses of the relevant agreement with the A.E. (b) The Assessee was a mere call centre and not engaged in other high end ITES like software development etc. Copies of the approval from the Department of Telecommunications as also the approval from the Shop and Establishment authority, both mention the nature of act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies. He held that these cannot be regarded as "chronically" loss making since they are just at the start-up stage. Balance one company, namely, Ask Me Info Hub Ltd. being a loss making company included in the list of comparable of the assessee but rejected by the TPO is, no doubt, established in the year 1962. However, on a perusal of its Profit and Loss Account, it cannot be lablled as "chronically" loss making since in the financial years 2005-06 and 2006-07 this company has turned around and has earned small profits. The companies selected by the assessee, though loss making during the relevant year, cannot be removed from the list of comparables in view of the fact that these are, like the Assessee itself, start-up companies and these companies are undoubtedly engaged in voice based call centre services. (i) With regard to the 9 new additional companies selected by the TPO (except Saffron Global) the CIT(A) held that these companies are not engaged in Plain Vanila Voice Based Call Centre and engaged in higher end ITES. Also since these are not start up companies, he held that the new 9 companies introduced by the TPO deserve to be rejected. Even if M/s. Saffron Global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se situations, everything else remaining the same. It is also quite common to hear about cash discount being offered by traders to induce the customer to make early payments. In view of this common business understanding and practice it will be fair and reasonable in accepting the claim of the appellant since the companies selected by him or by the TPO provide an average credit period of 3 months as against the Appellant obtaining advances from its customers which are periodically adjusted against the billing." (k) The CIT(A) also held that in Assessee's case in the earlier year, being the first year of operations, the Assessee charged cost plus 4 per cent mark up plus depreciation on actual basis to the AEs. That year's appeal was decided in favour of the assessee vide order dated 6th January, 2009 and the Revenue's appeal thereagainst has since been dismissed by the "L" Bench of the ITAT in ITA No. 1812/Mum./2009, dated 18th February, 2010. In the current year, the assessee has charged 7 per cent mark up not only on all costs but also on depreciation which according to CIT(A) means that the mark up charged by the assessee in current year has doubled than the mark up of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and considered the 6 companies selected by the assessee and arrived at a data base of 15 comparable cases. The assessee had objected before the Assessing Officer that 8 out of the 9 comparable cases cited by the Assessing Officer cannot be considered at all because they were in a totally different business. The objections with regard to the 8 parties out of the 9 considered by the Assessing Officer was as follows: Sl. No. Name of the company Reason for Non-comparison with Appellant's business as described in Company's own website Remarks if any. 1. Cepha Imaging Private Limited CEPHA is a complete service provider for all publishing needs in the contemporary electronic era. Our primary markets are Scientific, Technical, Medical, Scholarly, Reference, and College publishing. The core of business is Typesetting/ Composition and also provides Project Management Service and extended value added products-Multimedia Solutions. Refer Profile from Website at Pg.223 of PB 2. Vishal Information Technologies Ltd. Vishal is in the business for the last 8 years and is well established in its four areas of oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clientele. We conceptualize and realize technology driven business transformation initiates. With a vast worldwide network, we use a low-risk Global Delivery Model (GDM), to accelerate schedules with a high degree of time and cost predictability. High-end Technical Services, Refer profile for Description of nature of business at page No. 224 of PB 25. It was the plea of the Assessee before the TPO that the Services rendered by IT Industry (ITES-BPO) are classified into various segments are as under: - Customer care (Voice and non-voice) includes inbound and outbound calls, telemarketing, email support, market surveys, web sales, advertising PR; - HR includes benefits administration, recruiting, education and training payroll and records management; - Finance and accounting includes accounting transactions, tax consulting and management, risk management, financial analysis and reporting; - Payment services includes processing and collection of claims, credit/debit cards, loans and cheques and Electronic Data Interchange; - Content Development includes Animation, Gaming, business and Corp Research (includes data processing, de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... file of the assessee company. In our view the TPO was not justified in ignoring the distinction pointed out by the assessee with regard to the characteristics of the services provided by it and the 8 comparable cases considered by the TPO. 28. It has been the stand of the TPO that the assessee was not performing merely the services of a call centre and was providing services which were much more than an ordinary call centre. In this regard the Assessing Officer has pointed out certain facts which emerges from the agreement between the assessee and the AE. According to the assessee these facts were not confronted to the assessee by the TPO and the assessee came to know about the observation of the TPO only after receipt of the order of the TPO. The assessee filed an application under section 154 of the Act before the TPO. In this application the assessee had specifically pointed out that the conclusions of the TPO that the assessee also provided and delivered project software design reports is not factually correct. In this regard the assessee submitted "Deliverables" means any product, software, interface, design, report, document, specification or other item or any combination t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the