TMI Blog2015 (11) TMI 1592X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, we direct the AO/TPO to exclude Mold Tek from the list of comparables. Triton Corp. Ltd. company has merged with Mold-Tek Technologies Ltd. during the year under consideration. In view of the findings in respect of Mold-Tek Technologies Ltd., we are of the opinion that this company cannot be considered as a good comparable company. Vishal Information Technologies Ltd.(Coral Hub Ltd.) Wipro Ltd. (seg.)excluded from the list of comparables. Accordingly, we direct the AO/TPO to re-compute the ALP after exclusion of the above companies from the list of comparables. We direct the TPO to consider the claim of the assessee of granting the benefit of tolerance range +/-5% as raised in ground of the concise grounds. Allowance of deduction u/s 10A without setting off the domestic losses. - IT(TP)A No.1219/Bang/2011 - - - Dated:- 23-11-2015 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI G.MANJUNATHA, ACCOUNTANT MEMBER Appellant by: Shri Ajit Jain, CA. Respondent by: Shri Bijoy Kumar Panda, CIT(DR). O R D E R Per VIJAY PAL RAO, JM : This appeal by the assessee is directed against the order dated 30/9/2011 passed u/s 143(3) r.w.s.144C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding the audited financial statements of the comparable companies. 2.7 adopting additional comparable companies without giving any opportunity of being heard. 2.8 computing incorrect margins of the Appellant and the comparable companies; 2.9 rejecting the usage of consolidated financial statements; and 2.10 not granting working capital/ risk adjustment as claimed by the Appellant 3 The Honorable DRP and the learned AO/ TPO erred in law and on facts in not granting +/-5 percent range benefit. Corporate tax 4 The Honorable DRP has erred in law and on facts in upholding the AO's action of setting off domestic losses against the income from export of business. The Honorable DRP has erred in law by not considering the submission made by the Appellant in this regard. 5 The Honourable DRP has erred in law and on facts in upholding the AO's reasoning in recomputing the relief under section 10A of the Act and thereby computing the relief under section 10A of the Act at NIL (as against the amount of ₹ 68,525,186 claimed by the Appellant in its return of income). Others 6 Without prejudice to the above, the learned AO has erred in law and on fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manufacturing BPO (Shared Services) Operating revenues 377,47,71,961 37,66,76,121 Operating Cost 4185020210 326781756 Operating Profit (-) 410248249 49894365 OP/Cost (-) 9.80% 15.26% OP/Sales (-) 10.87% 13.25% The assessee has reported international transactions during the year under consideration as under: Paid Received Manufacturing segment a. Purchase of raw material accessories 4,59,25,125 b. Sale of finished goods 60,57,284 c. Purchase of fixed assets 2,90,04,696 I T Enabled services: d. Shared services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sl. No. Company Name Sales (Rs.cr.) GP to Total Cost% 1 Accetia Technologies Ltd (Seg.) 16.57 30.61% 2 Aditya Birla Mimics Worldwide Ltd (earlier Transworks Information Services Ltd) 1968.06 11.98% 3 Allsec Technologies Ltd 113.28 27.31% 4 Apex Knowledge Solutions Pvt. Ltd 6.64 % 12.83 5 Appollo Healthstreet Ltd 47.84 13.55% 6 Asit C.Mehta Financial Services Ltd. 6.09 24.21% 7 Bodhtree Consulting Ltd. (Seg.) 2.94 29.58% 8 Caliber Point Business Solutions Ltd 39.3 21.26% 9 Cosmic Global Ltd 4.28 12.40% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions of ₹ 3,97,79,596/-. The assessee challenged the action of the TPO by raising objections before the DRP but could not succeed. 8. Before us, learned AR of the assessee has submitted that though the assessee has raised objections against the various companies included by the TPO in the set of comparables, however, at the first instance, the assessee is raising objections against the 8 companies viz. 1. eClerx Services Ltd. 2. HCL Comnet Systems Services Ltd.(seg.) 3. Infosys BPO Ltd. 4. Maple eSolutions Ltd. 5. Mold-Tek Technologies Ltd. 6. Triton Corp. Ltd. 7. Vishal Information Technologies Ltd.(Coral Hub Ltd.) 8. Wipro Ltd. (seg.) We will deal with comparability of each of the 8 companies objected by the assessee as under: 8.1 eClerx Services Ltd: The learned AR of the assessee has submitted that this company is engaged in the high-end services and therefore, this company is basically a KPO and not a BPO. He has referred to Annual Report of this company at page 26 of the paper book -II and submitted that as it is clear from the Annual Report that this company is a knowledge process outsourcing (K. P. O) providing data analy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen marketsfinancial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the following decisions: i. Sandstone Capital Advisors Pvt. Ltd. (ITA No.6315/ Mum/2012) ii. Hapag-Lloyd Global Services Pvt. Ltd.(ITA No.8499/ Mum/2010) iii. Saven Technologies Ltd. (TS-44-ITAT-2014-HYD-TP) iv. Evonik India Pvt. Ltd. (ITA No.1125/Mum/2014) v. Telelogic India Pvt.Ltd.(ITA No.166/Mum/2011) vi. Honeywell Automation India Ltd. (ITA No.4/Pune/08) On the other hand, the learned departmental representative has relied upon the orders of the authorities below and submitted that the TPO has examined the functional comparability of this company and found that this company complies with filters applied by the TPO. Accordingly, this is a good comparable for determining the ALP in respect of international transactions in the ITES segment. 8.2.1 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that HCL Comnet System Services Ltd.(seg.) is following its accounting year from 1st July to 30th June. For the year under consideration, the financial accounts are prepared for the year ended on 30th June, 2007. Therefore, it is clear that for the financial year under consideration, only partial data a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentative contended the financial year end of a comparable case matches with assessee, it cannot be considered as comparable because of different financial year endings are distorted. He relied passed by the Mumbai Bench of the Tribunal in the case 01 Capital Advisors Private Limited v. AC'IT in ITA No 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule IOB(4) and an another case the Tribunal in Honeywell Automation India Lid, has mandatory for the purposes of comparing the data of m wpm transaction with an international transaction that the - to the financial year ending similar to that of the assessee The ld.DR contended that since the case of CMC Limited financial year ending vis-a-vis that of the assessee, have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by this regard was not seriously challenged by the id. AR. following the precedent, we hold that this case should from the list of comparables. Accordingly, by following series of decisions of the Tribunal on the point, we hold that this company cannot be treated as a good comparable for the purpose of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord. We note that in para 16.2.15 of the Annual Report of this company, it has been reported that there was amalgamation w.e.f 1/4/2008. The relevant part of the information provided in the Annual Report reads as under: Amalgamation of PAN Financial Services India Private Limited The Board of Directors in their meeting held on October 6. 2008. approved, subject to the approval of the Honorable High Courts of Karnataka and Chennai, a Scheme of amalgamation ( the Scheme ) to amalgamate PAN Financial Services India Private Limited (-PAN Financial ), a wholly owned subsidiary of the Company engaged in providing business process management of services, with the Company with effect from April 1. 2008 ( effective date ). The approval of the High Court was received on April 6, 2009 and filed with the respective Registrar of Companies of Karnataka and Tamilnadu on April 6, 2009 and March 10, 2009 respectively. Accordingly on the scheme becoming effective, the financial statement of PAN Financial has been merged with the company. It is clear that there was extraordinary event of amalgamation during the year under consideration. Therefore, in view of the extraordinary development of amalg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e orders of the authorities below. 8.4.1 We have considered the rival submissions as well as the relevant material on record. We find force and substance in the argument of the learned departmental representative that in the absence of any specific allegation that the alleged fraud by the director is in respect of business activity of the company, the said activity of fraud by the director in other business activity not related to the business of the assessee-company cannot be taken as a ground for doubting the financial statement of the assessee and thereby excluding the said company from a list of comparables. However, we find that this Tribunal in a number of cases as relied upon by the assessee, has held that this company cannot be taken as a good comparable because of the reason that the directors of the company were involved in fraud activity and therefore, financial statements of this company cannot be relied upon. In the case of First Advantage Offshore Services Pvt. Ltd., (supra) the Tribunal has held inpara.41 as under: 41. As far as the companies Mapel ESolution Ltd and Triton Corp Ltd., the learned counsel for the assessee submitted that these two companies are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g an extra ordinary event of demerger of its subsidiary M/s Mold Tek Tech.Ltd., and amalgamated with Tekmen Tool (P)Ltd., The scheme of amalgamation was approved by the Hon ble Andhra Pradesh High Court vide order dated 15/07/2008 therefore, there was amalgamation and demerger in respect of this Co. during the year under consideration. He has referred to the business activity of the said Co. as involved in the structural engineering KPO. Thus, the learned AR has submitted that this Co. is entirely in the different nature of activity and functions which is not comparable with the assessee. In support of his contention he has relied upon the decisions of the Special Bench of Mumbai (Supra). The learned AR has pointed out that this Co. is declaring only one segment operating revenue therefore, this cannot be compared with the assessee. 8.5.2 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that this Co. is in the field of ITES and therefore, functionally comparable with the assessee. 8.5.3 We have considered the rival submissions as well as the material on record. At the outset, we note that functional analysis of the Co. has been e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking out the operating margin of the said company provision for derivative loss of ₹ 6.43 Crores made by Mold Tek Tech.Ltd. was excluded by the AO treating the same as non-operating expenses whereas in the case of Rusabh Diamonds Vs Asst.CIT(reported at (2013) 155 TTJ (Mum.) 386 (2013) 89 DTR (Mum.)(Trib.) 57 Ed) it was held by the Division Bench of this Tribunal that the gain or loss arising from the forward contract entered for the purpose of foreign currency exposure on the export and import has to be taken into consideration while computing the operating profit. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AE are compared with the functional profile of M/s eClerx Services(P)Ltd and Mold-Tek Technologies Ltd. it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the directions of the DRP. 8.5.4 The Spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... list of comparables. 8.6 Tricom Corporation Ltd. The learned AR of the assessee has submitted that the financial statements of this company cannot be relied upon for the purpose of determining ALP because of the directors of this company involved in the fraud. He further submitted that there was merger during the year under consideration. Therefore, this company cannot be considered as a good comparable. In support of his contention, he has relied upon the following decisions: i. First Advantage Offshore Services Pvt. Ltd. (ITA No.1086/Bang/2011) ii. Stream International Pvt. Ltd.(ITA No.8290/ Mum/2011) On the other hand, learned Departmental Representative has relied upon the order of the authorities below. 8.6.1 We have considered the rival submissions as well as relevant material on record. We note that the comparability of this company has been examined by the Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. (supra) which has already been reproduced in the foregoing paragraphs. This company has merged with Mold-Tek Technologies Ltd. during the year under consideration. In view of the findings in respect of Mold-Tek Technologies Ltd., we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the IT1ES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP. Similar view has been taken by the Tribunal in the other decisions. We further note that the Hon ble High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has also decided this issue in favour of the assessee. Accordingly, we direct the AO to exclude this company from the list of comparable. 8.8 Wipro Ltd. (seg.) The learned AR of the assessee submitted that this company is an industry leader and also owns tangibles. He has further submitted that this company is engaged in product development and services. However, the segmental information is not available. He has pointed out that there is a amalgamation during the year. He has relied upon the decision of co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra). On the other hand, learned DR relied upon the orders of the authorities below and submitted that this company was found to be functionally similar to the ITES service provided by the assessee. 8.8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tellectual Property Rights in the form of registered patents and several pending applications for grant of patents. Therefore, the said company owning intangibles cannot be compared to low risk captive services provider. Following the finding of the co-ordinate bench of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. Accordingly, we direct the AO/TPO to re-compute the ALP after exclusion of the above companies from the list of comparables. The assessee claims that mean margin of the comparable after exclusion of the above comes to around 17.85% which is within tolerance range of +/-5%. We direct the TPO to consider the claim of the assessee of granting the benefit of tolerance range +/-5% as raised in ground No.3 of the concise grounds. 10. Ground Nos.4 to 6 is regarding setting off of domestic loss against income from export business for the purpose of deduction u/s 10A. 10.1 The learned AR of the assessee has relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Yokogawa India Ltd. others (341 ITR 385) as well as the decision in the case of CIT vs. M/s.Auringene Discovery Technologi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates the intention of Parliament that it is to be regarded as an exemption and not a deduction. The Act of the Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. The Parliament despite being conversant with the implications of this chapter, has consciously chosen to retain s. 10A in Chapter III. 17. If s. 10A is to be given effect to as a deduction from the total income as defined in s. 2(45), it would mean that s. 10A is to be considered after Chapter VI-A deductions have been exhausted. The deductions under Chapter VI-A are to be given from out of the gross total income. The term gross total income is defined in s. 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this chapter. As per the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the relevant assessment years. 21. It is in this background the Finance Act, 2003 was introduced by inserting the words the year ending upto the first day of April, 2001 , for that in cls. (1) and (2) of sub-s. (6) restricting the disallowance only upto the first day of April, 2001 and granting the benefit, of those provisions even in respect of units to which ss. 10A and 10B are applicable. The Finance Act, 2003, amended this sub-section with retrospective effect from 1st April, 2001 by lifting the embargo in the aforesaid clauses in respect of depreciation and business loss relating to the asst. yr. 2001-02 onwards. The amendment indicates the legislative intention of providing the benefit of carry forward of depreciation and business loss relating to any year of the tax holiday period to be set off against income of any year post tax holiday. This is supported by Circular No. 7 of 2003 [(2003) 184 CTR (St) 33] wherein the board has stated that the purpose of amendment is to entitle an assessee to the benefit of carry forward of depreciation and loss suffered during the tax holiday period. The circular dt. 5th Sept., 2003 reads as under : 20. Providing for carry forw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase M/s.Biocon Ltd. (supra) and held in para.23 to 26 as under: 23. We have given a very careful consideration to the rival submissions. The issue raised by the assessee in ground no.21 is identical to the ground raised by the assessee in Biocon (supra). The facts of the case before the Tribunal in the case of Biocon (supra) were that the assessee during the previous year had four units which were entitled to claim deduction u/s. 10B of the Act viz., CMZ Unit, SAP Unit, RHI Unit and IFP Unit. The assessee had claimed deduction u/s. 10B of the Act in respect of the aforesaid units totaling ₹ 157,22,33,066 which is the sum total of deduction u/s. 10B for the four units as follows:- (1) CMZ Unit : 6,87,70,229 (2) SAP Unit : 76,60,29,880 (3) RHI Unit : 52,42,56,278 (4) IFP Unit : 21,31,76,679 Total 157,22,33,066 The assessee had non-10B units as well. In those non- 10B units, there was a loss of ₹ 105,92,19,172. In the return of income filed by the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The CIT(A) found that in the case of Global Vantage Pvt. Ltd. (supra) decided by the Delhi Tribunal this decision has been held to be not in tune with the decision of the Hon ble High Court of Karnataka in the case of Himatsingike Seide Ltd. (supra). The CIT(A) also referred to the decision of the Chennai Bench of the Tribunal in the case of Sword Global India Pvt. Ltd. v. ITO, 306 ITR 286 (AT), wherein the provisions of section 10A and 10B have been held to be deduction provisions and not exemption provisions. For all the above reasons, the CIT(Appeals) confirmed the order of the Assessing Officer. Against the order of the CIT(A), the Assessee was in appeal before the Tribunal. 25. This Tribunal dealt with the issue in the following words : 63. We have given a careful consideration to the rival submissions. The issue as to whether the provisions of Sec.10B of the Act are deduction provisions or exemption provisions will assume great importance. The reason is that if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gawa (supra) was concerned with similar situation as set out above. In view of the aforesaid decision of the Hon ble Karnataka High Court, we are of the view that the claim as made by the Assessee for carry forward of loss of the non-eligible unit had to be allowed without set off of profits of the 10A/10B unit. We hold accordingly and allow the relevant grounds of appeal of the Assessee. 66. We may also observe that the Hon ble Karnataka High Court s decision in the case of Himatasingike Seide (supra) has held that unabsorbed depreciation (and business loss) of same (s. 10A/10B) unit brought forward from earlier years have to be set off against the profits before computing exempt profits. The assessee in that case set up a 100% EOU in AY 1988-89. For want of profits it did not claim benefits u/s 10B in AYs 1988-89 to 1990-91. From AY 1992-93 it claimed the said benefits for a connective period of 5 years. In AY 1994- 95, the assessee computed the profits of the EOU without adjusting the brought forward unabsorbed depreciation of AY 1988-89. It claimed that as s. 10B conferred exemption for the profits of the EOU, the said brought forward depreciation could not be set-off from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard business loss (and unabsorbed depreciation) against the s. 10A profits does not arise. Therefore the decision of the Hon ble Karnataka High Court in the case of Himatasingike Seide (supra) will not apply to the facts of the present case. 26. In view of the aforesaid decision, we are of the view that the claim made by the assessee deserves to be accepted. We may also observe that CBDT circular No.7 dated 16.07.2013, on the facts and circumstances of the present case is not a benevolent circular vis- vis, the assessee, and therefore the decision to the contrary of the Hon'ble Karnataka High Court in the case of Yokogawa India (supra) will continue to apply. For the reasons given above, we direct the Assessing Officer to accept the claim of the assessee, as raised in ground no.21. 10.5 Accordingly by following the latest judgment of the Hon'ble jurisdictional High Court based on the substituted/amended provisions of sec.10A/10B which are applicable in the case of the assessee as well as the decision of the Tribunal in case of Biocon (supra), we decide this issue in favour of the assessee and direct the AO to allow deduction u/s 10A without setting off the domestic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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