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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI A. T. VARKEY, JM & DR. A.L. SAINI, AM
Assessee by : Shri J.P. Khaitan, Sr. Advocate & Shri P. Jhunjhunwala, Advocate Revenue by : Shri Vijay Shankar, CIT सुनवाई क� तार�ख / Date of Hearing : 20/02/2020 घोषणा क� तार�ख/Date of Pronouncement : 10/06/2020 आदेश / O R D E R
Per Dr. A. L. Saini, AM:
The captioned appeal filed by the assessee, pertaining to Assessment Year 2011-12, is directed against the fair assessment order passed by the Assessing Officer u/s 143(3)/263 r.w.s. 144C of the Income Tax Act,1961, which incorporates the directions given by the Dispute Resolution Panel u/s 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
2. At the outset itself, Shri J.P. Khaitan, Senior Advocate, on behalf of the assessee, submits that the assessee company had not provided the necessary data/details with computation of the working capital of the tested party and the comparables, therefore, in absence of the relevant data, the Ld DRP was unable to give any direction to the TPO for working capital adjustments. The data/information relating to said working capital adjustments were not readily available with the assessee during the DRP proceedings therefore assessee could not submit the same before the ld DRP, and consequently the ld DRP could not direct the TPO to take into account to compute the arm`s length price adjustments (Transfer Pricing adjustments) and this had resulted into wrong determination of M/s Linde Global Support Services Private Limited, Kolkata arm`s length price of the assessee`s transactions. The Ld Counsel further submits that now the assessee got the data/information for working capital adjustments, therefore, he prays the Bench that additional evidences relating to working capital adjustments may be admitted and ld TPO may be directed to consider the same to compute the transfer pricing adjustments, if any.
3. The additional evidences submitted by the assessee by its letter dated 30.04.2019, are reproduced below:
1. The instant appeal for the Assessment Year 2011-12 was filed by your petitioner against an order dated July 27, 2017 passed by the Deputy Commissioner of Income Tax (Appeals) – 12(1), Kolkata made under section 144C of the Income-tax Act, 1961 (hereinafter referred to as
Your petitioner states that during the proceedings before the Dispute Resolution Panel (hereinafter referred to as the "DRP"), it had contended that the adjustment of working capital of the tested party and the comparables should be made in the computation of the margins of the tested party and the comparables. Your petitioner was of the bona fide belief that providing for working capital adjustment is a settled position of law and generally the DRP remits the issue to the file of the Ld. Transfer Pricing Officer for factual verification. Your petitioner states that it had prepared a computation/working of the margin after providing for working capital adjustment and was of the bona fide belief that it would have to submit the same before the Transfer Pricing Officer only. However, in the directions May 29, 2017, the DRP rejected the said contention on the ground that no working has been provided without asking your petitioner for the same.
Your petitioner states that the omission of the detailed computation of working capital before the Hon'ble DRP was not willful or unreasonable. Your petitioner had kept the summary of the margin of the tested party and comparables, detailed computation of the working capital and the arm's length range of working capital adjusted margin ready and was of the bona fide belief that the factual verification of the computations/workings would be done by the Transfer Pricing Officer as the allowability of working capital adjustment was not in doubt. Copies of the summary of the margin of the tested party and comparables, detailed computation of the working capital and the arm's length range of working capital adjusted margin are annexed hereto and collectively marked "A".
4. In such circumstances, your petitioner seeks leave of this Hon'ble Tribunal to file the additional evidences being Annexure "A" of the instant application and prays that the same may be admitted as the same is necessary for adjudication of the issue pertaining to adjustment of margin on account of working capital being ground nos. 4.1 & 4.4 of the instant appeal.
M/s Linde Global Support Services Private Limited, Kolkata
Unless an order as prayed for is made, your petitioner will suffer irreparable loss and prejudice.
6. This application is made bona fide and in the interest of justice. In the circumstances, your petitioner most humbly prays for:- (a) An order admitting the aforesaid additional evidence being Annexure "A" of the instant application in the instant appeal being Assessment Year 2011-12; (b) Such further or other order or orders be made and/or directions be given as to this Hon’ble Tribunal may seem fit and proper.”
Learned DR for the revenue objected that these additional evidences should not be accepted, as it is an afterthought to evade tax liability. Why these evidences were not submitted by the assessee during the DRP proceedings? Therefore, ld DR strongly opposed that these additional evidences should not be admitted.
