ACIT, NEW DELHI vs. M/S WNS BUSINESS CONSULTING SERVICES PVT. LTD.,, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES “I-1” : DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA.No.919/Del./2013 Assessment Year 2008-2009 M/s. WNS Business Consulting Services Pvt. Ltd., The ACIT, Circle-18(1), vs Gate No.4, Godrej & Boyce Room No.211A, C.R. Complex, LBS Marg, Building, New Delhi. Pirojshan Nagar, Vikhroli (West), Mumbai – 400 079. PAN AABCT8951H (Appellant) (Respondent) For Revenue : Shri Kumar Pranav, Sr. D.R. For Assessee : Shri Tarandeep Singh, Advocate. Date of Hearing : 30.07.2018 Date of Pronouncement : 14.08.2018 ORDER PER BHAVNESH SAINI, J.M.

This appeal by Revenue has been directed against the Order of the Ld. CIT(A)-XX, New Delhi, Dated 21.12.2012, for the A.Y. 2008-2009, on the following grounds :

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2. Ld. CIT(A) erred in law and on the facts of the case in deleting the allowing the claim of the assessee u/s 10A of the I.T. Act.”

comparables used by the TPO. The assessee mainly focuses on the following comparable companies inserted by the TPO/A.O. before the Ld. CIT(A), which, according to the assessee, should have been rejected as comparables i.e., (1) Mold-Tek Technologies Limited (2) Coral Hub Limited and (3) Eclerx Services Limited.

Mold-Tek Technologies Limited:-

4 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. support), product development and software customization, which are high-end technical services. The assessee also argued that the margin earned by this comparable (99.66%) is abnormally high. In case the provision for derivative loss of Rs.6,43,77,000/- is considered as operating expense (which should be considered so as derivative loss is an integral part of this company’s business activity), the profit margin reduces from 99.66% to 20.98%. Lastly, the assessee pointed-out that this comparable had been rejected by Dispute Resolution Panel-I, New Delhi in Para 2.10 on page 7 of their directions dated03.09.2012 on the ground that there was insufficient information regarding derivates loss. The relevant para is reproduced as under :

“Para 2.10

"... we would like to comment on the comparable namely Mold Tek Technologies Limited. In the margin computation of this company, the TPO has excluded the 5 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. profits derived from derivatives as well as losses incurred on account of derivatives. He has not given any reasons for excluding them. It is argued by the assessee that if this company is chosen as a comparable, then the profits/ losses attributable to the derivatives should also be taken into account as they are integral part of the business activity. Derivatives are generally forward exchange contracts entered into by businesses to hedge their business risks like currency risk on the receivables/ payables, interest rate risk etc. However, the nature of derivatives used by the company and how the profits and losses arose are not clear.

Item 9(d) of Notes to Accounts of the Annual Report confirms that the losses on derivatives have crystallized and have been provided for in the accounts on closure of the transactions.

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The profit/ loss on derivatives should be recognized as income or expenses in accordance with Accounting Standard 11 issued by ICAI. The loss is significant and is an one time impact on the profitability. Inclusion or exclusion of the result of the derivative transactions greatly alters the PLI of the company. In this regard, we have only insufficient information. In view of this discussion, this Panel considers that Mold-tek. is not a suitable comparable and hence needs to be dropped from the final set of comparables.”

4.1. The assessee, therefore, submitted that Mold-Tek Technologies Limited should be rejected as a comparable company.

Coral Hub Limited :

rekeying, OCR conversion, scanning and indexing, microfilm scanning, e-publishing services, and custom application development. The assessee submitted that the employee cost of the company is merely 2.92% of the operating revenue of the company, as against 58.9% of the assessee. It was, therefore, reiterated its arguments against abnormally high margin companies being used as comparables. It is also rejected as comparable company by DRP-I, Mumbai vide directions dated 04.09.2012 on the ground that major part of its business comprised of outsourcing of services.

Eclerx Services Limited

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04.09.2012 held it to be a high end service provider, as against BPO services of the assessee. It was, therefore, submitted that the above comparables may be rejected.

7. The Ld. CIT(A), as regards M/s. Mold-Tek Technologies Limited directed that this company should be excluded from the list of the comparables. The findings of the Ld. CIT(A) are reproduced as under :

“3.5. Mold-Tek Technologies Ltd. has two segments, ITES and Plastic division. ITES is having 100% exemption whereas on the profits of plastic division the company has to pay tax. It is not uncommon to see such financial results where the tax exempt unit has extraordinary profit while the taxpaying unit suffers losses under the same management control. The extraordinary profit in the ITES segment reaching upto 106.82% for the FY 2007- 08 is a pointer in this direction. In the subsequent

9 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. audited accounts, this fact of ending the tax holiday for ITES segment is mentioned by the annual report and some corrective entries have been passed.

