TaxTMI 
TaxTMI 
2019 (4) TMI 1361
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....ject matter of grounds of appeal; and also, the comparables challenged on the transfer pricing grounds: - Addition/Disallowance Amount (in Rs.) 1. Disallowing deduction claimed u/s.10A of the Act on interest income earned from short term fixed deposits by considering the same as income from other sources 63,67,249/- 2. Addition to "interest on short-term fixed deposits' on account of reconciliation with TDS certificates and taxing it as 'Income from Other Sources'. 1,02,261 3. Reduction in deduction claimed under section 10A of the Act by making adjustment to 'export turnover' on account of unbilled revenue and sundry debtors 52,18,911 4. Disallowance by invoking provisions of section 40(2)(b) r.w.s. 92CA of the Act, alleging excess payment 80,72,451 5. Disallowance of 'provision for bonus' by treating it as 'unascertained liabilities' for computing book profits under section 115JB of the Act. In the transfer pricing grounds, the assessee has challenged the following inclusion/ exclusion of 8 comparables: i) TCS-E Serve International Ltd. (included by the TPO); ii)  ....
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.... Acturial Includes analysing the losses on the specialised actuarial software Reserve Pro and providing recommendations. XL India is involved in creating various reports which is then circulated to relevant stakeholders. The team is also involved in commutation pricing calculations and capital adequacy tests. Operations a. Credit Control: Includes the following services: * Reconciliation of entries in broker statements with the entries in databases like PeopleSoft and Genius; and * Central settlement from clients, cash booking and inter branch accounting. b. Underwriting: (i) Property: It Includes risk modeling, portfolio analysis, coding of quotes and endorsements in the underwriting system and generation of relevant reports for the business from the underwriting system. Risk modeling and portfolio analysis involves entry of relevant data into software with assumptions for the purposes of analysis. (ii) Casualty and Specialty: Inputting quotes received from underwriters into various Underwriting systems, generating quote letters, entering data for the issuance of the policy letter and endorsements. ....
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.... i. Accentia Technologies Services Ltd. 43.07 ii Capgemini Business Services (India) Ltd. 27.32 iii Cosmic Global Ltd. 18.28 iv E4e Healthcare 31.03 v Fortune Infotech Ltd. 22.80 vi I-gate Global Ltd. 24.54 vii Infosys BPO Ltd. 31.46 viii Jindal Intellicom Ltd. 13.62 ix Omega Healthcare 15.31 x TCS E-Serve International Ltd. 53.80 xi TCS E-Serve Ltd. 53.38 Average profit margin 31.33 7. Out of 11 comparables, the TPO has considered 4 comparables of the assessee also, namely, i) Cosmic Global Limited; ii) E4e Healthcare; iii) Jindal Intellicom Pvt. Ltd.; and iv) Fortune Infotech Ltd. Since the average PLI of the comparables selected by the TPO was arrived at 31.33%. accordingly, adjustment of Rs. 67,87,84,800/- was made. 8. Now we shall take up various comparables which has been contested by the assessee. i) TCS E Serve Ltd.: 8.1 Before the TPO, the assessee had raised his objection that, firstly, there is no separate segmental information in respect of ITES and Software Development Services; and secondly, it is f....
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....ive services payment and global programs and investment reconciliation and reporting while performing the IT enabled services. The TPO has held that the appellant covers entire gamut's of ITES namely call centers technology, support transactional & services analysis. Therefore, I conclude that the appellant provides services to its AE of high end ITES. Therefore, functionally the company namely TCS International Ltd is a good comparables. Further, since I have held that this company is single segment therefore, it satisfies the filter of services revenue more than 75%. Further, Ld AR argued that during the year there is extraordinary growth in revenue and profit of this company. Therefore, he attributed some special reason for such exponential increase. In any view, unless, Ld AR points out any exceptional reason for the increase in revenue & profit of this company, this rise in turnover 8s profit itself would not constitute special reasons for disqualification as good comparable. Accordingly, this company will remain in the final list of the comparables. Ld AR has further argued that this company was takeover by Tata Consultancy Services Ltd earlier year. Thi....
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.... has been found to be non-comparable with the company providing simple BPO Services. 8.3 On the other hand, learned DR submitted as under: - A perusal of the Annual Report of TCS E-Serve Ltd shows that it is providing IT enabled Services or Business Process Outsourcing Services in Banking and Financial Services Industry domain to Citigroup entities being its largest customer. The company is engaged in Business Process Outsourcing (transaction processing) services to the Banking and Financial Services Industry (BFSI) which is considered a single segment. Like TCS the functions performed are similar to the assessee based on same argument as in case of TCSI. Annual Report of TCS E Serve does not show any significant difference in the functions being performed by TCS E Serve and TCSI as both provide transactional processing services to its client. For both the companies their main client is Citigroup entities. Also the technical services are part of the entire gamut of services provided by the assessee as well as TCS E Serve and therefore the segmental information relating to the technical services may not be relevant. This does not involve any....
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.... is basically the process of verifying a system with the purpose of identifying any errors, gaps or missing requirement vis-à-vis the actual requirement of the software so that the software applications meet the end users' requirement. It involves the execution of software component or a system component to evaluate one or many properties for finding out various errors or defect in the software or system and understand the risks of software implementation. It involves various testing methods and techniques to test the software which requires highly technical expertise and skill. Verification of software is the process for evaluating the system or component to determine whether the products given development phase satisfy the condition imposed at the start of that phase; and Validation is the process of evaluating the system or component during or at the end of the development process to determine whether it is satisfying specific requirement. The verification and validation process again require high technical expertise and methods for testing the software quality. All such functions are akin to software development. These technical services ostensibly cannot be held to be s....
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....e Ltd., we are of the opinion that it cannot be held to be comparable with the assessee whose functions are purely back end office support services. Thus, this comparable is directed to be excluded. ii) TCS E Serve International Ltd.: 10. This company too has reported similar function and activities as that of TCS E Serve Ltd. In its annual report which are as under: - Background and principal activities: TCS e- Serve International Limited is engaged in the business of providing information Technology-Enabled Services (ITES)/Business Processing Outsourcing (BPO) services, primarily to Citigroup entities globally. The company's operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data center management activities." &nb....
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....rrect, because back office support services or simple data management does involve such technical methods of software testing, verification and validation as it is very similar and akin to software development. Accordingly, we do not find any merits in the submissions made by the learned DR and same is rejected. 13. Thus, in view of our discussion made above, we hold that, both TCS E Serve Ltd. and TCS E Serve International Ltd. cannot be held to be comparables for benchmarking the assessee's margin and are hence directed to be deleted. iii) Omega Healthcare Ltd.: 14. The only reason given by the TPO to exclude this comparable is that, annual information of this company was not available in public domain. Ld. CIT(A) has directed the TPO to verify whether the information and annual report of the company is available in public domain or not and if it is available the same should be included. Before us, the ld. Counsel has provided the annual report which is appearing at pages 658 to 674 of the annual report compilation. 15. Since the only reason assigned to reject this company is that its financial data is not available in public domain, accordingly, w....
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....e computed. Hon'ble Punjab and Haryana High Court in CIT versus Mercer Consulting India Private Limited (ITA No. 101 of 2015), it is held that if the audited quarterly results can be used to compute margin for the year ending on March 2009, then company should be included in the final set of comparables. This Tribunal in the case of Cadence Design Systems (India) Pvt. Ltd. in ITA No. 2074/Del/2014 has discussed and analysed the same issue in the case of R System International Ltd. after observing and holding as under: - "19.2 We have heard rival submissions and also perused the relevant finding given in the impugned order. This comparables company has been rejected not on the ground of functionality albeit on the ground that it is following the financial year accounting from January to December (i.e. calendar year). Though a comparable company following a different financial 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....
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.... in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the Transfer Pricing Officer must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- "10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transa....
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....nt of Hon'ble Delhi High Court in the case of Chryscapital Investment India Pvt. Ltd vs. Dy. CIT, ITA No.417/2014. On the other hand, Ld. DR strongly relied upon the order of TPO and CIT(A). 24. After considering the relevant finding given in the impugned orders as well as the arguments placed by both the parties, we find that only reason for rejecting the three comparables is that their turnover is less than Rs. 5 crores, and therefore, same cannot be included for the comparability analysis. Such a filter applied by the TPO in the search matrix of assessee to reject the comparables cannot be upheld as it amounts to cherry picking. We find that now this issue of rejection on low turnover stands settled by the judgment of Hon'ble Delhi High Court in the case of Chryscapital Investment India Pvt. Ltd vs. Dy.CIT, (supra). Thus, we hold that these comparables cannot be rejected on low turnover filter. 25. Now we will come to three comparables as contested by the Department in the grounds of appeal; namely, i) Accentia Technology Pvt. Ltd.; ii) I-Gate Global Solution Ltd.; and iii) M/s. Infosys BPO Ltd. i) Accentia Technologies Pvt. Ltd.: 26. In so far as Accentia Te....
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....rand and IPR whereas no intangible assets are owned by the assessee company. Lastly, he submitted that it is a well settled proposition under the transfer pricing law that if there is any extraordinary event like amalgamation, acquisition or merger, then same cannot be taken for the comparability analysis because it is not sure what is the effect of overall turnover and profitability. In support, he has strongly relied upon the judgment of Hon'ble Delhi High Court in the case of Ameriprise India Pvt. Ltd., ITA 461/2016. Besides this, he also cited various decisions of this Tribunal in the case of Techbooks International Pvt. Ltd., ITA No.240/Del/2015, Equant Solutions India Pvt. ltd., ITA No.1202/Del/2015 and catena of other decisions wherein due to this extraordinary even this company has been held to be non-comparable. 30. After considering the aforesaid submissions and on perusal of the relevant findings given in the impugned order as well as material referred to before us, we find that this company is engaged in providing healthcare receivables cycle management services. It is not in dispute that in pursuance of scheme amalgamation of erstwhile company, Ascent Info....
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....ound that under TNNM such broad similarities of functions are required to be seen and if over all functions are to be compared same with that of the assessee. 32. Ld. CIT(A) held that since this company is also into providing software development services and there is no separate segmental information for ITES, therefore, he directed the TPO to exclude this company. 32. After hearing both the parties and on perusal of the relevant findings given in the impugned order, we find that this company is engaged in the business of developing software products besides carrying out ITES services. No segmental information or data has provided with regard to these two activities. Moreover, developing software products is entirely a different function altogether, and therefore, functionally it cannot be held to be comparable. Moreover, we find that ld. CIT(A) has noted that there was an amalgamation of I-Gate Global services with the assessee company during the relevant financial year and on that basis also ld. CIT(A) has held to be non-comparable. Under these facts and circumstances of the case, once there is no segmental information with regard to the information technical s....
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....interest income earned from short term deposits by considering the same as income from other sources for sums amounting to Rs. 63,67,249/-. 36. The facts in brief are that, as discussed in the operating part of this order, the assessee company is engaged in the business of providing ITES services which is registered STPI as 100% EOU under the Software Technology Park Scheme and hence was entitled for claim of deduction u/s.10A. Learned Assessing Officer noted that assessee has received interest on FDRs from Citi Bank amounting to Rs. 63,67,249/- which could not be said to be earned from the business activity of the assessee. He observed that there was no business exigency or condition to make FDRs, therefore, the investment in FDRs cannot be regarded as inextricably connected with the business of assessee and accordingly he held that interest received from such FDRs constitutes 'income from other sources' and is not eligible for deduction u/s.10A. 37. Before the ld. CIT(A), the assessee submitted that the assessee has outstanding external commercial borrowings (ECB) amounting to Rs. 2,28,55,000/-. It was pointed out that assessee has filed an application before RBI for....
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....s of Hon'ble High Court as well as Hon'ble Jurisdictional High Court that if the FDRs made has a link with the business activities of the assessee, then such an interest earned has to be treated as part of total turnover while computing the income u/s.10A(4). He strongly relied upon the judgment of Hon'ble Karnataka High Court in the case of CIT vs. Motorola Electronics Pvt. Ltd.; decision of Hon'ble Delhi High Court in the case of CIT vs. Hritnik Exports Pvt. Ltd., ITA No.219 and 239/2014. Again, he pointed out that there is full Bench decision of Hon'ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd., reported in (2017) 87 Taxmann.com 182; and Hon'ble Karnataka High Court judgment in the case of CIT vs. Hindustan Gums & Chemicals Ltd., reported in (2016) 72 Taxmann.com 90. In all these judgments it has been held that interest on bank deposits are part of profits of business eligible for deduction u/s.10A/ 10B on the ground that the profits of business of undertaking would include its entire business income including receipts on account of interest. Following these judgments, now there are various decisions of the Tribunals inc....
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....case the Tribunal has decided this issue against the assessee on the ground that fixed deposits are not maintained by the bank for the requirement of letter of credit and it this finding of the Tribunal which has been affirmed by the Hon'ble High Court after making following observations: - "In the grounds of appeal before the ITAT no specific challenge was raised by the Assessee to the above factual finding that the FDs were not being maintained to meet any requirement of the Bank for opening LC or for any other business purpose. In that view of the matter, the Court is unable to find any infirmity in the above treatment of interest income as income from other sources. No substantial question arises for consideration on this issue." 41. Thus, in that year the issue was decided against by the Hon'ble High Court on the ground that there was a factual finding that the FDRs were not maintained to meet any requirement of bank for opening LC or for any other business purpose. In this year, the assessee has given the explanation as to why the FDRs were placed to mitigate the interest cost and was kept as margin money obtaining bank guarantee and also for making prepay....
