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Income Tax Appellate Tribunal, DELHI BENCH “I-2 NEW DELHI
Before: SHRI R.K. PANDA & SHRI AMIT SHUKLA
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “I-2 NEW DELHI
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER & SHRI AMIT SHUKLA, JUDICIAL MEMBER
I.T.A. No.1477/DEL/2017 Assessment Year: 2010-11
XL India Business Services Pvt. Ltd., vs. Addl. CIT, FF-101, Building No. G-11, Special Range-9, Sarines Sonia Sadan, Community New Delhi. Centre, Vikas Puri, New Delhi. TAN/PAN: AAACX 0309A (Appellant) (Respondent)
I.T.A. No.4833/DEL/2017 & CO No.202/DEL/2017 Assessment Year: 2010-11
Addl. CIT, vs. XL India Business Services Pvt. Ltd., Special Range-9, FF-101, Building No. G-11, New Delhi. Sarines Sonia Sadan, Community Centre, Vikas Puri, New Delhi. TAN/PAN: AAACX 0309A (Appellant) (Respondent)
Appellant by: Shri Salil Kapoor, Adv & Ms. Ananya Kapoor, Adv. Respondent by: Shri Sanjay Kumar Yadav, Sr. D.R. Date of hearing: 08 05 2018 Date of pronouncement: 03 08 2018
O R D E R PER AMIT SHUKLA, J.M.: The aforesaid Cross Appeals and Cross Objection have been filed by the assessee as well as by the revenue against impugned order dated 28.09.2016, passed by ld. CIT (Appeals)-XLIV, New Delhi for the quantum of assessment passed u/s.143(3)/144C for the Assessment Year 2010-11.
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In the grounds of appeal, the assessee has challenged various additions/disallowances under corporate tax and also raised several grounds for challenging the transfer pricing adjustment of Rs.6,28,58,925/-. Since as many as 24 grounds have been taken with various sub grounds, therefore, for the sake of ready reference we are tabulating the addition made on corporate issues first which are subject matter of grounds of appeal; and also, the comparables challenged on the transfer pricing grounds: -
Addition/Disallowance Amount (in Rs.) 1. Disallowing deduction claimed u/s.10A of the Act on 63,67,249/- interest income earned from short term fixed deposits by considering the same as income from other sources 2. Addition to “interest on short-term fixed deposits’ on 1,02,261 account of reconciliation with TDS certificates and taxing it as ‘Income from Other Sources’. 3. Reduction in deduction claimed under section 10A of the 52,18,911 Act by making adjustment to ‘export turnover’ on account of unbilled revenue and sundry debtors 4. Disallowance by invoking provisions of section 40(2)(b) 80,72,451 r.w.s. 92CA of the Act, alleging excess payment 5. Disallowance of ‘provision for bonus’ by treating it as ‘unascertained liabilities’ for computing book profits under section 115JB of the Act.
In the transfer pricing grounds, the assessee has challenged the following inclusion/ exclusion of 8 comparables: i) TCS-E Serve International Ltd. (included by the TPO); ii) TCS-E Serve Ltd. (included by the TPO);
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iii) Omega Healthcare (included by the TPO); iv) R Systems International Ltd. (Segmental) (excluded by the TPO); v) Caliber Point Business Solution (excluded by the TPO); vi) C G-VAK Software & Export Ltd. (excluded by the TPO); vii) Microgenitics Systems Ltd. (excluded by the TPO); viii) Informed Technologies India (excluded by the TPO).
In the Revenue’s appeal, the Revenue has challenged exclusion of the following 3 comparable by the ld. CIT(A) which was included by the TPO: (i) M/s. Accentia Technology Pvt. Ltd.; (ii) M/s. I-Gate Global Solution Ltd.; (iii) M/s. Infosys BPO Ltd.
