TMI Blog2017 (11) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... this we do not have any hesitation in confirming the Transfer Pricing adjustment made by the ld. Transfer Pricing Officer on outstanding receivable beyond 30 days credit period applying the interest rate of 14.88% p.a. and computing the interest receivable at ₹ 31577050/-. Miscalculation of the total amount of adjustment - Held that:- It was submitted that the assessee has filed rectification application; however, same has not been attended to. We direct the ld Assessing Officer to consider the rectification application of the assessee and if the rectification request is found in accordance with the provision of section 154 of the Act, same may be rectified within 30 days of the receipt of this order, after granting the assessee appropriate opportunity of hearing Disallowance of deduction u/s 10AA on the basis that export proceeds have not been realized within a period of six months from the end of the previous year - Held that:- The provision of section 10A (5) speaks about the audit of the accounts and submission of report of an accountant in specified Performa. In this case same has been complied with by the assessee. Further section 10A (6) speaks about the restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Form 56F. On examination ld Assessing Officer found that assessee has not received export proceeds within 6 months of the end of the year and therefore, claim of the assessee was reduced by granting the deduction only of ₹ 42306994/- denying deduction on non receipt and late receipt of export proceeds of ₹ 75085404/- within 12 months from the date of invoice. 3. Assessee has entered into international transaction of provision of IT enabled services of ₹ 266570625/- and availing of services of ₹ 11584598/- which was benchmarked by the assessee in its T P Study report applying transaction net margin method ( in short TNMM) adopted PLI [ Profit level Indicator] of OP/OC [ Operating profit divided by operating cost] selecting 11 comparable companies having arithmetic mean of PLI of 12.05% compared with the PLI of the assessee of 14.17% claiming that international transaction entered into by it are at arm‟s length. 4. The ld TPO rejected the TP study of the assessee by rejecting 6 comparables retaining only 5 and he further added 5 comparables, thereby populating the 10 comparables as per para No. 12 at page No. 80 of his order. He computed the ave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned TPO / AO / DRP have erred in: a. Not accepting the use of multiple year data, as adopted by the appellant in its Transfer Pricing (TP1) documentation; and b. Determining the arm's length margins / prices using data pertaining only to financial Year ('FY') 2009-10 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements. 5. the learned AO / TPO/ DRP have erred by rejecting certain functionally comparable companies identified by the appellant, by applying the following filters: a. rejecting companies having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) b. rejecting companies with diminishing revenue c. rejecting companies with turnover lower than ₹ 5 crore d. rejecting companies with turnover from IT enabled services lower than 75 percent of total turnover e. rejecting companies with export turnover lower than 75 percent of total turnover 6. the learned AO / TPO / DRP have erred in selecting certain companies which are earning super normal prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligations required to be discharged under the legislation and therefore, legislation shall always have the binding effect over the Forms. 17. the learned AO / DRP have erred by failing to appreciate Master Circular dated July 1, 2009 (applicable for the AY 2010-11) issued by the Reserve Bank of India ('RBI') expressly provides that there is no time limit for realization of the export proceeds in case of SEZ units 18. without prejudice, even if section 10AA of the Act is to be read with section 10A(3) of the Act, the learned AO / DRP have erred, in law and on facts and circumstances of the case, by failing to consider the relaxation provided under Section 10A(3) of the Act with respect to realization of export proceeds 19. the learned AO / DRP have erred by failing to consider the legislative intent that even provision under section 115(11 A) of the Act do not intend to put any restriction on the deduction under section 10AA of the Act where the foreign exchange is not received within the stipulated time period. 20. Without prejudice to the above where time limit of six months is alleged to be incorporated into the provision of section 10AA of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rformance of the company and further it is functionally comparable, so it cannot be excluded. He further relied on the order of the ld DRP as well as the ld Transfer Pricing Officer where they have given reasons for inclusion of this comparable. 10. To decide on the inclusion or exclusion of any comparable for comparability analysis, prime requirement is to compare the functions performed by assessee with the functions of the comparable selected. Therefore, firstly, we refer to the functional profile of the assessee company. According to the transfer pricing study report the FAR analysis of the assessee is as under:- 4.02.2. Functions performed The purpose of this section is to identify economically important activities performed by each of the related parties and to explain the significance that each function has in creating value for the business. This section provides a broad overview of the various functions performed by BT e-Serv and BT Pic in relation to the identified international transaction. Based on our discussions with BT e-Serv, summarised below are the functions performed by BT e-Serv and BT Pic in relation to the services provided by BT e-Serv to BT Pic. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re met while rendering services. In the event of a quality failure, BT e-Serv may be asked to rework the same. However, the STPP mechanism ensures that BT e-Serv earns an arm's length return. * Human resources BT e-Serv undertakes the recruitment, hiring and training process and is responsible for day-to- day supervision and control of its employees. The functions performed by BT e-Serv and BT Pic with respect to the provision of IT-enabled services by BT e-Serv are summarised in the table below. BT e-Serv BT Pic Management functions No Yes Strategic management functions No No Marketing and business development Provision of services Conceptualization of services No Yes Execution of services Yes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are denominated in one currency while sales of finished product are denominated in another currency. It relates to the potential variability of profits that can arise because of changes in foreign exchange rates. BT e-Serv invoices BT Pic for its services in Indian Rupee, which is same as its functional currency. Accordingly, BT e-Serv does not bear any the foreign exchange risk. Briefly tabulated below are the risks, which are faced by BT e-Serv and BT Pic in relation to the IT- enabled services, provided by BT e-Serv: Type of risks BT e-Serv BT Pic Business / market risk No Yes Capacity utilisation risk No Yes S ervice liability risk No No Credit and collection risk No No Foreign exchange risk No Yes 11. Above functional profile of the company is not disputed by the ld TPO as well as ld DRP. Before us, the ld DR has also not disputed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elp in financial reimbursement from insurance companies and other government organizations, consulting firm, software companies etc. The next service area of the above company is medical billing which is a medical practice management and the doctor‟s key to getting paid and it maintains patient‟s financial accounts for collecting money. On looking at the income stream of the assessee on perusal of the profit and loss accounts, it is apparent that its earnings are from medical transcription, billing and collection and coding. On looking at the functional profile of medical transcription which is required to be carried out by well-trained persons who must be knowledgeable in the field of pharmacology. Further the comparable company has considered all the 3 segments as one segment. On perusal of page No. 78 of the annual report of the company it is noted that w.e.f. 1 st April 2008 the company which is engaged in the similar line of business has been amalgamated with this company. However, we do not find any reason to exclude this company for the reasons of amalgamation because the functions performed by the amalgamated company and amalgamating company are similar. But on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le financial data are available relevant to the accounting period of the appellant then merely the comparable has different financial year, it cannot be excluded. In view of this we direct the assessee to produce this information and demonstrate before ld TPO that relevant, authentic and reliable information with respect to the comparable is available in public domain and the ld Transfer Pricing Officer to verify the same, if found appropriate, to include the above comparable. 15. With respect to the risk adjustment as well as the working capital adjustment to the operating margin of the appellant as well as the comparable companies the ld Authorised Representative vehemently argued that same may be granted to the assessee. The ld Transfer Pricing Officer has rejected both the above adjustment as para No. 15 and 16 of his transfer pricing order for the reason that assessee could not demonstrate that there is difference in the level of working capital employed by the assessee company vis- -vis comparable. 16. With respect to the risk adjustment the ld Assessing Officer rejected the contention of the assessee that appellant is a risk mitigating entity as it has a single custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation to section 92 B of the act. He therefore, submitted that TP adjustment on that account is required to be made in view of the decision of Special Bench of ITAT in case of Instrumentation Corporation Ltd Vs. ADIT (TS-467-ITAT-2016-Kol-TP). He further submitted that Master Circular of the RBI does not determine whether there is an international transaction or not. He submitted that ld Transfer Pricing Officer as well as the ld DRP has given detail reasons for the same. With respect to the decision of the Hon'ble High Courts he referred that in case of Ameriprice there was a specific clause in the agreement of credit period up to 60 days and in case of Bechtel there is a agreed period of 60 days whereas in the case of the assessee there is no such period stated by the assessee. He therefore, submitted that in such event the assessee has kept the outstanding amounts for more than 300 days under many cases. He vehemently referred to page No. 111 of the order of the ld. Transfer Pricing Officer. He further submitted that whether the assessee is a debt free company or debt laden company, is not at all a criterion for imputing interest on outstanding. 