M/S.ALLIANZ CORNHILL INFORMATION SERVICES P. LTD,TRIVANDRUM vs. JTCIT, TRIVANDRUM

PER CHANDRA POOJARI: AM These cross appeals filed by the assessee and the Revenue are directed against the directions passed u/s. 144C(5) of the Income Tax Act, 1961 by Dispute Resolution Panel-2, Bengaluru dated 18/12/2014 and pertain to the assessment year 2010-11.

2. The assessee has raised the following grounds of appeal:

1 Non-allowance of prior period income in the computation of margins of the Company Relief

• The Assessing officer has assessed the same as current year income while the TPO has excluded the same in the computation of margins of the Company for the FY 2009-10.

2 Erroneous data used by the TPO

• The learned TPO erred in law and on facts in disregarding the application of multiple-year data while computing the margins of alleged comparable companies as such data had an influence in determining the transfer pricing policy of the Assessee.

3 Determination of arm's length price by the TPO in relation to the ‘Software Development Services’ segment

• The TPO erred in law in not rejecting certain companies originally selected as comparables in the TP study even though the underlying functional/ business profile of those companies squarely disqualified them being comparables.

185/Coch/2015 The TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparable to the Assessee, without establishing functional comparability.

The TPO also erred on facts in arbitrarily accepting companies without considering companies having varied turnovers, difference in the size and scale of operations which have a direct impact on their profitability considering the upper turnover filter.

The TPO erred in not considering the upper turnover filter of INR 200 crores as the turnover of the assessee in IT segment is only INR 39.6 crores compared to the comparable.

The TPO also erred on facts in wrongly computing the margins of certain companies

4. Determination of Arm’s Length price by the TPO in relation to the 'ITeS' segment

The TPO erred in law in not rejecting certain companies originally selected as comparables in the TP study even though the underlying functional/ business profile of those companies squarely disqualified them being comparables

The TPO erred in law in arriving at new companies as comparable to the Assessee, without establishing functional comparability

The TPO also erred on facts in arbitrarily accepting companies without considering companies having varied turnovers, difference in the size and scale of operations which have a direct impact on their profitability considering the upper turnover filter.

The TPO erred in accepting abnormal profit making companies as comparables. The TPO also erred on facts in wrongly computing the margins of certain companies.

5. Non allowance of Foreign Exchange gain or loss as Operating item

DRP directed AO to consider foreign exchange fluctuation in respect of reinstatement of the receivables and payables as operating in nature.

AO has rejected the same on the grounds of non-availability of data and considered the whole of foreign exchange gain or loss as non-operating in nature.

6. Non allowance of appropriate adjustments to the comparable companies by the TPO

The TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices (b) marketing expenditure adjustment risk profile between the Assessee and the comparable companies.

7. Variation of 5% from the arithmetic mean.

The TPO erred in law in not granting the variation as per the proviso to Section 92C(2) of the Act.

8. Disallowance of tax holiday section 10B of the Act

On the facts and in the circumstances of the case and in law, the learned Joint Commissioner of Income-tax ("JCIT") on direction made by the Dispute Resolution Panel ('DRP') has erred in disallowing Rs. I4,19,80,333/- claimed by the Company as deduction under section 10B of the Act.

On the facts and in the circumstances of the case and in law, the learned JCIT and DRP has wrongly adopted a position that, approval from Inter Ministerial Standing Committee ("IMSC") constituted under section 14 of Industries (Development and Regulation) Act, 1951 ["IDRA"] is not valid for the purpose of section 10B of the Act, disregarding the fact that IMSC is constituted under section 14 of the IDRA, as stipulated for the purpose of section 10B of the Act.

On the facts and in the circumstances of the case and in law, the learned JCIT and DRP has erred in disregarding the fact that once STPI approves the unit as a 100% export oriented undertaking, the Company should be allowed the bonafide claims of related income tax benefits under the Act as the doctrine of indoor management is equally applicable to public law. On the facts and in the circumstances of the case and in law, the learned JCIT and DRP has violated the settled position of law that tax holiday contemplated for a block period, which was consistently allowed in earlier years, cannot be disallowed in subsequent years in the absence of change in the related facts.

185/Coch/2015 Without prejudice to the above, the impugned order is bad in law in so far as learned JCIT and DRP vide the said order has not specifically refuted the submissions made by the Company in respect of the points of contention under this Ground.

Without prejudice to the above, the learned JCIT and DRP while disallowing the deduction under section 10B of the Act, has erred in law and on facts in not allowing the alternate claim of deduction under section 10A of the Act, which is para materia as that of section 10B of the Act, made by the Assessee in the course of assessment proceedings.

Without prejudice to the above, the learned JCIT and DRP has erred in rejecting the alternate claim made under section 10A of the Act on the ground that the same is contingent in nature and should have been made through filing return and not in the course of assessment.

Without prejudice to the above, the learned JCIT's and DRP's action in not granting the alternate claim of deduction under section 10A of the Act is in violation of CBDT Circular 14 (XL-35) dated 11 April 1955.

10. Other Grounds Without prejudice to the above, the learned JCIT has erred in considering the refund made to the assesse as amounting to Rs.29,02,771, whereas the actual refund received for the subject AY amounts to Rs.26,87,117.

Without prejudice to the above, the learned JCIT has erred in computing interest under section 234D on the refund made as erroneously considered in the assessment order whereas the same needs to be computed on the actual refund received.

Without prejudice to the above, the learned JCIT has erred in recovering interest under section 244A to the extent of Rs.1,88,676 from the petitioner when the same had not been granted for the subject AY.

The learned JCIT has erred in initiating penalty proceedings u/s. 271(1)© of the Act.

Relief

185/Coch/2015 12. The Assessee prays that the Assessing Officer be directed to grant all such relief arising from the proceeding grounds as also all relief consequential thereof.

The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal.