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....and gains derived by the assessee of a special nature and character like 100% Export Oriented Units (EOUs.) situated in Special Economic Zones (SEZs), STPI, etc., where the entire profits and gains of the entire Undertaking making 100% exports of articles including software as is the fact in the present case, the assessee is given 100% deduction of profit and gains of such export business and therefore incidental income of such undertaking by way of interest on the temporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings and these cases cannot be compared with deductions under Sections 80-HH or 80-IB in Chapter VI-A of the Act where an assessee dealing with several activities or commodities may inter alia earn profits and gains from the specified activity and therefore in those cases, the Hon'ble Supreme Court has held that the interest income would not be the income "derived from" such Undertakings doing such special business activity. 35. The Scheme of Deductions under Chapter VI-A in Sections 80HH, 80-HHC, 80-IB, etc from the 'Gross Total Income of the Undertaking', which may ar....
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.... under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act." 42. Thus, the ratio and principle laid down in the aforesaid judgments is quite clear that the computation of profit as given in sub-section (4) of Section 10A has to be seen in the context of entire income derived from income of export from such eligible undertaking including interest income derived from parking of funds. The words 'derived by' undertaking in Section 10A are derived from the words enshrined in Chapter VI A, and therefore, Profits & Gains of undertaking including incidental income by way of bank deposits is also entitled for 100% deduction u/s.10A. Keeping in view this princ....
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....nted out that such a difference has duly been offered to tax in the year of accrual. 48. After considering the relevant observation and finding of the ld. CIT(A) and the contention raised by the learned counsel, we do not find any infirmity in the order of the ld. CIT(A), because if the difference of interest amount has already been offered to tax in the year of accrual then there is no point for taxing the same in this year. In any case, we have already held while deciding ground no.4 to 4.2 subject to certain verification by the Assessing Officer if the interest income is subject to deduction, then ostensibly no addition can be made. Accordingly, in view of the direction given in ground no.4 and also in line with the direction of the ld. CIT(A), we hold that the Assessing Officer shall verify and delete the addition accordingly. 49. Next issue as raised in grounds no.6 and 7 whether unbilled revenue of Rs. 49,59,670/- was realized within the stipulated period for the purpose of computing the export turnover and whether sundry debtors amounting to Rs. 2,59,241/- were to be excluded from the export turnover. The Assessing Officer has reduced the export turnover of asses....
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....by the Assessee Amount assessed by Ld. Assessing Officer u/s.40A(2)(b) Disallowance u/s.40A(2)(b) Philippe Lutgen 55,07,503 18,00,000 37,07,503 Priti singh 73,79,009 36,00,000 37,79,009 Rahul Bhattacharya 41,85,939 36,00,000 5,85,939 Total 80,72,451 54. Before the Assessing Officer and ld. CIT(A) and also before us assessee's contention has been that Philippe Lutgen being a Country Manager of the assessee played a pivotal role in bringing efficiency in day to day working of XL India. The specific roles and responsibility of Philippe Lutgen included the following: - * Build a high quality sustainable operational center to maximize the performance of each and every service delivered by Appellant * Create a culture of continuous improvement and ensure that Appellant operates as a fully integrated component of XL Group * Manage various teams to ensure smooth service deliver by Appellant * Look after functions and supervise activities performed by Appellant. Philippe Lutgen worked exclusively for the assessee so as to ensure that service delivery standards of the assessee m....
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.... effect in calculating the operating profits of the assessee. We find substantial strength in this the contention of the learned counsel, that if the assessee is working on cost plus mark up model and if the salary cost is part of operating expenditure, then any disallowance of such operating expenditure will reduce the operating profit. The reason being, the assessee is reimbursed with mark up on the cost incurred. If the cost is reduced then at the same time, mark up on such cost also gets reduced. Therefore, in such a business model there could not be any disallowance on the salary expenses. In any case assessee is a 100% exportoriented unit eligible for deduction u/s.10A and if while computing the profits of the undertaking Assessing Officer has allowed the deduction u/s.10A, then such a disallowance ostensibly will only go to enhance the income of the assessee which again would be subject to deduction u/s.10A. Therefore, such a disallowance in the case of the assessee becomes purely academic. In any case, when this issue has been decided in favour of the assessee in the Assessment Year 2009-10, then on this ground also, we do not find any reason to deviate from such a preceden....