TaxTMI 
TaxTMI 
2011 (7) TMI 509
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....d by holding that there is no scope for calling any adjustment." 3. The assessee is a company engaged in providing information technology services such as call centre, back office operation etc. The assessee was incorporated in March, 1999 and commenced its business in April, 2003. The assessee is subsidiary of HTS Mauritius which in turn is subsidiary of M/s. Hutchinson Whampoa Ltd. Hongkong (HWL). It is a BPO centre providing services to two other fellow subsidiaries of its parent company i.e. M/s. Hutchison 3 G Australia Pvt. Ltd. (H3GA), Australia and Hutchison 3G UK Ltd., UK (H3GUK). The assessee provided IT services to Hutchison Australia Pvt. Ltd. and Hutchison 3G UK Ltd., UK. The aforesaid two companies were associated enterprises and in terms of the provisions of section 92CA of the Act the Arms Length Price (ALP) of the international transaction between the assessee and its associated enterprise had to be determined. The Assessing Officer referred to the TPO under section 92CA(1) of the Act the computation of ALP in relation to international transaction referred to above. 4. During the relevant year the assessee has provided I.T. enabled services (ITES) to its AEs- ....
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.... 5. Firstsource Solutions Ltd. 4.84 6. Godrej Upstream Ltd - 17.57 7. NIIT Smartserve Ltd. -15.21 8. Nipuna Services Ltd. - 7.33 9. Rev IT Systems Pvt. Ltd. - 7.33 10. Transwork Information Services Ltd. 5.69 11. Wipro BPO Solutions Ltd. 28.43 12. Hinduja TMT Ltd. (Segment) 62.25 13. Mpphasis Ltd. (Segment) 38.26 Arithmetic mean 6.93 The net margin of assessee worked out to 11.63 per cent and thus the assessee justified the price it charged the AEs as proper and calling for no adjustment by the TP. 8. The TPO (on a reference made by the Assessing Officer to determine the ALP) was of the view that the comparables selected by the assessee cannot be accepted as being comparable to assessee due to following reasons: Sl.No. Name of the company Reasons for rejection 1. M/s. Ask Me Info Hubs Ltd. Chronically loss making 2. B2K Corpn Pvt. Ltd. Chronically loss making 3. Citigroup Global Services Ltd. Related party transactions with foreign parent hence not uncontrolled transaction 4. Godrej Upstream Ltd. Chronically loss making 5. Nipuna S....
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....t between the assessee and the associated enterprises and drew conclusion to the effect that the Assessee is performing important functions, assuming risks etc. and therefore any price determined as ALP has to give due weightage to these factors: (a) The AEs operate mobile telecommunication network in Australia and U.K respectively. The assessee operates Contact Centre Services in India and is to provide a Contact Centre and Services the assessee is being paid certain charges in accordance with the agreement. (b) The TPO referred to clause 8.2 of the Agreement between the assessee and deliverables which reads as under: "8.2 As between GSPL and Hutchison, all Intellectual Property Rights in any Deliverable, and in any software or anything created or developed by GSPL or any third party acting on its behalf, in compliance or purported compliance with its obligations under this Agreement (including GSPL Materials) solely for the benefit of Hutchison under this Agreement (the "Works"), shall vest legally and beneficially in Hutchison. The parties further agree that all Intellectual Property Rights in any Deliverable, and in any software or anything crea....
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....ices being rendered by the assessee are of paramount importance for the core functions being performed by H3G companies and are not routine services. (f) The agreement also provides that the assessee has to provide a Professional Indemnity Insurance to H3G companies for an amount of US$ 10,000,000 per occurrence and also gave third party insurance covering the legal liability of the assessee to any injury to persons or loss or damage to property arising out of the performance of this agreement. This shows that the assessee is bearing the risks to a large extent arising from the performance of the contracts. 12. The TPO thereafter referred to the website of the Assessee "WWW.3globalservices.com" and found that the Assessee has described itself as providing the following services: (a) Post sales-Mobile Number Porting (MNP)/Activation/Provisioning. (b) Sales-Direct Selling/Campaign Management (c) Collections-Consumer/Commercial. (d) Value Added Service-Content Selling. (e) Customer Care-Queries/complaints/Billing requests/Technical issues/Delivery Enquiries Services Change Request.  ....
