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2015 (9) TMI 607 - ITAT DELHI

2015 (9) TMI 607 - ITAT DELHI - TMI - Transfer Pricing adjustment - selection of comparable - Inclusion of WEAL INFOTECH LIMITED - Held that:- No 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 include the data of a company in the list of comparables, which was .....

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ore and send the matter back to the AO/TPO for verifying the correctness of the calculation of OP/TC of 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 .....

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es 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 TMT LIMITED - Held that:- In view of the high significant related party transactions which has not been examined either by the AO/TPO or CIT (A) in the instant case, we deem it approp .....

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submitted that appeal before the Hon’ble High Court is pending adjudication. For the sake of consistency, we decide the matter in favour of the assessee by holding that interest on surplus business funds kept with short term deposits is to be treated as ‘income from business’ entitled to the benefit of deduction u/s 10A/10B of the Act.

Exclusion of HINDUJA TMT LIMITED - Held that:- this company is having high related party transactions to the extent of 68%. This categorical finding of .....

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e operating income. It is ordered accordingly.

Denial of deduction u/s 10A of the Act in respect of the newly set up AEGSC unit - Held that:- The issue in question is covered in favour of the assessee by order of the Tribunal in assessee’s own case for assessment year 2002-03 and assessment year 2007-08 as held CIT(A) has considered all the parameters which may be necessary for adjudicating whether the set up of the new unit is by way of splitting up of the existing business or it is .....

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, 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 .....

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lusion of one company from the comparable list. The details of which we shall take up for consideration in the subsequent part of this order. 3. With reference to the corporate tax issue, the assessee has raised following effective grounds :- 4.1. That the Learned CIT(A) has erred on facts and in law in taxing the sum of ₹ 4,594,589 being interest on short-term deposits and ₹ 7 109,196 being interest on income tax refund as Income from Other Sources and in denying deduction under sec .....

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ken :- 1) On Relief of ₹ 15,87,61,266/- on account of Arm s Length Price : a) Whether in the facts and circumstances of the case the Ld. CIT(A) was right in rejecting the comparables on the ground of related party transactions? b) Whether in the facts and circumstances of the case the Ld. CIT(A) was right in treating the foreign exchange and miscellaneous income as operating income? c) Whether in the facts and circumstances of the case the Ld. CIT(A) was right in admitting the additional e .....

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2010 (ASSESSEE S APPEAL) 4.1 Ground Nos.1 to 3 and its sub-grounds relate to the Transfer Pricing issue. However, these grounds need not be given much importance because, as mentioned earlier, the AR in the course of hearing has confined his submissions 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 lis .....

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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 TNMM 20,10,14,142 3. Charges for global max software TNMM 54,09,681 4. Travel agency services TNMM 13,68,47,592 5. Corporate credit cards TNMM 5,72,926 6. Secondment of personnel TNMM 2,95,21,902 7. Relocation of expenses TNMM 62,70,773 8. Reimbu .....

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ategory-II with reference to transactions from Sl. Nos.9 to 13. With reference to Category-II transactions, there was no transfer pricing adjustment and the arm s length price of these transactions was accepted. In benchmarking Category-I transactions, the assessee adopted approach of aggregation of international transactions from 1 to 8 and concluded that Transactional Net Margin Method (TNMM) is most appropriate method to benchmark these international transactions. In TNMM, the assessee has co .....

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:- 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 (xv) Tricorn India Limite .....

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rables on account of his reasoning that these were start-up companies having turnover of less than ₹ 1 crore. The TPO also rejected the assessee s plea that Datamatics Technologies Limited and Hinduja TMT Limited are to be excluded from the comparable list of companies on account of high related party transactions. The final list of comparables included by the TPO are as follows :- SL.No. Name of the Company (i) Ace Software Exports Limited (ii) C S Software Enterprise Limited (iii) Datama .....

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ving at the above transfer pricing adjustment reads as follows :- Total Cost of provision of services by the assessee : (as per Appendix F of TP Report) ₹ 2,83,56,58,219/- Margin @ 23.90% of the above: ₹ 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 ₹ 3 .....

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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 Assessing Officer shall enhance the income of the assessee by an amount of ₹ 36.89,34,440/- while computing its total income. No exemption u/s. l0B shall be admissible on such adjustment in accordance with proviso of Sub-Section (4) of Section 92C. 5. Aggrieved, the assessee filed an appeal before the fi .....

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ial on record. We shall considered the issues raised in the course of arguments as under:- INCLUSION OF WEAL INFOTECH LIMITED 8.1 This company was selected as a comparable by the assessee. However, the TPO had excluded the same from the list of comparables on the ground that current year s data is not available. Before the CIT (A), the assessee had submitted the financial information of the company and requested for accepting the same as a comparable. The CIT (A) vide order dated 22.02.2010 even .....

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nvergys India Services (P) Ltd. (supra) has opined that though the company is excluded by the TPO, for the reason that there is no financial data is available at the time of TP study, the same can be included in the comparable list, during the appellate stage when financial details are made available. The relevant finding of the Tribunal on an identical issue reads as follows :- 7. The second ground taken by the Department is against the inclusion of Weal Infotech Ltd. by the ld. CIT(A) in the l .....

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(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 o .....

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. CIT(A) accepted the data furnished by the assessee of this company and proceeded to include the same in the list of comparables without affording any opportunity to the TPO for examining the same. We, therefore, find that there is violation of rule 46A to this extent. Accordingly, we set aside the impugned order on this score and send the matter back to the AO/TPO for verifying the correctness of the calculation of OP/TC of this company for the purposes of calculating arithmetic mean of PLI of .....