5.Per contra, ld Counsel submitted before us that the assessee wanted to submit these additional evidences before ld DRP but it was beyond his control, as the information/data were not readily available with the assessee and therefore the assessee was prevented by sufficient cause from producing these additional evidences during the DRP proceedings. The ld Counsel also pointed out that the omission of the detailed computation of working capital before the Hon'ble DRP was not willful or unreasonable. The assessee had kept the summary of the margin of the tested party and comparables, detailed computation of the working capital and the arm's length range of working capital adjusted margin was ready and was of the bona fide belief that the factual verification of the computations/workings would be done by the Transfer Pricing Officer, as the allowability of working capital adjustment was not in doubt. Hence, ld Counsel prays the Bench that these additional evidences may be admitted.
We have heard both the parties and perused the additional evidences submitted by the assessee, as noted above. First of all, let us examine the findings of ld DRP about the working capital adjustments. We note that learned DRP had M/s Linde Global Support Services Private Limited, Kolkata issued directions in respect of Ground No.4 raised by the assessee which relates to the fact of not allowing appropriate adjustment under Rule 10B for inter alia differences in risk profile and working capital adjustments between the assessee and the comparable companies. The directions given by the DRP is reproduced below:
“DRP Directions: Risk adjustment as a general rule, cannot be allowed unless it is demonstrated that the comparables had actually undertaken such risk and how the same materially affected their margins. Unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the taxpayer, In the present case, the taxpayer has not shown with evidence as to whether each of the risk was actually undertaken or not by the comparables and if so, how these risks affected each of them and whether such adjustment would improve the comparability. Probability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustment. All this requires robust and reliable data, both for the assessee and the comparables in the absence of which risk adjustment cannot be considered for enhancing comparability. Thus, the objection regarding risk adjustment is dismissed. The assessee argued that working capital adjustment should be made as Rule 10B(3) read with Rule 10B(1)(e) recognizes that appropriate adjustments should be made to eliminate material effect of differences and improve comparability. The submissions of the assessee and the facts have been carefully considered. Working capital is measured by trade receivables/debtors, trade payables/creditors and inventories, Interest cost will be high if the trade receivable/debtors time cycle is large. Interest cost will be low if the company can pay its liabilities after a longer period. Holding of inventory has an interest cost and interest cost will be lower if inventory turnover is within a shorter period. The amount of trade debtors, trade creditors and inventories affects the overall results of a company. If the comparables have a higher intensity of accounts receivable, or inventories to sales, relative to the tested party, then it shows that the comparables were in effect, also providing a valuable financing function to their customers which would be compensated through higher prices. In such a situation the comparables are carrying out more value added functions than the tested party, therefore, the margins of the comparables should be adjusted downwards to enable a better comparison with the margins of the tested party. On the other hand, if the comparables have a higher level of accounts payable to sales relative to the tested party then this shows that these comparables were receiving a valuable financing function from their suppliers and would have paid
M/s Linde Global Support Services Private Limited, Kolkata a higher price to their suppliers. In such a situation, these comparables are receiving a valuable financing function from their suppliers therefore, the margins of the comparables should be adjusted upwards to enable a better comparison with the margins of the tested party. Working capital requirements affect the margins and costs because this is an implicit cost which is recovered/recoverable from the customers. Considering Rule 10B(3) and the facts in this case, working capital adjustment should be made provided reliable data is furnished by the assessee to the TPO. The claim for working capital adjustment has consistently been accepted in several decisions of the ITAT. Considering the facts, the TPO is directed to give working capital adjustment using the methodology given in Annexure to Chapter III of OECD guidelines and apply SBI Prime Lending rate (as on 30" June of the relevant financial year) as the interest rate. The assessee has not provided the necessary data/details with computation of the working capital of the tested party and the comparables., in absence of the relevant data, the Panel is unable to give any direction to the TPO for working capital adjustments. As far as Risk adjustments are concerned, Risk adjustment as a general rule cannot be allowed unless it is demonstrated that the comparables had actually undertaken such risk and how the same materially affected their margins. Unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the taxpayer. In the present case, the taxpayer has not shown with evidence as to whether each of the risk was actually undertaken or not by the comparables and if so, how these risks affected each of them and whether such adjustment would improve the comparability. Probability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustment. All this requires robust and reliable data, both for the assessee and the comparables in the absence of which risk adjustment cannot be considered for enhancing comparability. The TPO has given elaborate reasons and has followed laid down for rejecting the assessee’s TP study and for selecting his own comparables. Specific comparables have already been discussed. As far as calculation of PLI is concerned, the TPO is directed to adopt uniform approach for calculating PLI for the assessee as well as comparables. The objection is accordingly disposed off.”