services set out in the Service Schedule in accordance, in particular, with the forecasts provided to GSPL from time to time which are to be agreed between the parties.' The service schedule has been defined as follows: ' "Service Schedule" means the Schedule to be agreed between the parties setting out the Services to be provided by GSPL as amended or replaced by Hutchison from time to time and notified to GSPL.' On a careful perusal of the agreement we find that there is no exact description of the nature of services to be rendered. That can be verified only from the schedule agreed between the parties setting out the services to be provided. The ld. counsel for the assessee submitted before us that in the earlier assessment year the assessee has been accepted to be performing the services of a call centre. It was also pointed out that the registration certificate of the assessee under Bombay Shop and Establishment Act, 1948 the assessee has been described as a call centre. It has also been pointed out that the approval from Department of Telecommunication also supports the claim of the assessee that it is call centre. 31. We have, on a carefully consideration of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c development and level of competition and whether the markets are wholesale or retail. Rule 10B(3) lays down that an uncontrolled transaction shall be comparable to an international transaction if (i) 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, or the profit arising from, such transactions in the open market ; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. In the set aside proceedings, the Assessing Officer will consider the issue in the light of the rules set out above. The Assessee has set out in pages 337 to 340 of his paper book as to how working capital adjustments have to be made. In pages 183 to 186 and 191 to 202 of the paper book the Assessee has also highlighted the other adjustments that are required to be made to eliminate material effects of the differences between the international transaction and the comparable uncontrolled transactions. These aspects will also be considered by the Assessing Officer in the set aside proceedings. It was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entre but performing much more skilled jobs than that of a call centre. We have already extracted the explanation of the Assessee before the TPO in this regard. The TPO has ignored the plea of the Assessee and has not given any reasons for doing so. The TPO has merely said the comparable instances were performing identical job as performed by the Assessee. In our view such rejection of the Assessee without assigning any reason is arbitrary. 33. Another aspect which we notice in the TPO's order is that he had carried out FAR analysis and has alleged that the Assessee was performing services that are much more technical than what an ordinary call centre performs. The TPO has not spelt out as to how in the comparative uncontrolled transaction considered by the TPO, the nature of services rendered is similar to the one rendered by the assessee. 34. One of the submission made by the learned counsel for the Assessee was that, if for any reason, the Tribunal remands the issue of determination of ALP to the Assessing Officer, then, a direction should be given that the TPO will not look afresh into data that is available in the public domain. According to him, the TP study is required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er alia, erred in completely overlooking/ignoring the earlier year's order of the Appellate Authorities and all other submissions/arguments of the Appellant. 2. The appellant, therefore, humbly prays that the addition under section 92 be deleted. 38. In this assessment year the assessee has challenged the adjustment made by the TPO to the ALP. In this assessment year the facts are almost identical. The TPO in his order under section 92C has determined the ALP in the following manner. The assessee had given 11 comparable instances. The assessee on his own only pressed for 7 of the comparables selected by it. The TPO rejected these comparables for the following reasons: Sl. No. Name of the comparable Reasons for rejection. 1. Ask Me Info Hubs Ltd. The company is chronically loss making, hence rejected. 2. B 2K Corp. Pvt. Ltd. Company operates in the area of rendering business process outsourcing services. The company is chronically loss making with loss in FY 2005-06, hence rejected. 3. Godrej Upstream Ltd. Company is engaged in business of ITES services. Main income from call centre ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arithmetic mean 24.00% 40. The TPO held that the arm's length margins of comparable companies engaged in software development activities is 24 per cent on cost. Accordingly the ALP was determined by adopting the above arithmetic mean of 24 per cent and ALP determined. Consequently the impugned addition to the total income was made by the Assessing Officer based on TPO's report. 41. It was the claim of the Assessee that out of the 13 companies selected by the TPO 11 companies are grossly non-comparable with the Assessee. The Assessee pointed out that the 10 out of the 11 companies were functionally not comparable at all and the other company viz., Spanco Ltd. earned export revenues of less than 25 per cent of its total revenue. The Assessee pointed out that the 10 companies fell under the higher strata of services with some getting classified under content development and KPO. Thus they were functionally not comparable at all. The details in this regard are contained at page-204 of the Assessee paper book in the form of annexure-1 to the reply filed by the Assessee before the TPO vide its letter dated 21-10-2009 filed before the TPO. Apart from the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aside the order of the Assessing Officer and remand the question of determination of ALP by the Assessing Officer afresh in the light of the directions given above. For statistical purposes, the ground of appeal of the Assessee is treated as allowed. 42. Ground No. 2 raised by the Revenue in ITA No. 5887/Mum./10 reads as follows: "2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing the claim of the assessee under section 10A before setting off of unabsorbed depreciation." 