ACIT, CIRCLE-17(1), HYDERABAD, HYDERABAD vs. DST WORLDWIDE SERVICES INDIA PVT. LTD., HYDERABAD, HYDERABAD

Brief facts of the case are that the assessee company, engaged in the business of providing software development and IT enabled services, filed its e-return for the A.Y 2010-11 on 07.10.2010 declaring total income of Rs.1,67,92,830. Since the assessee had entered into international transactions with its AE, the determination of the ALP of the said transaction was referred to the TPO u/s 92CA(3) of the Act. The TPO vide order dated 21.01.2014 proposed an adjustment of Rs.1,62,05,938. In accordance with the order of the TPO, a draft assessment order was proposed against which the assessee filed its objections before the DRP. The DRP granted partial relief to the assessee and against the relief granted by the DRP, the Revenue is in appeal before us by raising the following grounds of appeal: “1. The order of ORP is erroneous both in law and facts of the case. 2. Whether on the facts and in the circumstances of the case, the ORP is justified in rejecting M/s Infosys BPO Ltd and M/s TCS-E-Serve limited as comparable companies on the ground of exceptionally large scale of operations and thereby ignoring the fact that high or low turnover do not influence the margins of the comparables? 3. Whether on the facts and circumstances of the case, the ORP is justified in deleting M/s e-Clerx Services Ltd regarded as KPO by ITAT ignoring the fact that such a minute comparison reduces transfer pricing study to comparison between replicas of companies? 4. Whether on the facts and circumstances of the case, the ORP is right in law in directing the Assessing Officer to take export turnover of rupees 63,40,59,883/instead of 65,97,10,413/-taken by the Assessing Officer to calculate benefit under section 10A. 5. Whether on the facts and circumstances of the case, the ORP is right in law in directing the Assessing Officer to take Rs. 21,68,353/- as Communication expenses ignoring the fact that the Assessing Officer had rightly taken the amount of Rs. 39,03,927/- towards communication expenses debited under the head 'Internation Privately Leased Circuit and Internet Charges. I

Grounds 1 & 7 are general in nature and need no adjudication.

As regards Grounds 2 and 3 are concerned, it is the case of the Revenue that the DRP should not have rejected M/s. Infosys BPO, M/s. TCS-E-Serve Ltd as comparable companies on the ground of exceptionally large scale of operation and should not have rejected M/s. e-Clerx Services Ltd, by regarding it as KPO.

The learned DR supported the orders of the AO and the TPO, while the learned Counsel for the assessee supported the orders of the DRP and also placed reliance upon the decisions of various Benches of the ITAT, wherein the above three companies were considered and directed to be excluded on the above grounds.

Having regard to the rival contentions and the material on record, we find that the TPO, after making the FAR analysis, has held the assessee to be an ITES provider. After aggregating the transactions, the operating revenue was arrived at Rs.66,44,89,983, whereas, as seen from the financials of Infosys

As far as Grounds 4 to 6 are concerned, we find that these grounds are now covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT vs. HCL Technologies Ltd in CIVIL APPEAL NO. 8535 and others of 2013, dated 24th April, 2018 wherein it was has held that while computing the deduction u/s 10A of the Act, if any expenditure is

The assessee has raised the following objections: “1. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in making an addition of Rs.42,68,103 to the provision of Information Technology enabled services and in doing so, the Ld. AO erred in not granting the benefit of the proviso to section 92C(2) the Act. 2. On the facts and in the circumstances of the case and in law, the Ld. DRP and Ld. AO erred including companies namely TCS e-Serve International Ltd. and Accentia Technologies Ltd. in the comparability analysis which are different from the Cross-objector in functions, asset base and risk profile. 3. On the facts and in the circumstances of the case and in law, the Ld. DRP and Ld. AO erred in not granting adjustment on account of risk differential between the Cross-objector and the comparable companies. 4. On the facts and in the circumstances of the case and in law, the Ld. DRP and Ld. AO erred in excluding the telecommunication expenses, being 'Data Com- Connectivity' expenses amounting to Rs 39,03,927 while computing deduction under section 10A of the Act. 5. Without prejudice to above, even assuming but not admitting that the above telecommunication expenses incurred in foreign currency are to be reduced from Export Turnover and Total Turnover, the Ld. AO erred in considering a higher amount for the telecommunication expenses as Rs.39,03,927 whereas the expenses pertaining to the telecommunication expenses were Rs.21,68,353”. 10. As regards the ground No.1, the assessee is aggrieved because the AO has not given the benefit of the proviso to sub-

As regards Ground Nos. 2 & 3, we find that the assessee is seeking exclusion of these two companies on the ground of functional dissimilarity. However, by exclusion of three companies by the DRP, which is confirmed by us in the Revenue’s appeal, the assessee’s margin falls within +_5% of the average margin of the comparables and the adjudication about the comparability of these two companies at this stage will only result in an academic exercise. Therefore, the said grounds are not adjudicated at this stage and accordingly rejected.

As regards the grounds 4 & 5, we find that in the Revenue’s appeal, we have already held that the telecommunication charges have to be excluded from both the export as well as total turnover. We however, direct the AO to consider the correct figure for such exclusion. Therefore, grounds are treated as partly allowed for statistical purposes. 13. In the result, Revenue’s appeal is dismissed, while cross objections of the assessee are partly allowed. Pronounced in the Open Court on 18th July, 2018.