M/S 24/7 CUSTOMER PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2(1)(1), BANGALORE

The final assessment order dated 26.9.2017 passed by the Ld. AO u/s 143(3) r.w.s. 114C(13) of the Act is bad in law and on the facts of the case. Grounds of appeal qua the transfer pricing matters -

The Ld. DRP[FPO erred in making an addition of Rs.31,07,95,547 to the total income of the Appellant on account of adjustment in the arms length price of the international transactions entered by the Appellant. 4.The Ld. DRPPO have erred in enhancing the TP adjustment from Rs. 29,55,15,684 to Rs. 31,07,95,547 without putting the Appellant to notice.

The Ld. DRP/TPO have erred in not accepting the economic analysis undertaken by the Appellant and suo moto conducting a fresh economic analysis for determination of ALP.

The Ld. DRP/TPO have erred in law and on facts in arbitrarily selecting Infosys BPO Limited. Hartron Communications Limited and Capgemini Business Services India Pvt. Ltd. as comparable even though they are incomparable oil ground of dissimilarity of functions performed. assets employed or / and risk.

The Ld. DRP/TPO erred in law and oil in incorrectly computing OP/OC ratio of Hartron Communications Limited and E4e Healthcare Business Services Private Limited.

The Ld. DRP /TPO erred in law in Rejecting and thus excluding R Systems International Limited (Seg.) and Caliber Point Business Solutions for the sole reason that these companies follow Calendar year as their accounting year and in rejecting Informed Technologies India Ltd. for the Page - 3 reason that it does not satisfy the core service filter or filter of 'Income from non-financial services to sales of >75%'.

The Ld. DRP/TPO have erred in not giving the benefit of +/-3% under the proviso of section 92C of the Act.

The Ld. DRP/TPO have erred in being inconsistent in selectively invoking power u/s 133(6) for collecting information from the companies.

The Ld. DRP/TPO have violated the principles of natural justice by not allowing the Appellant an opportunity to cross examine persons who have furnished the information u/s 133(6) of the Act.

The Ld. DRP/TPO have erred in law in ignoring the fact that since the income of the Appellant from export of ITeS is having a tax holiday u/s 10AA, there is no motive or reason to shift profits out of India. Ground of appeal qua the re-computation of the deduction u/s 10AA

The Ld. DRP/AO have erred in law and on facts in acting contrary to the judgment of jurisdictional 1-ugh Court by restricting the deduction claimed by the Appellant under section 1 OAA of the Act by reducing leased line charges incurred in foreign currency amounting to Rs.55,95,413 only from export turnover without making a corresponding reduction in the total turnover.

That without prejudice to the other grounds of appeal the Ld. DRP/AO has erred in law and of facts by not considering that deduction under section 10AA of the Act has to be computed. after taking into account disallowance under section 30 to 43D of the Act. Accordingly the Ld. DRP/AP ought to have given effect to the above disallowance before arriving at the profit eligible for deduction under section 1OAA of the Act. Grounds of appeal qua the disallowance of software development expenses

The Ld. DRP/AO have erred in law and on facts in disallowing expenditure on purchase of software amounting to Rs.47,66,421 be treating the same to be capital in nature.

Without prejudice, the Ld. DRP/AO have erred in law and on facts in not granting consequential depreciation at the rate of 60% on the software disallowed as capital in nature.

The Ld. DRP/AO have erred in law and on facts in not granting current year depreciation at the rate of 60% on software expenditure disallowed as capital in nature in the earlier years. Other grounds

The DRP/AO have erred in law and on facts in levying interest of Rs.5.70.73,182 under section 234B and 234C of the Act.

That the Ld. DRP/AO have erred in law and on facts in initiating penalty proceedings u/s 271(1)(c) of the Act.

At the outset the Ld. AR for the assessee had submitted that the Grounds 1, 2 and 3 are general in nature, whereas grounds 4, 5, 9, 10, 11, 12, 14 to 19 are not pressed. It was also submitted by the Ld. AR that the assessee had filed the application for additional ground for admitting the same vide letter dated 18.05.2018 and it was submitted that the assessee had given elaborate reason in the Page - 5

The Ld. DR had not opposed to the admission of additional ground. In view of the above additional grounds number 1 to 5 filed vide application dt.18.05.2018, are admitted.