We will first take up the transfer pricing issues. The brief facts are that the assessee-company was incorporated on 14th November, 2003 to provide IT Enabled Services (ITeS) to its associates enterprises. It has 100% export-oriented unit under the Software Technology Park Scheme. It had entered into a ‘master service agreement with’ its AE, XL Services Switzerland for providing back up support with respect to following services: - Finance: The finance operation at XL India includes the following: a. Report preparation: Preparation of financial reports (income statement and balance sheet)
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and operational reports for internal use (internal) as well as reports for submission to the insurance regulator (external). b Reconciliation Reconciliation of general ledger balances in the financial accounting system with balances from various input systems; includes bank reconciliation, TPA reconciliation and other account reconciliation. c. Booking of accounting entries: Booking of Journal entries in the financial accounting system based on input received from staff onshore. d. Re-insurance operations: Preparation of statement of account for re-insurers, accounting of premium and losses and running interface between the re-insurance input system and financial accounting system. e. Tax Assisting in the preparation of tax returns and calculation of indirect tax/corporate tax due. f. Others Assisting the internal audit team and SOX compliance team to conduct audits and SOX compliance activities.
Acturial Acturial Includes analysing the losses on the specialised actuarial software Reserve Pro and providing recommendations. XL India is involved in creating various reports which is then circulated to relevant stakeholders. The team is also involved in commutation pricing calculations and capital adequacy tests. Operations a. Credit Control: Includes the following services: • Reconciliation of entries in broker statements with the entries in databases like PeopleSoft and Genius; and • Central settlement from clients, cash booking and inter branch
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accounting. b. Underwriting: (i) Property: It Includes risk modeling, portfolio analysis, coding of quotes and endorsements in the underwriting system and generation of relevant reports for the business from the underwriting system. Risk modeling and portfolio analysis involves entry of relevant data into software with assumptions for the purposes of analysis. (ii) Casualty and Specialty: Inputting quotes received from underwriters into various Underwriting systems, generating quote letters, entering data for the issuance of the policy letter and endorsements. c. Claims It includes setting up new claims, reserves, claims related amendments, making interim and final payments and reconciling statements in accordance with developed process flows. d. GDMS ("Global Data Management Services") Supporting the onshore staff in maintenance of databases like GENIUS, WINS, PeopleSoft etc. e. Re-insurance Administration Re-insurance administration includes performing various activities like calculating and initiating recover request of re-insurance claims, calculating the premiums to be paid to the reinsures, settlement of accounts for inward premium, recording of additional or reversal premium entries. f. Service Commitment & Global Programs: Tracking the process/progress of critical accounts identified on the basis of certain business conditions. The team in India also updates country guides, Service & fronting manuals and provide other reporting and administrative support. g. Investment Reconciliation and reporting:
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Reconciliation of investment data between the accounting system and PACE, perform data checks in PACE and preparation of various investment data reports.”
During the year under consideration, the assessee has entered into following international transactions: -
Nature of international transaction Method selected Amount (in INR) Provision of IT enabled services TNMM 677,280,476 Payment of interest on external - 4,546,493 commercial borrowings Reimbursement of expenses - 654,191 received from associate enterprises
The TPO has made an upward adjustment of provision for IT Enabled Services; and other transactions were accepted to be at arm’s length. To bench mark the transaction of ITES, the assessee has chosen TNMM, as the most appropriate method by taking OP/TC as the PLI. The assessee after detailed search analysis, short listed 13 comparable companies within average profit margin of 14.85%. Since assessee’s operating profit on operating cost was 18.92%, hence, it was reported that assessee’s margin are at arm’s length. However, the TPO rejected most of the comparables short listed by the assessee and carried out his own search after applying various filters and finalised following 11 comparables: -
No. Company Name OP/TC (%) i. Accentia Technologies Services Ltd. 43.07 ii Capgemini Business Services (India) Ltd. 27.32
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iii Cosmic Global Ltd. 18.28 iv E4e Healthcare 31.03 v Fortune Infotech Ltd. 22.80 vi I-gate Global Ltd. 24.54 vii Infosys BPO Ltd. 31.46 viii Jindal Intellicom Ltd. 13.62 ix Omega Healthcare 15.31 x TCS E-Serve International Ltd. 53.80 xi TCS E-Serve Ltd. 53.38 Average profit margin 31.33
Out of 11 comparables, the TPO has considered 4 comparables of the assessee also, namely, i) Cosmic Global Limited; ii) E4e Healthcare; iii) Jindal Intellicom Pvt. Ltd.; and iv) Fortune Infotech Ltd. Since the average PLI of the comparables selected by the TPO was arrived at 31.33%. accordingly, adjustment of Rs.67,87,84,800/- was made.
