TMI Blog2017 (4) TMI 1484X X X X Extracts X X X X X X X X Extracts X X X X ..... on but to adopt the methodology provided in Rule 8D r.w.s 14A(2) of the Act. In the present case, the AO has only applied 0.5% of the total income as expenditure. AO has rightly applied the Rule 8D and no error has been pointed out by the ld AR on working out of the expenditure by applying the Rule 8D. In our view, the AO has worked out the expenses after due application of the methodology, therefore, the ground raised by the assessee is required to be rejected. Non granting the relief u/s 10A of the Act on the enhanced income - HELD THAT:- In Gem Plus Jewellery India Ltd., [ 2010 (6) TMI 65 - BOMBAY HIGH COURT] wherein it was held that the assessee was entitled to exemption u/s 10A with reference to addition or disallowance of various payments as the plain consequence of disallowance and add back made by the AO is increased in the business profit of the assessee. We find force in the submissions of the learned AR of the assessee on this issue because if part of expenses claimed by the assessee against business income is considered as expenses incurred for earning tax free income and is disallowed u/s 14A, the business income stands increased by that amount and only suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision of development and engineering design services ( software development ), engineering consultancy services and customer support services(in the nature of IT Enabled Services [ ITES ]). The company is eligible for deduction under Section 10A of the Income-tax Act, 1961( the Act ) in respect of its income from various units registered with the Software Technology Parks of India ( STPI ). 3. GEIE provides ITES in accordance with specific directions, guidelines and criteria established by the Associated Enterprise ( AE ). The customer support services include handling the queries of credit card customers of AE through the call centre located at Hyderabad and providing other back end support to credit cardholders. The pricing for such services is done on the basis of actual cost plus mark-up. GEIE, through its 100% export oriented units, also provides software development services in accordance with the directions, guidelines and specifications provided by the AEs. Under this segment, GEIE also provides IT project management, IT infrastructure management, application management and other forms of support for IT operations to the AEs. The pricing for all the services is done on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the details filed , it was observed that the assessee has received exempt income by way of dividend of ₹ 2,56,08,000/- and has not debited any expenditure to earn the exempt income as required as per the provisions of the Sec. 14A r.w. Rule 8D of the Income-tax Rules. During the course of assessment proceedings the assessee's AR was asked to furnish the details of expenditure attributable to earn exempt income. In response assessee's AR filed a letter dt. 24.10.2011 contending that section 14A is not applicable in the present case relying on various case laws. As I am not satisfied with the explanation offered by the assessee's authorized representative, I proceed to bring to tax the expenditure on exempt income as follows: Average investment x 0.5% 2 388000000 + 388000000 x 0.5% = ₹ 19,40,000/- 2 The expenditure on exempt income works out to ₹ 19,40,000/- and the same is brought to tax. The draft asst. order dated 8.12.2011 was forwarded to the assessee vide letter dated 8.12.2011. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the intention of earning dividend income and dividend income was incidental to his business of sale of shares which remained unsold by assessee, it could not be said that expenditure incurred in acquiring shares had to be apportioned to extent of dividend income and that should be disallowed under section 14A. It is clear that the facts and circumstances of CCI Ltd. were completely different from those of the present case where the appellant is neither a dealer in shares and securities, nor has it sold any shares. Thus, the ratio of the case cited by the appellant does not apply to the facts of its own case. 8. Before us, the ld AR has submitted that no expenses in relation with the earning of dividend income were incurred. 9. The ld AR has submitted that the assessee has not incurred any expenditure, therefore, the provision of sec. 14A is not applicable. It is submitted that there should be proximate cause for disallowance which is in relation to the tax exempt income. In the absence of proximate cause, the disallowance u/s 14A of the Act cannot be invoked. The ld AR relied upon the judgment of CIT Vs. Karnataka State Industrial Infrastructure Development Corpn., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, in the light of the above, this ground of the is dismissed. 