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....ee was undertaking substantial risk in its business with the AEs. The TPO held that the interest cost would therefore, not affect the profit margin. The TPO also held that the assessee was not able to demonstrate that link charges and cost of assets installed at premises of the AEs were also not charged in comparable cases set out in the T.P report filed by the assessee. 14. Thereafter the TPO took up nine comparable cases and also 6 comparable cases given by the assessee. Thus the 15 comparables including 6 selected by the assessee and nine selected by the TPO are as under:- Sl.No. Comparable companies OP/TC (%) 1. Allsec Technologies Ltd 28.07 2. WIPRO BPO Solutions Ltd. 28.43 3. Transworks Information Services Ltd. 5.69 4. Hinduja TMT Ltd. 62.25 5. Mphasis Ltd. 38.26 6. Firstsource Solutions Ltd. 4.84 7. Tulsyan Technologies Ltd. (Cosmic Global) 19.08 8. Saffron Global 24.89 9. Vishal Information Technologies Ltd. 45.65 10. Ace Software Exports Ltd. 15.46 11. Nucleus Netsof & GIS India Ltd. 40.6 12. Asian Cerc Information Technology Ltd.(seg) 37.4 13. Air....
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....the assessee and the AE. According to the assessee these facts were not confronted to the assessee by the TPO and the assessee came to know about the observation of the TPO only after receipt of the order of the TPO. The assessee filed an application under section 154 of the Act before the TPO. In this application the assessee had specifically pointed out that the conclusions of the TPO that the assessee also provided and delivered project software design reports is not factually correct. In this regard the assessee submitted "Deliverables" means any product, software, interface, design, report, document, specification or other item or any combination thereof to be developed, created or provided by GSPL in the course of or arising out of the supply of services under the this agreement. It was submitted that the term "Deliverables" is used only in relation to any software etc. that may get developed in the course of rendering the "Services", being the services of a call centre as explained above. The assessee is not engaged in the business of supplying "Deliverables" as presumed by Assessing Officer. The word 'Deliverables' is used only in Clause 8.2 which reads as under: "8.2 As....
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....yond the scope of service rendered by a call center. The assessee also pointed out that by looking into the web site of the assessee the TPO had drawn some conclusions. The assessee pointed out that all these services were ordinarily performed by a call centre. The assessee also pointed out that the assessee has no privity of contract with the customers of the AEs and only provides call centre services, answering queries of subscribers or prospecting subscribers of the AEs. The assessee also invited the TPO to visit its office to find out the nature of services the assessee renders. 18. The TPO passed an order under section 154 wherein he expressed the opinion that the comparable selected by him are broadly similar to the functions performed by the assessee. Thus the TPO in his original order took the view that the services rendered by the Assessee were much sophisticated and technical than a mere call centre. In the order under section 154 of the Act, he did not deny the plea of the Assessee as set out in the application under section154 of the Act but took a stand that the comparable cases relied by TPO, similar services were being rendered as the one claimed by the assessee. ....
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.... in providing such 3G technology services to its 4 million customers. (h) On rejection of the loss making companies included in the list of companies selected by the assessee, the CIT(A) found that 5 out of 6 companies were all established in the year 2001-02 which is around the same time as the incorporation of the assessee. He also held that the 9 new companies added by the TPO in his list are the companies established during the period 1992 to 2000 i.e. period much prior to the incorporation of the Appellant Company. He was of the view that the companies which were at the start-up stage may make losses and, therefore, cannot be brushed aside from the sample of comparable companies. He held that these cannot be regarded as "chronically" loss making since they are just at the start-up stage. Balance one company, namely, Ask Me Info Hub Ltd. being a loss making company included in the list of comparable of the assessee but rejected by the TPO is, no doubt, established in the year 1962. However, on a perusal of its Profit and Loss Account, it cannot be lablled as "chronically" loss making since in the financial years 2005-06 and 2006-07 this company has turned around ....
