TMI Blog2015 (9) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... this company for the purposes of calculating arithmetic mean of PLI of the comparable companies Inclusion of F I Sofex Limited & TULSYAN TECHNOLOGIES LIMITED - Held that:- Even though the assessee in its TP study has included the turnover filter of less than ₹ 1 crore, the assessee has given reasons for inclusion of these two companies in the list of comparables, primarily for the reason that these are not start-up companies and functional data for these companies are reliable. The Tribunal in the case of Techbook International Pvt. Ltd. (2015 (7) TMI 473 - ITAT DELHI ) has held that low turnover per se cannot be reason to exclude a company from the comparable test. In view of the reasons given in the aforesaid order of Tribunal in case of Techbook International Pvt. Ltd., we hold that the CIT (A) is not justified in excluding F I Sofex Limited and Tulsyan Technologies Limited from the list of comparables purely on account of its low turnover. The issue needs to be examined by the AO/ TPO whether these two companies are otherwise functionally similar to that of the assessee irrespective of having low turnover. Exclusion of DATAMATICS TECHNOLOGIES LIMITED AND HINDUJA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is created in the new unit, fresh funds have been invested in the new unit and even after the setting up of the new unit, the turnover of the old unit has not reduced but, on the other hand, increased. During AY 2002-03, when no new unit was in existence, the turnover of old unit was ₹ 129 crores which, after the setting up of the new unit, has increased to ₹ 294 crores in AY 2008-09. In view of the above facts, we do not find any infirmity in the order of ld. CIT(A) - Thus assessee was entitled for deduction u/s 10A as it had established a new unit. - Decided in favour of assessee. - ITA No.1700/Del./2010, ITA No.1832/Del./2010 - - - Dated:- 28-8-2015 - SHRI S.V. MEHROTRA AND SHRI GEORGE GEORGE K., JJ. For The Assessee : Shri Nageswar Rao Sandeep S. Karhail, Advocates For The Revenue : Shri M.B. Reddy, CIT DR ORDER PER GEORGE GEORGE K., JUDICIAL MEMBER : These are cross appeals directed against the Commissioner of Incometax (Appeals) order dated 22.02.2010. The relevant assessment year is 2004-05. 2. In assessee s appeal (ITA No.1700/Del/2010), several grounds are raised with reference to Transfer Pricing adjustment. However, in the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons to include in the list of comparables the following three companies :- (i) Weal Infotech Limited (ii) F I Sofex Limited (iii) Tulsyan Technologies Limited The ld. AR had also requested for exclusion of Datamatics Technologies Limited from the list of comparables. 4.2 Brief facts in relation to the TP adjustment are as follows. 4.3 The assessee is a private limited company. It is a wholly owned subsidiary of America Express International Inc., USA. It is engaged in provided IT Enabled Services to its group companies i.e. transaction processing, data management, information analysis and control. For the work which assessee undertakes with its Associated Enterprises, assessee was remunerated at cost plus method. During the relevant period, the assessee has undertaken the following international transactions with its Associated Enterprises :- S.No. International Transaction Method Method Value (in Rs.) 1. Export of business processing and support TNMM 3,14,44,46,093 2. Charges for CDN/CPU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns it had undertaken with its Associated Enterprises in Category-I transactions. The list of comparable companies taken by the assessee are as follows :- SL.No. Name of the Company (i) Ace Software Exports Limited (ii) C S Software Enterprise Limited (iii) Datamatics Technologies Limited (iv) F I Sofex Limited (v) Hinduja T M T Limited (vi) M C S Limited (vii) Max Healthscribe Limited (viii) Nucleus Netsoft Gis India Limited (ix) Tata Services Limited (x) Suprawin Technologies Limited (xi) Tulsyan Technologies Limited (xii) Weal Infotech Limited (xiii) Carborundum Universal Limited (xiv) Mukand Engineers Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 67,77,22,314/- Operating Margin calculated by assessee (as per Appendix F of TP Report) ₹ 30,87,87,874/- Difference ₹ 36,89,34,440/- Book value of international transaction of export of business processing and support Rs.3,14,44,46,093/- Add: Difference as above ₹ 36,89,34,440/- Arm's length price of international transaction of export of business processing and support ₹ 