The main grounds which now remain for adjudication which are ground nos.6, 7, 8 and 13 and the additional grounds nos.1 to 5. 05. Now we will deal one after the other. At the outset the Ld. AR had submitted ground no.6 pertains to exclusion of Infosys BPO, Hartron Communications Ltd and Capgemini Business Services India P. Ltd, In this regard other attention was drawn to objections raised by the assessee and the order passed by the DRP. The DRP had at para 12 dealt with the Infosys BPO in para 4.1.2.4 and had decided to include this company. Where as our attention was also drawn to the ground raised before the DRP against the inclusion of Infosys BPO at Page 96, it was mentioned as under : Sl Comparable companies Assessee’s contentions No. • Use of 133(6) Information 6 Infosys BPO Ltd • Functionally different • Market Leader • Significant selling, marketing & brand building expenses • Significant brand value and owns significant intangibles Page - 6

Similarly, the Ld. AR had also drawn our attention to the Harltron Communications Ltd. Our attention was also drawn to the order of the DRP at page 14 where in para 4.1.2.5, the DRP had recorded this and our attention was also drawn to the objection raised by the assessee before the DRP at page 97 which is as under: Sl Comparable companies Assessee’s contentions No. • Functionality 7 Harltron different as the Communications Ltd company is engaged in custom (segmental) software development services, intellectual property services, web hosting, tech solutions, apart from back office services. • Exceptional year of operation as the company has recorded a steep increase in the revenue earned from BPO business to the tune of approx. 483.72% over last year

In respect of Capgemini Business Services India P. Ltd, the Ld. AR had drawn our attention to page 11 of the DRP order where the assessee’s contentions are recorded as under:

On the basis of the above the Ld. AR submitted that the TPO / DRP both have not discussed and examined the objections raised by the assessee on the basis of which the assessee has sought exclusion and the DRP in a cryptic and stereotyped manner had passed the order without considering in detail the objections raised by the assessee.

Per contra the Ld. DR had submitted that she relied on the orders passed by the lower authorities.

We have heard the rival contentions and perused the material on record. From a perusal of the order reproduced here in above and the objection raised by the assessee, it is clear that the assessee has raised multiple objections. But the DRP while passing the order had restricted to adjudication of one or two objections only and has not bothered to consider and pass an elaborate and reasoned order accepting or rejecting these comparables. In the light of the above, we deem it appropriate to remand the matter back for examination of these comparables to the file of the TPO / AO by considering all the objections raised by the assessee. Needless to say while doing so, the TPO will also consider the binding precedent of the jurisdictional Tribunal in the matter of CGI Information Systems & Page - 8

Ground no.7 and additional Grounds 2 and 3 of the additional grounds is with respect to exclusion of Harton Communication Ltd, Omega Healthcare Management and e4e Healthcare Business Services P. Ltd, It was the submission of the Ld. AR that these three comparables were required to be excluded being functionally dissimilar to the assessee . In respect of e4e Healthcare Business Services P. Ltd, it was mentioned that this is comparable qualify all the filters of the TPO. However the TPO has considered the current year data and applied the PLI as 17.26%. With respect to Omega Healthcare Management, it was submitted that the data was not available in public domain. Before the DRP the Ld. AR had drawn our attention to para 2.4.1.5 at page 69, wherein it was mentioned as under :

1. 5. Omega Healthcare Management Services Having considered the submissions, we note that the TPO has rejected stating that no data is available in public domain. However the assessee has stated that the data is available in public domain and that the company is engaged in medical coding, billing, accounts receivable management and claims process. The assessee submitted the annual report of this company and at page No.2 as per the statement of profit and loss account & Director’s report, revenue from sale of services was Rs.13.91 crores and this entire revenue is from export of services. We also Page - 9

By way of additional ground it was submitted that this company is not comparable as the assessee had submitted before us that RPT of this comparable is 100% and therefore this fact was required to be examined. However with respect to e4e Healthcare Business Services P. Ltd, no objection was raised or order was passed by the DRP. Before us it was submitted in respect to both the comparables that these were required to go back to the TPO for examination as both the companies are into healthcare services and the RPT is more than 15% and therefore these companies are to be excluded.

On the other hand the Ld. DR had no objection if the matter is sent back to the TPO for consideration afresh.

We have heard the rival contentions of the material on record. From the perusal of the above said order of the DRP at page 12 it is clear that the DRP had passed a cryptic stereo type order and had not specifically dealt with all the objections raised by the assessee.

The ground no.8 pertains to 3 comparables namely R Systems International Limited (seg) and Caliber Point Business Solutions and Informed Technologies India Ltd DRP had excluded these comparables on the pretext that current year data is not available and the calendar year of these three companies are different from the calendar year of the assessee company. It was submitted that in terms of the decision of the Honourable Delhi High Court in the following matters : i) Mickinsey Knowledge Center (pg.2222 at 1121 / Vol-IV) ii) Mercer Consulting [390 ITR 615] iii) Indecomm (Bang) The issue is no more res integra. It was fairly settled by the coordinate bench as well as the High Court with fair certainty that if the data of the current financial year can be interpolated by adding the first and last quarter, then even these companies are required to be considered as good comparables if otherwise functionally comparable with the company.

