TMI Blog2016 (6) TMI 790X X X X Extracts X X X X X X X X Extracts X X X X ..... e in different assessment years on one agreement. Considering this aspect, we are of the view that impugned orders are not sustainable on this issue, therefore, we set aside the assessment order including that of DRP and restore this issue to the file of the AO for fresh adjudication. The ld.AO shall take into account, the TPO’s order passed in subsequent period i.e. dated 26.2.2014 though passed for the subsequent period but deals with same agreement. If the assessee is being accepted as a BPO, then, all the comparable selected by the TPO would not be relevant, and a fresh inquiry has to be conducted. Considering all these aspects, we allow the appeal of the assessee for statistical purpose. Deduction under section 10A - whether Foreign exchange fluctuation gain is directly linked with export business carried on by the undertaking, and hence, deemed to be derived from undertaking’s business eligible for deduction u/s.10A? - Held that:- DRP has recorded a finding that foreign exchange fluctuation gain was directly linked with the export business carried out by the assessee, hence, it is to be treated as income derived by an undertaking. The ld.DR was unable to point out any sign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Financial LC, One SNL Plaza, Charlottesville VA 22902, USA 13,08,92,011 The ld.TPO has passed an order on 28.1.2013. He recommended an upward adjustment of ₹ 3,36,21,812/- in the value of international transaction. The objection filed by the assessee with DRP did not bring any relief to the assessee. 4. The ld.counsel for the assessee, while impugning the order of the AO passed under section 143(3) r.w. 144C(13) of the Income Tax Act contended that agreement for providing the services to AE was executed on 1/10/2004 and it was valid upto 30.12.2012. Copy of the inter-company agreement is filed at page no.64 of the paper book. He took through the clause (3) of the agreement on page no.65. It reads as under: 3. AGREEMENT TERM: Contractor shall provide services to the Company pursuant to this Agreement for a term beginning on 1wst October, 2004 and ending on December 30 th , 2012 (the Agreement Term ). The term of agreement may be extended if required in future on mutual agreement between the parties. 5. He further contended that one notification no.SO2810(E) dated 18.9.2012 issued by the CBDT has notified Safe Harbour Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression KPO in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entities that fall in the extreme quartiles for comparability. However, neither Chapter X of the Act nor the Rules made by CBDT provide for exclusion for such statistical reason. 41. Having stated the same, it may be necessary to bear in mind that supernormal profits may in certain cases indicate a functional dissimilarity or dissimilarity with respect to a feature that has a material bearing on the profitability. In such circumstances, it would be necessary to undertake further analysis to eliminate the possibility of the high profits resulting on account of any material dissimilarity between the tested party and the chosen comparable. A wide deviation in the PLI amongst selected comparables could be indicative that the comparables selected are either materially dissimilar or the data used is not reliable. The Tribunal proceeded on the basis that an adjustment could be made only in cases where supernormal profits resulted from the factors indicated in Rule 10B of the Income Tax Rules, 1962. In our view, the factors mentioned in Rule 10B are not exhaustive. The principal object of benchmarking international transactions against uncontrolled transactions is to impute an ALP t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity only for the reason that its impact may be reduced on account of using arithmetical mean of the PLI. The DRP had noted that eClerx was functionally dissimilar, but ignored the same relying on an assumption that the functional dissimilarity would be subsumed in the profit margin. As noted, the content of services provided by the Assessee and the entities in question were not similar. In addition, there were also functional dissimilarities between the Assessee and the two entities in question. In our view, these comparability factors could not be ignored by the Tribunal. While using TNMM, the search for comparables may be broadened by including comparables offering services/products which are not entirely similar to the controlled transaction/entity. However, this can be done only if (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the risks assumed; and (b) the difference in services/products offered has no material bearing on the profitability. 45. In view of the aforesaid, the questions of law framed by an order dated 27th February, 2015 are answered in the affirmative and against the Revenue. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered under the definition of Information technology enabled services , as defined in rule 10TA(e) of the IT Rules, 1.962,Consequently the transactions for which the claim of safe harbour is made are covered under the definition of eligible international transactions , as defined in rule 10TC(ii). 3,2 In order to examine if the assessee is covered under the definition of eligible assessee , it is seen that the assessee is. engaged in providing information technology enabled services to a. non-resident associated enterprise. In order to be considered as eligible assessee , it needs to be seen if it is operating with insignificant risks , The factors to be kept in mind in relation to such determination are provided in rule 10TB(2). The analysis of the same is made as below; Factors Remarks The foreign principal performs the most of economically significant functions involved including the critical functions such as conceptualisation and design of the product and providing the strategic direction and framework, either through its own employees or through its other associated enterprises, while the eligible assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible assessee is doing so, the contractual terms shall not be the final determinant The assessee does not bear the risk related to marketing, utilization, of employees, service liability, credit and collection risk et cetera. As per the terms of cdntract and the conduct also, it was not found that the assessee was bearing any such risk, even though, the assessee is bearing single customer risk. The eligible assessee has no ownership right, legal or economic, on any intangible \ generated or on the outcome of any intangible generated or arising during the course of rendering of services, which vests with the foreign principal as evident from the contract and the conduct of the parties As per the terms of contract and on the basis of examination of services being carried out by the assessee, it was found that there was a low possibility for generation of any intangible and even if the same could be generated, the assessee did not have any ownership right on the same. 3.2.1 From the perusal of the above analysis, it can be seen that the assessee is covered under the factors identified in the Safe harbo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transaction, In case the facts and circumstances as provided in rule 10TE(10) change, the exercise of valid claim by the assessee, as accepted by this office, would not apply to the relevant assessment year in which such change in facts and circumstances take place, other than the initial assessment year and fresh determination of the claim would be required to be undertaken, as per the provisions of rule 10TE(11),This is particularly important in this case since the initial agreement between the assessee and the AE was valid for the period of 9 months i.e. 01.04.2012 to 31.12.2012 and the new agreement is valid For a period of only two years commencing from. 01.01.2013.Therefore,in respect of the period from 01.01.2015 onwards which corresponds to part period of AY 2015-16 and subsequent assessment years, unless the same agreement -is continued and there is no change in the facts and circumstances as provided in rule 10TE(10),the Assessing officer has to take action in accordance with the provisions of rule 10TE(10). 9. As observed earlier, agreement with the AE for providing service was executed on 1.10.2004. It was valid upto 30.12.2012. In the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4 and 5 are general grounds of which do not call for recording any specific finding, hence, they are rejected. 13. The ground no.2 reads as under: 2. The DRP, Ahmedabad has erred in law and on facts to hold that Foreign exchange fluctuation gain of ₹ 28,21,403/- is directly linked with export business carried on by the undertaking, and hence, deemed to be derived from undertaking s business eligible for deduction u/s.10A of the Act. 14. ld.DRP has made the following discussion on this issue: 10.1 the assessee has submitted that in respect to 10A claim the AO has AO held that gain from foreign exchange fluctuation claimed as a deduction has not been derived from the actual conduct of the business of the Industrial undertaking. The AO has argued that gain or loss on account of change in exchange rate of foreign currency need to be recognized and accounted separately and the same cannot be adjusted against the sale/purchase price, as the case may be. Hence such gain in the present case cannot be treated as part of export/sale proceeds as claimed by the assessee, but the same need to be treated as separate income. For the purpose of claiming deduction under se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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