AI Drafter 
TaxTMI 
TaxTMI 
2020 (7) TMI 719
X X X X Extracts X X X X
X X X X Extracts X X X X
....onsideration in the cross-appeals and cross-objections pertains to : (a) Transfer pricing adjustment ('TP adjustment') of Rs. 5,62,77,751/- made by the Transfer Pricing Officer ('the TPO' for short) towards the international transaction of provision of Information Technology Enabled Services ('ITES') to the Appellant's Associated Enterprise ('AE'), which was subsequently enhanced to Rs. 6,07,73,624/- in the final assessment order passed by the Assessing Officer ("AO") under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ("the Act"); (b) Re-computation of deduction claimed under Section 10A of the Act; (c) Non-grant of credit of entire TDS deducted on the basis of Form 16A and consequent erroneous levy of interest under Sections 234B and C of the Act; and (d) Non-grant of interest under Section 244A of the Act. 3. As far as the issue with regard to Transfer Pricing Adjustment and consequent addition to the total income in respect of an international transaction between the Assessee and its Associate Enterprise is concerned, the facts and circumstances under which the said issue arises for consideration are that the Assessee i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows: Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the Company Mark-up on Total Costs (WC- unadj) (in %) Mark-up on Total Costs (WC- adj) (in %) 1. Accentia Technologies Ltd. 43.06 39.17 2. Acropetal Technologies Ltd. (Seg) 22.27 17.67 3. E-Clerx Services Ltd. 55.97 52.98 4. Fortune Infotech Ltd. 22.80 20.05 5. ICRA Online Ltd. (Seg) 43.39 40.72 6. Informed Technologies India Ltd. 26.15 25.94 7. Infosys BPO 31.23 28.68 8. Cosmic Global Ltd. 14.97 16.20 9. Sundaram Business Services Ltd. -12.31 -13.28 10. Jeevan Scientific Technology Ltd. (Seg) 21.05 37.99 Average 26.86 26.61 7. The Computation of arm's length price by the TPO and the adjustment made (as per the order dated 27.01.2014): Arm's Length Mean Margin 26.87% Less: Working Capital Adjustment* 0.23% Adjusted mean margin of the comparables 26.64% Operating Cos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Assessee and directed the AO to recompute the margins of the comparable companies by granting the working capital adjustment on actual basis without any restriction. The DRP also, directed the AO to recompute the margins after rectifying defects pointed out by the Assessee in the computation of some of the comparable companies. 10. It is the plea of the Assessee that as per the directions of the DRP, the TP adjustment ought to be deleted but in the order passed by the AO giving effect to the directions of the DRP i.e., the final assessment order which is subject matter of this appeal, the AO passed the final assessment order dated 30.12.2014 without giving effect to the directions given by the DRP. Consequently, the addition to the total income pursuant to TP adjustment stood enhanced to Rs. 6,07,73,624/-. 11. In its appeal before the Tribunal, the Assessee has raised the following grounds of appeal viz., (a) That the AO erred in upholding the adjustment made by the TPO without giving effect to the directions given by the DRP (Ground Nos. 2 and 3). (b)That the TPO erred in not excluding Accentia Technologies Limited from the list of comparables although it fails the te....
X X X X Extracts X X X X
X X X X Extracts X X X X
....derived from the operating activity and. 7. The DRP erred in concluding that forex gain / loss are to be treated as operating in nature without appreciating that though they may be incidental to the operating activity, they cannot be deemed as operating in nature since, they are not critical to operational activities of the business conducted by the taxpayer. 8. The DRP erred in directing the AO to carry out the working capital adjustment as per the actual figures worked out by the assessee without putting any cap on the ground that there is time value of money without appreciating the fact that the TPO had put a cap on the basis of the average cost of working capital of the comparables selected by the TPO and that the accurate details of debtors and creditors of the assessee and the comparables were not available. 9. The DRP erred in directing the AO to follow the ratio laid down by the Hon'ble Court in the case of Tata Elxsi Limited 349 ITR 98 and exclude telecommunication expenses and travel expenses incurred in Foreign currency from the export turnover also while computing the deduction u/s 10A of the I.T. Act, without appreciating the fact that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....details of debtors and creditor of the assessee and the comparable were not available (Ground No. 8). (e) The DRP erred in directing the AO to follow the ratio laid down in Tata Elxsi Limited and exclude telecommunication and foreign travel expenses from the export turnover without appreciating the fact that there is no provision in Section 10A that such expenses should be reduced from the total turnover also. (Ground No. 9). 14. We shall first deal with the appeal of the Revenue. As far as Ground No.2 raised by the revenue is concerned, the grievance of the Revenue projected in those grounds is that the DRP has set side issue for consideration to the AO/TPO and in terms of Sec.144C(8) of the Act, the DRP has to decide issues before it and cannot set aside issues to AO/TPO. In this regard, we have perused the directions of the DRP and we find that with regard to exclusion of Acropetal technologies at page-16 last paragraph and page-17 first paragraph, the DRP has held that the expenses incurred on on-site provision of ITeS by the Assessee was 64% of the total expenses and therefore the company was to be regarded as one providing onsite ITeS and cannot be compared with a co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Services Ltd., inclusion was not contested by the Assessee at all before DRP and the DRP suo motto considered exclusion of this company. In respect of both the companies the specific direction of the DRP is to exclude both the aforesaid two companies. (vide paragraph-2 at page-18 and paragraph-1 of page-19 of the DRP's directions). The revenue is not correct in contending that the issue has been set aside to the TPO/AO contrary to the provisions of Sec.144C(8) of the Act. Since we have come to the conclusion that the directions of the DRP cannot be construed as a set aside of the issue to the TPO/AO, we find no merits in Gr.No.3 raised by the revenue. 