3. Ground Nos. 2, 6, 7 and 8 were not pressed by the assessee before us and hence, they are dismissed as not pressed.

4. The first Ground, Ground No. 1 is with regard to prior period income of the company in the software development and ITeS segment for determination of ALP.

4.1 The facts of the issue are that the prior period income (which are of the nature of income from services, excess gratuity accounted in the previous year rectified and rent expenses) amounting to Rs.55,451,678/- was not considered while computing the margin of F.Y. 2009-10. The TPO was of the view that the prior period adjustment was a result of material error discovered in Financial Statement of a prior period that had already been published and this was a below the line item which had no effect on the current period net income.

5.2 On appeal, the DRP confirmed the findings of the TPO that the TP study was undertaken of a particular year, in order to compare Arm’s Length Margin

185/Coch/2015 based on independent comparables considering the fact that the operating cost of the income pertaining to prior period was debited in the preceding year and there is no rationale to treat the prior period income as part of the operating revenue of subsequent year. As regards granting of benefit in the preceding assessment year, the DRP observed that their jurisdiction was to decide the variation of the income relating to the relevant assessment year.

5.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the prior period income pertained to income which should have been accrued in the books in the F.Y. 2008-09 and the same was invoiced only in FY 2009-10. According to the Ld. AR, since it was not accrued in the books in FY 2008-09, the same was accounted as prior period income in the FY 2009-10. It was submitted that the operating margins of the Company for transfer pricing purposes are computed based on the books and not based on tax books and the prior period income was accounted in the books only in FY 2009-10 and hence, must be considered in this year. According to the Ld. AR, the Company had disclosed the said prior period income in the Form 3CEB for FY 2009-10 and this income had not yet been tested for arm’s length compliance neither in FY 2009- 10 nor in FY 2008-09. Hence, it was submitted that the same be considered in computation of margins for the current year. For this purpose, the Ld. AR relied on the following case laws wherein it was held that in the context of MAT, prior

185/Coch/2015 period income should be considered in the year in which the same is recorded in the books. Since TP margins are also based on books, the same is relevant.

1) Khaitan Chemicals and Fertilizers Limited (175 taxman 195 (Delhi) 2) Tamil Nadu Cements Corporation Limited TC(A) No. 1123 of 2005.

The Ld. AR also relied on the decision of Tribunal in the case of Sony India Private Limited vs. DCIT in dated 23/08/2008. The Ld. AR also relied on the decision of Tribunal in the case of Nalco Water India Limited vs. ACIT in ITA No. 742/Pun/2017 dated 06/09/2019 wherein it was held that wherein it was held that subvention income given by parent Company to subsidiary has to be treated as operating in nature and has to be included as operating revenue while computing PLI of assessee.

5.4 The Ld. DR relied on the order of the DRP.

5.5 We have heard the rival submissions and perused the material on record.

There is no dispute that the amount of Rs.55,451,678/- is the prior period income relevant to the assessment year 2009-10. All the expenses relating to this income had already been accounted for in the earlier assessment year 2009-

185/Coch/2015 Length Margin based on independent comparables considering the fact that the operating cost of the income pertaining to prior period was debited in the preceding year and the prior period income cannot be treated as part of the operating revenue of subsequent year. We have also gone through the case laws relied upon by the Ld. AR which were delivered in different context and have no application to the facts of the present case. Hence, this ground of appeal of the assessee is rejected.

6. The next ground is with regard to determination of arm’s length by the TPO in relation to the software development services segment.

6.1 The facts of the issue are that assessee has challenged the inclusion of the following companies from the list of comparables:

6.2 Larsen & Turbo Infotech Ltd. The facts of the issue are that from the Annual Report of the Financial Year, the DRP noticed that during the year the assessee did not carry out assessment year engineering service business which was carried out till last Financial Year. The entire revenue during the year was from IT services. The annual report does not indicate that it had rendered any other services other than the software development services and the entire revenue was shown against IT services. Thus, the DRP rejected the exclusion of the above company from the list of comparables.

6.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the turnover of this comparable is 45 times the turnover of the IT segment of the assessee company. The turnover of the assessee company was only INR 39.61 crores as against that of this company whose turnover was Rs.1787.2 crores which is more than 10 times and hence, should be excluded from the list of comparables. It was submitted that there was functional dissimilarity as cost of bought out items for resale and segmental details were not available for this comparable. Moreover, this company had significant presence of onsite services and development of in-house intangibles. The comparable had also huge brand value and predominant presence in the market. The Ld. AR relied on the judgment of the Karnataka High Court in the case of Acusis Software India Private Limited vs. ITO in wherein it was held that a tolerance range of 10 times on both sides of the assesses turnover should be applied. The Ld. AR also relied on the decision of the Tribunal in the case of M/s. Electronic Arts Games India Pvt. Ltd. vs. CIT in ITA No. 380/Hyd/2015 dated 30/09/2016 (Hyd) wherein it was held that segmental data was not available. The Ld. AR also relied on the decision of the Tribunal in the case of Cerner Healthcare Solutions (P) Ltd. in IT(TP)A No.44/Bang/2015 dated 16/01/2017 wherein it was held that Larsen & Toubro Infotech Ltd. was held to be functionally different and owned huge brand value along with significant intangibles.

185/Coch/2015 6.4 We have heard the rival submissions and perused the material on record.

We find this issue is covered by the decision of the Tribunal in the case of M/s.

Electronic Arts Games India Pvt. Ltd. vs. CIT in dated 30/09/2016 (Hyd.) wherein it was observed that Larsen &Toubro Infotech Ltd. is functionally different from the assessee company and also there is significant onsite services. It was observed that there is no segmental data available coupled with L & T Infotech Ltd. is having huge brand value. Hence, it cannot be compared with the assessee company.

6.5 In view of the above order of the Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables. This ground of appeal of the assessee is allowed.