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....Prime Lending Rate of the State Bank of India. If this adjustment is to be factored, the ratio of operating profit to the total operating cost works out to 29.87 per cent and this is even higher than the ratio of 29.38 if all the comparables of the TPO are accepted blindly. It has to be borne in mind that Transfer Pricing cases typically require a more in depth analysis of the facts and underlying economic of a particular related party transactions. From the point of view of a trader, his pricing would differ if the customer pays him advance or cash payment as compared to the customer who pays him after a credit period. There can be no two views on the proposition that the pricing of the trader would differ in these situations, everything else remaining the same. It is also quite common to hear about cash discount being offered by traders to induce the customer to make early payments. In view of this common business understanding and practice it will be fair and reasonable in accepting the claim of the appellant since the companies selected by him or by the TPO provide an average credit period of 3 months as against the Appellant obtaining advances from its customers which are peri....
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....e international transaction between the assessee and its AE the most appropriate method is TNMM. We have already seen the manner in which the assessee substantiated the price which it charged its AE. The assessee while doing so had selected 13 comparable cases. The net margin on operating cost earned by this comparables was between - 41.87 per cent to 62.25 per cent with arithmetical mean of 6.95 per cent. The assessee had claimed that the price it had charged gave a net margin on operating cost which at 11.63 per cent and, therefore, justified the price that it charged to the AE. The TPO rejected 7 of the 13 comparables selected by the assessee in its TP Study. The Assessing Officer had on his own collected the data of 9 companies and considered the 6 companies selected by the assessee and arrived at a data base of 15 comparable cases. The assessee had objected before the Assessing Officer that 8 out of the 9 comparable cases cited by the Assessing Officer cannot be considered at all because they were in a totally different business. The objections with regard to the 8 parties out of the 9 considered by the Assessing Officer was as follows: Sl. No. Name of the company Rea....
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....bsite at Pg.221 of PB 7. Goldstone Teleservices Limited (Seg) GIL is pioneer in design and manufacturing Composite Insulators in the country for use in Transmission and Distribution, Railway Traction networks. The company is also setting up plant to manufacture corrosion protective sleeves for oil and gas pipelines. The company is having its own R&D Centre and manufacturing facility at Cherlapally. Refer Profile from Website at Pg.225 of PB 8. Tulsyan Technologies Limited (Cosmic Global) CGL provides Business Process Outsourcing (BPO) and IT enabled services (ITES) to a global clientele. We conceptualize and realize technology driven business transformation initiates. With a vast worldwide network, we use a low-risk Global Delivery Model (GDM), to accelerate schedules with a high degree of time and cost predictability. High-end Technical Services, Refer profile for Description of nature of business at page No. 224 of PB 25. It was the plea of the Assessee before the TPO that the Services rendered by IT Industry (ITES-BPO) are classified into various segments are as under: - Customer care (Voice and non-voice) includes inb....
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....Payment Services, HR, Payroll, Finance and Accounts which require personnel with specific skill sets like Accountants, HR professionals having post degree qualification in HR, etc. The higher one go in the list of NASSCOM table given above, the more complex the jobs are and accordingly, the more are their billing rate per hour and the resultant margins charged for the services. 27. The TPO has not considered the above objections of the assessee at all. In para 16 of the TPOs order the TPO has merely observed that the 9 comparables selected by the TPO are broadly similar functioning to the functions and risk profile of the assessee company. In our view the TPO was not justified in ignoring the distinction pointed out by the assessee with regard to the characteristics of the services provided by it and the 8 comparable cases considered by the TPO. 28. It has been the stand of the TPO that the assessee was not performing merely the services of a call centre and was providing services which were much more than an ordinary call centre. In this regard the Assessing Officer has pointed out certain facts which emerges from the agreement between the assessee and the AE. According to t....
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....that one of the areas of dispute is regarding the exact nature of services rendered by the assessee. In this regard we have examined the agreement between the assessee and its AEs. In this agreement (a copy of which is at page Nos. 32 to 94 of the PB) the assessee has agreed to operate international contact centre in India to provide contact centre services. Services has been defined in this agreement as follows: ' "Services" means the establishment of the Contact Centre, hiring and training of the Contact Centre personnel, recruitment and supervision of GSPL Personnel, ensuring quality customer service and providing the services set out in the Service Schedule in accordance, in particular, with the forecasts provided to GSPL from time to time which are to be agreed between the parties.' The service schedule has been defined as follows: ' "Service Schedule" means the Schedule to be agreed between the parties setting out the Services to be provided by GSPL as amended or replaced by Hutchison from time to time and notified to GSPL.' On a careful perusal of the agreement we find that there is no exact description of the nature of services to be rendered. That can be verifi....