11. The ground appeal of the assessee at 2.1 is as under: Without prejudice to the above, even assuming but not admitting that the above amount of ₹ 19,40,000/- is disallowance u/s 14A of the Act, the ld CIT(A) erred in upholding the order of the ld AO in not granting the relief u/s 10A of the Act on the enhanced income. In this regard, the ld AR has submitted that in case this Tribunal disallows the ground 2.1 and held that the sec. 14A is applicable for instant case then in such eventuality, the expenditure should be added back to the income of the undertaking and deduction u/s 10A should be allowed on such enhanced income. The CIT(A) in paragraph 173 of the order records the submission of the assessee in the following manner:- Deduction u/s 10A was allowed on profits earned by the appellant form of the business of its undertaking. Any adjustment made during the computation of income under the head profits and gains of business or profession increased the profit of the business of the undertaking which was then eligible for tax holiday benefits. The provisions of sec. 10A did no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue, is opposed to law and the facts and circumstances of the ease. 2. The Ld. CIT(A) has failed to appreciate that the different year ending filter applied by the TPO is necessary to exclude companies which do not have the same or comparable financial cycle as the tested party. 3. The Ld. CIT(A) erred in excluding the comparable companies like Aditya Birla Minacs, Coral Hubs, Eclerx, Jindal Intellicom. Mold-Tek and Allse Technologies Ltd on the basis of Abnormal Profit without defining constitutes abnormal profit filter and how the same is determined. 4. The learned CIT (A) erred in holding that M/S Genesys International Corporation Ltd. being functionally different, cannot be taken as comparable without appreciating the that he himself has held that services the being in the nature of ITES services, it is not necessary tor the TPO to go into the horizontal and vertical segments of the same sub segment. 5. The learned CIT (A) erred in rejecting Genesys International Corporation Ltd as a comparable without identifying any extraordinary\ variable which distinguish this company from the taxpayer in terms of functions performed, assets used and risk undertaken i.e. quan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period is available then it cannot be rejected simply on the ground that it has a different financial year. Assuming that instead of financial year i.e 1st April to 31st March, the comparable companies adopted the financial year from 1st January to 31st December and 3 months financials of the comparables are otherwise available in the public domain then in our view it can be considered as comparable as different reporting/ accounting period would be not effect FAR analysis by TPO or by assessee, as financial for the year under consideration are derivable by reconstructing it on the basis of information available in public domain however this is su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent. In the written submissions filed with the assessee it is mentioned as under: 6.1.2 In the case of Mold-Tek, the learned TPO has considered, the Engineering services in the nature of producing design drawings, detailed structural engineering drawings using 3D and 2D software specializing in civil, structural and mechanical engineering services, as comparable to the ITES segment of the Appellant. Mold-Tek has a strong team of highly skilled resources. Mold-Tek helps its clients to cut down design and development costs of civil, structural, mechanical and plant design and delivered technologically superior outputs. The company also has in-house software development team, quality control training and troubleshooting facilities. 6.1.3 In this regard, the extract of segmental information from the annual report of Mold-Tek provided below (Refer page 749 of the paper book): Segment wise/product wise performance The Company's business segments are Plastics IT (KPO) Divisions. Further, plastics can be segmented to the lube oils, paints, pet products, consumer products etc. areas. The sales performance during the year is: 6.1.4 The Hon ble Members would app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata analytics KPO services in two business verticals - financial services and retail and manufacturing. eClerx offers solutions that do not just reduce cost, but also help their clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. eclerx provides tailored process outsourcing and management services along with data aggregation, mining and maintenance services. 6.1.7 The relevant extract from the Annual Report of the company for FY 2007-08 is provided below; 7 Page 6 of the Annual report (Refer Page 818 of the Paper book): eClerx is a very different company, with industry specialized services for meeting complex client needs. We are sometimes compared to a BPO or an IT offshoring company, which we are not. We are a data analytics KPO service provider specializing in two business verticals - Financial Services and Retail and Manufacturing. We provide solutions that do not just reduce cost, but help our clients increase sales and reduce risk, by enhancing efficiencies and by providing valuable insights that empower better decisions. We provide services to 50 large global corporations across mul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services and whereas Mold-Tek and Eclerx Services are into KPO services and the Tribunal relied upon the judgment of Hon ble Delhi High Court in the matter of Rampgreen Solutions Ltd., has held that the KPO company cannot be compared with BPO, hence Mold-Tek and Eclerx Services are not required to be treated as comparable and, therefore, is required to be excluded. 