7. iGATE Global Solutions Ltd. The Ld. AR submitted that the turnover of this company is more than 22 times the turnover of the assessee. It was submitted that the turnover of the assessee was only INR 39.61 crores as against that of this company at Rs. 893.4 crores which is more than 10 times of the assessee and hence, it should be excluded. The Ld. AR relied on the judgment of the Karnataka High Court in the case of Acusis Software India Private Limited vs. ITO in wherein it was held that a tolerance range of 10 times on both sides of the assesses turnover should be applied. The Ld. AR relied on the decision of the Tribunal in the case of Zafin Software Centre of Excellence vs.

185/Coch/2015 ACIT in IT(TP)A No. 331/Coch/2017 dated 16/05/2018 for the assessment year 2013-14. The Ld. AR relied on the decision of the Tribunal in the case of M/s.

Rampgreen Solutions Ltd. since iGATE Solutions Ltd. loses the tag of comparability due to amalgamation merges etc. The ld. AR also relied on the decision of the Tribunal in the case of ACIT vs. M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A No. 04/Bang/2012 dated 18/03/2016 (Bang).

7.1 We have heard the rival submissions. We find this issue does not arise from the direction of the DRP or the order of the TPO. Against this comparable, the assessee has not raised any objection before the DRP. Hence, this issue does not arise out of the direction of the DRP. Accordingly, this ground of appeal of the assessee is rejected.

185/Coch/2015 Ltd. vs. ACIT (6) TMI 746 (DEL) and the decision of the Tribunal in the case of M/s. Philips India Ltd. vs. DCIT 2017 (2) TMI 1337 (Kol).

8.1 We have heard the rival submissions. We find this issue does not arise from the direction of the DRP or the order of the TPO. Against this comparable, the assessee has not raised any objection before the DRP. Hence, this issue does not arise out of the direction of the DRP. Accordingly, this ground of appeal of the assessee is rejected.

9.1 We have heard the rival submissions. We find this issue does not arise from the direction of the DRP or the order of the TPO. Against this comparable,

185/Coch/2015 the assessee has not raised any objection before the DRP. Hence, this issue does not arise out of the direction of the DRP. Accordingly, this ground of appeal of the assessee is rejected.

10. The next ground is with regard to determination of ALP in relation to the ITeS segment. The assessee was in appeal against the inclusion of the following comparables:

10.1 Informed Technologies India Ltd. The facts of the issue are that after perusing the Annual Report, the DRP noticed that the company was functionally comparable with the assessee and therefore, rejected the contention of the assessee 10.2 Against this, the assessee is in appeal before us. The Ld. AR submitted that the turnover of the assessee was only 0.07 times that of this company. The Ld. AR relied on the judgment of the Karnataka High Court in the case of Acusis Software India Private Limited vs. ITO in wherein it was held that a tolerance range of 10 times on both sides of the assesses turnover should be applied. It was submitted that the company was engaged in KPO services (financial research content, executive compensation data, book publications and data process. It was submitted that forex expenditure was 13.21% of operating cost and employee cost was 29.93% of total operating income as compared to 185/Coch/2015 59% of the assessee company and hence, it should be excluded. The Ld. AR relied on the decision of the Tribunal in the case of Aptara Technologies Pvt. Ltd. operating on different business model. The Ld. AR also relied on the decision of the Tribunal in the case of XM Software Private Limited vs. ACIT in wherein it was held that interest free loan to AE which is now irrecoverable, granting of loan to the related party directly affects the assessee’s profitability. Granting of the said loan to the related party is definitely prejudicial to the interest of the assessee.

10.3 We have heard the rival submissions and perused the material on record. The turnover of Informed Technologies India Ltd. is 2.14 crores as against the turnover of Rs.29.78 crores of the assessee company. By placing reliance on the judgment of the Karnataka High Court in the case of Acusis Software India Private Limited vs. ITO in this company cannot be comparable with the assessee company. Further, as seen from the paper book pg. no. 1073, Informed Technologies India Ltd. is not functionally comparable with the assessee company which is engaged in KPO services. As seen from paper book pg. no.1085, the employee cost ratio was low at 29.93% of total operating income as compared to 59% and onsite expenses was at 13.21% of operating cost. By placing reliance on the on the decision of the Tribunal in the case of Aptara Technologies Pvt. Ltd. ITA No. 259/PUN/2015 dated 31/05/2016 (Pune) we

185/Coch/2015 direct the A.O./TPO to exclude this company from the list of comparables. This ground of appeal of the assessee is allowed.

11. BNR Udyog Ltd. The facts of the issue are that DRP noticed that the related party do not have any connection with the ITeS and the assessee failed to contradict the finding of the TPO and hence, the DRP rejected the assessee’s contention to exclude this company from the list of comparables.

11.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that the turnover of the assessee was INR 29.78 crores as against that of this company whose turnover was INR Rs.1.45 crores which is less than 10 times of the assessee and hence, should be excluded from the list of comparables. The Ld. AR relied on the judgment of Karnataka High Court in the case of in the case of Acusis Software India Private Limited vs. ITO in wherein it was held that a tolerance range of 10 times on both sides of the assesses turnover should be applied. The Ld. AR submitted that this company was functionally dissimilar as it was engaged in medical transcription and it has significant related party transactions which is 739.62% of operating revenue and hence, it should be excluded from the list of comparables. The Ld. AR relied on the following case laws:

1. M/s. Arctern Consulting Pvt. Ltd. vs. DCIT IT(TP)A No. 352/Bang/2017 which is engaged in medical transcription.

185/Coch/2015 2. Teradata India Private Limited vs. DCIT (Delhi Trib.) which is engaged in medical transcription.

