Tax Management India. Com
                        Law and Practice: A Digital eBook ...

Category of Documents

TMI - Tax Management India. Com
Case Laws Acts Notifications Circulars Classification Forms Manuals SMS News Articles
Highlights
D. Forum
What's New

Share:      

        Home        
 

TMI Blog

Home List
← Previous Next →

2015 (11) TMI 1740

ices to its AE, thus companies functionally dissimilar with that of assessee need to be deselected from final list. - Setting-off of domestic loss against income from export business for the purpose of deduction u/s 10A - Held that:- The income of 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of 10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of s. 10A in this context means the global income of the assessee and not the total income as defined in s. 2(45). Hence, the income eligible for exemption under s. 10A would not enter into computation as the same has to be deducted at source level - as relying on case of Biocon Ltd. [2014 (12) TMI 838 - ITAT BANGALORE] we decide this issue in favour of the assessee and direct the AO to allow deduction u/s 10A without setting off the domestic losses. - IT (TP) A No. 1219 (Bang.) of 2011 - 23-11-2015 - Vijay Pal Rao, Judicial Member And G. Manjunatha, Accountant Member Ajit Jain, CA for the Appellant. Bijoy Kumar Panda , CIT(DR) for the Respondent. ORDER Vijay Pal Rao, Judicial Member - This appeal by the .....

X X X X X X X

Full Text of the Document

X X X X X X X

available in public domain and being inconsistent with the information available in public domain, including 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 per cent 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 Honorable DRP has erred in law and on facts in upholding the AO's reasoning in re-computing 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 With .....

X X X X X X X

Full Text of the Document

X X X X X X X

.7 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 IT Enabled services: d. Shared services 37,66,76,121 Others e. Service Charges 1,81,42,089 f. Repair services 1,82,43,110 g. IT Link Charges 1,78,59,983 f. Cross charges 1,64,98,181 g. Recovery of expenses 7. The dispute before us is only with respect to BPO segment under which the assessee has provided back-support of services to its AE. The entire services under BPO are only to the AE of the assessee. The assessee has benchmarked its transaction by selecting 7 companies as comparable with average profit margin at 14.96% on cost in comparison to assessee's margin at 15.52% on operating cost (OC) and accordingly the assessee claimed that the international transactions of the assessee are at arm's length. The companies selected by the assessee for benchmarking its international transactions are as under: i. Allsec Technologies Ltd. ii. Cosmic Global Ltd. iii. Datamatics Softworld Pvt. Ltd. iv. HCL Technolog .....

X X X X X X X

Full Text of the Document

X X X X X X X

t on account of ALP of the international transactions 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 d .....

X X X X X X X

Full Text of the Document

X X X X X X X

ort for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the 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 markets- financial 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 ??? 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 ser .....

X X X X X X X

Full Text of the Document

X X X X X X X

s to that of the assessee which is following the financial year as the accounting year. In support of his contention, he has relied upon the following decisions: i. Sandstone Capital Advisors (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 240/[2013] 32 taxmann.com 216 (Mum. - Trib.) ii. Asstt. CIT v. Hapag Lloyd Global Services (P.) Ltd. [2014] 62 SOT 8/[2013] 34 taxmann.com 241 (Mum. - Trib.) iii. Saven Technologies Ltd. v. ACIT [IT Appeal No. 1416 (Hyd.) of 2010, dated 10-1-2014] iv. Evonik India (P.) Ltd. v. Dy. CIT [2014] 51 taxmann.com 124 (Mum. - Trib.) v. Telelogic India (P.) Ltd. v. Dy. CIT [2015] 69 SOT 135/58 taxmann.com 364 (Mum. - Trib.) vi. Honeywell Automation India Ltd. v. Dy. CIT (ITA No. 4/Pune/08, dated 10-2-2009) 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 mate .....

X X X X X X X

Full Text of the Document

X X X X X X X

nsactions, the same cannot be considered as a proper comparable. " We further note that a similar view has been taken in all other decisions as relied upon by the Tribunal in the case of ACIT v. Loyal Groth Services (supra) the Tribunal vide its order dated 26/02/2013 has held in para. 7.2 as under: "7.2 The learned Departmental Representative contended that 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 of Capital Advisors. Private Limited v. ACIT in ITA No 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule I0B(4) and an another case the Tribunal in Honeywell Automation India Ltd., 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 A .....

X X X X X X X

Full Text of the Document

X X X X X X X

es all the tests and filters applied by the TPO. The functional comparability has been examined by the DRP and it was found that this company is in the same line of activity under the category of ITeS. He has relied upon the order of the authorities below. 8.3.1 We have considered the rival submissions as well as relevant material on record. 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 Regis .....

X X X X X X X

Full Text of the Document

X X X X X X X

td. v. Asstt. CIT [2015] 152 ITD 664/53 taxmann.com 19 (Mum. - Trib.) On the other hand, learned departmental representative has objected to the exclusion of this company and submitted that when this company is functionally similar to the assessee, then involvement of a director in some activity of fraud cannot be related to the business of the company, until and unless the fraud is committed in respect of the business activity of the said company. He has relied upon the 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 respects 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 th .....

X X X X X X X

Full Text of the Document

X X X X X X X

l in the case of Trilogy E-Business Software India Pvt. Ltd. " Similar view has been taken by this Tribunal in other decisions relied upon by the assessee Accordingly, following the earlier decisions of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. 8.5 Mold-Tek Technologies Ltd. The learned AR of the assessee has referred to the director's report of M/s Mold-Tex Technologies Ltd. and submitted that this Co. was having an extraordinary 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 pointe .....