22. We have carefully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is included in the definition of capital financing‟ as an international transaction‟ as per explanation 2 to section 92B of the Act w.e.f 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an international transaction‟. The natural corollary would be of imputing interest on such capital financing‟, if same is not charged at arm‟s length. Therefore, we reject the contention of the assessee that outstanding receivable is not an international transaction‟ and therefore, hence, according to us, interest on it requires to be imputed. Now the next question arises is that if outstanding receivables are within the terms of agreement of rendering of services than it may be argued that interest on such outstanding is already covered in the sale price of the goods. Naturally such is not the case of the assessee before us as some of the outstanding are for more than 300 days. Decision relied upon by the ld AR in the case of Ameriprice and Bechtel are distinguishable on the facts as they had credit period as per agreement but in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me may be rectified within 30 days of the receipt of this order, after granting the assessee appropriate opportunity of hearing. In view of this ground No. 13 of the appeal of the assessee is allowed with above direction. 24. Ground Nos. 14 to 22 are with respect to disallowance of deduction of ₹ 16639234/- u/s 10AA of the Act on the basis that export proceeds have not been realized within a period of six months from the end of the previous year. Ld Assessing Officer was of the view that as the assessee is a unit established under SEZ, therefore, if the proceeds have not been received in convertible exchange on or before 30th September 2010 then, the deduction u/s 10AA cannot be granted. Assessee submitted that there is no specific provision u/s 10AA requiring the realization of export proceeds within a prescribed time limit. Further, assessee relied on the master circular on export of goods and services issued by the RBI under FEMA. The ld Assessing Officer rejected the contention of the assessee for the reason that according to section 10AA(8) which makes applicable sub-section 5 and 6 of section 10A to this section i.e. 10 AA of the act, and according to form No. 56F, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04/ is unbilled revenue of the assessee. The unbilled revenue is like work in progress in case of ITES industries. The explanation 1 (ii) defines export means taking goods or providing services out of India from SEZ by land, sea, or by any other mode whether physical or otherwise. Regarding the unbilled revenue the assessee has not exported the goods and therefore such sum do not fall in the definition of export and therefore it cannot fall into the definition of export turnover. Hence, according to us the deduction under section 10 AA of the income tax act cannot be allowed on this sum as it does not qualify the definition of export and export turnover. Even otherwise assessee has not given any details of receipt of foreign exchange and therefore the consideration in respect of that is either received in or brought into India by the assessee. Hence, we confirm the finding of the lower authorities regarding disallowance of deduction under section 10 AA of the income tax act on this sum. With respect to the other sum of ₹ 4.80 crores The assessee has given foreign inward remittance certificates and such sum has also been received in India on 04/02/2011 and 24/2/2011. The prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising out of the order of Income Tax Officer, Ward-5(2), New Delhi dated 27.11.2015 u/s 143(3) read with section 144C(3) of the Income Tax Act, 1961, wherein against the return income of the assessee filed on 23.04.2012 addition on account of disallowance of deduction on account of u/s 10AA of ₹ 29086105/- and addition on account of arms length price u/s 92CA(3) of ₹ 76391345/- was made as per the order of the ld Transfer Pricing Officer dated 07.01.2015 which was subjected to direction before the ld Dispute Resolution Panel-1, New Delhi passing a direction u/s 144C(5) of the Act on 05.10.2015, consequently, the assessed income was determined at ₹ 105503756/-. 31. The assessee is a company engaged in the business of providing ITES registered under SEZ. The assessee has claimed deduction u/s 10AA of the Act of ₹ 117451538/- filing audit report in Form 56F. on examination ld Assessing Officer found that assessee has issued invoice on 31.03.2011 for ₹ 104980126/- and out of which only ₹ 3092732/- was received within 6 months. Therefore, the applying the provisions of section 10A(3) of the Act the disallowance of ₹ 101887394/- was made. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case and in law, Transfer Pricing grounds: 1. The transfer pricing adjustment of INR 76,391,345 made by the learned AO based on the order of learned TPO and confirmed by the learned DRP is bad in law inter-alia for the reason that: (a) the order of the learned TPO is bad in law in as much as based on an invalid reference made by the Ld. TPO without complying with the statutory requirements; (b) the Appellant's income being eligible for deduction under section 10AA of the Act, there was no question of any erosion of the Indian tax base; and (c) the Appellant's AE being chargeable to tax at a higher rate in the UK, there was no question of shifting of any profit from a low tax paying country to a high tax paying country 2. the learned AO / TPO / DRP have erred by not accepting the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ( the Rules ). 3. the learned AO / TPO / DRP have erred in making an adjustment under Section 92CA(3) of the Income Tax Act, 1961 ( Act ) without returning a finding about existence of any of the circumstances specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not represent an uncontrolled transaction. Corporate Tax grounds: 13. the learned AO / DRP have erred by disallowing an amount of INR 29,086,105 under Section 10AA of the Act on the basis that the export proceeds have not been realized within a period of six months from the end of the previous year 2011-12. 