3. DCIT vs. PTC Software (India) Private Limited which fails RPT.

4. GTS e-Services Private Limited vs. ITO which is engaged in medical transcription.

11.2 We have heard the rival submissions and perused the material on record.

The turnover of BNR Udyog Ltd. was only INR 1.45 crores which is less than 10 times of the assessee’s turnover of INR 29.78 crores. By placing reliance on the judgment of Karnataka High Court in the case of Acusis Software India Private Limited vs. ITO in we are of the opinion that this company cannot be considered as comparable. We have gone through the paper book pg. no. 1122 which shows that BNR Udyog Ltd. is engaged in medical transcription, construction and financial activities as against the assessee’s activity which is software development and information technology enabled services. Being so, it is not functionally comparable with the assessee’s company. Further, related parties transactions carried on by BNR Udyog Ltd. is very significant. Hence, by placing reliance on the above decisions of the Tribunal cited by the Ld. AR, we are inclined to direct the Assessing Officer to exclude this company from the list of comparables. This ground of appeal of the assessee is allowed.

12.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that this company is engaged in providing software as a service as well as medical transcription. It was submitted that the company had undergone business restructuring during the F.Y. 2009-10 and amalgamation with Asscent Infoserve Private Limited. The figures for F.Y. 2009-10 are inclusive of figures of amalgamating company. The Ld. AR relied on the following case laws:

1. Aptara Technologies Pvt. Ltd. (TS-309-ITAT-2016(PUN) wherein it was held that it was not comparable as extraordinary events took place in the said concern.

2. Hyundai Motors India Engineering P. Ltd. vs. ACIT (ITA No. 1743/Hyd/2014) wherein it was held that it was not comparable as extraordinary events took place in the said concern.

3. Cummins Turbo Technologies Limited, United Kingdom – India Branch vs. DCIT ITA No.438/PUN/2015.

4. GTS e-Services Private Limited vs. ITO which is engaged in medical transcription.

185/Coch/2015 12.2 We have heard the rival submissions and perused the material on record.

As seen from the paper book pg. nos. 1184, 1193 to 1201, 1225, 1227 and 1233, the company is engaged in medical transcription, medical coding and billing and receivable management services as against the assessee’s business of software development and providing information enabled services. No segmental data is available and the company has considerable intangible assets coupled with onsite activity which is 13.79% of the total operating cost. Further, the company had undergone business restructuring during the F.Y. 2009-10 and amalgamation with Asscent Infoserve Private Limited and figures for FY 2009-10 are inclusive of figures of amalgating company. By placing reliance on the decision of the Tribunal in the case of Aptara Technologies Pvt. Ltd. dated 31/05/2016, we are of the opinion that this company cannot be compared with the assessee company and accordingly, we direct the Assessing Officer/TPO to exclude this company from the list of comparables.

This ground of appeal of the assessee is allowed.

13. The next ground is with regard to disallowance of deduction u/s. 10B of the I.T. Act and alternate claim of allowing deduction u/s. 10A of the I.T. Act.

13.1 The facts of the issue are that the Assessing Officer rejected the alternate claim of granting deduction u/s. 10A of the I.T. Act by relying on the judgment of the Supreme Court in the case of Goetze (India) Limited (284 ITR 323). The 185/Coch/2015 Assessing Officer further held that the alternate claim is only possible through filing of return and not in the course of assessment proceedings. The Assessing Officer rejected the alternate claim on the ground that the assessee was claiming exemption under a different section of the Act.

13.2 On appeal, the DRP relied on the judgment of the Delhi High Court in the case of Regency Creations Ltd. (255 CTR 63) wherein it was held that for the purpose of section 10B of the I.T. Act, 100% EOU is only the undertaking which is so approved by the Board appointed by the Central Government in exercise of powers conferred u/s. 40 of Industries (Development & Regulation) Act, 1951 and not the undertaking having approved by Director STPI. The DRP stated that the issue was considered by it for the assessment year 2009-10 and the disallowance of deduction u/s. 10B was upheld. Regarding alternate claim of deduction u/s. 10A, the DRP confirmed the findings of the Assessing Officer.

13.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the DRP and the A.O. was bound to examine and grant the alternative claim u/s. 10A of the Act to the assessee as per the CBDT Circular No. 14(XL-35) dated 11 April 1955 and the judgment of the Bombay High Court in the case of Vodafone India Services Pvt. Ltd. WP 1877 of 2013. The Ld. AR relied on the judgment of the Apex Court in the case of National Thermal Power Co. Ltd. (229 ITR 383) wherein it was held that the Tribunal is also vested with jurisdiction to 185/Coch/2015 grant alternate claim available for the company u/s. 10A. It was also submitted that section 10A of the Act is pari material with section 10B of the Act. For this purpose, the ld. AR relied on the following case laws:

1. M/s. US Technology International Pvt. Ltd. vs. JCIT in dated 19/04/2018.

13.4 Further, the Ld. AR relied on the judgment of the Jurisdictional High Court in the case of CIT vs. Flytxt Technology (P) Ltd. in & 77 of 2015 wherein the alternate claim for exemption u/s. 10A of the Act granted by the Tribunal was upheld.

13.4 We have heard the rival submissions and perused the record. A similar issue was considered by the Jurisdictional High Court in the case of CIT vs. Flytxt Technology (P) Ltd. 87 taxmann.com 77 where it was held as follows:

“6. We have considered the submissions made. Admittedly, the assessee initially claimed the benefit of Section 10B which was allowed by the Assessing Officer. Only when the Commissioner was seized of the proceedings under Section 263, the assessee raised an alternative claim for the benefit of Section 10A. The Commissioner did not examine that plea and on the other hand, directed the Assessing Officer to withdraw the 185/Coch/2015 exemption under Section 10B. It was this order which was challenged by the assessees in the appeals filed by them before the Tribunal. Such an appeal filed by the assessee is liable to be considered by the Tribunal exercising its power under Section 254 of the Act which obliged the Tribunal to consider appeal and pass such orders thereon as it thinks fit. It was this power of the Tribunal which considered by the Apex Court in National Thermal Power Co. Ltd.'s case (supra) which held that the Tribunal is only required to consider the questions of law arising from the facts which are on record, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. Even if the contention raised by the learned Senior Counsel for the revenue that the power conferred on the appellants under Section 263 only authorised him to examine whether the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the revenue, that restriction of power cannot affect the powers of the Tribunal which is bound to exercise under Section 254 of the Act. In such a situation, having regard to the language of Section 254 and as interpreted by the Apex Court in National Thermal Power Co. Ltd.'s case (supra), we do not see any reason to think that the Tribunal has committed an illegality by directing the Assessing Officer to decide the matter afresh duly adverting to the claim of the assessee for the benefit of Section 10A.