We note Ld DRP held that “the assessee has not provided the necessary data/details with computation of the working capital of the tested party and the M/s Linde Global Support Services Private Limited, Kolkata comparables, in absence of the relevant data, the Panel is unable to give any direction to the TPO for working capital adjustments”.
From the above findings of the ld DRP, it is abundantly clear that during the DRP proceedings the assessee company could not furnish the data relating to working capital adjustments therefore ld DRP could not direct the TPO to consider working capital adjustments to compute the arm`s length price (ALP) of assessee`s transactions.
Now, the assessee has submitted the relevant information/ data for working capital adjustments, before the Bench by way additional evidences in the form of Annexure-A, which is reproduced below:
Annexure-A
M/s Linde Global Support Services Private Limited, Kolkata
Now the question before us is that whether these additional evidences relating to “working capital adjustments” should be admitted or not? We note that Rule 29 and Rule 30 of the Income Tax Appellate Tribunal Rules provide for production of additional evidences and admission thereof, these are reproduced below:
“Production of additional evidence before the Tribunal.
The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any document to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or , if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced.
Mode of taking additional evidence. 30. Such document may be produced or such witness examined or such evidence adduced either before the Tribunal or before such income-tax authority as the Tribunal may direct.”
Having gone through the Rules, as noted above, we are of the view that a neat principle of law that discretion lies with the Tribunal to admit additional evidence in the interest of justice once the Tribunal affirms the opinion that doing so would be necessary for proper adjudication of the matter. This can be done even when application is filed by one of the parties to the appeal and it need not to be a suo motu action of the Tribunal. The aforesaid rule is made enabling the Tribunal to admit the additional evidence in its discretion if the Tribunal holds the view that such additional evidence would be necessary to do substantial justice in the matter. For that we rely on the judgment of the Hon`ble Delhi High Court, in the case of Text Hundred India (P) Limited, 239 CTR 263 (Del-H.C), wherein it was held that: “It is well-settled that the procedure is handmaid of justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence at the appropriate stage. Once it is found that the party intending to lead evidence before the Tribunal for the first time was prevented by sufficient cause to lead
M/s Linde Global Support Services Private Limited, Kolkata such an evidence and that this evidence would have material bearing on the issue which needs to be decided by the Tribunal and ends of justice demand admission of such an evidence, the Tribunal can pass an order to that effect to admit the additional evidence.”
We note that aim of the transfer pricing law is to determine the correct arm`s length price of the assessee`s transactions with its associated enterprises(AE). For the sake of argument, let say, if these additional evidences were not admitted by us, then it would have not been possible to determine the correct transfer pricing adjustments (ALP-adjustments) and as a result there will not be correct determination of tax liability of the assessee company. Therefore, we have to admit these additional evidences.
In the light of the facts and circumstances, as explained above, and in the interest of justice and fair play, we admit these additional evidences (relating to working capital adjustments) filed before us and we remit these additional evidences to the file of ld TPO with the direction to examine these additional evidences and adjudicate the issue in accordance with law. For statistical purposes, the ground raised by the assessee is allowed.
The assessee has challenged before the Bench two comparable companies stating that these companies are functional different from the assessee company therefore these should be excluded. These companies are as follows:
(i). eClerx Services Limited (eClerx), and (ii). TCS eServe International Limited (TCS eServe).
Now, we shall take these comparable companies one by one
eClerx Services Limited (eClerx). This company contains margin of 69.25%. The Ld. TPO has considered the company as functionally comparable. ( PB 170). Aggrieved by the order of the ld TPO, the assessee filed the objections before the ld DRP. The ld DRP examined the issue and held as follows:
M/s Linde Global Support Services Private Limited, Kolkata (1). FAR of eClerx Services Limited (eClerx) is similar to that of the Assessee (2). High profits do not render an entity excludible.
(3). Assessee failed to explain how the wounding up of subsidiary has impacted the profitability of the company.
Therefore, ld DRP retained this company as comparable company.(PB 45).
Aggrieved by the order of the ld DRP/TPO, the assessee is in appeal before us.