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applying less than ₹ 1 crore turnover filter. Two reasons were cited for such an approach, namely, starting up year and financial data may not be reliable as the shareholders and the employees may be the same. Before the CIT (A), the assessee submitted that these two companies were not in the start-up phase and were in existence since FY 1998-99 and FY 2000-01. Further, these companies are listed or part of listed group and, therefore, there is clear distinction between profits and salari .....

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hese companies are generally in the set-up phase of business and are also not big enough to establish distinction in profits and salaries of the 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 th .....

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s 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 above the judgment of the Hon ble jurisdictional High Court in the case of ChrysCapital Investment Advisors (India) P. Ltd (supra) in which it has been held that high turnover .....

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company in the list of comparables, after due verification of the necessary figures for determination of the operating profit margin etc. 9.2 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 Int .....

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nctionally similar to that of the assessee irrespective of having low turnover. EXCLSUON OF DATAMATICS TECHNOLOGIES LIMITED AND HINDUJA TMT LIMITED 10. Datamatics Technologies Limited and Hinduja TMT Limited were selected as comparable by the assessee and the same were also selected by the TPO. Before the CIT (A), the assessee has challenged the inclusion of both the companies on the ground that these companies were having significant related party transactions of more than 25% during the releva .....

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llowing 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 su .....

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gested on behalf of the assessee. The view adopting more than 25% RPTs making a company incomparable has been taken by various benches of tribunal including Aglient Technologies International P. Ltd. VS. ACIT (2013) 36 CCH 187 Del Trib; Stream International Services Pvt. Ltd. VS. ADIT (IT) (2013) 152 TTJ (Mumbai) 553 ; and Actis Advisers Pvt.Ltd. VS. DCIT (2012) 20 ITR (Trib) 138 (Delhi). We, therefore, hold that a company can be considered as incomparable if its RPTs exceed 25%. 10.1 In view of .....

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se surplus funds are nothing but business funds temporarily available out of working capital of the busienss. The assessee liquidates/withdraws funds from the short term deposits to discharge short term liabilities/meet working capital requirements as and when required. Accordingly, it was submitted that the interest is earned on short term funds temporarily available out of surplus working capital. However, the AO held that the interest income earned on such short term deposit cannot be said to .....

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nsidered as the profits and gain derived from an undertaking. This is stretching the arguments too far. The intention of the legislature is to grant deduction to the first degree of income and not to the second degree income generated out of first degree income. This has been 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/ .....

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rest 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 Hon ble High Court and the Tribunal :- (i) CI .....

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rt in the case of Motorola India Electronics (P) Ltd. and deals with the issues of entitlement of interest from surplus funds under section 10A/10B of the Act. 11.4 On the other hand, the ld. DR relied on the judgment of Hon ble Supreme Court in the case of M/s. Liberty India Ltd. Vs. CIT (the judgment relied upon by the ld. CIT (A)) and also in the judgment of Hon ble jurisdictional High Court in the case of Marubeni India Private Limited vs. Director of Income-tax reported in 354 ITR 638. 11.5 .....

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ng that interest on surplus business funds kept with short term deposits is to be treated as income from business entitled to the benefit of deduction u/s 10A/10B of the Act. It is ordered accordingly. GROUND NOS.4.1 TO 4.3 - Interest income earned from income tax refund whether business income or income from other sources 12. The assessee did not press this part of the ground in view of the Tribunal s order in assessee s own case for assessment year 2002-03 being ITA Nos.1338/Del/2009 & 151 .....

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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 significan .....

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enged by the revenue in its grounds The various orders of the Tribunal have held that the companies having related party transactions in excess of 25% are to be excluded from the comparable list. Following the orders of the Tribunal which have held so, i.e., Nokia India (P) Ltd. Vs. DCIT (supra) and ACIT vs. Convergys India Service (P) Ltd. (supra), we hold that the CIT (A) is justified in excluding the same from the list of comparables. WHETHER FOREIGN EXCHANGE INCOME AND MISC. INCOME ARE OPERA .....

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pricing order, the TPO has not considered other operating items of income (namely Foreign exchange income and miscellaneous income). I have reviewed the computation of its operating margin provided by the appellant. In this regard, I am of the view that the same should be considered as operating items of income and hence, any difference, if any, should be adjusted to the operating revenues of the appellant and not to the sales turnover. The above view has also been supported by Hon ble Delhi Tri .....

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46/Del/2007)(AY 2003-04) (Page 6 - 16 at Page 15 & 16); (iii) CISCO Systems (India) Private Limited vs. DCIT (IT (TP) A.No.271/Bang/2014) (Page 15 & 16 at Para 23); and (iv) SAP Labs India Private Limited - (2010) 6 ITR (T) 81) (At para 42 & 46). In view of the above orders of the Tribunal, we hold that the CIT (A) is justified in including the foreign exchange income and misc. income as the operating income. It is ordered accordingly. CORPORATE TAX ISSUES IN DEPARTMENTAL S APPEAL DE .....

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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 A .....

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Tax. I have also gone through the observations of my predecessor for the Assessment Year 2003-2004 i.e. the first year of claim of deduction under section 10A. This is not denied that the turnover of both the units are rising and not detrimental to the performance of each other. Hence it cannot be dragged under mischief of splitting. There is no sign of decline in the turnover of FCE unit which is approaching end of tax holiday or even after the tax holiday. Further they are not using the same i .....

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sessee by order of the Tribunal in assessee s own case for assessment year 2002-03 being ITA No.4240/Del/2009 & 4295/Del/2009 (page26 para 36) and assessment year 2007-08 being ITA No.295/Del/2012 (page 7 & 8). For ready reference, the finding of the Tribunal for the assessment year 2007-08 reads as follows :- 18. We have considered the submissions of both the parties and have perused the record of the case. 19. We find that Tribunal in assessee s own case for AY 2003-04 has held as unde .....

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