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TMI Blog2021 (7) TMI 508X X X X Extracts X X X X X X X X Extracts X X X X ..... cwen Asia Holdings Limited, Mauritius. 3. We shall first take up the appeal filed for AY 2010-11. Only issue urged in this appeal is whether the Ld CIT(A) was right in law in holding that the interest income earned from deposits kept in banks for availing bank guarantees is assessable under the head "Income from other sources". 4. This is second round of proceedings. In the earlier round, the Tribunal has restored this issue to the file of AO, vide its order dated 19-05-2017 passed in ITA No.863/Bang/2016. The Tribunal directed the AO to determine the purpose for which the deposits were kept in banks and decide the issue on the basis of ratio laid down in the case of Motorola India Electronics Ltd (2014)(225 Taxman 11) by Hon'ble Karnataka High Court. The relevant observations made by the Tribunal in the first round are extracted below:- "...Thus in case if the interest income is earned from the deposits made in connection with the business activity of the undertaking then the same is eligible for deduction under Section 10A/10B of the Act. In the case of the assessee neither the Assessing Officer nor the CIT (Appeals) has verified this fact though the assessee in its reply bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made out of surplus funds of the undertaking and on advances given to staffs. Hence it was related to the business of the undertaking, which was eligible for deduction u/s 10A of the Act. 7. The AO also observed that the present assessment has been done as per the order passed by the ITAT, which has restored the issue to his file with the limited purpose of examining the applicability of decision rendered in the case of Motorola India Electronics Ltd (supra) only. Hence the AO observed that the assessee could not rely upon the decision rendered in the case of Hewlett Packard Global Soft Ltd (supra). In spite of this legal position, the AO held that he has examined the above said decision and distinguished the same. Accordingly, the AO held that interest derived on the bank deposits made for availing bank guarantees cannot be considered as derived from the business of undertaking. Accordingly, the AO held as under:- "7. In view of the above, the interest income of Rs. 67,86,002/- earned on fixed deposits made with banks (which have majorly been used to make bank guarantees) is income from other sources." Accordingly, the AO rejected the claim for assessing the above said intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enerated by the undertaking. Hence, the deposits made for availing such bank guarantees, in our view, cannot be linked with the business carried on by the undertakings. Hence we agree with the view of the tax authorities that the interest income earned on bank deposits made for securing bank guarantees in favour of income tax department cannot be considered as "business income" of the eligible undertaking. Accordingly, the same has been rightly assessed under the head Income from other sources. 13. We have noticed that the bank guarantees have been given in favour of Customs department also. It is stated that the deposits to the extent of Rs. 42,92,970/- was made for availing duty benefits under Customs Act. 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 by Hon'ble jurisdictional Karnataka High Court in the case of Hewlett Packar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve Ltd. 15,78,44,000 9,64,28,000 63.69 8. BNR Udyog Ltd. (Seg)(Medical Transcription) 1,47,04,000 97,87,000 50.61 9. Excel Infoways Ltd. (Seg) (IT/BVPO) 790,96,95,000 559,06,04,000 29.79 10. E4e Healthcare Services Pvt. Ltd. 89,50,04,209 74,59,23,078 19.85 Average PLI 28.11% The average margin of above said companies worked out to 28.11%. After giving credit of 0.27% towards working capital adjustment, the TPO arrived at adjusted margin of 27.84%. Accordingly, he made transfer pricing adjustment of Rs. 25.01 crores. 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 Rs. 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record. The issue of comparability of Universal Print Systems Ltd. with that of the assessee- company has been duly considered by TPO after referring to information contained in Annual Report. The relevant findings of the TPO had not been countenanced by learned AR of the assessee. However, the issue of comparability of Universal Print Systems Ltd. has also been considered by the co-ordinate bench of this Tribunal in the case of CGI Information Systems & Management Consultants Pvt. Ltd. (supra) wherein it was held 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 po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of the TPO. One of the objection before the DRP was that this company did not figure in the list of companies engaged in ITES. On this objection the DRP held that though this company did not figure in the list of companies in ITES in the main search of capital line and prowess database but on a segmental search these two companies satisfied the requirement of being considered as companies engaged in providing ITES. 50. Aggrieved by the directions of the DRP, the Assessee is in 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) & ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail (3) An uncontrolled transaction shall be comparable to an international transaction if-- (i) none 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inabove. Needless to say that proper opportunity shall be granted to assessee as per law. Accordingly we set aside this comparable back to Ld.TPO. 2. Infosys BPO Ltd. Assessee objected for inclusion of this comparable primarily on the basis of functional incompatibility and presence of intangibles. It has been submitted that this company owns huge brand and not 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany is functionally not comparable with captive service provider. Respectfully following the same we direct this company to be excluded from the list of comparables. 3. TCS e-Serve Ltd. Ld.AR submitted that this company has been objected by assessee for its functional dissimilarity as it renders both BPO and KPO 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. Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been excluded due to absence of segmental information. Respectfully following aforesaid decision, we direct Ld.TPO to exclude this company from the list of comparables. 5.BNR Udyog Ltd. (segmental) Ld.AR submitted 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 provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... afford the assessee adequate opportunity of being heard and to file details/submissions in this regard. It is also been observed that similar view has been taken by decision of this Tribunal 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 pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pages pointed out in the misc. petition. We do not however agree with the assessee that functional comparability of this company has not been examined 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 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an appropriate case. We therefore agree with contention raised by assessee regarding this comparable not satisfying employee 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 resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of deduction u/s 10A of the Act. Our finding is in consonance with various judicial 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D.R on this issue. The 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 assessee for buy-back of shares amounting to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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