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....taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (d) conditions prevailing in the markets 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. Rule 10B(3) lays down that 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 a....
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....d not hold any specific skill like accountants, legal professionals, software professionals, executives, technical consultants, creative agents. The ITES-BPO sector provides higher end services like payment services, HR, Payroll, Finance and Accounts which require personnel with specific skills sets like Accountant, HR Professionals having post-degree qualification in HR, etc. It has been the claim of the Assessee that as one goes higher in the ITES-BPO sector ladder, the job is more complex and therefore billing rate per hour and resultant margin charged for services is bound to be higher. Thus the Assessee claimed that the BPO sector selected by the TPO (9 companies) were not mere call centre but performing much more skilled jobs than that of a call centre. We have already extracted the explanation of the Assessee before the TPO in this regard. The TPO has ignored the plea of the Assessee and has not given any reasons for doing so. The TPO has merely said the comparable instances were performing identical job as performed by the Assessee. In our view such rejection of the Assessee without assigning any reason is arbitrary. 33. Another aspect which we notice in the TPO's order ....
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....essee's apprehension is not well founded. 36. For statistical purposes, the ground of appeal is treated as allowed. 37. Connected Issue in ITA No. 7125/M/2010: (Ground No. 1 in Assessee's appeal for assessment year 2006-07 : Ground No. 1: Addition under section 92CA(3)- Rs. 32,56,85,911. 1. On the facts and in the circumstances of the case and in law, the Deputy Commissioner of Income-tax, Range 3(3), Mumbai (the Assessing Officer) erred in making an addition under section 92 amounting to Rs. 32,56,85,911 in respect of the Appellant's international transaction with its associated enterprises of rendering voice based call centre services. In doing so, the Assessing Officer has, inter alia, erred in completely overlooking/ignoring the earlier year's order of the Appellate Authorities and all other submissions/arguments of the Appellant. 2. The appellant, therefore, humbly prays that the addition under section 92 be deleted. 38. In this assessment year the assessee has challenged the adjustment made by the TPO to the ALP. In this assessment year the facts are almost identical. The TPO in his order under section 92C has determined....
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....ier known as Goldstone Teleservices Ltd.) 5.03 29.01 9. Maple e Solutions Ltd. 7.43 32.66 10. R Systems Internation Ltd. (Seg) 9.17 15.11 11. Spanco Ltd. (Seg) (Earlier known as Spanco Telesystems & Solutions Ltd.) 82.32 20.86 12. Transworks Information Services Ltd. 163.3 19.56 13. Vishal Information Technologies Ltd. 25.64 48.03 Arithmetic mean 24.00% 40. The TPO held that the arm's length margins of comparable companies engaged in software development activities is 24 per cent on cost. Accordingly the ALP was determined by adopting the above arithmetic mean of 24 per cent and ALP determined. Consequently the impugned addition to the total income was made by the Assessing Officer based on TPO's report. 41. It was the claim of the Assessee that out of the 13 companies selected by the TPO 11 companies are grossly non-comparable with the Assessee. The Assessee pointed out that the 10 out of the 11 companies were functionally not comparable at all and the other company viz., Spanco Ltd. earned export revenues of less than 25 per cent of its total revenue. The Assessee pointed out that th....
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.... the claim of the Assessee. In the set aside proceedings he shall address all the above issues in the light of the observations made by us above and the earlier part of this order on identical issue for assessment year 2005-06. In our view the DRP has also not considered all these objections, which are clearly set out in the statement of facts filed by the Assessee before the DRP. We therefore set aside the order of the Assessing Officer and remand the question of determination of ALP by the Assessing Officer afresh in the light of the directions given above. For statistical purposes, the ground of appeal of the Assessee is treated as allowed. 42. Ground No. 2 raised by the Revenue in ITA No. 5887/Mum./10 reads as follows: "2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing the claim of the assessee under section 10A before setting off of unabsorbed depreciation." 43. The Assessee had filed a return of income for assessment year 2005-06 on 28-10-2005 declaring total income of Rs. 15,71,120 after claiming deduction under section10A of the Act of Rs. 11,29,06,385. The sum of Rs. 15,71,120 was interest income which was offered to....