The Ld. DR had relied on the orders passed by the lower authorities.

We have heard rival contentions and perused the material on record. The Honourable Delhi High Court in Mickinsey Knowledge Center after elaborate discussion had recorded a finding that if the current year data can be derived / deduced by including the first and last quarter of the calendar year and the company is an otherwise functionally comparable with the assessee then the data so derived should be utilised for the purposes of carrying out the FAR analysis. In view of the above, we allow the ground no.8 raised by the assessee and remand the matter back to the TPO / AO for the purpose of recalculating the current year data in the manner laid down in the matter of Mickinsey Knowledge Center, Mercer Consulting and In decomm.

Now we are left with additional ground no.1, which pertains to risk adjustment. In this regard, the Ld. AR had submitted that the assessee is entitled to risk adjustment in terms of the law laid down in the matter of Hyundai Rotem Company ITA No 510/ DEL/ 2016, Sony India (P) Ltd 114 ITD 448 etc.

The Ld. DR submitted that no calculation was provided by the assessee before the DRP or the TPO. Therefore assessee is not entitled to risk adjustment.

We have heard the rival contentions and perused the record. Since we are remanding the matters in respect of nine comparables to the file of TPO therefore we deem it appropriate to remand this Page - 12

2 Per contra, the learned Authorised Representative of the assessee submitted that the working of assessee's claim for risk adjustment was filed before the DRP. However, in the course of proceedings, the learned Authorised Representative of the assessee submitted that ground No.11 of the assessee's appeal related to risk adjustment is not being pressed. 7.3.1 We have heard both parties, perused and carefully considered the material on record. We find that the DRP, at para 14 of its order, had relied on its decision in the earlier Assessment Year 2010-11 and directed the TPO to allow risk adjustment and decide the percentage of risk adjustment to be allowed. As a matter of guidance, the DRP referred to a decision of the ITAT, Hyderabad in the case of Dy. CIT v. Hellosoft (P.) Ltd.[2013] 32 taxmann.com 101/57 SOT 4 wherein 1% risk adjustment was allowed. From the above, it is seen that the DRP has merely referred to a decision in which 1% risk adjustment was granted and it is not correct to say that DRP directed that 1% risk adjustment is to be granted in this case. 7.3.2 The Bangalore Benches of the Tribunal, while allowing risk adjustment to captive service providers, as a matter of principle has held in many cases, ;including the one cited (supra), that risk adjustment cannot be granted unless the assessee has submitted computation of the same before the authorities below. In the case on hand, we find that though the assessee in Form 35A submitted before the DRP, at Annexure/Objection 13 thereof, mentioned risk adjustment at 4.92%, no scientific basis or working in respect of the assessee's claim vis-à-vis the comparable companies had been provided. Even on pages 890 & 891 of paper book (Annexure 9-B), no working has been given in respect of risk Page - 13

Additional Ground nos.4 pertain to errors in computation of working capital adjustment. The DRP had directed the TPO to work out the working capital adjustment as per its direction. However the TPO while giving effect to the directions of the DRP had repeated the working capital adjustment previously done by the TPO. The Ld. DR had submitted that this ground may also be sent back to the TPO to recompute the working capital adjustment, after taking into account various comparables now sought to be included / excluded by the assessee.

We have heard the rival contentions and perused the material on record. In terms of the submission made by the Ld. DR, we remand this issue to the file of the TPO for the calculating the working capital adjustment, if any, in accordance with law and the TPO shall consider all the binding decisions of the High Court / coordinate bench. These grounds are allowed for statistical purpose.

Additional Ground nos.5 pertain to working capital adjustment at interest rate applicable to US currency. The TPO had considered average PLR of 14.58% while computing the working capital adjustment. Ld AR had submitted that the assessee is only receiving in US currency therefore rate as applicable in US should be considered for working out working capital adjustment . HE relied upon various judgment including Cotton Natural 276 CTR 445, Rampgreen Solutions etc

We have heard the rival contentions and perused the material on record. In terms of the submission made by the Ld. DR, we remand this issue also to the file of the TPO for recalculating the working capital adjustment, if any, in accordance with Cotton Natural 276 CTR 445, Rampgreen Solutions etc and any other decisions as found applicable. TPO shall consider all the binding decisions of the High Court / coordinate bench. This additional ground no 5 is allowed for statistical purpose.

Ground no.13 of the main grounds pertain to deduction u/s.10A of the Act. We have heard the rival contentions and perused the material on record. We find that this issue is put to rest by the judgment of the Hon’ble Supreme Court in the matter of CIT v. HCL Technologies Ltd [(2018) 93 taxmann.com 33], wherein the Hon’ble Supreme Court has decided the issue in favour of the Page - 15

Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well.

On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover.

In the result, appeal of the assessee is allowed for statistical purpose.