We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP/TPO and other materials brought on record. Learned Counsel for the assessee submitted before us this company is Functionally different. The Assessee provides IT enabled services. [PB Pg. Nos. 82, 89 - 91 & 100 - 102] whereas Eclerx is a leading KPO service provider which provides high end data analytics and customized process solutions to a host of global clients. As would be evident upon perusal of annual report for FY 2010-11, it is observed that Eclerx has won various accolades for the same. Thus, the processes which are outsourced to a KPO i.e. eClerx are more specialized and knowledge based which is distinct from the services provided by the Assessee. [PB Pg. Nos 210, 215, 217, 231, 232 & 280]. The eClerx enables financial institutions to balance these priorities by partnering with them to increase control, execute ongoing functions with a significant reduction in cost, and accelerate change initiatives by providing domain specific re-engineering expertise. Assessee provides a broad suite of services that allow its clients to operate on a day to day basis, including trade processing, reference data, accounting and finance, and expense management activities. Assessee`s professional services practice includes consulting, business analysis and solution testing.
M/s Linde Global Support Services Private Limited, Kolkata As a specialist assessee is able to provide complex process support, promote best practices among clients, and continuously improve processes. The assessee`s shared services support functions, such as knowledge management allows assessee to quickly institutionalize process knowledge, while assessee`s IT teams allow assessee to deconstruct, design, and automate functions leading to control and efficiency. [PB Pg. No. 215] The eClerx powers the operations of the Sales & Marketing divisions of some of the largest Fortune/ Financial Times/Internet Retailer 500 scale companies globally, augmenting bandwidth to drive greater quality and control to their digital operations, data management and analytics needs. Some of the key Sales & Marketing functions assessee supports includes web content management & merchandising execution, web analytics, social media moderation and analytics, search engine analytics & support, CRM platform support, lead generation, customer data management, supply chain and channel analytics, price & catalogue competitive intelligence and broader data collection, cleansing, enriching and reporting. [PB Pg. No. 217]
Ld Counsel submits that so far Segment Reporting is concerned, the eClerx Services limited should not be accepted as comparable. The Company operates under a single primary segment i.e. data analytics and process outsourcing services.Details of secondary segments i.e. geographical segments are as under:
(Rupees in milion) Year ended March Year ended March 31, 2011 31, 2010 United States of America 2074.00 1,573.85 United Kingdom 334.26 324.34 Europe 767.88 545.63 Asia Pacific 242.89 125.39 Total Revenues 3,419.11 2,570.21 [PB Pg. No. 280]
M/s Linde Global Support Services Private Limited, Kolkata
Ld Counsel submits that due to high turnover with significant fluctuations in revenues and profits, the eClerx Services limited should not be selected as comparable company. The Assessee is a captive service provider with a reported revenue of 233 million in FY 2010-11 [Refer PB Pg. No.75,76] vis-a-vis revenue of 3,494 million in FY 2010-11 reported by eClerx. [Refer PB Pg. No. 268]. Further, a trend analysis of the revenue of eClerx depict an abnormal / supernormal or inorganic growth as would be evidenced from the widely fluctuating revenues vis-a-vis margins illustrated below: Particulars FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10 FY 2010-11 Operating Revenue 47.20 86.12 116.98 197.09 257.02 341.91 (INR in crores) Profit before tax (INR 24.65 39.94 49.53 67.55 81.35 134.77 in crores)
Revenue Growth (y-o- NA 82% 36% 68% 30% 33% y) Profitability Growth (y- NA 62% 24% 36% 20% 66% o-y)
The revenue numbers have indicated an unusual growth of 33% in FY 2010-11. Further, the company shows widely fluctuating trend in revenue and profits as tabulated above. Hence, Eclerx cannot be suitable for being considered as a comparable to the Assessee.
We note that eClerx Services limited, is Functionally different from the assessee company. The eClerx Services limited is not a comparable company so far Segment Reporting is concerned. The eClerx Services limited operates under a single primary segment i.e. data analytics and process outsourcing services therefore different from the assessee company. Besides, due to high turnover with significant fluctuations in revenues and profits, the eClerx Services limited should not be selected as comparable company. For that we rely on the following precedents wherein the eClerx Services limited was rejected as a comparable company:
M/s Linde Global Support Services Private Limited, Kolkata (i). Pr. CIT vs. B. C. Management Services Pvt. Ltd (AY 2011-12) [ITA 1064/2017 &CM No. 43177/2017] wherein the hon`ble Delhi High Court upheld ITAT decision of excluding eClerx services on account of functional dissimilarity and absence of segmental data. Earlier the ITAT had held that the Assessee provides IT enabled services in infrastructure development and testing, system and performance operations management and support etc. while eClerx provided high value financial services relating to consultancy business and solution testing besides the web content management merchandising execution, web analytics etc and thus excluded it as a comparable.