The employee cost filter might not have been used by the TPO but in the presence of extraordinary deviation from the ratio of employee cost to sales of appellant’s case cannot be simply brushed aside. In the case of Mold-Tek Technologies Ltd it is 7.6%. By implication, either Mold-Tek Technologies Ltd. has employed larger capital against the man power to get the kind of productivity to generate profit of 106.82% or the employees are so extraordinary that they have accepted the lower wages and still work so hard for the company to generate that kind of profitability. In either situation, the company becomes not comparable to the appellant.

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Even on functionality ground Mold-Tek Technologies Ltd. is not comparable because as compared to the appellant this comparable is mainly dealing in engineering design and detailing services, website design services, software testing, in-house software development etc. This reason for rejection of the comparable is also supported by the view taken by the DRP-I, New Delhi as quoted by the appellant.

Therefore, I hold that this company should be excluded from the list of comparables.”

7.1. The Ld. CIT(A) after excluding M/s. Mold-Tek Technologies Limited found that the arms length margin for ITES segment of the assessee remain only 25.83%. The table is quoted at page-10 of the appellate order. The margin of the assessee for the A.Y. 2008-2009 under appeal is 21.02%. The assessee submitted that using 5% variation range, there would be no difference. The price of 11 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. international transaction of assessee for its ITES Segment confirm with the arms length principle. The Ld. CIT(A) accepted the contention of assessee and accordingly, deleted the addition.

7.2. The Ld. Sr. D.R. relied upon the orders of the TPO/A.O. and submitted that the submissions noted by the Ld. CIT(A) were not made before A.O./TPO.

8. On the other hand, Learned Counsel for the Assessee reiterated the submissions made before the authorities below and relied upon the Order of ITAT, Mumbai-K (Special Bench) in the case of Mearsk Global Centres (India) (P.) Ltd vs. ACIT 43 taxmann.com 100 in which the Tribunal in para-81 and 83 held as under :

“81. In so far as the case of Mold-Tek Technologies Ltd. is concerned, it is observed from the annual report of the said company for the financial year 2007-08 placed at page 139 to 151 of the paper

12 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further information of Mold-Tek Technologies Ltd. available on their Website is furnished in the form of printout at page 158 to 165 of the paper book and a perusal of the same shows that it is a leading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development costs of civil, structural, mechanical and plant design by 30-40% and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in-house software development team, quality control training and trouble shooting

13 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. facilities. M/s Mold-Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low- end services. It may be pertinent to note here that the financial year 2007-08 was a unique year for Mold- Tek Technologies Ltd. as the scheme of arrangement involving amalgamation between Tekmen Tool Pvt. Ltd. and Mold-Tek Technologies Ltd. and de-merger between Mold-Tek Technologies Ltd. simultaneously

14 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. was sanctioned by the Hon’ble AP High Court by 15th July, 2008 with the appointed date for amalgamation and de-merger being 1st October, 2007 and 1st April, 2007 respectively. It is also pertinent to note that while working out the operating margin of the said company, provision for derivative loss of Rs.6.43 crores made by Mold-Tek technologies Ltd. was excluded by the A.O. treating the same as non- operating expenses whereas in the case of Rushabh Diamonds (supra), it was held by the Division Bench of this Tribunal that the gain or loss arising from the forward contract entered into for the purpose of foreign currency exposure on the export and import has to be taken into consideration while computing the operating profit.

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8.1. He has, therefore, submitted that since DRP as well as Special Bench of the Mumbai Tribunal have excluded M/s.Mold-Tek Technologies Limited from comparables, therefore, the Ld. CIT(A) correctly deleted it to be excluded from the list of the comparables.

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Limited is not a comparable because its profit is very high and is engaged in different kind of business and even the financial results do not support the case of the A.O. The cost of sales in case of comparable was found low as against assessee. The finding of fact recorded by the Ld. CIT(A) have not been disputed through any evidence or material on record. The ITAT, Special Bench in the case of Maersk Global Centres (India) (P.) Ltd., vs. ACIT, Circle-6(3), Mumbai (supra) also considered that the above comparable is providing high end services to its clients involved in high special knowledge and domain expertise in their field which cannot be compared to the assessee which is mainly involved in providing low-end services. In assessment year under appeal i.e., 2008-2009, the Special Bench Mumbai found comparable Company as a Scheme of Arrangement involving amalgamation between other Companies had a demerger. Therefore, it was found not comparable. Similarly, the assessee explained that this comparable have been rejected by the DRP-1, New Delhi vide

18 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. their Direction Dated 03.09.2012 as reproduced above. The nature of business of the assessee and comparable is also different because assessee is involved in BPO services which is very low-end and routine BPO services but, the comparable Company has engaged in providing engineering design services, product and software customization and development which are high-end technical services. Learned Counsel for the Assessee also relied upon decision of the Hon’ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd., vs. CIT (2015) 377 ITR 533 (Del.) in which it was held as under :

“Though entities rendering voice call center services for customer support and a KPO service provider employ IT- based delivery systems, but characteristics of services, functional aspects, business environment, risks and quality of human resource employed are materially different; and therefore, benchmarking international transactions on basis of comparison of PLI of high-end KPO service providers with PLI of Voice Call Centres, would be unreliable.”

