TMI Blog2014 (6) TMI 1076X X X X Extracts X X X X X X X X Extracts X X X X ..... of the view that if the assessee has maintained separate records and can substantiate allocation of expenditure to the international transactions with AE and non-AE there is no reason why working capital adjustment should not be made accordingly. In that view of the matter, we remit the issue back to the file of the AO/TPO for deciding the same afresh after affording reasonable opportunity of being heard to the assessee. TPO must consider the submissions of the assessee in the context of the facts and materials placed before deciding the issue. Accordingly, we direct the AO/TPO to compute ALP in conformity with our directions hereinabove and work out adjustment if any to be made u/s 92CA of the Act. Exemption u/s 10A of the Act on the profit relating to offshore research services centre (ORSC) unit of the assessee - AO while framing draft assessment order rejected exemption claimed u/s 10A of the Act in respect of ORSC unit by holding that the aforesaid unit having been set up by splitting up/reconstruction of the existing business exemption claimed cannot be granted - HELD THAT:- So far as the first contention of the assessee that ORSC is a new unit, we are unable to accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, revenue earned from international transactions with AE as per 92CE Report are as under: Sale of services i) Provision of Data Processing (IT Enabled Services) ii) Market Research 26,06,79,292/- 6,29,81,801/- Business Solutions License Fees 78,52,761/- Payment of License Fees 1,68,77,683/- Group overhead Allocation Costs 1,41,25,663/- Asia Pacific Overhead Allocation 1,48,54,475/- Trademark license fee 1,06,11,398/- Reimbursement of expenses (paid) 4,15,50,234/- Reimbursement of expenses (received) 2,13,26,742/- 2.1 For the impugned assessment year assessee filed its return of income on 30/11/2006 declaring net income of Rs. 9,71,44,588/- after claiming deduction u/s 10A of the Act. To benchmark its international transaction with AE assessee conducted a TP study by selecting Transaction Net Margin Method (TNNM) as the most appropriate method. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 2,89,80,138/- was treated as adjustment to be made u/s 92CA. After receiving the order of the TPO, AO framed a draft assessment order incorporating the adjustments proposed by TPO. Further, AO also modified the deduction claimed u/s 10A of the Act. Assessee objected to the draft assessment order before the DRP. Though assessee had challenged the order of the TPO on various grounds but DRP rejected most of them. Only in case of reimbursement of Rs. 2,13,26,742/-, DRP after considering clarification of TPO directed for reduction of Rs. 2,13,26,742/- from the adjustment proposed by TPO. Further, with respect to deduction claimed u/s 10A also DRP confirmed the draft assessment order. In conformity with the direction of DRP, AO passed the impugned assessment order. 3. Though ground Nos. 1 to 17 are on TP issues but at the outset learned AR expressed his intention to confine his argument to the following issues: i) Selection of comparables. ii) Rejection of comparables. iii) Consideration of management fees disallowed in computation of operating margin. iv) Computation of working capital adjustment. 4. Hereinafter, we will deal with each of the issues specificall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of this company is abnormally low compared to the assessee, which presupposes that it has outsourced major portion of its work to third parties. ITAT Mumbai Bench in case of Maersk Global Services Centre (India) Pvt. Ltd., (14 ITR [Trib.] 541) after considering this aspect rejected it as a comparable. Following the aforesaid decision of the ITAT Mumbai Bench, the coordinate bench of this Tribunal in case of M/s HSBC Electronic Data Processing India Ltd., Vs. Addl. CIT in ITA No. 1624/Hyd/2014 dated 28/06/2013 has directed the AO to exclude this from the list of comparables. The finding of the coordinate bench is extracted hereunder for convenience: 9.2 After considering the rival contentions, we find considerable force in the contentions advanced by the learned counsel. There is no dispute with reference to the fact that most of the cost incurred by the company taken as comparable is outsourcing cost, as can be seen from the Annual report placed in the paper book and ITAT, Mumbai in the case of Maersk Global Service Centre (supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange revenue is less than 1% of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the basis of the foreign exchange earnings. Further, the Revenue from BPO is failing over a period of three years. This issue was considered by the coordinate Bench (Mumbai Bench) of the Tribunal in the case of Stream International Services Ltd.(supra)wherein it was considered as under- 14. The inclusion of second case objected to by the ld. AR is that of Goldstone Infratech Limited (Seg) (earlier known as Goldstone Teleservices Limited). Here it is relevant to note that the TPO, inter alia, applied filter of Companies with export revenues more than 25% of the revenues . Annual accounts of Goldstone Teleservices Limited indicate total revenue of the company at Rs. 30.89 crore from three segments, viz., Telecommunication at Rs. 13.63 crore, BPO at Rs. 5.02 crore and Insulator at Rs. 12.23 crore. The break up of such revenue of Goldstone Teleservices Limited has been provided at page 236 of the paper book. Schedule forming part of the annual accounts of Goldstone Teleservices Limited divulges earnings in foreign currency at Rs. 4.24 lakh. Such detail is availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id contentions, he relied on the following decisions: 1. M.s HSBC Electronic Data Processing India Ltd. Vs. ACIT, ITA NO. 1624/Hyd/2010. 2. CES Pvt. Ltd., ITA No. 1445/Hyd/2010. 