(ii). Pr.CIT vs. Evalueserve SEZ (Gurgaon) Pvt. Ltd (AY 2010-11) [ITA 241/2018] wherein the Hon`ble Delhi High Court upheld ITAT's decision of excluding eClerx and noted that its activity was functionally dissimilar because it performed KPO function whereas the assessee was classifiable as a BPO.
(iii). Evalueserve SEZ (Gurgaon) Pvt. Ltd vs. ACIT, Circle 8(2) (AY 2011- 12) [ITA No.5147/Del/2017] The Co-ordinate Bench of ITAT Delhi excluded eClerx as comparable company. The Coordinate Bench held that it was a KPO company providing data analytics and data process solutions to global clients. It provided end to end support through trade lifecycle including trade and sales and marketing support services to leading companies engaged in the manufacture, leisure, travel etc. through its pricing and profitability services and developed tool & process automation.
(iv). CIT Vs Rampgreen Solutions P Ltd (AY 2008-09) [ITA No. 102/2015] wherein the Hon`ble Delhi High Court held that Eclerx Services cannot be included as a comparable as it is engaged in providing KPO services and also returned supernormal profit. The Hon`ble Court placed reliance on the ruling in case of Maersk Global Centres (India) Pvt.Ltd V.ACIT, dated 07.03.2014 (SB).
M/s Linde Global Support Services Private Limited, Kolkata (v). Actis Global Services Private Limited Vs ITO (AY 2011-12) [ITA No. 6175/Del./2015], order dated 29.07.2016 wherein the Coordinate Bench of ITAT Delhi, followed the coordinate Bench decision in assessee's own case for AY 2010-11 wherein eClerx was held to be functionally different as per its business profile of outsourcing the substantial amount of work to outsiders, presence of substantial intangible assets, absence of segmental data and abnormal profits and excluded the same.
Taking into account the facts narrated above and various precedents cited above, we note that eClerx Services limited, is functionally different from the assessee company, it is not a comparable company so far Segment Reporting is concerned. The eClerx Services limited operates under a single primary segment i.e. data analytics and process outsourcing services therefore different from the assessee company. The eClerx Services limited, is engaged in providing KPO services to global clients. Besides, due to high turnover with significant fluctuations in revenues and profits, the eClerx Services limited should not be selected as comparable company. Therefore, we direct the TPO/AO to exclude the eClerx Services limited, as this company is not a comparable company, as explained above, hence it requires to be excluded.
TCS eServe International Limited (TCS eServe). This company contains margin of 53.89%. The Ld. TPO has considered this company as functionally comparable (Vide pb170). Aggrieved by the order of the ld TPO, the assessee filed the objections before the ld DRP. The ld DRP examined the issue and held as follows:
(1). The Function, Asset and Risk (FAR) of TCS eServe International Limited (TCS eServe) is similar to that of the Assessee.
(2). High profits do not render an entity excludible. Only differences on account of FAR are material.
M/s Linde Global Support Services Private Limited, Kolkata (3). Taxpayer has not shown how payment of Tata Brand Equity and ownership of high profit margin is leading to high profit margin.
Therefore, ld DRP retained TCS eServe International Limited (TCS eServe) as comparable company.
Aggrieved by the order of the ld DRP/TPO, the assessee is in appeal before us.
We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP/TPO and other materials brought on record. Learned Counsel for the assessee submitted before us that this company is Functionally different. The Assessee provides IT enabled services. [PB Pg. Nos. 89, 90,91 & 100 - 102] whereas a review of the annual report of TCS e-serve for FY 2010-11 evidences that the company is engaged in the business of providing services for its customers in banking, financial services and insurance domain. The Company's operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. It provides services to both external third- party customers and group entities.[PB Pg. No 368] The Assessee being a captive service provider does not own any intangibles in the form of brand and as a result does not benefit from it, whereas TCS e-serve possesses brand value being a subsidiary of TATA group which will tend to influence the pricing policy and thereby directly impacting the margins earned by TCS e-serve.