Now we shall take up various comparables which has been contested by the assessee.
i) TCS E Serve Ltd.:
8.1 Before the TPO, the assessee had raised his objection that, firstly, there is no separate segmental information in respect of ITES and Software Development Services; and secondly, it is functionally dissimilar with the assessee company. However, the TPO after detail discussion has rejected the assessee’s objection and included it for the purpose of comparability analysis. Ld. CIT(A) in so far as the
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assessee’s contention are that this company is also involved in software testing and verification, held that these services are not separate software development but had done at the time of implementing the data center management activities at the time of execution of BPO services, therefore, these technical services are not independent software development services. The relevant observation and the findings of the ld. CIT(A) reads as under: “I have perused the entire remarks of the annual report. In the first line it is stated that company is engaged in the business of providing information technology enabled services i.e. business process outsourcing services primarily to CT Group Entities. As far as technical services are involved i.e. software testing verification etc. are concerned, these services are not on separate software development. These technical services are done at the time of implementing the data centre management activities. Therefore, even if some technical services are provided, it is at the time of execution of business process outsourcing service i.e. ITES. Therefore, these technical services are not separate independent software development services. The scope of technical services in this company is restricted to verification of the software used while applying them in business processing outsourcing. These facts that the development services are restricted to the software used in the business processing outsourcing services only was not brought to the knowledge of Hon'ble ITAT. What company provides its client namely City Group India is one BPO/ITES only. There is no separate software development charges therefore the same is an integral part of ITES/BPO service charge. Therefore, in my view this company has single segment of ITES/ BPO service which at the most can to be said to be high end.
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The appellant company as per the function of the company is characterized in earlier paragraph is providing high end ITES services as per the master service agreement where the appellant undertakes financial operational, actuaries, credit control underwriter claims, GDMS re-insurance administrative services payment and global programs and investment reconciliation and reporting while performing the IT enabled services. The TPO has held that the appellant covers entire gamut's of ITES namely call centers technology, support transactional & services analysis. Therefore, I conclude that the appellant provides services to its AE of high end ITES. Therefore, functionally the company namely TCS International Ltd is a good comparables. Further, since I have held that this company is single segment therefore, it satisfies the filter of services revenue more than 75%. Further, Ld AR argued that during the year there is extraordinary growth in revenue and profit of this company. Therefore, he attributed some special reason for such exponential increase. In any view, unless, Ld AR points out any exceptional reason for the increase in revenue & profit of this company, this rise in turnover 8s profit itself would not constitute special reasons for disqualification as good comparable. Accordingly, this company will remain in the final list of the comparables. Ld AR has further argued that this company was takeover by Tata Consultancy Services Ltd earlier year. This is the first full year of operation after takeover by TCS Ltd. The company has used customer base of name of TCS to optimize its profit. I have considered this argument of Ld. AR. Firstly, this company was not taken over by TCS Ltd. during this year. Secondly, as reproduced in earlier paragraph. The appellant has provided ITES to City Group only. Therefore, the use of synergy of TCS name and use of its customer base ’is factually incorrect. The Ld. AR has not provided any evidence that this company is using software or technical
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expertise of TCS Ltd. in its operation. Therefore, the arguments of Ld AR is not theoretical and without any evidence or facts. I confirm the action of TPO to include TCS-E-Serve Ltd. in final list of comparable.