3. M/s Stream International Services Pvt. Ltd. Vs. ACIT, ITA No. 8997/Mum/2010. iii) The learned DR, however, supported the order of the TPO and DRP on the selection of this company as comparable. iv) We have considered the submissions of the parties and perused the materials on record. As can be seen the assessee has objected to the inclusion of the aforesaid company for the reason that it fails RPT filter applied by the TPO himself as the RPT exceeds 25% of the sales. In support of such contention, he relied on the decision of the coordinate bench in case of HSBC (supra). On perusal of ruling of the coordinate bench in case of HSBC it is see that on considering similar argument advanced by the assessee, it was held as under: 11. The assessee s objection to inclusion of this comparable is on the basis of Related Party Transactions filter. It was submitted that RPT exceeds 25% of the sales and therefore, to be excluded. The assessee relied on the decision of the coordinate Bench of the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving necessarily including profit element or mark-up so as to fall within the definition of transaction under Chapter X of the Income-tax Act. Since the TPO applied filter of having companies with less than 25% related party transactions, it is not open to argue that the transactions of reimbursement of expenses duly reported by Datamatics Financial Services Limited as an international transaction within the meaning of section 92B should be ignored simply because they represent reimbursement of expenses. If the contention of the ld. DR that the reimbursement of expenses not involving profit element should not be construed as a transaction, is taken to a logical conclusion, it would mean that all such dealings will cease to be transactions for the purposes of Chapter-X of the Act. Once these dealings are not considered as transactions , these will also cease to be international transactions, going out of the purview of section 92 itself. Obviously, such a view point is contrary to the clear intention and the language of the relevant provisions. A pure reimbursement of expenses by one AE to another AE is very much a transaction as per section 92F(v) and consequently is equally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench in Stream International Services Pvt. Ltd., the coordinate bench of this Tribunal in case of HSBC (supa) while excluding the aforesaid company from the list of comparables held as under: 12.1. We have considered the rival sub missions. We agree with the objections of the assessee. In the case of Stream International Services P. Ltd. (supra), it is held with reference to this company as under- 18. We are unable to uphold the contention raised by the learned Departmental Representative. It is apparent from two orders passed one by the Delhi Bench and the other by the Hyderabad Bench of the Tribunal that the case of Maple eSolutions Limited has been directed to be excluded from the list of comparables. As the assessment year under consideration is 2006-2007 and the Delhi Bench of the Tribunal has also considered the same assessment year while directing the exclusion of the case of Maple e Solutions Limited from the list of comparables, we are unable to accept the contention of the ld. DR in this regard. It is more so because no contrary view has been brought by the ld. DR to our notice. Respectfully following the precedents, we direct the exclusion of this case from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies as comparables. vi) We have considered the submissions of the parties and perused the materials on record. As can be seen from the annual report of the Genysis International Corp. Ltd., this company is engaged in geospatical and mapping activities, engineering services, etc. Its business model is completely different from the assessee and as such it is functionally different. Further, we have come across a number of cases where taxpayers have objected to the aforesaid company being treated as comparable to companies in ITES sector. That being the case, we are of the view that the aforesaid company cannot be considered as comparable to the assessee company. vii) So far as Goldstone Technologies Ltd. is concerned, the coordinate bench in case of HSBC (Supra) has held that aforesaid company being engaged in providing consultation services with various middle ware products is not functionally similar to the companies in the ITES sector. In view of the aforesaid decision of the coordinate bench, this company cannot be considered as comparable to the assessee. viii) So far as the Visual Soft Technologies Pvt Ltd. and Quantum e-solutions Services Pvt. Ltd., are concerned, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since the assessee has also entered into international transactions with non-AEs, AO should have allocated proportionate receivable and payables to non-AE transactions as the assessee has furnished all the details before the TPO. The learned AR submitted that if receivables and payables are properly allocated to AE and non-AE transactions instead of negative working capital of 2.12%, it will be a positive figure of 2.29%. In this context, learned AR referred to summary of working capital adjustment at page 338 of the paper book. ii) The learned DR, on the other hand, supported the orders of the TPO and DRP on this issue. iii) We have considered the submissions of the parties and perused the materials on record. It is seen from the order of the DRP that though the assessee has raised similar arguments before the DRP but the DRP has rejected the same by stating that the assessee has not maintained segmental accounts, hence, allocation of cost to respective segments cannot be ascertained. DRP held that since the TPO has worked out the working capital adjustment on the business of a transparent method adopted in case of all taxpayers it cannot be questioned. However, we are of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8. We have heard the parties and perused the materials on record as well as the orders of the DRP on this issue. So far as the first contention of the assessee that ORSC is a new unit, we are unable to accept such contention in view of the specific finding of the AO, which has not been controverted by the assessee by bringing sufficient material to substantiate its claim. However, so far as alternative contention of the assessee for allowing claim of deduction u/s 10A of the Act due to conversion from DTA unit to STPI unit, we find force in such contention of the learned AR. It is not in dispute that ORSC unit is recognized as a STPI unit. On perusal of the order passed by the DRP for the AY 2008-09, it is seen that in para 12 of the said order, the DRP has held that when ORSC unit is converted from domestic tariff area to STPI unit, it is eligible for deduction u/s 10A of the Act for the remaining period out of 10 consecutive assessment years starting from the year in which it was approved as STPI unit. In view of such finding of the DRP for the AY 2008-09, we direct the AO to allow deduction u/s 10A of the Act for the impugned assessment year also. 8.1 The assessee has ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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