M/s Linde Global Support Services Private Limited, Kolkata Following extract from the Annual report emphasizes on the fact, that the company is deriving benefits from use of brand of its holding company Tata Consultancy Services Limited.
Year ended March Year ended March 31, 2011 31, 2010 Tata Brand Equity contribution 241 3,738 [PB Pg. No 367]
Ld Counsel submits that due to high turnover in the current year compared to the Assessee and Super Normal Profits, the TCS eServe International Limited (TCS eServe) should not be a comparable company. The Assessee is a captive service provider with a reported revenue of 233 million in FY 2010-11 [Refer PR Pg. No.75,76] vis-a-vis revenue of 2,500 million in FY 2010-11 reported by TCS eServe. [Refer PB Pg. No.354]. Further, as per the Directors' report of TCS eServe International, the company recorded a massive increase in operating income by 67% in comparison to previous year while its profits increased by an abnormal percentage of 117% over the preceding year. TCS E-serve Ltd. has super normal profits of about 54% during the year. This increase was mainly attributed to its starting of operations in Chennai and this being the second year of acquisition by TCS.[PB Pg. No 346]. Therefore, the TCS eServe International Limited (TCS eServe) should not be treated as comparable company.
We note that following are the precedents, where the TCS eServe International Limited (TCS eServe) company was rejected as a comparable.
(i). Pr.CIT vs. Evalueserve SEZ (Gurgaon) Pvt. Ltd (AY 2010-11) [ITA 241/2018] wherein the Hon`ble Delhi High Court upheld ITAT's decision of excluding TCS eServe International and noted that it had a high brand value and, therefore, was able to command greater profits, besides, it operated on economic upscale. The ITAT [ITA No. 1467/Del/2017] in its order had directed the exclusion of TCS eServe International considering that the company is engaged
M/s Linde Global Support Services Private Limited, Kolkata in the business of software testing, verification and validation and thus not comparable.
(ii). Evalueserve SEZ (Gurgaon) Pvt. Ltd vs. ACIT, Circle 8(2) (AY 2011-12) [ITA No.5147/Del/2017] The Coordinate Bench of ITAT Delhi in its order had directed the exclusion of TCS eServe International considering that the company is engaged in the business of software testing, verification and validation and also contributes to Tata Brand equity and thus not comparable.
(iii). Pr. CIT vs. UNITED HEALTH GROUP INFORMATION SERVICES (P) LTD (AY 2010-11) [ITA 1180/2017, C.M. APPL.46758-46759/2017] wherein the Hon`ble Delhi High Court upheld ITAT's decision of excluding TCS eServe International on the basis that its established 'brand value' drew the profitability upward relied upon BC Management Services High Court ruling (AY 2011-12) [ITA 1064/2017 & CM No. 43177/2017] to exclude it as a comparable.
22. Taking into account the facts narrated above and various precedents cited above, we note that TCS eServe International had a high brand value and, therefore, was able to command greater profits, besides, it operated on economic upscale. The TCS eServe International is engaged in the business of software testing, verification and validation and thus not comparable, therefore, we direct the ld TPO/AO to exclude the TCS eServe International, as this company is not a comparable company with the assessee, as explained above, hence it requires to be excluded.
22. Ground No. 5 raised by the assessee relates to erroneous denial of claim of exemption of interest under section 10A of the Act.
M/s Linde Global Support Services Private Limited, Kolkata
At the out set itself, ld Counsel for the assessee pointed out that issue raised by the assessee in ground No. 5 is no longer res integra. The assessee company was having an undertaking unit at Kolkata, the profit of which was claimed to be eligible for exemption under section 10A of the Act, as a 100% export oriented unit. The assessee had obtained a 100% Export Oriented Unit permission under the STP scheme. The assessee claimed exemption of the interest income from FRDs amounting to Rs 61,63,346/- under section 10A of the Act which was denied by AO/DRP.
Before us, ld DR for the Revenue reiterated the stand taken by the TPO/DRP and stated before the Bench that interest income from FRDs amounting to Rs 61,63,346/- is not covered by the scheme of section 10A of the Act.