3,51,33,80,533/- 9. The arm s length price of the international transactions entered into by the assessee regarding export of business processing and support to its AEs is determined at ₹ 3,51,33,80,533/- in place of ₹ 3,14,44.46,093/-. Since the price charged by the assessee varies by more than 5% from the Arm s Length Price, an adjustment of ₹ 36,89.34,440/- is to be made to the income of the assessee, being the difference between the arm s length price and the price charged by the assessee from its AEs for rendering services to them. i.e. the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed this company in the list of comparables, but, due to the absence of the relevant annual accounts, the working of OP/TC of this company was not calculated. Accordingly, this case was included in the list of comparables with the remarks NA against the column OP/TC margin. The assessee submitted the data in respect of this company before the ld. CIT(A), which came in public domain later on. Such data was considered by the ld. CIT(A) for the purposes of calculation of arithmetic mean of the comparable companies. On this score, we find that the Revenue is aggrieved against the acceptance of additional evidence in respect of this company in violation of Rule 46A. 8. There are two aspects of this issue. First is the question of the very inclusion of this company in the list of comparables and the second is about the calculation of its profit margin. As regards the first issue, we do not find any reason to disturb the view of the ld. CIT(A) because the assessee included it in the list of comparables in its Transfer pricing study. The very comparability of this company was not disputed by the TPO. In that view of the matter, the ld. CIT(A) cannot be faulted with for directing to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... key managerial personnel thereby significantly reducing the reliability of the financial data. The sale basket is narrow whereas the fixed cost and establishment cost of newly established companies are large. Therefore the TPO action is correct in rejecting companies having sales turnover less than ₹ 1 Crore. 9.1 Before us, the ld. AR relied on the judgment of Techbooks International Pvt. Ltd. vs. DCIT in ITA No.240/Del/2015 order dated 06.07.2015. The Tribunal in the case of Techbooks International Pvt. Ltd. (supra) held as under :- 12.2.2. Having heard both the sides on this issue, we find that the TPO has accepted the functional comparability of this company on segmental level. The ld. DR was also fair enough to candidly accept the functional similarity of the relevant segment of this company. In such circumstances, the question arises as to whether the relevant segment of this company can be excluded from the list of comparables merely on the ground that the revenue from this segment is only ₹ 83 lacs? In our considered opinion, the quantum of turnover can be no reason for the exclusion of a company which is otherwise comparable. We have noticed abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und of significant percentage of related party transactions. The CIT (A) however did not consider the assessee s submission regarding exclusion of Datamatics Technologies Limited. The assessee for exclusion of Datamatics Technologies Limited and Hinduja TMT Limited is relying on the following case laws :- (i) Nokia India (P) Ltd. Vs. DCIT ITA No.242/Del/2010 178/Del/2010; and (ii) ACIT vs. Convergys India Service (P) Ltd. ITA No.4291/Del/2009. The assessee has given the working of related party transactions of Datamatics Technologies Limited, which is at 39% (page 49 of the Paper Book submitted by the assessee). This aspect has not been considered by the CIT (A). The Tribunal in the case of Nokia India (P) Ltd. (supra) has held as follows :- 16. We find that this submission has two components, viz., the composition of numerator and denominator and the percentage of such numerator to the denominator. We agree in principle that if any company though functionally comparable, but, has more than a specific percentage of the RPTs, then, the same should be ignored by treating it as a controlled transaction. However, the percentage of RPTs to make a company as ineligibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n held in a recent judgment (M/s Liberty India Vs Commissioner of Income Tax on 31st August, 2009)(SC) wherein the deduction with regard to section 80I has been given only to the direct profit and gains from the undertaking/ exports. In all these sections the wordings are exactly the same as that of section 10A that is profit derived from the undertaking. The legislature has not used the word profits pertaining to the manufacture and production of article or things. The word derived is narrower in connotation and cannot be equated with pertaining to . Such second degree income would constitute independent source of income beyond the first degree nexus between profit and the industrial undertaking. Therefore the interest income from other sources doesn t qualify for deduction. Therefore this ground is rejected. 