8.2 Before us, the learned counsel for the assessee submitted that, firstly, this company besides ITES services is also engaged in the business of software testing, verification and validation of software at the time of implementation of software and data center management activities and development of transport management software. Hence, the services are different from the company providing non- software development and that of the assessee; secondly, he submitted that there is no segmental information available and there is no bifurcation available in respect of revenue from transaction processing and technical services, in absence of which it cannot be held different comparable; thirdly, the other main objection of the learned counsel was that this company also contributes to Tata Brand equity which has substantially increased the operating profits and if compared to assessee, it does not own any kind of tangibles; and lastly, it was submitted that it was a part of TCS/Tata Group which has a large client base and it was first full year as a step down subsidiary of TCS, and therefore, there is a substantial growth and the income which is three time higher then the last year and there was a manifold increase in the profit also. Thus, he submitted that in view of these facts and also looking to the fact that it has a large size and scale of operation, hence cannot be included. In support, he has
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strongly relied upon various judgments including that of Hon'ble Delhi High Court in the case of B.C. Management Services Pvt. Ltd., ITA No.1083/2017 and catena of other Delhi Tribunal decisions wherein TCS E Serve Ltd. has been found to be non-comparable with the company providing simple BPO Services.
8.3 On the other hand, learned DR submitted as under: -
A perusal of the Annual Report of TCS E-Serve Ltd shows that it is providing IT enabled Services or Business Process Outsourcing Services in Banking and Financial Services Industry domain to Citigroup entities being its largest customer. The company is engaged in Business Process Outsourcing (transaction processing) services to the Banking and Financial Services Industry (BFSI) which is considered a single segment. Like TCS the functions performed are similar to the assessee based on same argument as in case of TCSI. Annual Report of TCS E Serve does not show any significant difference in the functions being performed by TCS E Serve and TCSI as both provide transactional processing services to its client. For both the companies their main client is Citigroup entities. Also the technical services are part of the entire gamut of services provided by the assessee as well as TCS E Serve and therefore the segmental information relating to the technical services may not be relevant. This does not involve any software development activity only verification and validation of software for ITeS operation. Thus, since the transactions relating to the transactional processing and technical services (Provision of ITeS) are inter connected and continuous transactions therefore these can be evaluated and compared on aggregate basis. Regarding the brand value relating to TCS it is submitted that the entire revenue of TCS e-Serve is from Citigroup entities therefore it can be said that the revenue of the TCS is not effected by Tata Brand.”
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We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material referred to before us. On perusal of the annual report of TCS E Serve Ltd., it is seen that it has reported that the financial year 2009-10 was the first full year as step down subsidiary of TCS and its income has increased manifold. The background and principal activity carried out by this company has been stated as under: Background and principal activities; TCS e-Serve Limited is engaged in the business of providing Information Technology - Enabled Services (ITES) / Business Process Outsourcing (BPO) services, primarily to Citigroup entities globally. 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.”
Its ITES Services has been bifurcated into; i) transaction processing; and ii) technical services. In so far as the transaction processing is concerned, it is mostly processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. These functions can be said to be in the realm of BPO services and quite akin to assessee’s functions as incorporated in the
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earlier part of the order. However, so far as ‘technical services’ are concerned, it involves, software testing, verification, validation of software at the time of implementation in data center management activities. ‘Software testing’ is basically the process of verifying a system with the purpose of identifying any errors, gaps or missing requirement vis-à-vis the actual requirement of the software so that the software applications meet the end users’ requirement. It involves the execution of software component or a system component to evaluate one or many properties for finding out various errors or defect in the software or system and understand the risks of software implementation. It involves various testing methods and techniques to test the software which requires highly technical expertise and skill. Verification of software is the process for evaluating the system or component to determine whether the products given development phase satisfy the condition imposed at the start of that phase; and Validation is the process of evaluating the system or component during or at the end of the development process to determine whether it is satisfying specific requirement. The verification and validation process again require high technical expertise and methods for testing the software quality. All such functions are akin to software development. These technical services ostensibly cannot be held to be simple ITES/BPO services if compared to the assessee’s functions. We find that assessee is mostly into finance operation which includes report preparation, reconciliation,