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9.1. Considering the above in the light of decision of the Special Bench of the Mumbai Tribunal in the case of Maersk Global Centres (India) (P.) Ltd., vs. ACIT, Circle-6(3), Mumbai (supra), Order of DRP and Judgment of Delhi High Court in the case of Rampgreen Solutions (P.) Ltd., vs. CIT (supra) and in the absence of any material on record in favour of the Revenue, no interference is required in the matter. The Ld. CIT(A) correctly excluded M/s. Mold-Tek Technologies Limited from the list of comparables. This ground of appeal of Revenue is dismissed.

10. On ground No.2, Revenue challenged the Order of the Ld. CIT(A) in allowing claim of assessee under section 10A of the I.T. Act.

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Technology Park India. The submissions of the assessee are reproduced by the Ld. CIT(A) in the appellate order in which assessee explained that sufficient evidences have been produced on record to satisfy that assessee is entitled for deduction under section 10A of the I.T. Act. The assessee also submitted that its claim for deduction under section 10A of the I.T. Act for A.Y. 2005-2006 was allowed by the A.O. after examining the business activities/business model of the assessee-company. In the assessment order for A.Y. 2005- 2006, it was held that assessee-company is engaged in BPO services and accordingly, the claim of deduction under section 10A of the Act for A.Y. 2005-2006 was allowed by the A.O. It was further submitted that Ld. CIT(A) in A.Ys. 2006-2007 and 2007-2008 have also allowed the similar claim of deduction under section 10A to the assessee. It was submitted that there is no change in the business model or business activities carried on by the assessee as compared to the preceding assessment years mentioned above. It was, therefore,

21 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. submitted that in the absence of any change in the case/ change in business activity/business model of the assessee, the assessee is entitled for deduction under section 10A of the I.T. Act. The assessee relied upon the decision of Hon’ble Supreme Court in the case of Radhasoami Satsung vs. CIT 193 ITR 321. The Ld. CIT(A) examined the issue of the assessee on merit and observed that similar claim of deduction of assessee under section 10A of the I.T. Act in preceding A.Ys. 2006-2007 and 2007-2008 have been allowed and accordingly, allowed this ground of appeal of assessee. His findings in para 4.3 of the Order are reproduced as under :

“Reasons for decision :

4.3. I have considered the submissions of the Appellant and the details filed by the appellant during the course of assessment proceedings. My observations are as under :-

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The appellant is engaged in the business of export of IT enabled Business Process Outsourcing services and IT enabled delivery solutions including back-office operations and data processing services to customers in the financial services industry in the United States of America.

The Appellant has set up an undertaking at Gurgaon which is registered with the Software Technology Parks of India, through which it undertakes export of IT enabled Business Process Outsourcing services.

Section 10A of the Act provides for deduction of such profits and gains as derived by an undertaking from the export of articles or things or computer Software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software.

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Further, the term computer software has been defined in Section 10A of the Act to mean: a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or b) any customized electronic data or any product or services of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means. The Central Board of Direct Taxes has issued a Notification No.SO890(E), dated 26.9.2000, which specifies certain Information Technology enabled products or services (like back-office operations, data processing, etc.), as a computer software for the purpose of claim of deduction under section 10A of the Act.

I have examined the following details/documents filed by the appellant during the assessment proceedings and also placed on record before me :

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 Copy of the STPI approvals/registration certificate.  Copy of Form No. 56F duly certifying the claim of deduction under section 10A of the Act.  Details of export proceeds along with its realization date as per the FIRCs.  Copy of FIRC’s.  Summary of invoices and copy of the form SOFTEX submitted to the STPI authorities along with the invoices raised during the financial year 2005-06.  Invoices raised subsequent t the name change of the company

From the perusal of the above details/documents, my observations are as follows :

The appellant is engaged in the business of export of IT enabled BPO services and IT enabled delivery

25 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. solutions including back-office operations and data processing services to customers in the financial services industry in the United States of America.  These services are provided by the appellant through its customer services undertaking located in Gurgaon which is registered with the STPI. The appellant has obtained necessary approvals/registrations from the STPI.  The activities of business of export of IT enabled BPO services and delivery solutions to customers outside India squarely fall within the meaning of term ‘Computer Software’ as clarified by the CBDT in its Notification.  Copy of invoices/shipping bills and Form SOFTEX along with the invoices raised which clearly shows that the appellant has exported the software services through data communication link provided by VSNL.