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....to be carried forward, effect should first be given to the provisions of section 72(2). Now, since in view of the Tribunal, section 10A is to be computed before setting off brought forward losses and since effect should be given first to brought forward losses and then unabsorbed losses, it is only logical that the deduction under section 10A should be allowed not only before setting off brought forward losses but also before setting off unabsorbed depreciation. The appellant's stand is also covered by the decision of the Special Bench in the case of Scientific Atlanta India Technology (P.) Ltd. Thus ground No. 2 is allowed." 46. Aggrieved by the order of the CIT(A), the revenue has raised ground No. 2 before the Tribunal. We have heard the rival submissions. Under the provisions of section 10A of the Act, deduction of such profits and gains as are derived by an undertaking from the export of computer software or other notified business shall be allowed from the total income of such undertaking. Section 72(2) clearly and specifically provides that where any allowance or part thereof under sub-section (2) of section 32 is to be carried forward, effect shall first be given to the ....
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....justed against losses of a non-10A unit. In other words, deduction under section 10A ought to be granted solely on the profits of the business of the 10A undertaking and not on total income computed after giving effect to section 72/section 32(2), etc. We are therefore of the view that deduction under section 10A has to be allowed on profits of the undertaking before set-off of unabsorbed depreciation. Unabsorbed depreciation has therefore to be allowed to be adjusted against interest income. For the reasons given above, we confirm the order of CIT(A) and dismiss ground No. 2 raised by the Revenue. 47. Ground No. 3 raised by the Revenue in ITA No. 5887/Mum./10 reads as follows: "3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that exchange rate gain is integral part of the exports and hence part of "Business Income" and cannot be treated as "Income from other sources." 48. The Assessee had earned foreign exchange gain of Rs. 3,19,32,434 . The foreign exchange gain earned by the Assessee and its accounting was explained by the assessee as follows: The assessee say receives an advance of 1000 US$ on 15-3-2004 from AE (Excha....
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....gain from the profits of the business while working out deduction under section 10A of the Act. 50. On appeal by the Assessee, the CIT(A) held as follows: "5.2 I have considered the submissions and I find that the issue is covered by the decision of the Tribunal in Changepond Technologies (P.) Ltd. and it has been categorically held that where the gain from fluctuation of foreign exchange is directly related to the export activities, it should be considered as income derived from export activity and, therefore, such foreign exchange gain would be included in the profits for computation of deduction under section 10A. Moreover, the Special Bench in Asstt. CIT v. Prakash L. Shah (301 ITR) has also held that exchange rate gain difference pertaining to exports is an integral part of the exports and export turnover cannot be treated as income from other sources. Thus ground Nos. 3 & 4 are allowed." 51. Before us the learned D.R. relied on the order of the Assessing Officer. We are of the view that the order of the CIT(A) on this issue has to be upheld. In the case of Changepond Technologies (P.) Ltd. (supra), the Chennai Bench of ITAT dealt with identical issue and held as foll....
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....d No. 3 raised by the Assessee reads as follows: "Ground III: Treating interest on L/C Margin & Bank Guarantee of Rs. 3,36,697 as 'Income From Other Sources': 1. On the facts in the circumstances of the case and in law, the Assessing Officer erred in treating interest income on L/C Margin & Bank Guarantee as "Income from Other Sources" as against "Business Income" of the eligible 10A unit for the first time in his final assessment order without having considered so in his draft assessment order under section 144C and accordingly, erred in denying deduction under section 10A in respect of such interest income." 58. For deciding ground No. 3 it is necessary to have a look at the provisions of section 144C of the Act, which were introduced by the Finance Act , 2009, with effect from 1-4-2009. The said provisions provide that in the case of eligible assessee, the Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee, if he proposes to make, on or after the 1st day of October, 2009, any ....