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booking of account entries, reinsurance operation tax; and actuarial analysis; and its operation consist of credit control under writing, claims, global data management services, investment, reconciliation, reporting etc. Though these services may be slightly more than BPO services and at par with high end IT enabled services, but none of these activities can be reckoned to be in realm of highly technical software services which require high technical expertise/ skills and methods for conducting software testing, verification and validation of software. One of the observations of the Ld. CIT(A) to include this as comparable is that software testing, etc., are for data center management only, hence it is part of IT enabled services. Data centers manage and process huge complex data especially in case of Citi Bank which is possible with apt software systems and if there are any errors or defect or any kind of gap in the software, then it can risk the data and jeopardise the whole banking system. TCS E Serve provides such software testing, verification and validation to remove the errors and defects and see that the software is as per the requirement and evaluate the entire system. For carrying such technical services across the entire data management centers, it is paid by the Citi Group. This technical service is different from transaction services which is pure ITeS. Now how much component of the fees is for such technical services is not clear from its financials. The income reported by the TCS E serve is under the one head ‘transaction process and other services’. From such a
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description, it is very difficult to deduce as to how much is for rendering technical services for software testing, verification and validation and how much is for transaction services. Apart from that, various courts including that of Hon'ble Delhi High Courts have held that the association of higher brand value of Tata and TCS have impacted its revenue and the profitability in a positive manner, because associated with such a big brand, has a direct impact on price negotiation which ultimately affects the profitability also. Thus, on functional level and looking to technical services rendered by the TCS E Serve Ltd., we are of the opinion that it cannot be held to be comparable with the assessee whose functions are purely back end office support services. Thus, this comparable is directed to be excluded.
ii) TCS E Serve International Ltd.: 10. This company too has reported similar function and activities as that of TCS E Serve Ltd. In its annual report which are as under: - Background and principal activities: TCS e- Serve International Limited is engaged in the business of providing information Technology-Enabled Services (ITES)/Business Processing Outsourcing (BPO) services, primarily to Citigroup entities globally. 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
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its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data center management activities.”
Thus, the functions of this company are similar to what has been discussed above. Ld. CIT(A) too has given exactly the similar finding and the contention of the learned Department Representative are again the same.
After hearing both the parties, we find that this company is also rendering almost similar kind of services as provided by TCS E Serve Ltd. Thus, this company too apart from transaction processing services is also providing technical services which involves software testing, verification and validation of software at the time of implementation of data management activity services. While analysing the functions of TCS E Serve, we have already held that software testing, verification and validation of software are highly technical and require high level of technical expertise for carrying out such type of software relating testing, and therefore, such a function cannot be compared with that of the assessee. Again, in the profit and loss account, the income has been shown as transaction processing and other services which does not give any segmental information with regard to the technical services rendered by this company, therefore, we hold that at the functional level this company cannot be held to be comparable.
In so far as the contention raised by the learned
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Department Representative in respect of aforesaid two comparables that, software testing does not involve any software development activity but only verification and validation of software for ITES operations and that assessee also carries out similar technical services under Global Management Data Services, for supporting the on-shore staff and maintenance of data base. As discussed earlier, software testing, verification and validation is not something which can be said to be a simple data management services, because this require very elaborate and sophisticated techniques and method to find out various defects and errors in a software application program and to test the quality of software product. Verification and validation are both process of evaluating a system to determine whether the product or the development process satisfies the specific requirement. Such a process require various stages of technical evaluation and testing techniques which can be done by highly technical experts. Simply saying that these are part of ITES operation, it would not be correct, because back office support services or simple data management does involve such technical methods of software testing, verification and validation as it is very similar and akin to software development. Accordingly, we do not find any merits in the submissions made by the learned DR and same is rejected.
Thus, in view of our discussion made above, we hold that, both TCS E Serve Ltd. and TCS E Serve International Ltd. cannot be held to be comparables for benchmarking the
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assessee’s margin and are hence directed to be deleted.
iii) Omega Healthcare Ltd.: 14. The only reason given by the TPO to exclude this comparable is that, annual information of this company was not available in public domain. Ld. CIT(A) has directed the TPO to verify whether the information and annual report of the company is available in public domain or not and if it is available the same should be included. Before us, the ld. Counsel has provided the annual report which is appearing at pages 658 to 674 of the annual report compilation.