43. The Assessee had filed a return of income for assessment year 2005-06 on 28-10-2005 declaring total income of Rs. 15,71,120 after claiming deduction under section10A of the Act of Rs. 11,29,06,385. The sum of Rs. 15,71,120 was interest income which was offered to tax. On 9-2-2007, the Assessee filed a revised return of income of Rs. Nil . The Assessee had brought forward depreciation loss of Rs. 3,85,20,781. In this revised return of income the Assessee set off against the interest income brought forward depreciation loss and claimed carry forward of the remaining depreciation loss of Rs. 3,69,49,662. The Assessing Officer however held that under section 32 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses but also before setting off unabsorbed depreciation. The appellant's stand is also covered by the decision of the Special Bench in the case of Scientific Atlanta India Technology (P.) Ltd. Thus ground No. 2 is allowed." 46. Aggrieved by the order of the CIT(A), the revenue has raised ground No. 2 before the Tribunal. We have heard the rival submissions. Under the provisions of section 10A of the Act, deduction of such profits and gains as are derived by an undertaking from the export of computer software or other notified business shall be allowed from the total income of such undertaking. Section 72(2) clearly and specifically provides that where any allowance or part thereof under sub-section (2) of section 32 is to be carried forward, effect shall first be given to the provisions of section 72(2). Thus, there is no reference to the set-off of business losses and unabsorbed depreciation. The view is also supported by decision of Chennai Tribunal in the case of Changepond Technologies (P) Ltd. v. Asstt. CIT [2008] 22 SOT 220 wherein it was held as under: "The Commissioner (Appeals) was not correct in setting off of carried forward losses before giving the exemption unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sorbed depreciation has therefore to be allowed to be adjusted against interest income. For the reasons given above, we confirm the order of CIT(A) and dismiss ground No. 2 raised by the Revenue. 47. Ground No. 3 raised by the Revenue in ITA No. 5887/Mum./10 reads as follows: "3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that exchange rate gain is integral part of the exports and hence part of "Business Income" and cannot be treated as "Income from other sources." 48. The Assessee had earned foreign exchange gain of Rs. 3,19,32,434 . The foreign exchange gain earned by the Assessee and its accounting was explained by the assessee as follows: The assessee say receives an advance of 1000 US$ on 15-3-2004 from AE (Exchange rate difference on the date of receipt 1 US$ = Rs. 44.00). This advance will get adjusted against subsequent billing on AE. Entry passed at the time of receipt on 15-3-2004 will be: Bank A/C. Dr. Rs. 44,000 To AE Cr. Rs. 44,000 On 31-3-2004, (1 US$ = Rs. 47.00) revaluation of foreign currency liability, the entry passed will be: Foreign Exchange loss A/c. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in Changepond Technologies (P.) Ltd. and it has been categorically held that where the gain from fluctuation of foreign exchange is directly related to the export activities, it should be considered as income derived from export activity and, therefore, such foreign exchange gain would be included in the profits for computation of deduction under section 10A. Moreover, the Special Bench in Asstt. CIT v. Prakash L. Shah (301 ITR) has also held that exchange rate gain difference pertaining to exports is an integral part of the exports and export turnover cannot be treated as income from other sources. Thus ground Nos. 3 4 are allowed." 51. Before us the learned D.R. relied on the order of the Assessing Officer. We are of the view that the order of the CIT(A) on this issue has to be upheld. In the case of Changepond Technologies (P.) Ltd. (supra), the Chennai Bench of ITAT dealt with identical issue and held as follows: "The gain from the fluctuation of foreign exchange was directly related to the export activities and should be considered as income derived from export activities. Such gain due to fluctuation of foreign exchange arose only due to the export and not due to oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Guarantee as "Income from Other Sources" as against "Business Income" of the eligible 10A unit for the first time in his final assessment order without having considered so in his draft assessment order under section 144C and accordingly, erred in denying deduction under section 10A in respect of such interest income." 58. For deciding ground No. 3 it is necessary to have a look at the provisions of section 144C of the Act, which were introduced by the Finance Act , 2009, with effect from 1-4-2009. The said provisions provide that in the case of eligible assessee, the Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee, if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. For the purpose of section 144C of the Act, Eligible assessee has been defined under section 144C(15) to (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e can project his grievance against such variation before the DRP. The fair order passed by the Assessing Officer on receipt of directions from the DRP cannot be at variance with the directions issued by the DRP nor can the Assessing Officer deal with issues not considered in the draft assessment order. If the Assessing Officer is permitted to make any variation to the loss or income returned by the eligible assessee which is not spelt out in the draft assessment order, then the Assessee will have no opportunity to address his grievance before the DRP. 59. In the present case, the Assessing Officer treated interest on L/C. Margin and Bank Guarantee earned by the Assessee of Rs. 3,36,697 as "Income from Other sources" in the fair order passed. The Assessee had claimed the same as "Income from Business" and had also claimed that the same is eligible for deduction under section10A of the Act. In the draft assessment order he did not deal with this issue at all. The Assessee has therefore objected to the said action of the Assessing Officer in ground No. 3 raised above. 60. We are of the view that in the light of the statutory provisions of section 144C of the Act, which have been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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