In the aforesaid circumstances, we do not find any illegality in the order passed by the Tribunal. Therefore, the questions of law framed have to be answered in favour of the assessee and against revenue. Accordingly, the appeals are dismissed.”

185/Coch/2015 13.5 In view of the above judgment of the Jurisdictional High Court in the case of CIT vs. Flytxt Technology (P) Ltd. supra, this ground of appeal of the assessee is allowed.

14. The next ground is with regard to treatment of foreign exchange fluctuation gain or loss.

14.1 The facts of the case are that the DRP observed that foreign exchange fluctuation in respect of reinstatement on account of receivables and payables should be considered as operating in nature. The DRP relied on the following judicial pronouncements: i) Curram Software International (P) Ltd. in ITA No. 1280/Bang./2012 in which it was held that foreign exchange gain is to be treated as operating income in view of the facts of the case and the margins are to be computed accordingly. ii) SAP Labs India (P) Ltd. vs. ACIT 44SOT 156 (Bang.) in which it was held that the foreign exchange fluctuation gain is nothing but an integral part of the sales proceeds of a assessee carrying on export business. iii) Shah Brothers vs. Cit (259 ITR 741) (Bom.) and CIT vs. Ambha Infex (284 ITR 144) (Guj.) and ACIT vs. Prakash L. Shah (306 ITR (AT) 01) (Mum. SB) wherein it was held that foreign exchange fluctuation gains computed by teh assessee in a relevant previous year should be treated as part of the operating income and thereby it would contribute to the operating margin of the assessee company. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company.

Thus, the DRP directed the Assessing Officer to compute the margin of the assessee company as well as the companies in accordance with above findings.

14.2 In the TPO order giving effect to DRP direction, the TPO observed that as the assessee had entered into lot of derivative contracts and from the break up of forex from receivables ad payables, it was not possible to ascertain profit and loss.

14.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee had not entered into any derivative contracts during the year which is evident from Notes to Accounts of the assessee for FY 2009-10. It was specifically mentioned that there were no outstanding derivative instruments as on balance sheet date. Further, it was submitted that the only foreign currency exposure the assessee had was with regard to reinstatement of receivables and payables which the DRP had clearly held as operating in nature. The Ld. AR submitted that the TPO’s argument that the details with regard to break up of foreign exchange gain for comparable companies cannot be determined and hence, the same should not be considered in computing the operating margin of the company as well as the comparables is incorrect since the prudent approach would have been to consider foreign exchange gain as operating given that the entire foreign exchange gain or loss pertains to the operations. Thus, it was submitted that foreign exchange gain or loss must be considered as operating.

The Ld. AR relied on the following case laws:

185/Coch/2015 i) Infac India P. Ltd. DCIT in IT(TP)A No. 27/Cheny/2018 dated 05/10/2018 ii) M/s. Ambattur Clothing Ltd. vs. JCIT & 1643/mds/2014 and 910/Mds/2015 dated 28/12/2015 (Chennai Trib.)

14.4 The ld. DR relied on the order of the TPO.

14.5 We have heard the rival submissions and perused the material on record.

Regarding foreign fluctuation expenses, the Ld. AR strongly relied on the order of the ITAT, Chennai in the case of India Pvt. Ltd. vs. DCIT in IT(TP)A No. 27/Chennai/2018 dated 05/10/2018 wherein it was held as under:

“8. We have considered the rival submissions on either side and perused the relevant material available on record. An identical issue was considered by the co-ordinate Bench of this Tribunal after referring to safe Harbour Rules, found that the loss incurred by the assessee in foreign exchange fluctuation due to international transaction does not give any extra benefit to the Associated Enterprise who supplies the material. The loss arose due to exchange difference between the foreign currency and Indian currency. Therefore, the co-ordinate Bench of this Tribunal found that the foreign exchange loss or gain has to be excluded from operating income. In view of the decision of co-ordinate bench of this Tribunal in Hanil Tube India Pvt. Ltd.(supra), this Tribunal is of the considered opinion that the profit or loss due to foreign exchange fluctuation has to be excluded from the operating income for the purpose of PLI. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to exclude the loss or gain in foreign exchange fluctuation from the operating income for computing PLI.”

The Ld. AR also relied on the order of the ITAT, Chennai in the case of DCIT vs. Hanil tube India Pvt. Ltd. in dated 22/02/2017 wherein it was held as follows:

“8. We have considered the rival submissions on either side and perused 1the relevant material available on record. An identical issue was considered by the co-ordinate Bench of this Tribunal in Hanil Tube India

185/Coch/2015 Pvt. Ltd. (supra). This Tribunal after referring to safe Harbor Rules, found that the loss incurred by the assessee in foreign exchange fluctuation due to international transaction does not give any extra benefit to the Associated Enterprise who supplies the material. The loss arose due to exchange difference between the foreign currency and Indian currency. Therefore, the co-ordinate Bench of this Tribunal found that the foreign exchange loss or gain has to be excluded from operating income. In view of the decision of co-ordinate Bench of this Tribunal in Hanil Tube India Pvt. Ltd. (supra), this Tribunal is of the considered opinion that the profit or loss due to foreign exchange fluctuation has to be excluded from the operating income for the purpose of PLI. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to exclude the loss or gain in foreign exchange fluctuation from the operating income for computing PLI.