Since the only reason assigned to reject this company is that its financial data is not available in public domain, accordingly, we remand this comparable to the file of the TPO who shall examine the annual report and decide accordingly.
iv) Caliber Point Business: 16. This company has been rejected by the TPO and ld. CIT(A) on the ground that this company follows the different financial year ending but there has been no comment as to whether this company is functionally comparable or not.
Before us, the learned counsel submitted that quarterly results for different financial years are available and now there are various judgments including that of Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India Pvt. Ltd., ITA No.217/2014 and Techbooks International
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Pvt. Ltd., ITA No.343/Del/2017, wherein it has been held that if quarterly results are available then profit margin can be worked out.
After considering the rival submissions and following the ratio laid down by Jurisdictional High Court in the aforesaid cases, we hold that if the quarterly results of the relevant financial year of this company are available and margins can be computed proportionately, then same can be adopted; and simply because this company follows different financial years ending, the same cannot be excluded if functionally it is found to be comparable. Accordingly, we remand this comparable back to the file of the TPO to examine the quarterly results and see the proportionate profit margin.
v) R Systems International Ltd. (Segmental) 19. Here, again this company has been rejected by the TPO on the ground that company has different financial year ending, that is, 31st December, which too has been upheld by the ld. CIT(A) on the ground that quarterly results are not available in public domain.
Before us, the learned counsel submitted that quarterly results are now available in public domain for the financial year ending 31st March, 2010, and therefore, margin can be computed based on quarterly results. He also strongly relied upon the judgment of Hon'ble Delhi High Court in the case of
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Mckinsey Knowledge Centre India Pvt. Ltd. (supra) and Techbooks International Pvt. Ltd. (supra).
After considering the rival submissions and on perusal of the relevant findings, we hold that if company is functionally comparable and quarterly result of the company are available, then based on such quarterly result margin can be computed. Hon’ble Punjab and Haryana High Court in CIT versus Mercer Consulting India Private Limited (ITA No. 101 of 2015), it is held that if the audited quarterly results can be used to compute margin for the year ending on March 2009, then company should be included in the final set of comparables. This Tribunal in the case of Cadence Design Systems (India) Pvt. Ltd. in ITA No. 2074/Del/2014 has discussed and analysed the same issue in the case of R System International Ltd. after observing and holding as under: - “19.2 We have heard rival submissions and also perused the relevant finding given in the impugned order. This comparables company has been rejected not on the ground of functionality albeit on the ground that it is following the financial year accounting from January to December (i.e. calendar year). Though a comparable company following a different financial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period is
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available then it cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Ld. Counsel before us submitted that the audited accounts of R- Systems for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.03 2009 can easily be deduced. If there are no major incident of factors disturbing the profit margin in that quarter, whose results are being worked out and the transactions of the Company are carried out in the normal course of business, then we do not find any reason to reject the comparable out rightly on the aforesaid ground. The working of PLI based on audited accounts as incorporated above clearly clinches the point. The Hon'ble P&H High Court in CIT Vs. M/s. Mercer Consulting India Pvt. Ltd., in the context of R- Systems only had made a very important observation which reads as under:- “27. The TPO excluded the case of R-Systems International Limited from the list of comparables. The ITAT included the same. The Transfer Pricing Officer excluded the case of R- Systems International Limited on the ground that it follows the calendar year i.e. 1st January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The Transfer Pricing Officer followed an order passed by the Mumbai Bench of the Tribunal in ACIT v. Hapag Lloyd Global Services Ltd. 2013- TH- 68-ITATMUM-TP in which it had been held that a company with a different financial year ending cannot be compared. 28. We are unable to agree with the decision of the Transfer Pricing Officer and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different it would make no difference. If it is possible to determine the value of the transactions during the corresponding period, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the Transfer Pricing Officer must refer to the corresponding
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period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- "10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transaction has been entered into.” 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus, so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R-Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, the same cannot be held as not passing the test of sub-rule (4) of Rule 10 B.” Thus, respectfully following the judgment of Hon’ble High Court, we hold that this company should be accepted as comparable company for the purpose of benchmarking the assessee’s margin.”