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 The details of export proceeds and copies of FIRCs show that the appellant has received the remittances from Trinity Partners Inc. in respect of export of I.T. enabled BPO services.  Sale proceeds in respect of export of computer software was brought into India by the appellant within the prescribed time limit, as certified in Form 56F.  There has been no change in the facts of the case/business activities of the appellant as compared to AY 2005-06, AY 2006-07 and AY 2007-08. This is also evident from Form No. 3CD placed by the appellant on records.

On the basis of legal position, judicial precedents and examination of the documents placed on record by the appellant, it is held that appellant has got all the necessary approvals/registrations of STPI for its 27 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai.

Gurgaon undertaking and has also satisfied all other conditions required for claiming deduction under Section 10A of the Act. It is pertinent to mention here that, for the A.Y. 2006-07 and 2007-08, CIT(A)-XXI, New Delhi through his order dated 15.11.2010 and 28.03.2012 respectively has held that 10A deduction is allowable under exactly similar facts and circumstances of the earlier years.

Accordingly, the appellant is allowed the claim of deduction under section 10A of the Act of Rs.7,20,12,249/-.”

authorities below. He has submitted that in A.Y. 2006-2007, the ITAT, Delhi-D Bench in the case of the same assessee vide Order dated 10.02.2017 in ITA.No.236/Del./2011 confirmed the order of the Ld. CIT(A) in allowing the deduction under section 10A of the I.T. Act and dismissed the appeal of the Revenue. The Order of the Tribunal in paras 5 to 8 are reproduced as under :

5. Point for determination is whether the order of the Ld.CIT (A) suffers any legal infirmity or a regularity warranting any interference.

6. A perusal of Section 10A Explanation 2(b) shows that computer software means any customized electronic data or any product or service of similar nature as may be notified by the Board. Under this provision the Board has issued a notification referred to by the Ld. CIT (A) at page nos. 9 & 10 of his order which covers as many as 15 activities which are as follows:

29 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. i. Back-office Operations; ii. Call Centres; iii. Content Development or Animation; iv. Data Processing; v. Engineering & Design; vi Geographic Information System Services; vii Human Resources Services; viii Insurance Claim Processing; ix Legal Databases; x. Medical Transcription; xi. Payroll; xii. Remote Maintenance; xiii. Revenue Accounting; xiv. Support Centres; and xv. Webs-site Services

30 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. the course of assessment proceedings before the AO vide its submission dated December 29, 2009.

In the circumstances, we will find it difficult to hold that the assessee could not prove the actual development or export of the software.

31 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai. benefit of an exemption/deduction from taxable total income. In the instant case the intention of legislature is to provide benefit of deduction to enterprises which are not simply engaged in manufacture or produce any article or thing, but even to those assesses whose end product is any customized electronics data. Benefit of deduction u/s 10B of the Act, is also available on rendering of any of the services as notified by the Board like the item (ii) in the notification (supra) wherein even call centers, animation, etc. which are brought in the sweep of any product or services stated in clause (b) of item (i) Explanation 2 to Section 10B”. It is pertinent to note that this decision of the Tribunal was upheld by the Hon’ble Jurisdictional High Court in CIT vs. Kiran Kapoor 372 ITR 321 (Del.).

9. In view of the above facts and law, we find that the material on record amply justifies the reasoning and 32 ITA.No.919/Del./2013 M/s. WNS Business Consulting Services Pvt. Ltd., Mumbai.

conclusions reached by the Ld. CIT (A) and the findings of learned CIT(A) are unassailable and do not warrant any interference. We, therefore, uphold the same.”

13.1. He has further submitted that same order have been followed by the Tribunal in the Departmental Appeal for A.Y. 2007-2008 in ITA.No.2571/Del./2012 and Departmental Appeal have been dismissed vide Order dated 26.05.2017. Learned Counsel for the Assessee further submitted that in A.Y. 2007-2008, the Departmental Appeal have been dismissed by the Hon’ble Delhi High Court in ITA.No.91 of 2018 vide Judgment dated 29.01.2018. Same Judgment have been followed by the Hon’ble Delhi High Court in A.Y. 2006-2007 in ITA.No.807/Del./2017 dated 30.01.2018 and Departmental Appeal have been dismissed. He has, therefore, submitted that the issue is covered in favour of the assessee by the Order of the Tribunal as well as the Hon’ble Delhi High Court. Copies of the Orders are placed on record.

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Order pronounced in the open Court.