TMI Blog2021 (7) TMI 508X X X X Extracts X X X X X X X X Extracts X X X X ..... me has been rightly assessed under the head Income from other sources. Also noticed that the bank guarantees have been given in favour of Customs department also - There should not any dispute that the transactions under the Customs Act could be linked to a particular undertaking, in which case, the interest income earned on the above said bank deposits could be linked to any particular eligible undertaking . Since transactions under Customs Act are related to import/export activities carried on by the undertakings, we are of the view that the decision rendered in the case of Hewlett Packard Global Soft Ltd [ 2017 (11) TMI 205 - KARNATAKA HIGH COURT ] can be applied on it. Accordingly, the interest income shall normally form part of business income of the undertaking. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess interest income from bank deposits for availing duty benefits under Customs Act as business income of the relevant undertaking. The assessee is directed to link the bank deposits with specific undertaking so that the AO could work out deduction u/s 10A accordingly. TP adjustment made in respect of ITES services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on buy back of shares. Non-grant of brought forward MAT credit - HELD THAT:- Since this issue requires factual verification, we restore this issue to the file of the AO with the direction to examine the claim of the assessee in accordance with law. Charging of interest u/s 234C - A.R submitted that the interest u/s 234C is chargeable on the returned income AND AO has charged said interest on assessed income - HELD THAT:- We find merit in the submission of Ld A.R, since it is in accordance with the provisions of sec. 234C of the Act. Accordingly, we direct the AO to charge interest u/s 234C of the Act on the returned income. - ITA No.153/Bang/2017, ITA No.2292/Bang/2019 - - - Dated:- 12-7-2021 - Shri N.V. Vasudevan, Vice President And Shri B.R. Baskaran, Accountant Member For the Appellant : Shri K.R. Vasudevan, A.R. For the Respondent : Ms. Neera Malhotra Shri Kannan Narayanan, D.Rs ORDER PER B.R. BASKARAN, ACCOUNTANT MEMBER: The assessee has filed these appeals relating to AY 2010-11 and 2012-13. The appeal filed for AY 2010-11 is directed against the order dated 30-08-2019 passed by Ld CIT(A)_10, Bengaluru. The appeal filed fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) Bank Guarantee in favour of Income tax department ₹ 7,95,85,318/-. (b) Bank Guarantee for availing duty benefits under Customs Act ₹ 42,92,970/- The assessee also submitted that it is having three undertakings viz., Mumbai undertaking, Bangalore undertaking and Goa undertaking. It further submitted that all the three units are availing deduction u/s 10A of the Act. Accordingly, it was submitted that there is nexus between the bank deposits and business of undertaking. The assessee placed its reliance on the decision rendered by Hon ble Karnataka High Court in the case of Hewlett Packard Global Soft Ltd (ITA No.812/2007 dated 30-10-2017). 6. The AO did not accept the submissions of the assessee. He took the view that the deduction u/s 10A of the Act is given to the profits and gains derived by an undertaking , where as the income tax liability is fastened upon the assessee, which owns those undertakings. He noticed that the interest income has accrued/received to/by the assessee from the deposits kept with bank for availing bank guarantees and those bank guarantees have been given in favour of Income tax department towards the income tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO has rightly held that fixed deposits were used for non-business purposes and for earning interest income. Hence, there is no infirmity in the order of the AO. Accordingly, the addition of ₹ 67,86,002/- is confirmed. Aggrieved, the assessee has filed this appeal. 9. The Ld A.R submitted that the assessee is carrying on business through three undertakings and all of them are eligible for deduction u/s 10A of the Act. Accordingly he submitted that the bank deposits should be considered as related to all the three undertakings. Accordingly, he submitted that the decision rendered by Hon ble jurisdictional Karnataka High Court in the case of Hewlett Packard Global Soft Ltd (supra) shall apply to the facts of the present case also. 10. The Ld D.R, on the contrary, supported the order passed by Ld CIT(A). 