14.6 In view of the above decisions of the Tribunal, we direct the Assessing Officer to exclude the gain or loss on account of foreign fluctuation from the operating expenses for computing the profit and loss. This ground of appeal of the assessee is partly allowed. : Revenue’s Appeal : AY 2010-11

2. The learned Dispute Resolution Panel-1, Bangalore has erred in allowing working capital adjustment to the assessee. The assessee has negative working capital. Working capital adjustments are primarily given to account for difference in the working capital Inputs. Since the assessee is a captive service provider, its debtors and creditors are Associate Enterprises. The assessee has not also incurred any interest expenditure. Thus, the assessee is not eligible for working capital adjustments, reliance is placed on the decision ITAT, Chennai In the case of Mobis India Pvt Ltd.

185/Coch/2015 3. The ld Dispute Resolution Panel had directed to exclude certain companies in the IT segment as they have substantial onsite revenues. However the DRP has not fixed an upper filter for onsite revenue. The filter for onsite revenue is generally taken as 75%, The ld DRP ought to have noted that even though there are functional differences between onsite development and offshore development of software, the same is not significant to exclude comparables generating onsite revenue. In the decisions of various ITATs in the cases of Trilogy E-Business Software India Pvt Ltd Vs DCIT(2013) 29 taxmann.com 310 Bang): 2013) 140 ITD 540 (Bang) , United Online Software Development (India) Pvt Ltd (TS-22-ITAT- 2014)(Hyd-TP) and Hello Soft India Pvt Ltd (TS-59-ITAT-2013J(Hyd-TP), the application of the 75% onsite revenue filter was upheld.

4. The ld. DRP ought to have observed that suitability of FCS Software Solutions Ltd as a comparable was upheld in the case of Navisite India Ltd vs ITO (TS-193-ITAT-2013)(Del).

7. For these and other grounds that may be advanced at the time of hearing the order of the learned Dispute Resolution Panel-1, Bangalore may be set aside and that of the Assessing Officer restored.

“29. Coming to the aspect of adjustment pleaded by the assessee for negative working capital, no doubt, in the case of Demag Cranes & Components (India) (P) Ltd, (supra), it was held that adjustment had to be granted for eliminating material effects, if any, arising out of difference in working capital between tested party and comparables. Nevertheless, we find from the said decision that the plea regarding adjustment for working capital was first raised before DRP and the DRP had decided the issue without realizing that this was never adjudicated by the TPO. As per the assessee, it was having negative working capital as against substantial positive working capital enjoyed by the comparables. If the assessee is able to demonstrate that negative working capital had effected its margins, adjustment should have been made. Assessee has indeed filed before the DRP, margins of comparables adjusted for difference in working capital, but at no point of time it had given any reason why such adjustments were required. Assessee had made adjustment on inventories, debtors and creditors, which in its opinion, reflected the difference in working capital, based on OECD guidelines. Just because assessee relied on OECD guidelines, would not mean that the adjustment made by it were required, unless the impact could be demonstrated. Such a demonstration was never done by the assessee. Here it will be relevant to have a look at the narration given by the assessee with regard to the adjustment carried out for working capital, as appearing in its transfer pricing documentation. This reads as follows :-

"To elaborate, the adjustment is made by adding the debtor adjustment to sales and by adding creditor adjustment and subtracting inventory adjustment from Cost of Goods Sold for each comparable company. Here, the prime-lending rate was used as the appropriate cost of capital because it can be determined with reasonable accuracy and is the best available estimate of the cost of capital. For this purpose, the prime-lending rate of 12.50% for the year 2007, 10,80% for the year 2006 and 10.89% for the year 2005 published in CMIE and Reserve Bank of India publications were considered."

What were the debtor adjustment and creditor adjustment and how these were relevant have not been demonstrated by the assessee. We are thus of the opinion that the assessee has not been able to justify the adjustments that were required to be made on account of negative working capital.”

“5.3 We have heard the rival submissions and perused the record. The Ld. AR relied on the decision of the ITAT, Chennai Bench in the case of Foxtex Services India (P) Ltd. vs. ACIT in 74 taxman.com 216 where in it was held as under:

“7. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee objected to the adjustment made by the Transfer Pricing Officer. With regard to working capital adjustment, the assessee claims that the difference in working capital between the assessee and the comparable companies would materially affect the profit determined. Therefore, certain adjustment needs to be made to bring them on equal footing. The assessee also brought to the notice of the DRP that the working capital adjustment, which was to ensure the profit derived by the comparable companies, can be compared with the profit of the assessee. This Tribunal is of the considered opinion that the capital employed by the assessee, including the working capital, and that of comparable companies needs to be taken into consideration. Without comparing the working capital employed by the comparable companies and that of the assessee, this Tribunal is of the considered opinion that there cannot be any transfer pricing adjustment.”

5.4 In view of the above order of the Tribunal, we are inclined to direct the Assessing Officer to consider the working capital adjustment as computed by him while determining the ALP of international transactions of the assessee with its AEs. Hence, this ground of appeal taken by the assessee is partly allowed.”

185/Coch/2015 20.1 In view of the above order of the Tribunal in the case of Zafin Software Centre of Excellence Pvt. Ltd. vs. ACIT cited supra, we are inclined to dismiss this ground of appeal of the Revenue. Thus, this ground of appeal of the Revenue is dismissed.

21. The next ground is with regard to exclusion of certain comparables on application of upper turnover filter in ITes segment.

21.1 The facts of the case are that the DRP had directed to exclude certain companies in the IT segment as they have substantial onsite revenues. However, the DRP had not fixed an upper filter for onsite revenue. The filter for onsite revenue is generally taken at 75%.

21.2 Against this, the Revenue is in appeal before us. Regarding exclusion of some companies, the Ld. DR submitted that the DRP had not fixed an upper filter for onsite revenue. According to the Ld. DR, the filter for onsite revenue is generally taken at 75%. The Ld. DR submitted that though there are certain functional differences between onsite development and offshore developments of software, the same is not significant to completely exclude comparables generating onsite revenue. The Ld. DR relied on the decision of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. vs. DCIT 140 ITD 540 (Bang.) wherein it was held as under:

185/Coch/2015 “67. The companies who generate more than 75 percent of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services are located. Hence, the companies in which more than 75 percent of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO.”