Thus, in view of the aforesaid decision, we direct the TPO to examine the quarterly result and work out the proportionate profit margin of bench mark with the PLI of the assessee. Accordingly, this comparable is accepted subject to aforesaid condition.
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vi) Microgenetic System Ltd.; vii) CG-VAK Software & Export Ltd.; viii) Microgenitics Systems Ltd.;
All the three comparables have been rejected by the TPO on the ground that the revenue of these companies are less than Rs.5 crore and in case of CG-VAK another point of rejection has been taken by the ld. CIT(A) is that employee cost is less than 25%.
Before us, the learned counsel submitted that all these three companies are functionally comparable but they have been excluded on the ground that they have low turnover. Moreover, in the case of CG-VAK, TPO’s observation is not correct as the employee cost percentage is 68.22% which is much higher than the filter of 25% applied by the TPO. In support of his contention that low turnover cannot be the basis for rejection, he strongly relied upon the judgment of Hon'ble Delhi High Court in the case of Chryscapital Investment India Pvt. Ltd vs. Dy. CIT, ITA No.417/2014. On the other hand, Ld. DR strongly relied upon the order of TPO and CIT(A).
After considering the relevant finding given in the impugned orders as well as the arguments placed by both the parties, we find that only reason for rejecting the three comparables is that their turnover is less than Rs. 5 crores, and therefore, same cannot be included for the comparability
24 I.T.A. No.1477, 4833/Del/2017 & 202/Del/2017
analysis. Such a filter applied by the TPO in the search matrix of assessee to reject the comparables cannot be upheld as it amounts to cherry picking. We find that now this issue of rejection on low turnover stands settled by the judgment of Hon'ble Delhi High Court in the case of Chryscapital Investment India Pvt. Ltd vs. Dy.CIT, (supra). Thus, we hold that these comparables cannot be rejected on low turnover filter.
Now we will come to three comparables as contested by the Department in the grounds of appeal; namely, i) Accentia Technology Pvt. Ltd.; ii) I-Gate Global Solution Ltd.; and iii) M/s. Infosys BPO Ltd.
i) Accentia Technologies Pvt. Ltd.: 26. In so far as Accentia Technology Pvt. Ltd. is concern, the learned TPO has included the said company as comparable, because, this company is into ITES and rejected the assessee’s submission that, since there was a merger with Asscent Info Serve Ltd., in this year, therefore, due to such extraordinary event, this company cannot be held to be comparable. The TPO held that such an acquisition does not construe or become extraordinary events as there is nothing to suggest company’s functions have changed substantially after the acquisition and it does not affect any normal operation of the business. He also compared the comparative income and Operating Profit of three financial years from 2007-08 to 2009-10 and held that there is not much
25 I.T.A. No.1477, 4833/Del/2017 & 202/Del/2017
difference in the operating profit. In so far as the assessee’s contention that this company operates in a healthcare receivable management and its income is from medical prescription and coding, collection and income from client, and therefore, it is functionally different, he rejected the same on the ground that this company is too into ITES services carrying host of services which is quite akin to assessee.
Ld. CIT(A) has directed the TPO to exclude the said comparable due on the fact there was an extraordinary event of merger with Ascent Info Serve Pvt. Ltd. during the year, and therefore, the said company cannot be held to be comparable at all.
Learned Department Representative submitted that the amalgamation cannot be held to be an extraordinary event, because, here in this case it has not impacted the profit margin which has been clearly spelled out by the TPO in his impugned order. In fact, the profit margin in the financial year 2008-09 was 52.50% which in this financial year is 43.07%. In so far as the issue that this company is into medical coding and prescription, medical bill, etc., he submitted that under the TNMM, one has to see the functional similarity and not whether the similar kind of services are rendered or not because similarity of function has to be seen. Thus, this company has wrongly been rejected by the ld. CIT(A).