11. We heard rival contentions and perused the record. We have also gone through the decision rendered in the case of Hewlett Packard Global Soft Ltd (supra). As observed by the AO, the facts prevailing in the above said case were related to incidental income by way of interest income on the temporarily parked funds in Banks/ interest on staff l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss ground no.II(3) relating validity of reduction of travelling conveyance, legal professional and other expenses incurred in foreign currency from Export turnover, while computing deduction u/s sec. 10AA of the Act. The remaining grounds relate to following issues:- (a) Transfer pricing adjustment made (b) Whether Foreign exchange gain forms part of profit eligible for deduction u/s 10AA (c) Whether brought forward losses are required to be set off from profits before computing deduction u/s 10AA of the Act. (d) Disallowance of expenses incurred on buy back of shares (e) Non-granting of brought forward MAT credit. (f) Charging of interest u/s 234C on assessed income instead of returned income. 15. The first issue relates to the transfer pricing adjustment made in respect of ITES services. The assessee reported a turnover of ₹ 216.78 crores from providing ITe services. The assessee selected TNM method as most appropriate method and Operating profit/Operating Cost (OP/OC) as Profit level indicator (PLI). The TPO noticed that the assessee has arrived at average margin of comparable companies by considering average margin of 3 years data. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res. The Ld DRP confirmed inclusion of all the comparable companies selected by the TPO. However, after the order passed by Ld DRP, Transfer pricing adjustment was made by the AO at ₹ 11.31 crores in the final assessment order. 16. The Ld A.R submitted that the assessee seeks exclusion of five companies, viz., M/s Universal Print Systems Ltd, M/s Infosys BPO Ltd, M/s TCS E-serve Ltd, M/s BNR Udyog Ltd and M/s Excel Infoway Ltd. The Ld A.R further submitted that though the assessee has sought inclusion of three companies in ground no.11, yet he presses for inclusion of only one company named M/s Crystal Voxx Ltd. 17. With regard to the claim of exclusion of five companies, the Ld A.R submitted that the claim of the assessee is supported by the decision rendered by co-ordinate bench in the case of Indecomm Global Services (India) P Ltd vs. DCIT (IT(TP)A No.185/Bang/2018 dated 28-09-2019). With regard to the claim of inclusion of M/s Crystal Voxx Ltd, the Ld A.R submitted that the said claim is supported by the decision rendered by the co-ordinate bench in the case of FNF India P Ltd (IT(TP)A Nos. 195/Bang/2016 459/Bang/2017 dated 03-07-2019. 18. We heard Ld D.R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: '47. The next submission of the learned counsel for the Assessee was with regard to exclusion of 2 comparable companies from the list of 7 comparable companies that remain after the order of the DRP. The first comparable company sought to be excluded is Universal Print Systems Ltd. This company was chosen as a comparable company by the TPO. In reply to the proposal of the TPO to include this company as a comparable company, the Assessee vide its letter dated 22.12.2015 had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP/TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP/TC of this company will be only 51.80%. The Assessee further pointed out (Page 764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.63% of the total revenue from operations of this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal before the Tribunal. The learned counsel for the Assessee reiterated submissions that were made before the TPO/DRP. In particular it was submitted that the service revenue filter was applied by the TPO himself at the entity level and on such search this company was not regarded as engaged in providing ITES. At this stage the TPO ought to have dropped this company as a comparable company because this filter has to be applied at the entity level and not at the segmental level. The learned DR submitted that if the service revenue filter is applied at the segmental level there can be no objection by the Assessee. She relied on the order of the DRP/TPQ. 51. The requirements of Rule 10B(1)(2) (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows: 10B. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:-- (a) to (d) (e) transactional-margin method, by which, (i) the net profit margin realis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 52. There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of net profit margin realized by the enterprise from an international transaction with the net profit realized from a comparable uncontrolled transaction . Therefore comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a fit comparables for company like assessee, who provide captive service to its AE's. Ld.CIT DR opposed the exclusion and placed reliance upon orders passed by authorities below. 6. We have perused submissions advanced by both sides in the light of the records placed before us. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Pvt Ltd., vs ACIT vide order dated 28/06/19 in ITA (TP) a No. 1661/Bang/2016, wherein this comparable has been excluded by observing as under: '5. We have heard the rival submissions on the comparability of Infosys BPO as a comparable company. The Delhi ITAT in the case of Baxter India Pvt. Ltd. Vs. ACIT ITA No.6158/Del/2016 for AY 2012-13 in the case of a company rendering ITES such as the Assessee, vide order dated 24.8.2017 Paragraph 23 held that Infosys BPO is not comparable with a company rendering ITES for the following reasons:- 23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO IT(TP)A No.185(B)/2018 services without segmental reporting. It is submitted that this company owns huge brand of TATA group and has also incurred brand related expenses and therefore cannot be accepted to be compared with a captive service provider like assessee. Ld.CIT DR on the contrary opposed its exclusion and placed reliance upon orders passed by authorities below. 7. We have perused submissions advanced by both sides in light of records placed before us. Assessee placed reliance upon following decisions in support of its argument for exclusion of this comparable: Zyme Solutions Pvt Ltd. vs ACIT (supra) Baxter India Pvt. Ltd vs ACIT reported in (2017) 85 Taxmann.com 285 (Delhi-Trib) PCIT vs BC Management Services Pvt. Ltd. reported in TS-948- HC- 2017 (Del)-TP It is observed that this comparable has been excluded by this Tribunal. Assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Pvt Ltd., vs ACIT reported in (2019) 101 taxman.com 292, by observing as under: 11.3 We have heard rival submissions and perused material on record. The issue of comparability of this company was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that this company fails RPT filter and also fails export filter applied by Ld.TPO. It is submitted that this company is into medical transcription, coding, business support services and e- governance projects and therefore functionally not similar with that of assessee. Ld. CIT DR however contended that this company is compared only for segment of medical transcription and therefore should not be excluded. She placed reliance upon decision of this Tribunal in case of Mobily Infotech India (P) Ltd vs DCIT reported in (2018) 97 taxman.com 2 in support. 8. We have perused submissions advanced by both sides in the light of the records placed before us. Assessee is challenging functional dissimilarity of this company with that of assessee as it is into medical transcription. We have our reservation to consider medical transcription services to be one of KPO services. In our considered opinion medical transcription services is basically back-office services provided by graduates who are trained for short period of 6 months to one year. These are short crash courses undertaken by graduates who are trained to understand and speak English. There is no value additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in case of M/s Nielson Sports India Pvt.Ltd., Vs ACIT in IT(TP)A No.196(B))/2017 vide order dated 28- 06-2019. Respectfully following the same, we set aside this comparable back to Ld.TPO for considering it afresh. Needless to say that proper opporMtunity shall be granted to assessee as per law. Accordingly we set aside this comparable back to Ld.TPO 6. Excel Infoways Ltd. (segmental) This comparable selected by Ld.TPO is alleged to be functionally not comparable with assessee, as it is handling business relations and managing customer relationships. It has been submitted by Ld.AR that this comparable fails employee cost filter. Ld.CIT DR however contended that this company is compared only for segment of medical transcription and therefore should not be excluded. She placed reliance upon decision of this Tribunal in case of Mobily Infotech India (P) Ltd vs DCIT reported in (2018) 97 taxman.com 2 in support. 9. We have perused submissions advanced by both sides in light of records placed before us. Annual report of this company is placed at page 273 of paper book (Index for Annual Reports). In the Significant Accounting Policies reported at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined by the Tribunal in paragraph 14.4. The Tribunal has come to the conclusion that this company is a ITeS company and that cannot be reviewed in the misc. application. However there has been omission to adjudicated exclusion of this company on account of extraordinary events. We therefore recall the order of the Tribunal to the limited extent of examining of the employee cost filter and the presence of extraordinary events on warranty exclusion of this company. 