11.2 Before us, the ld. AR submitted that interest income earned on short term deposit is eligible for deduction u/s 10A/10B of the Act. For the above proposition, the ld. AR relied on assessee s own case in ITA No.1016/Del/2001 for AY 2002-03. It was further submitted that the issue in question is squarely covered by the following judgments/orders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies and whether the foreign exchange income and misc. income are operating income. EXCLUSION OF HINDUJA TMT LIMITED 13.1 This company was selected as a comparable by the assessee and same was accepted by the TPO. Before the CIT (A), assessee challenged the inclusion of this company in comparable list for the reason that it was having high related party transactions exceeding 25% during the relevant assessment year. The CIT (A) vide para 11.5 of the impugned order excluded the above said company from the list of comparables. The relevant finding of the CIT (A) reads as follows :- Based on the above calculations, it is clear that the company has significant percentage of related party transactions (total value of related party transactions/ total operating expense is close to 68%) hence, I hold that Hinduja TMT is not to be used as a comparable company on account of significant related party transactions. 13.2 The revenue, being aggrieved, is in appeal before us. 13.3 Having heard rival submissions, we notice that this company is having high related party transactions to the extent of 68%. This categorical finding of the CIT(A) has not been challen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income and misc. income as the operating income. It is ordered accordingly. CORPORATE TAX ISSUES IN DEPARTMENTAL S APPEAL DENIAL OF DEDUCITON U/S 10A ON PROFITS OF AEGSC UNIT (GROUND NO.2 OF DEPARTMENT S APPEAL) 15. The AO denied deduction u/s 10A of the Act in respect of the newly set up AEGSC unit. The reasoning given by the AO reads as follows :- .. Based on the directions given by Addl. CIT, Range-1 my predecessor had treated the business of AEGSC Unit (Regd as STP Unit) as having been created by splitting/ expansion of the existing business of FCE Unit which is already enjoying the benefit of Section 10B of the Act and the issue was decided against the assessee in the preceding year. In view of facts of the case and following the decision given by my predecessor for AY 2003-04, I am satisfied that business of AEGSC Unit (Regd as STP Unit) as having been created by splitting/ expansion of the existing business of FCE Unit which is already enjoying the benefit of Section 10B of the Act. Hence, as a natural corollary to above; the assessee s eligibility for exemption u/s 10A for the newly set up AEGSC unit is rejected. 15.1 The CIT (A) dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of activities is different, separate license is obtained for the new unit, separate infrastructure is created in the new unit, fresh funds have been invested in the new unit and even after the setting up of the new unit, the turnover of the old unit has not reduced but, on the other hand, increased. During AY 2002-03, when no new unit was in existence, the turnover of old unit was ₹ 129 crores which, after the setting up of the new unit, has increased to ₹ 294 crores in AY 2008-09. In view of the above facts, we do not find any infirmity in the order of ld. CIT(A). The same is sustained and ground no. 3 of the Revenue s appeal is rejected. 20. Respectfully following the decision of Tribunal we hold that assessee was entitled for deduction u/s 10A as it had established a new unit. This ground is allowed. 26.1 In view of the above finding of the Tribunal, we hold that the CIT (A) is justified in granting the benefit of deduction u/s 10A of the Act in respect of newly set up AEGSC unit of the assessee. It is ordered accordingly. 27. In the result, the appeal of the revenue is rejected. 28. To sum up : the appeal filed by the assessee is partly allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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