16. As far as Gr.No.4 & 5 raised by the revenue are concerned, the Revenue is challenging the exclusion ICRA, Infosys BPO Ltd., and Eclerx Services Ltd. 17. As far as exclusion of ICRA is concerned, before the DRP the Assessee sought exclusion of ICRA from the list of comparables on the ground that this company is functionally dissimilar to the Assessee. It was submitted that ICRA is engaged in providing services which are in the nature of KPO services. It provides financial and analytical services and support to clients in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anding membership interests of McCamish Systems LLC which constitutes a peculiar economic circumstance for which no reasonable adjustment could be made to mitigate its effect on the company's margin. Also, the company has incurred huge selling and marketing expenses and the same has been increasing year on year. Reliance in this regard was placed on the decision in the case of Arctern Consulting Pvt. Ltd. (supra) and Tesco Hindustan Service Centre (P.) Ltd. (2017)77 taxmann.com 48 (Bangalore) for AY 2010-11, where in identical circumstances, the exclusion of the company came to be upheld/company was directed to be excluded. The learned DR reiterated the stand of the revenue as reflected in the grounds of appeal of the revenue. 21. We have carefully considered the rival submissions. In the case of Tesco Hindustan Service Centre Pvt.Ltd.(supra) vide paragraph 47 & 48 of its order, the Tribunal upheld exclusion of this company from the list of comparable companies, on the ground of presence of brand value and other factors. Respectfully following the decision of the Tribunal, we upohold the order of DRP excluding this company from the list of comparable companies. 22. As far as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....liance upon the order of the AO. 39. Having carefully examined the orders of lower authorities in the light of Tribunal's finding in the case of Stream International Services (P) Ltd. (supra), we find that the profile of this company was examined by the Tribunal in this case and following the order of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. (supra), the Tribunal held this company to be noncomparable. For the sake of reference, we extract the relevant portion of the order of the Tribunal:- "(xi) Eclerx Services Ltd. & Mold-Tek Technologies Ltd.:- For both these companies, the ld. Counsel for the assessee stated that these companies are functionally different, therefore, cannot be considered as comparables. We find that the Mumbai Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. in ITA No. 7466/Mum/2012 has rejected eClerx Services Limited because solutions offered by this company included data analytics, operations, management, audits and reconciliation, metrics management and reporting services. The Special Bench opined that if these functions actually perfor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he rival contentions. The Hon'ble Delhi High Court in the case of PCIT Vs. B.C.Management Services (P) Ltd., (supra) held that foreign exchange gain has to be regarded as part of operating income by following its own order in Pr. CIT v. Cashedge India (P.) Ltd. [IT Appeal No. 279 of 2016, dated 4-5-2016.Respectfully following the said decision, we uphold the directions of the DRP and dismiss Gr.No.6 & 7 raised by the revenue. 27. As far as Gr.No.8 raised by the revenue is concerned, the Revenue is challenging the action of the DRP in directing the AO to grant the working capital adjustment without any restrictions. In this regard, it was submitted on behalf of the Assessee that DRP has rightly held that working capital adjustment must be granted in full without there being any arbitrary and adhoc upper cap or restriction to the same. It was submitted that Rule 10B(3) of the Income-tax Rules, 1962 ('the IT Rules' for short), provides that an adjustment ought to be provided for any differences in the economic factors between the tested party and the comparables. A working capital adjustment is one such adjustment which is to be applied in order to adjust for the differences betwee....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... limit being placed on working capital adjustment was an issue which had come up before this Tribunal in the case of Rambus Chip Technologies (India) (P.) Ltd. v. Dy. CIT [IT (TP) A. 23/Ban/2015, dt. 22.07.2015. Coordinate bench had held as under at para 13 and 14 of its order: "13. As regards ground No. 3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71% in case of uncontrolled comparables selected by the TPO. The learned counsel for the assessee submitted that the TPO has not given any basis for such restriction of the working capital adjustment. He submitted that the CIT (A) also has not applied his mind to this issue but has summarily confirmed the order of the AO and therefore it has to be set aside. 14. On going through the TPO's order as well as annexure D referred to in the transfer pricing order on working capital adjustment, we find that the AO has not given any basis for restricting the adjustment to 1.7....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t paras 9 and 10); and - July Systems and Technologies Pvt. Ltd. v. DCIT (Common order dated 31.10.2018 passed in IT(TP)A N0. 368/Bang/2016 and others at paras 15 and 16). We are of the view that a direction to the AO/TPO to follow the directions of the DRP on all aspects dealt with the revenue's appeal and other directions of the DRP, would be just and sufficient. We hold and direct accordingly. Gr.No.2 & 3 of the Assessee's appeal are accordingly treated as allowed for statistical purpose. 30. We shall now take up for consideration corporate tax issues in the Revenue's appeal, which is projected in Grds.No.9 & 10 of the revenue's appeal. These grounds of appeal arise under the following facts and circumstances. While computing the deduction u/s.10A of the Act, the AO noticed that during the relevant assessment year, the Assessee had incurred telecommunication charges and travel expenses in foreign exchange currency in respect of Sec.10A unit which was not reduced from the export turnover while computing deduction under section 10A of the Income Tax Act, 1961. The AO therefore excluded the aforesaid sum from the export turnover without excluding them from the tot....