3. We have heard the rival submissions on the exclusion of this company on the basis of extraordinary events that occurred during the relevant previous year which had impact on the profit margin of this company and therefore rendering this company from being chosen as a comparable company. The Delhi ITAT in the case of BT e-Serve (India) Ltd. Vs. ITO ITA No.6690/Del/2016 for AY 2012-13 order dated 19.6.2018 considered the comparability of this company and came to the conclusion in paragraph 5.4 of its order that there was abnormal volatility of revenue of this company from 2009-10 to 2014-15 and therefore this company should not be regarded as comparable company. Respectfully following the aforesaid decision, we di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployee cost filter. Respectfully following aforestated decision of Delhi Tribunal reproduced hereinabove, we direct Ld.TPO to exclude this comparable from the final list. 19. We notice that the co-ordinate bench has directed exclusion of M/s Infosys BPO Ltd, M/s TCS E-serve Ltd and M/s Excel Infoways Ltd. Following the above said decision, we direct exclusion of above said three companies. The co-ordinate bench has remanded the matter to the file of AO/TPO M/s Universal Print Systems Ltd and M/s BNR Udyog Ltd. Following the same, we restore these two companies to the file of AO/TPO with similar directions. 20. With regard to the claim of inclusion of Crystal Voxx Ltd, the Ld A.R relied upon the decision rendered in the case of FNF India P Ltd (supra), wherein it was held as under:- 24. In ground No.13, the Assessee has prayed for inclusion of Crystal Voxx Ltd. as a comparable company. This company was not regarded as comparable company with the Assessee by the DRP for the reasons given in Para 2.15 of its order i.e., for the reason that in the financial results, the Auditors have mentioned that this company was predominantly a Business Process Outsourcing (BPO) co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... precedents, a few of which are discussed, in brief, here-below: (i) The Hon'ble Madras High court in the case of CIT v. M/s. Pentasoft Technologies Ltd. reported in 2010-TIOL-525-HC-MAD-IT, had held that - The exchange value based on upward or downward of the rupee value is not in the hands of the assessee. The assessee does not determine the exchange value of the Indian rupee; that when the fluctuation in foreign exchange rate was solely relatable to the export business of the assessee and the higher rupee value was earned by virtue of such exports carried out by the assessee, there was no reason why the benefit of s.10A should not be allowed to the assessee. (ii) In the case of CIT v. Gem Plus Jewellery India Ltd. reported in (2010) 233 CTR (Bom) 248, the Hon'ble High Court of Bombay has ruled that - Gain from fluctuation of foreign exchange is directly related with the export activities and should be considered as income derived from export in the year in which the export took place for the purpose of deduction u/s 10A of the Act. (iii) With regard to the foreign exchange fluctuation is a part of 'profits from business and profes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Supreme Court has held in the case of Yokogawa India Ltd (supra) that the deduction u/s 10A has to be made independently and immediately after the stage of determination of its profits and gains. It further held that, at that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 of the Act would be premature for application. Accordingly, the Hon ble Supreme Court held that the deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. In the present case, the deduction claimed by the assessee is under section 10AA, which is akin to the deduction allowed u/s 10A of the Act. Accordingly, the ratio laid down by Hon ble Supreme Court in the above said case shall apply to the deduction claimed u/s 10AA of the Act. Accordingly, we direct the AO to allow deduction u/s 10AA without setting off of brought forward losses. 25. The next issue relates to the deduction of expenses incurred on buy back of shares. This issue has been decided in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit- making. The expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Issue of bonus shares does not result in the expansion of capital base of the company. It does not lead to any inflow of fresh funds into the company. The capital structure is not expanded. On the contrary the consequence of such buy-back of shares is the capital base of the company gets reduced and the capital structure will go down. It is not of an enduring effect so as to bring the expenditure incurred in this regard as capital expenditure. Where there is no flow of funds or increase in the capital employed, the expenditure incurred would be revenue expenditure. Therefore, rightly the Tribunal held that it is in the nature of revenue expenditure and allowed the same. 4.2.7 In view of the judgment of the Hon'ble High Court of Karnataka in the case of CIT v. Motor Industries Co. Ltd. (supra), we hold that the expenses incurred by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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