X X X X X X X

Full Text of the Document

X X X X X X X

t may be pertinent to note here that the financial year 2007-08 was a unique year for Mold Tek Tech. Ltd. as the scheme of arrangement involving amalgamation between Tekmen Tool (P.) Ltd and Mold Tek Tech. Ltd. and demerger between Mold Tek Technologies Ltd., simultaneously, was sanctioned by the Hon'ble Andhra Pradesh High Court by 15th July, 2008 with the appointed date for amalgamation and demerger being as October, 2007 and April 2007 respectively. It is also pertinent to note that while working 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 v. Asstt. 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 com .....

X X X X X X X

Full Text of the Document

X X X X X X X

owledge Processing Company. Thus, the DRP was not justified in the comparing the same with the assessee which is functionally different insofar as assessee is engaged in providing low-end backoffice support services". 8.5.5 In view of the above facts and nature of the functions performed by the Mold Tek which have been examined by the Special Bench and found is not compared with the low-end ITES service provider Co. we hold that this Co. is functionally not comparable with that of the assessee. Accordingly, we direct the AO/TPO to exclude Mold Tek from the 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 (P.) Ltd.'s case (supra) ii. Stream International Services (P.) Ltd.'s case (supra) On the other hand, le .....

X X X X X X X

Full Text of the Document

X X X X X X X

acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot he said that the said filter is not applicable to ITES segment, where comparably less employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the ITES 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 (P.) 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 a .....

X X X X X X X

Full Text of the Document

X X X X X X X

ngibles cannot be compared to a low-risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer (TPO) to omit this company from the set of comparable companies in the case on hand for the year under consideration. 17.3 As it was found that this company owns Intellectual 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 o .....

X X X X X X X

Full Text of the Document

X X X X X X X

ed as "Incomes which do not form part of the total income", It may be noted that when s. 10A was recast by the Finance Act, 2001 (sic-2000), the Parliament was aware of the character of relief given in Chapter III. Chapter III deals with incomes which do not form part of total income. If the Parliament intended that the relief under s. 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI-A which houses the sections like 80HHC, 80-IA, etc. The Parliament was aware of the various restricting and limiting provisions like- s. 80A and s, 80AB which were in Chapter VI-A which do not appear 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

sessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year, sub-s. (2) of s. 32, cl. (ii) of sub-s. (iii), s. 32A cl. (ii) of sub-s. (3) of s. 32A, cl. (ii) of sub-s. (2) of s. 33 and sub-s. (4) of s. 35 of the Act or the second proviso to cl. (ix) of sub- s. (1) of s. 36 shall not be applicable in relation to any such allowance or deduction. Similarly no loss as referred to in sub-s. (1) or in s. 72 or sub-s. (1) or sub-s. (3) of s. 74 insofar as such loss relates to the business of the undertaking was permitted to be carried forward or set-off where such loss relates to any 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

and the depreciation as per the provisions of the Act should be made for each year of the tax holiday period. While so computing, attention will have to be given to provisions of ss. 70, 71, 72 and s. 32(2). The amount of depreciation and business loss remaining unabsorbed at the end of the tax holiday period should be determined so that the same may be set-off against the income post-tax holiday period.' 10.4 We further note that this view has been reiterated by the Hon'ble jurisdictional High Court in the case of Aurigene Discovery Technologies Ltd. (supra). A similar view was considered by the co-ordinate bench of this Tribunal in the case Biocon Ltd. (supra) and held in paras 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

y the ITAT Bangalore Bench in the case of Intelnet Technologies India Pvt. Ltd. v. ITO, ITA No. 1021/Bang/2009 dated 12.3.2010. Similar view expressed by the Delhi Bench of the Tribunal in the case of Global Vantage Pvt. Ltd. v. DCIT, 2010 TIOL 24 ITAT (DEL) was also referred to by the CIT(A). A contrary view was expressed by the Bangalore Bench of the Tribunal in the case of KPIT Cummins Info Systems (Bangalore) Pvt. Ltd. v. ACIT,120 TTJ 956. 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 Himatasingika 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 wo .....

X X X X X X X

Full Text of the Document

X X X X X X X

g. The Hon'ble Court thereafter held that though the expression used in Sec. 10A was "Deduction" but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Hon'ble Court's judgment. 65. The situation with which we are concerned in the present case is a situation where there is positive income of the eligible unit then the same should be allowed deduction u/s. 10B of the Act without setting of the loss of non-eligible unit. The Hon'ble Karnataka High Court in the case of Yokogawa India Ltd. (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 Himatasingika Seide (supra) has held that unabsorbed depreciation (and business loss) of same (s. 10A/10B) unit brought forward from earlier years ha .....

X X X X X X X

Full Text of the Document

X X X X X X X

ed not be so set-off as mandated in the decision of the Hon'ble Karnataka High Court in the case of Himatasingika Seide Ltd. (supra). As we have already seen, in Yokogawa India Ltd. 341 ITR 385 (Kar.), it was held that even after s. 10A/10B were converted into a "deduction" provision w.e.f 1.4.2001, the benefit of relief u/s 10A/10B is in the nature of "exemption" with reference to "commercial profits" and that as the income of the s. 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year's or the brought forward 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-a-vis, the assessee, and therefore the .....

X X X X X X X

Full Text of the Document

X X X X X X X

 

 

← Previous Next →

 

 

|| Home || About us || Feedback || Contact us || Disclaimer || Terms of Use || Privacy Policy || Database || Members || Refer Us ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.
|| Blog || Site Map - Recent || Site Map ||