TMI Blog2017 (4) TMI 1347X X X X Extracts X X X X X X X X Extracts X X X X ..... qualify for deduction as provided under the law - Decided in favour of Assessee. Exclusion of communication expenses from the export turnover as well as total turnover while computing the deduction u/s. 10A - Held that:- DRP has directed the AO to exclude the communication expenses both from export turnover as well as total turnover while computing the deduction u/s. 10A by following the decision of Hon'ble jurisdictional High Court in case of Tata Elxsi Ltd (2011 (8) TMI 782 - KARNATAKA HIGH COURT). No error or illegality in the directions of the DRP qua this issue. Comparability analysis - Held that:- As the assessee who is into captive service provider of ITES companies functionally dissimilar with that of assessee need to be deselected from final list. Thus exclude these two companies namely Accentia Technologies Limited and eClerx Services Limited from the set of comparables. Foreign exchange gain / loss was treated as non-operating in nature - Held that:- For the purpose of computing the margins for the assessment year under consideration only the gain or loss which pertains to the export made during the year under consideration has to be taken into account as opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the TPO and that the accurate details of debtors and creditors of the assessee and the comparables were not available 3. The DRP erred in allowing the alternate claim of the assessee that the assessee would be eligible for deduction u/s 10A on the enhanced income due to the disallowance u/s. 40(a)(ia) of the Act without appreciating that the Ahmedabad bench of the Hon'ble ITAT has held in the case of DCIT v. Rameshbhai C. Prajapati [2013] 29 taxmann.com 64 that an amount disallowed under section 40 (a)(ia) cannot be taken into account to determine the profit of business for purpose of computing deduction under section 80IB as it is a settled principle that the deeming fiction created under any provisions of the Act cannot be imported into the beneficial provisions and that while computing deduction under section 80IB(10), the plain meaning of the language of the act has to be given effect and, therefore, the legal fiction created by virtue of section 40(a)(ia) cannot be extended to determine the profit of the business for the purpose of computing deduction under section 80IB(10). 4. The DRP erred in directing the AO to verify whether any services have been rendered or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010-11 vide order dated 06.01.2017 in IT(TP) Nos. 267 222/Bang/2015 in para 10 as under: 10, The next issue is On the Working Capital Adjustment : The Revenue objected to the restriction of working capital adjustment to the 1.01% as against the actual working capital adjustment carried out by TPO at 2.23%, The TPO has in principle agreed to the claim of the assessee for granting the working capital adjustment and has consequently granted the same. However it is seen that the working capital adjustment was restricted to 1.01% which is the average cost of capital of the comparable companies selected by the TPO, In this regard, the DRP held as under : We have considered the submissions of the assessee as well as the reasons of the TPO. The argument propounded by the TPO that the average cost of comparables should provide the upper cap on the working capital adjustment is not the correct position. This implies that the average working capital of the industry is being forced upon the assessee and in other words the assessee is being asked to keep the debtors, inventory and creditors at a fixed level, defined by the level of such capital of the comparables. This would mean t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on u/s. 10A. The AO has made a disallowance u/s. 40(a)(ia) in the draft assessment for want of deduction of tax source in respect of the expenses which are claimed to be reimbursement towards power and fuel expenses. The AO held that these expenses are incurred against the services rendered and, therefore, liable for TDS. Since the assessee did not deduct the TDS therefore the AO disallowed this amount of ₹ 6,08,46,978/-. 7. Before the DRP the assessee contented that these expenses are not incurred towards any service rendered by M/s. Golflinks Software Park Pvt. Ltd. But these were only reimbursement of the expenses towards power and fuel. The DRP while adjudicating the objection on this issue directed the AO to verify whether any service has been rendered by M/s. Golflinks Software Park Pvt. Ltd. or the expenditure is purely in the nature of reimbursement on account of power and fuel. Since the assessee also raised an alternative plea that even in the case of disallowance u/s. 40(a)(ia) the enhanced income of the undertaking of the assessee is eligible for deduction u/s. 10A. The DRP has accepted this alternative plea of the assessee by holding that such enhanced profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s provided under the law. 11. Following the decision of Hon'ble Gujarat High Court we upheld the directions of the DRP on this issue. Since the alternative claim of the assessee is allowed therefore we do not propose to go into the issue of nature of payment in question. The same becomes infructuous. 12. Ground nos. 6 7 regarding the issue of exclusion of communication expenses from the export turnover as well as total turnover while computing the deduction u/s. 10A. 13. We have heard the Id. DR as well as Id. AR and considered the relevant material on record. At the outset we note that this issue is covered by the decision of jurisdiction High Court in case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98/204 Taxman 321/17 taxmann.com 100 (Kar.). The DRP has directed the AO to exclude the communication expenses both from export turnover as well as total turnover while computing the deduction u/s. 10A by following the decision of Hon'ble jurisdictional High Court in case of Tata Elxsi Ltd (supra). Thus we do not find any error or illegality in the directions of the DRP qua this issue. Cross Objection No. 43/Bang/2016: 1. In the Cross objection the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /TPO have erred in law and on facts in rejecting several companies chosen as comparable to the ITES segment of the Respondent, for the purpose of determining the ALP for the international transaction of the Respondent, on account of inappropriate reasons including the reason that the said companies failed the filters erroneously applied by the learned TPO. Computation of operating mark up on cost 8. The Honorable DRP has erred in law in upholding the learned TPO's action of treating the foreign exchange gain/loss arising on account of foreign currency fluctuation to be non-operating in nature. 