On the other hand, learned counsel submitted that
26 I.T.A. No.1477, 4833/Del/2017 & 202/Del/2017
this company is into KPO services is carrying out diversifying nature of operation in the medical field whereas assessee renders only simple BPO services. Further, this company has significant intangibles consist of goodwill brand and IPR whereas no intangible assets are owned by the assessee company. Lastly, he submitted that it is a well settled proposition under the transfer pricing law that if there is any extraordinary event like amalgamation, acquisition or merger, then same cannot be taken for the comparability analysis because it is not sure what is the effect of overall turnover and profitability. In support, he has strongly relied upon the judgment of Hon'ble Delhi High Court in the case of Ameriprise India Pvt. Ltd., ITA 461/2016. Besides this, he also cited various decisions of this Tribunal in the case of Techbooks International Pvt. Ltd., ITA No.240/Del/2015, Equant Solutions India Pvt. ltd., ITA No.1202/Del/2015 and catena of other decisions wherein due to this extraordinary even this company has been held to be non-comparable.
After considering the aforesaid submissions and on perusal of the relevant findings given in the impugned order as well as material referred to before us, we find that this company is engaged in providing healthcare receivables cycle management services. It is not in dispute that in pursuance of scheme amalgamation of erstwhile company, Ascent Info Serve Pvt. Ltd. with the assessee company, this company was amalgamated with the assessee company during the relevant financial year and hence there is an extraordinary event
27 I.T.A. No.1477, 4833/Del/2017 & 202/Del/2017
during the year. Apart from the functions and services provided by this company has been held to be high level KPO services providing company which now has been held to be functionally different from the company providing BPO Services. In the case of Cadence Designs Supra this comparable has been discussed and excluded in the following manner: - “14.3 We have considered the rival submissions and also perused relevant finding given in the impugned order. Accentia Technologies Ltd. has two main business areas namely, health care receivable cycle management services and software products for BPOs. It earns substantial part of its income from coding activities which is primarily related to e-software development. Various streams of income shown in the annual report reflects that it has income from medical transcription, billing and collections, income from coding, etc. It is not in dispute that segmental information for each streams of income are not available; therefore, it would be very difficult to benchmark profit margin with the assessee-company, which is only rendering back office support services. Another important fact which is borne out/ from the its annual report is that, during the year under consideration, assessee has acquired business of Oak Technologies Inc. USA which has led to rapid increase in its customer base. Such acquisition definitely has an impact on the trading result and can distort profit margin. Thus, we hold that Accentia Technologies Ltd. cannot be included in
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the list of final comparables and accordingly, the same is directed to be excluded.”
Thus, on these two counts, that it is functionally different and there is also event of extraordinary event, we hold that this company cannot be held to be comparable and same has rightly been rejected by the ld. CIT(A).
ii) I-Gate Global Services Ltd. 31. This company too has been taken as comparable by the TPO on the ground that it is providing IT Enabled Services. So far as the assessee’s contention that it is functionally non- comparable, because it is also into providing software development services and there is no separate segment for ITES has been rejected by the TPO on the ground that under TNNM such broad similarities of functions are required to be seen and if over all functions are to be compared same with that of the assessee.
Ld. CIT(A) held that since this company is also into providing software development services and there is no separate segmental information for ITES, therefore, he directed the TPO to exclude this company.
After hearing both the parties and on perusal of the relevant findings given in the impugned order, we find that this company is engaged in the business of developing software products besides carrying out ITES services. No segmental information or data has provided with regard to
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these two activities. Moreover, developing software products is entirely a different function altogether, and therefore, functionally it cannot be held to be comparable. Moreover, we find that ld. CIT(A) has noted that there was an amalgamation of I-Gate Global services with the assessee company during the relevant financial year and on that basis also ld. CIT(A) has held to be non-comparable. