TaxTMI 
TaxTMI 
2021 (7) TMI 508
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....herein is a wholly owned subsidiary of M/s Ocwen 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 ....
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.... High Court, the interest income was an incidental income earned from deposits 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 o....
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....see, which owns eligible undertakings. The income tax liability arises upon the assessee on the profits already generated 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 ....
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.... 1316,75,11,974 962,91,06,964 36.30 5. Jindal Intellicom Ltd. 30,27,51,875 30,29,02,990 -0.05 6. Microgenetic Systems Ltd. 1,29,93,217 1,08,63,390 19.61 7. TCS E-Serve 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 TC....
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.... In written submission filed, assessee placed reliance upon decision of this Tribunal in case of Zyme Solutions Pvt Ltd., vs ACIT reported in (2019) 101 taxman.com 292, wherein this comparable has been excluded by observing as under: 10.4 We heard rival submissions and perused the 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 ....
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....e requirement that a comparable company must have revenue from rendering services of more than 75% of its total revenue, the TPO again held that the pre-press BPO segment's entire income is from services and therefore this objection is not to be accepted 49. On objections by the Assessee before the DRP, the DRP confirmed the 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 th....
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....formed, 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 (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 e....
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....gs on the basis of materials which he may gather u/s. 133(6) of the Act, The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO.' Respectfully following the decision, we remand this comparable to the file of the TPO/AO for fresh adjudication on the above lines." Respectfully following aforesaid decision, we remand this comparable to file of Ld.AO/TPO, for fresh adjudication, on the basis of directions reproduced hereinabove. 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....
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....to exclude Infosys BPO Ltd. from the list of comparables for the purpose of computing the average margin." It was also brought to our notice that the Hon'ble Delhi High Court in ITA No.260/2018 in the appeal filed by the Revenue against the aforesaid order dismissed the appeal at the admission stage observing that rationale given by the ITAT for exclusion was correct. In view of the aforesaid decision, we direct exclusion of Infosys BPO from the list of comparable companies chosen by the TPO. From above, it is clear that this company 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 it....
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....Process Outsourcing and therefore for reasons stated by us while dealing with this issue of comparability of the company Infosys BPO Ltd. shall equally hold good and therefore we direct th e A O / T P O to e x c l u d e this company from : list of comparables.' Since the appellant company is into low end BPO, it cannot be compared with KPO service provider. 11.4 Respectfully following the decision of the co-ordinate bench of Tribunal, we direct for exclusion this company from the list of comparable". It has been observed that this company is into high-end KPO services and an assessee rendering low end BPO services cannot be compared with it. Further, this company has 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 ....
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....he assessee to be BPO services with any proper analysis. In this factual matrix of the case, we find that on similar facts, the co-ordinate Bench o ITAT Bangalore in the case of Indegene (P) Ltd., (supra) has remanded the matter of comparability of this company to the file of the TPO for fresh consideration. In view of the factual matrix of the case on hand, as laid out above and following the decision of the co-ordinate Bench in the case of Indegene (P) Ltd. (Supra) which is also rendered on similar facts, we deem it appropriate to remand the matter of the comparability of this company, TCS E-serve Ltd. To the file of the TPO for fresh consideration in the light of out abov observations. Needless IT(TP)A No.185(B)/2018 to add, the TPO shall 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 oppor....
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....this company as not comparable company. The Tribunal while adjudicating of exclusion of this company in paragraph 14.3 of its order held that on application of employee cost filter that the Assessee has failed to show as to how the findings of the TPO and DRP are not correct. 2. The assessee has pointed out certain facts with regard to employee cost and diminishing revenue of this company which takes it out of the comparability and these aspects have not been considered by the Tribunal in its order. On the above objections in the MA, the Tribunal held as follows:- "8. We have examined the contents in the misc. petition and we find that there has been omission to consider the application of employee cost filter by the Tribunal though attention of the Bench was invited to relevant 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 ....
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.... annual report and as per the information gathered u/s. 133(6). In view of above discussion, we hold that Excel Infoways Ltd. cannot be considered as comparable and should be excluded from the list of comparables. We hold and direct accordingly". From the above observation by coordinate bench, objection raised by Ld.CIT DR stands clarified, as this company for year under consideration made a statement under 133 (6) regarding allocating entire employee cost to IT-BPO segment, with no allocation to other segment, which amounts to almost 49% of its total revenue during the year under consideration. At this stage, we clarify that, we are not inclined to express our opinion regarding functional similarities/dissimilarity of this company with that of present assessee before us and the same is kept open to be considered in 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 exclusio....
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....se of Wipro Ltd (ITA No.3202/2005) and also the decision rendered by the co-ordinate bench in the case of Sanyo LSI Technology India Pvt Ltd (ITA No.977/Bang/2010 dated 13-05-2011. The decision rendered by the co-ordinate bench in the case of Sanyo LSI Technology India P Ltd (supra) is extracted below:- "8.1.4. Reverting back to the issue under consideration, on the facts and circumstances of the issue, we are of the considered view that the foreign exchange fluctuation gain was directly related to the export activity of the assessee. Assuming that the assessee had not ventured to do any export sales, the question of foreign exchange gain didn't arise. As such, the foreign exchange fluctuation had direct nexus with the STPI U/T of the assessee which has been rightly included by the assessee as part of profits of the U/T for the purpose of computation 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 exchang....
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....ign exchange gain was income derived by export business of the assessee, and, hence, eligible for deduction u/s 10A of the Act; & (ii) the foreign exchange gains has to be taxed under the head 'income from business and profession'. It is ordered accordingly." Following the above said decision, we direct the AO to consider foreign exchange gains realised on export proceeds as income derived from export and allow deduction u/s 10AA of the Act. 23. The next issue relates to the action of the AO in setting off of brought forward losses prior to computing deduction u/s 10AA of the Act. The ld A.R submitted that the Hon'ble Supreme Court has held in the case of Yokogawa India Ltd (2017)(77 taxmann.com 41) has held that the stage of deduction u/s 10A would be while computing gross total income of eligible undertaking under Chapter IV of the Act and not at stage of computation of total income. 24. We heard Ld 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, a....
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....mium account or other reserves (other than revaluation reserve). These provisions do not permit debiting the amount paid to profit and loss account for the year. So there is no infirmity in the order of the AO and the objection of the assessee is not accepted." 4.2.3 Aggrieved by the directions of the DRP, the assessee is in appeal before the Tribunal. 4.2.4 The ld. AR submitted that the issue in question is decided in favour of assessee by the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Motor Industries Co. Ltd. - ITA No.1064/2008 judgment dated 31.10.2014 (Karnataka High Court). 4.2.5 The ld. DR supported the orders of income-tax authorities. 4.2.6 We have heard the rival submissions and perused the material on record. The Hon'ble High Court of Karnataka in the case of CIT v. Motor Industries Co. Ltd. (supra) has held as follows:- "26. The increase in the capital results in expansion of the capital base of the company 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 ....