9. The Honourable DRP and the learned AO/TPO have erred in treating the provision of doubtful debts as non-operating in nature thereby wrongly computing the operating mark upon cost of the comparable companies after excluding the provision for doubtful debts. Risk adjustment 10. The Honourable DRP and learned AO/TPO have erred in not appreciating that the Respondent, being a captive service provider operates at lower risk levels as compared to comparable companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments to the ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the relevant jurisdictional High Court of Gujarat in the case of Keval Construction (354 ITR 13 of 2013) wherein it has been held that ultimate profit of the assessee as computed after making disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80IB of the Act. Disallowance under section 14A of the Act 17. The Honourable DRP and learned AO have erred in law and on facts in upholding the disallowance under section 14A of the Act read with Rule 80 of the Rules in connection with the investment of ₹ 3,25,66,000 in the share capital of its subsidiary. 18. The Honourable DRP and learned AO have erred in law and on facts in not considering the contention of the Respondent that there was no exempt income earned in the first place during the relevant AY and hence the applicability of section 14A of the Act does not arise. 19. The Honourable DRP and learned AO have erred in law and on facts disallowing an amount of ₹ 81,415 under section 14A of the Act by mechanically applying Rule 8D of the Rules when there is no basis to reject the Respondent claim that no expenditure was incurred in respect of making the said i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amined by TPO as well as DRP and therefore these two companies are found as functionally comparable to the assessee. 5. Having considered the rival submissions as well as relevant material on record, at the outset we note that the functional comparability of these two companies have been examined by the coordinate bench of this Tribunal in case of Unisys India (P.) Ltd. (supra) in para 49 to 51 and 53 to 54 as under: 'Accentia Technologies Ltd.: 49. The comparability of this company was again considered by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions (supra) and it was held by this Tribunal as follows: (1) Accentia Technologies Ltd. (Seg.) 10. This was considered as a comparable by the TPO and listed at Sl. No. l of the comparable companies chosen by the TPO. The Id. counsel for the assessee drew our attention the fact that there are extra-ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A. Y. 2007-08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physician Billing Services Inc., GSR Systems Inc. and Den ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpact on the profitability arising out of merger and demerger. 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact that taken place, then the aforesaid comparable has to be excluded. 50. The learned DR however put forth an argument that the case decided by the Tribunal was in relation to A.Y 2008-09 and there was an amalgamation during the previous year relevant to AY 2008-09 and therefore the aforesaid decision of the Tribunal cannot be applied blindly in this regard, the learned counsel for the assessee brought to our notice that even during the previous year relevant to AY 2009-10 there was an amalgamation of Acentia Technologies Ltd with another company by name Asscent Infoserve Private Limited. The followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two companies namely Accentia Technologies Limited and eClerx Services Limited from the set of comparables. 7. Ground nos. 8 and 9 regarding the foreign exchange gain / loss was treated as non-operating in nature. 8. We have heard the ld. AR as well as the ld. DR. and considered the relevant material on record. There is no quarrel on this aspect that if the foreign exchange gain / loss arising on account of fluctuation of foreign exchange rate in respect of export realization then the same would be part of operating profit or cost as case may be. However, for the purpose of computing the margins for the assessment year under consideration only the gain or loss which pertains to the export made during the year under consideration has to be taken into account as operating revenue or cost. Accordingly, we direct the AO / TPO to compute the operating margins of the assessee as well as comparable companies by considering the gain or loss arising from forex fluctuation on account of the exports made during the year. 9. Ground no. 10 is regarding risk adjustment. We have heard the ld. AR as well as the DR and considered the relevant material on record. Though the assessee has cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm investment. Whereas in the case of the assessee the disallowance has been made by the AO on account of administrative expenses which is only 0.5% of the average investment as per rule 8D(2)(iii) of IT Rules. Thus he has submitted that the decision relied upon by ld. AR is not applicable. 14. Having considered the rival submissions as well as relevant material on record, we note that for the year under consideration, the assessee has made fresh investment in the shares and therefore the earlier order of this Tribunal in assessee's own case is not applicable for the year under consideration. As regards the decision of the Hon'ble Delhi High Court in case of Cheminvest Ltd. (supra) the issue involved in the said case was disallowance u/s. 14A on account of interest however, the Hon'ble High Court while deciding the issue has held in para 21 to 23 as under. 21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody's case (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is 'for the purpose of making or earning such income'. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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