16. We have gone through the profile of the assessee wherein it is stated that the assessee is providing specialized services and is not simply into BPO services provider as projected by the assessee. The work scope and the agreement of the assessee with its AE clearly provides that the assessee is providing high end technical services to its AE and for that purposes has engaged various technical staffs in the form of IT Team Leader, Program Manager, Project Manager, Enterprise Architect/Application Architect/Design Architect, Business Analyst/Project Leader, Product Developer/Senior Product Developer, Product Quality Engineer/Senior Product Quality Engineer, Technical Author/Senior Technical Author, Team Lead (Development), Team Lead (QA) and various functions of these persons are provided in detail in the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development costs of civil, structural, mechanical and plant design by 30-40% and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in-house software development team, quality control training and trouble shooting facilities. M/s Mold-Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services. It may be pertinent to note here that the financial year 2007-08 was a unique year for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. 83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec 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 entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any with its AEs. Facts being identical, respectfully following the observations of the Special Bench (supra), we direct that these two entities be excluded from the list of final comparables. 40. Since the Tribunal has examined this issue under similar set of facts, we find no reason to take a contrary view. Accordingly following the order of the Tribunal in the case of Stream International Services (P) Ltd. (supra), we hold that this company is not a good comparable and direct the AO/TPO to exclude it from the list of comparables. ........................................................... 57. Mold-Tek Technologies Ltd. : In this regard, the ld. counsel for the assessee has contended that this company's function is dissimilar, therefore it should be excluded from the list of comparables. The ld. counsel further contended that in this case the employee cost is 7.6% of sales, therefore this company can also be excluded by applying employee cost filter as the benchmark fixed by the TPO is at 25%. Moreover, it has abnormal growth of 204% in sales over the previous year. Therefore, for these reasons, the company should be excluded from the list of comparables. He also pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided by the company included data conversion, migration, and maintenance, application development, photogrammetry, and outsourcing services. Further, during the year 2007-08, Genesys had earned supernormal growth of 145.92% in total income and 605.43% in profit after tax. In view of this, Genesys could not be considered as an appropriate comparable company. 126. The Hyderabad bench of the hon'ble ITAT has held in the case of Capital IQ Information Systems (India) Pvt. Ltd. (ITA No. 1961/Hyd/2011) that extraordinary events like merger and de-merger impact profitability in the financial year in which such events take place and these companies cannot therefore be treated as comparables and if it is found that amalgamation has in fact taken place, then the comparable has to be excluded. 127. I am inclined to agree with the appellant that Genesys cannot be selected as a comparable to the appellant for being functionally different and in view of its abnormal results during the relevant FY. The hon'ble Pune Tribunal in the case of E-Gain Communication Pvt Ltd ([2008]118 TTJ 354) while deciding the arm's length nature of the tax payer, who is a contract service p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , technology used etc. by the assessee for the purpose of rendering the work to AE. 30. In the light of the above, this issue is allowed for statistical purposes. 31. Ground Nos.6, 7 and 8 are regarding exclusion of telecommunication expenses from the total turnover also while computing the deduction u/s 10A of the IT Act. 32. The case of the Revenue is that the telecommunication expenses should be excluded from the export turnover but should not be excluded from total turnover. On this issue, the judgment of Hon ble Karnataka High Court rendered in the case of Tata Elxsi, 349 ITR 98 supports the case of the assessee because in this case, it was held by Hon ble Karnataka High Court that the total turnover is sum total of export turnover and domestic turnover and, therefore, if an amount is excluded from export turnover, the total turnover is also reduced by the same amount as a consequences of deduction from export turnover. In this view of the matter, we find no infirmity in the order of the learned CIT(A) on this issue. Regarding the contention of the Revenue that the Revenue has not accepted the judgment of Hon ble Karnataka High Court and has filed appeal before the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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