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TMI Blog2017 (3) TMI 1302X X X X Extracts X X X X X X X X Extracts X X X X ..... both on facts and in law in confirming the addition of Rs. 12,94,11,325 to the income of the Appellant by holding that its international transaction of 'Provision of back office services' does not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act'). 3. The Ld, DRP erred in confirming the deduction u/s.10A/10AA of the Act at Rs. 15,47,25,328 as against an amount of Rs. 15,71,52,337 claimed by the Assessee. 4. The Ld. DRP erred in confirming non allowing carry forward/set off of current year business loss of Rs. 3,37,37,937. 5. The Ld. DRP erred in confirming levying interest under section 234 D of the Act. 6. The Ld. DRP erred in confirming levying interest trader section 234D of the Act. 3. The original ground raised in respect of Transfer Pricing Adjustment is general without any specific comparable therefore the assessee raised the additional ground which reads as under: 1. The above referred appeal is in respect of the order passed by the learned Assistant Commissioner of Income-Tax. Circle 12(3), ('Assessing Officer'/'AO'). The AO had passed Draft Assessment Order against which the Appellant had filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ldwide Group and engaged in the business of ITES services relating to back office operation on contract basis to its Associated Enterprises (AEs). Thus the assessee is a BPO and providing data services in respect of accounts and finance to its overseas group companies. The assessee has reported the following international transactions in 92C report which are reproduced by the TPO in para 2.5 as under: 2.5 International Transactions (as mentioned in the 92 CE report) The following are the international transactions entered into by the taxpayer with its Associated Enterprises (AEs) as per the 3 CEB report and as per the reference received from the AO. 1 Back office services Rs. 1,019,001,979/- 2 Recovery of expenses (Receipt) Rs. 46,613,897/- 3 Reimbursement of consultancy charges Rs. 6,356,856/- 4 Reimbursement of preventive maintenance charges Rs. 18,831,922/- 5 Reimbursement of license and royalty charges Rs. 5,567,546/- The assessee selected 13 companies to bench mark its international transactions as per the TNMM. The TPO accepted five companies from the set of assessee and added 15 more companies. Accordingly, the TPO has considered 20 comparable compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. ITO 2014 (2) TMI 83 - ITAT BANGALORE and Kodiak Networks (India) (P.) Ltd. v. Dy. CIT in IT(TP)Appeal No.l540/Bang/2012. 9. On the other hand, the Id. DR has relied upon the orders of the authorities below and submitted that the TPO has not applied any filter of employee cost therefore it is not relevant to determine the functional comparability of this company. (ii) Acropetal Technologies Ltd.(Seg.) 10. The learned Authorised Representative has submitted that this company is not functionally comparable as it provides engineering design services which is a KPO service and therefore is not a good comparable to the BPO service of the assessee. He has relied upon the decision of Hon'ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 377 ITR 533 and Kodiak Networks (India) (P.) Ltd. (supra). 11. On the other hand, the Id. DR has relied upon the orders of the authorities below and submitted that this company is in the ITES services therefore it is comparable to the assessee. (iii) Coral Hubs Ltd. (earlier known as Vishal Information Technologies Ltd.) 12. The learned Authorised Representative of the assessee has submitted that the employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that being subsidiary of Infosys Limited, a brand value is associated with this company and also it owns Intellectual Property Rights (1PR). This company is also a market leader being part of the Infosys Limited. In support of his contention, he has relied upon the decisions in the case of Rampgreen Solutions (P.) Ltd. (supra) and Kodiak Networks (India) (P.) Ltd. (supra). 21. On the other hand, the learned Departmental Representative has relied upon the orders of authorities below. (viii) Mold-tek Technologies Ltd. 22. The learned Authorised Representative has submitted that this company is in KPO activity as it provides engineering design sevices. Further this company also does not satisfy the filter of 75% export earnings. In support of his contention, he has relied upon the decisions in the case of Rampgreen Solutions (P.) Ltd. (supra) and Kodiak Networks (India) (P.) Ltd. (supra). 23. On the other hand, the learned Departmental Representative has relied upon the orders of authorities below. (ix) Wipro Limited. 24. The learned Authorised Representative has submitted that this company owns significant intangibles, IPRs and brand name. Since this company is having softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , He has the upon the order of TPO and DRP. 31. We have considered the rival submissions and material available on record. The assessee has raised main objection against the Accentia Technologies Ltd (seg) on the ground that during the year extra ordinary event of merger and amalgamation occurred and therefore, in view of the decision of the Tribunal in the case of Symphony Marketing Solutions India Private Limited (supra) the said company cannot be considered a good comparable for determining the ALP. The findings of the Tribunal in the case of Symphony Marketing Solutions India Private Limited (supra) is based on the another decision of Hyderabad Bench of the Tribunal in the case of CAPITAL IQ INFORMATION SYSTEMS (INDIA) (P.) LTD. v. DCIT 2014 (3) TMI 626 - ITAT HYDERABAD. It is pertinent to note that an extra ordinary event of merger, amalgamation or acquisition is relevant only if such event affects the result and operating margin of the very segment of the company to be compared with the assessee. In case, of segmental results are taken in to account and extraordinary event of merging or demerging taken place in other division or segment of the comparable company then such ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged In the business of rendering highend services which are intangible. It is pertinent to note that whether a particular company is rendering high end services or not has to be decided by considering the real functions and services and not by mere nomenclature of KPO or BPO. This aspect has been considered in the case of Maersk Global Centres (India) (P) Ltd (supra) in paras 73,75 and 78 and the Special Bench has observed and held as under: "73. On a careful study of the material placed before us to highlight the distinction between BPO services and KPO services, we are of the view that even though there appears to be a difference between the BPO and KPO services, the line of difference is very thin. Although the BPO services are generally referred to as the low end services while KPO services are referred to as high end services, the range of services rendered by the ITES sector is so wide that a classification of all these services either as low end or high end is always not possible. On the one hand, KPO segment is referred to as a growing area moving beyond simple voice services suggesting thereby that only the simple voice and data services are the low end services of BPO s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be further bifurcated as BPO and KPO services for the purpose of comparability analysis, the next question that arises is what could be the basis of such dissection, bifurcation or classification of ITES services to facilitate relatively equal degree of comparability when the broad functional analysis based on ITES sector is taken into account by applying TNMM. In our opinion, this purpose of attaining a relatively equal degree of comparability can be achieved by taking into consideration the functional profile of the tested party and comparing the same with the entities selected as potential comparables on broad functional analysis taken at ITES level. The principal functions performed by the tested party should be identified and the same can be compared with the principal functions performed by the entities already selected to find out the relatively equal degree of comparability. If it is possible by this exercise to determine that some uncontrolled transactions have a lesser degree of comparability than others, they should be eliminated. The examination of controlled transactions ordinarily should be based on the transaction actually undertaken by the AE and the actual tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king into consideration the functional profile of the tested party and comparing the same with functional profile of the potential comparables selected at ITES level. 78. To sum up, we hold that the potential comparables of ITES sector level can be selected by applying broad functional test at first stage and although the comparables so selected can be put to further test depending on feels of each case, by comparing the specific functions performed in the international transactions with that of uncontrolled transactions to attain the relatively equal degree of comparability as discussed above, the classification of ITES into low-end BPO services and high-end KPO services for comparability analysis would not be fair and proper. The first question referred to this Special Bench is whether for the purpose of determining the arm's length price of international transactions of the assessee company providing back office support services to their overseas associated enterprises, companies performing KPO functions should be considered as comparable ?. In our opinion, the answer to this question will depend on the facts and circumstances of each case inasmuch as if the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utine ITES service provider." 40. The Id. DR submitted that the functional comparability has to be examined on the basis of the nature of services and function performed by the company and not on the basis of the nomenclature. 41. Having considered the rival submissions and material available on record, we note that in the case of Symphony Marketing Solutions India (P) Ltd (supra), the Tribunal has noted that the said company is engaged in to provide end to end payroll solutions to clients. It is pertinent to note that Payroll Outsourcing, payroll services prima facie does not require any expertise and are routine low end ITES service. The pay roll outsourcing does not require any special skill or expertise etc and it is routine work of just like data entries. However, the issue has been examined by the Special Bench of the Mumbai Tribunal in the case of Maersk Global Centres (India ) (P) Ltd (supra) vide paragraphs 73 to 78. We have already quoted above paragraph at para 37 of this order. Accordingly, we set aside the issue of comparability of the company to the record of TPO/AO to examine the functional comparables, in view of the decision of Special Bench (supra). 5. Infosvs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of software product, therefore, it is clear that the company apart from having its own IPR and brand value also engaged in the software product. Therefore, this company cannot be considered functionally similar to that of assessee and accordingly, we direct the AO/TPO to exclude from the list of comparables. 6. Mold-tek Technologies Ltd. (Seg.) 45. The Id. AR submitted that this company is functionally different and is engaged in the business of rendering high end services. This company is also having extra ordinary event of merger. He has also contended that this company is having floated profit over the period of 5 years, therefore, it cannot be considered as a good comparable. In support of this contention, he has relied upon the decisions in the cases of Accentia Technologies Ltd (supra) and Genesys International Corporation Limited (supra). 46. On the other hand, the Id.DR submitted that the TPO has taken into consideration only segmental result and therefore, extra ordinary event if not in the ITES segment, the same cannot render this company as non-comparable . He has relied upon the orders of authorities below. 47. We have considered the rival submissions as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out its work by itself whereas in the case of VITL, it is outsourcing most of its work. We are therefore of the considered opinion that the decision of the ITAT, Mumbai in the cited case on the issue of excluding VITL as a comparable squarely applies. This decision was followed by the decision of the co-ordinate bench of this Tribunal in the case of Netlinx India (P.) Ltd. in ITA No.454/Bang/2011 dt 19.10.2012 wherein it was held that Vishal Information Technologies Ltd. cannot be considered as a comparable. We, therefore, respectfully following the decision of the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd., direct the Assessing Officer/TPO to exclude Vishal Information Technologies Ltd, from the list of comparables." 15. Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A. Y 2007-08. In fact in A. Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les." In case of Maersk Global service Centre India (P.) Ltd., (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- "Insofar as the cases of tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business, As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded." In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable,' 16. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%, This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT IT (TP)A No.l086/Bang/2011, order dated 30.4.2013 has taken the following view:- "36. Having heard both the parties and having considered their rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is concerned, the discussion made while deciding Infosys BPO Ltd. as a comparable will equally apply to this company also. This company owns substantial intellectual property on software products. This company cannot therefore be regarded as a comparable. For the reasons given while disregarding Infosys BPO Ltd, as a comparable, this company is also directed to be excluded from the list of comparables." 55. In view of the above findings and respectfully following the same, we direct the TPO/AO to exclude from the list of comparables. 9. Accentia Technologies Ltd (seg) 56. The Id. AR submitted that this company is functionally different and is engaged in the business of high end services. He has relied upon the decision of the Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. (supra). 57. The Id. DR relied upon the decisions of authorities below. 58. Having considered the rival contentions of both the parties and on perusal of the record, we note that functional comparability of this company has been examined by co-ordinate Bench of this Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. (supra) in paras 12 and 13 which are reproduced belo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat this company is engaged in providing engineering design services and software development services. In the segment ITES this company is deriving income from engineering design services and software development services and segmental data of this company does not give separate revenue and margin relating to the software development services. Therefore, in view of the facts that this company is engaged in the various different functions including the design engineering services, this company cannot be considered as functionally comparable with the assessee. Accordingly, we direct the TPO/AO to exclude this company from the list of comparables. We find that in paras 55 & 56 of the above decisions, the name of company is mistakenly recorded as Accentia Technologies Limited instead of Acropetal Technologies Limited. In view of the above decision of the Tribunal as well as the decision of the Hon'ble High Court in the case of Rampgreen Solutions (P.) Ltd. (supra), we direct the A.O./TPO to exclude the following companies from the set of comparables : (i) E-clerx Services Ltd. (ii) Infosys BPO Ltd. (iii) Coral Hubs Ltd. (Vishal information Technologies Ltd.) (iv) Wipro Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . By following the said decisions of the Hon'ble jurisdictional High Court, the co-ordinate bench of this Tribunal in the case of Mindteck (India) Ltd. v. ITO 2015 (4) TMI 56 - ITAT BANGALORE has decided in paras 36 & 37 as under: " 36. We have considered the rival submissions. The legal position that emanates from the decisions referred to above can be summed up thus:- (i) The carried forward business loss of Sec.10A unit cannot be set off or carried forward during the tax holiday period against any income. (ii) The carried forward business loss to the extent it pertains to non- 10A unit can be set off against income of non-10A unit. (iii) Sec.l0A is an exemption provision and therefore will not enter the computation of total income and therefore there is no question of any carried forward loss being set off against the profits eligible for deduction u/s.10A of the Act; and (iv) the profit or loss of Sec.l0A unit during the tax holiday period is quarantined and loss if any is carried forward to the assessment years immediately following the last of the assessment years for which the Assessee is entitled to claim exemption u/s.10A, for being set off in accordance with law ..... X X X X Extracts X X X X X X X X Extracts X X X X
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