14. the learned AO / DRP have erred by failing to consider that provisions of section 10AA(8) of the Act do not intend to import provisions of section 10A(3) of the Act (which provides for realization of export proceeds within a period of six months or within such further period as the competent authority may allow in this behalf) 15. the learned AO / DRP have erred by failing to appreciate that, it is well settled rule for interpretation of law that express provisions as envisaged under the legislation cannot be overruled by the forms. Income tax forms merely act as a mode of fulfilling the obligations required to be discharged under the legislation and therefore, legislation shall always have the binding effect over the Forms. 16. the learned AO / DRP have erred by failing to appreciate Master Circular dated July 1, 2009 (applicable for the AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appeal. The appellant prays for appropriate relief based on the said grounds of appeal and the facts, and circumstances of the case. 34. Briefly stated in this case the assessee has submitted a chart. According to that on the transfer pricing issues with respect to comparability analysis, assessee is contesting for exclusion of e-Clerx Services Ltd and TCS e-Serve Ltd. it is also contesting for inclusion of R Systems International Ltd which was excluded by ld TPO. Therefore, first we consider the issue of comparable in the appeal. 35. E-Clerx Services ltd having a margin of 56.82% has been included by the ld Transfer Pricing Officer stating that it is functionally comparable as its functions are similar to the functions of the assessee under the ITES segment. It is further held by him that this comparable does not own any significant intangibles. The assessee contested this comparable before the ld DRP who upheld the action of the ld TPO. 36. Before us, the assessee has contested that the above company is functionally not comparable as it is rendering different set of services such as data analytics, computer added simulations. It was further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T enabled services. Therefore, respectfully following the decision of the coordinate bench we direct the Ld. transfer pricing officer/assessing officer to exclude the above comparable from the comparability analysis. 40. Now we come to the next comparable contested by the assessee by the name of TCS e-serve Ltd., The Ld. authorised representative submitted that above comparable has a margin of 69.06 percentage and same was not included in the transfer pricing study report of the assessee, but it is included by the Ld. transfer pricing officer stating that it is functionally comparable to the assessee and does not own any significant intangibles. The contentions of the Ld. transfer pricing officer for inclusion of the above company were also upheld by the Ld. dispute resolution panel. Before us. The Ld. authorized representative submitted that this company is functionally different as it earns revenue from 4 different activities such as financial information processing, customer contract voice services, business process management and analytics. It was further stated that during the year it was taken over by the TCS Ltd and therefore it has an exceptional year of operation. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ve already given our finding in appeal of the assessee for assessment year 2010 11. Therefore, for the reasons given therein, we direct he assessee to produce relevant information and demonstrate before ld TPO that relevant, authentic and reliable information with respect to the comparable is available in public domain and the ld Transfer Pricing Officer to verify the same, if found appropriate, to include the above comparable 44. In view of the above facts we direct the Ld. Transfer pricing officer to exclude e- Clerx services Ltd and TCS e-serve Ltd and include R systems Ltd subject to our direction above. Accordingly Ground No. 1 8 of the appeal of the assessee are partly allowed. 45. Ground No. 9 of the appeal of the assessee is with respect to making the suitable adjustment to the account of differences in the risk profile and working capital of the appellant vis-a-vis the comparable companies. As we have already decided this ground of appeal in the appeal of the assessee for assessment year 2010 11 wherein we have stated that assessee has not produced any working before ld TPo as well as before us, therefore we do not find any infirmity in the order of Ld. assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the orders of the lower authorities. Admittedly, the assessee has made invoice on 31/03/2011 of a sum of ₹ 101887394/ the consideration for which has been received on 03/10/2011, 17/10/2011, 01/11/2011 and 30/11/2011. Admittedly, the copies of the foreign inward remittance certificates evidencing the receipt of the above mentioned export proceeds were also produced before the ld assessing officer but as the sums were received after 30/09/2011, Ld. assessing officer disallowed the claim of the assessee. The identical issue has been decided by us in the appeal of the assessee for assessment year 2010 11 wherein we have held that there is no time limit prescribed for receipt of the foreign exchange in India with respect to the export of goods/services under section 10 AA of the income tax act. Therefore, for similar reasons as given in deciding the appeal of the assessee on this issue for assessment year 2010 11, we direct the Ld. assessing officer to grant the deduction of the above sum under section 10 AA of the income tax act to the assessee as the foreign exchange has already been received in India. In view of this ground No. 13 21 of the appeal of the assessee are a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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