21.3 According to the Ld. DR, in this case the taxpayer was engaged in the business of providing software development services to its AE and was captive unit operating on cost plus basis. The Ld. DR submitted that the TPO rejected the comparables selected by the taxpayer for the reason that they do not satisfy the onsite revenue filter i.e., if revenues of comparable companies from rendering onsite software exceed 75% of the total revenues of comparable companies from rendering onsite software exceed 75% of the total revenue or onsite expenses exceed 75% of expenses, then they should not be regarded as comparable to the taxpayer whose revenue is from rendering offshore software development services. According to the ld. DR, the ITAT upheld the adoption of 75% filter. He placed reliance on the decision of United Online Software Development (India) Pvt. Ltd.,(TS-22-lTAT-2014) (Hyd-TP), wherein the 185/Coch/2015 application of the 75% onsite revenue filter was upheld, as well as Hello Soft India P. Ltd,(TS-59-lTAT-(2013-Hyd-TP). The Ld. DR contended that in the case of TPO's comparables the onsite revenue percentage varies from 32% to 85% and no objective upper filter has been applied to exclude companies. The companies excluded by DRP on the basis of this criterion are FCS Software Solutions Limited, Mindtree Limited, Zylog Systems Ltd., Akshay Software 21.4 The Ld. AR relied on the order of the DRP.

21.5 We have heard the rival submissions and perused the record. We find force in the argument of the Ld. DR that the DRP ought to have fixed the upper filter for onsite revenue so as to exclude certain companies in ITeS segment. In our opinion, it is appropriate to fix the upper filter of 75% for onsite revenue so as to exclude certain companies. On this basis, we will examine each comparable as follows:

However, the segmental information in respect of all the segments was not 185/Coch/2015 available. Further, there remain huge unallocated expenses. The company was also engaged in on-site development of software which had influence on the margin of the above company. Accordingly, the DRP accepted the objection of the assessee and directed the Assessing Officer/TPO to exclude the above company from the comparables.

22.1 The Ld AR submitted that the company is engaged in Information Technology Consulting and Implementation and is structured in two units, i.e., product engineering services which comprises R & D services and IT services which encompasses consulting, implementation and post production services. It was also submitted that the company had incurred the expenses o the extent of 34.49% of the total revenue in foreign currency which include 38.59 crores in the branch offices outside India. It was also submitted that during the year Aztecsoft Limited had been amalgamated with effect from 1-4-2009, all the above facts made the company as not comparable.

185/Coch/2015 (i) In the case of Akshay Software Technologies Ltd., on the perusal of the Annual Report, the DRP found that out of the total operating expenses of Rs.11.33. crores incurred during the year, the expenses in foreign currency were incurred to the extent of Rs.9.57 crores which established that the company was predominantly engaged in development of software on-site.

(ii) In the case of LGS Global Limited, on the perusal of the annual report, the DRP noticed that out of operating expenses (excluding depreciation) of Rs.220 crores, the expenses to the extent of Rs.122 crores had been incurred in foreign currency (55%) which made it clear that the above company was predominantly engaged in the on site development of software. Further, earning from export Rs.117 crores as against the turnover of Rs.237 crores.

23.1 In view of the above, the DRP directed the Assessing Officer to also exclude Akshay Software Technologies Ltd and LGS Global Limited from the comparables of the TPO.

23.2 The Ld AR submitted that the company had earned more than 80% revenue from the on-site development of software, and therefore, need to be excluded from comparable.

23.3 We have heard the rival submissions and perused the material on record.

The Ld. DR contended that in the case of Akshay Software Technologies Ltd., 75% onsite filter must be applied since the company had onsite expenses of 85.49%. In the case of LGS Global Ltd., since the company incurred onsite expenses of 57% on total operating expenses, therefore, 75% onsite filter must be applied. In the case of Zylog Systems Ltd., 75% onsite filter must be applied since the company had expenses of 87.96%. In our opinion, it is appropriate to fix the upper filter of 75% for onsite revenue so as to exclude certain companies.

Since we have observed that upper filter for onsite revenue must be applied at 75%, the Assessing Officer is directed to examine the financials of each company with regard to upper filter for onsite revenue and exclude the same if the upper filter of onsite revenue is more than 75%. With this observation, we remit this issue with reference to the four comparables, i.e., Mindtree Ltd., Zylog System Ltd., Akshay Software Technologies Ltd. and LGS Global Ltd. to the file of the Assessing Officer for fresh consideration. This ground of appeal of the Revenue is partly allowed for statistical purposes.

24. The next ground is with regard to suitability of FCS Software Solutions Ltd. e24.1 On this issue, the DRP observed that no segmental information was available with regard to the software development and other services. It was further observed by the DRP that the company had foreign branches. Hence, the 185/Coch/2015 DRP held that this company cannot be retained as comparable and directed the Assessing Officer to exclude the company from the list of comparables.

24.2 Against this, the Revenue is in appeal before us. The Ld. DR submitted that suitability of FCS Software Solutions Ltd., as a comparable was upheld in the case of Navisite India Ltd. vs. ITO (TS-193 ITAT 2013 (DEL).

24.3 The Ld. AR submitted that the company was engaged in 3 segments, i.e., IT Consulting, Education and infrastructure, IT Consultancy Division provided application maintenance for which no segmental information was available. It was also submitted that the company was predominantly engaged in onsite development of software. It was also engaged in R&D and had significant intangibles. Further, the company had undergone restructuring during the year.

The Ld. AR relied on the decision of the Tribunal in the case of DCIT vs. Barclays Technology Centre India Pvt. Ltd. in dated 29/09/2017 on the reason that it was functionally different and no segmental information was available. He also relied on TIBCO Software India Pvt. Ltd. vs. DCIT. The DRP observed that no segmental information was available with regard to the software development and other services. Therefore, it was not appropriate to retain the above company as comparable.

185/Coch/2015 24.4 We have heard the rival submissions and perused the record. We do not find any infirmity in the order of the DRP in holding that this company cannot be retained as comparable since the company was engaged in 3 segments, i.e., IT Consulting, Education and infrastructure, IT Consultancy Division provided application maintenance for which no segmental information was available. It was also submitted that the company was predominantly engaged in onsite development of software. It was also engaged in R&D and had significant intangibles. Further, the company had undergone restructuring during the year.

By placing reliance on the decision of the Tribunal in the case of DCIT vs. Barclays Technology Centre India Pvt. Ltd. in dated 29/09/2017,we direct the Assessing Officer/TPO to exclude this company from the list of comparables. This ground of appeal of the Revenue is dismissed.

Hence, the DRP held that the TPO was not justified in retaining the above company and directed the Assessing Officer to exclude the company from the list of comparables.

25.1 Against this, the Revenue is in appeal before us. The Ld. DR submitted that Sasken Communication Technologies Limited was rejected for the reason that segmental information was not available. The Ld. DR submitted that 185/Coch/2015 software services comprises 94% of the total revenue of this company and the usual criterion adopted was to select companies which have atleast 50% of its total revenue from software services. Besides the non-software sector in this case contributes only 6% of the revenue.

25.2 The Ld. AR submitted that the company was engaged in software products. It was further submitted that the company had inventories amounting to Rs.1.66 crores which indicated that the company is not a purely software development company. Further, the company had undergone restructuring during the year. It was engaged in R&D and technology absorption and had significant intangibles. The Ld. AR relied on the decision of the Tribunal in the case of Cerner Healthcare Solutions P. Ltd. vs. ITO in IT(TP)A Nos.44 & 69/Bang/2015 dated 16/01/2017 and ITO vs. M/s. CSR India Pvt. Ltd. in IT(TP)A Nos.256 & 506/Bang/2015 dated 24/01/2018.

25.3 We have heard the rival submissions and perused the material on record.

We do not find any infirmity in the order of the CIT(A) in holding that that this company cannot be retained as comparable since it was engaged in software products and the company had inventories amounting to Rs.1.66 crores which indicated that the company is not a purely software development company.

Further, the company had undergone restructuring during the year and it was engaged in R&D and technology absorption and had significant intangibles. By 185/Coch/2015 placing reliance on the decisions of the Tribunal in the case of Cerner Healthcare Solutions P. Ltd. vs. ITO in IT(TP)A Nos.44 & 69/Bang/2015 dated 16/01/2017 (Bang.) and ITO vs. M/s. CSR India Pvt. Ltd. in IT(TP)A Nos.256 & 506/Bang/2015 dated 24/01/2018 (Bang), we direct the Assessing Officer/TPO to exclude this company from the list of comparables. This ground of appeal of the Revenue is dismissed.

"82. In so far as M/s Eclerx Services Limited is concerned, the relevant information is available in the form of annual report........................................A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognised as experts in chosen markets-financial services and retail and manufacturing........................................ These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s Eclerx Services Pvt Ltd and its functional profile, we are of the view that this company is also mainly engaged in providing high-

185/Coch/2015 end services involving specialised knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns".

26.1 The DRP also relied on the decision of the Tribunal in the case of First Advantage Offshore Services Private Limited Vs. DCIT in (Bang.) in which Eclerx was directed to be excluded as a comparable sighting the differences between a company engaged in the provision of BPO and KPO services:

"40. We have to now consider whether a BPO and a KPO are functionally similar and are comparable to each other. BPO is a subset of outsourcing and involves the contracting of the operations and responsibilities of specific business functions or process to a third party service provider. Often business process outsourcing are information technology based and referred to as ITE5-BPO. KPO is one of the sub-segment of the BPO industry. It involves outsourcing of core information related business activities which are competitively important or form an integral part of a company's value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist expertise. The KPO services include all kinds of research and information gathering. Thus it can be seen that even though both BPO and KPO are offering information technology based services, the skill and expertise and may be even the tools required are different which may result in different economic results of both the segments. Thus in such circumstances, we are of the opinion that they cannot be compared with each other and have to be excluded from the list of comparables". (Emphasis supplied)

26.2 The DRP relied on the decision of the Tribunal in the case of Symphony Marketing Solutions India Private Limited Vs. ITO [1TA No. 1316/Bang/2012]:

"(5) Eclerx Services Ltd.

20. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO.....................This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an 185/Coch/2015 occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:-

"14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that the concerned company is engaged in providing Knowledge Process Outsourcing (KPO) Services,"

"15. On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee."

26.3 Following the above decisions of the Tribunal as the functional profile of the above company remains the same, the DRP directed the Assessing Officer to exclude the above company from the comparables.

26.4 Against this, the Revenue is in appeal before us. The Ld. DR submitted that Eclrex Services Ltd. should be included as a comparable although it provides KPO services.

185/Coch/2015 26.5 The Ld. AR submitted that this company was not comparable with the assessee as it was engaged in providing KPO services and had abnormal profits and failed upper turnover filter. The company had related party transactions at 14.77% and incurred onsite expenses of 16.60%. the Ld. AR relied on the decision of the Tribunal in the case of Actis Global Services Pvt. Ltd. vs. ITO in dated10/12/2015 and Cummins Turbo Technologies Ltd., UK –India Branch vs. EDCIT in ITA No. 438/PUN/2015.

26.6 We have heard the rival submissions and perused the record. In this case, Eclerx Services Ltd. is engaged in IT enabled services which is nothing but KPO services. Being so, it is not functionally comparable with the assessee company when compared to the services rendered by the assessee company. Even otherwise it fails on account of turnover filter and on account of related party transactions which is at 14.77% and incurred onsite expenses of 16.60%. Being so, the DRP is justified in excluding this company from the list of comparables.

Accordingly, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. This ground of appeal of the revenue is dismissed.

185/Coch/2015 27. In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue is partly allowed for statistical purposes.