The ld Counsel pointed out that said interest is eligible for deduction under section 10A of the Act on the ground that profits of business of undertaking would include its entire business income, including receipt on account of interest. For that ld Counsel relied on the judgment of the Hon`ble High Court of Calcutta in the case of Hindustan Gum & Chemicals Ltd, [2016] 72 taxmann.com 90(Cal), wherein it was held as follows: “4. Mr. Dudhoria, learned Advocate appearing for the revenue drew our attention to a judgment of the Madras High Court in the case of International Components India Ltd. v. Asstt. CIT [2015] 372 ITR 190/59 taxmann.com 32 wherein the following view was taken : "In the light of the above said decision, we are of the firm view that the interest earned from deposits with Corporation Bank, Electricity Board and on staff advances does not have direct or immediate nexus with the business of the assessee's undertaking and, consequently, they are not eligible for grant of deduction under Section 10B of the Act, which is akin to Section 80HH of the Act dealt with in the decision referred supra." 5. Mr. R.N. Bajoria, Learned senior advocate rightly pointed out that the judgment of the Madras High Court is of no relevance for the simple reason that sub-section (4) of Section 10B was not taken into account by the Hon'ble Madras High Court. Therefore, this judgment is of no assistance in deciding the issue. The learned Tribunal has passed the following order : 'There is no requirement for the purposes of section 10B to establish direct nexus between the income and the undertaking. The entire business income of the 100% EOU will be the "profits of the business of the undertaking". It has been held above that the interest earned on temporarily surplus business funds of the 100% EOU deposited with banks for short periods is business income and has in fact been so assessed. It is not in dispute that the surplus funds were of the 100% EOU. As such, the interest earned
M/s Linde Global Support Services Private Limited, Kolkata thereon has to be regarded as part of the "profit of the business of the undertaking". We further find that the Tribunal in the case of Cheviot Co. Ltd. for assessment years 2003-04 and 2004-05, relied upon by the assessee, has dealt with similar issue. In those cases, the difference between the provisions of sections 10B and 80HH was noted and after considering the judgments of the Hon'ble Supreme Court in Sterling Foods (supra) and in P.R. Prabhakar v. CIT (284 ITR 548 (SC)) approving the Special Bench decision of the Tribunal in International Research Park Laboratories Limited v. Assistant C.I.T. (212 ITR (AT) 1 (SB)), it was held that the profits of the business of the undertaking would include its entire business income. Keeping in view the above decision and the decision of the Tribunal, we are of the considered opinion that the assessee has to succeed. The Assessing Officer is directed to treat the interest of Rs. 28,74,473/- as part of the profits of the business of the 100% EOU eligible for deduction under section 10B and compute the deduction accordingly. The Assessing Officer should deduct the sum of Rs. 8,01,30,294/- (Rs. 7,72,54,821/- + Rs. 28,74,473/-) and not only Rs. 7,72,54,821/- from the profit as per profit and loss account for the purpose of separate consideration under section 10B Ground Nos. 3,4 and 5 of the assessee's appeal are thus allowed.' 6. We are of the opinion that the Tribunal was right in the view they took for the reasons discussed by us. In that view of the matter, the question no. 1 is answered in the negative and in favour of the assessee. The appeal is, therefore, dismissed.”
We note that Hon`ble High Court of Calcutta in the case of Hindustan Gum & Chemicals Ltd (supra) held that in order to compute deduction under section 10B of the Act, the profits of the business of the undertaking would include its entire business income including interest income on fixed deposits. We note that judgment of the Hon`ble High Court of Calcutta (supra) is in the context of section 10B of the Act but the ratio of this judgment is squarely applicable to section 10A deduction. Therefore, respectfully following the judgment of the Hon`ble High Court of Calcutta in the case of Hindustan Gum & Chemicals Ltd (supra), we direct the AO/TPO to allow deduction under section 10A in respect of interest income of fixed deposits of Rs 61,63,346/-.
Learned Counsel, during the course of hearing, has pressed the ground relating to additional evidences, ground relating to two comparable companies, viz:(i). eClerx Services Limited (eClerx), and (ii). TCS eServe International Limited (TCS eServe) and ground No.5, which we have adjudicated in our earlier paras. Other remaining grounds raised in form No. 36, were not pressed therefore, we do not adjudicate them.
M/s Linde Global Support Services Private Limited, Kolkata
Before parting, it is noted that the order is being pronounced after 90 days of hearing. However, taking note of the extraordinary situation in the light of the Covid-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Co- ordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JCB Limited in and ITA No. 6103/Mum/2018 for A.Y. 2013-14 order dated 14.05.2020.
The appeal of the assessee is allowed to the extent indicated above.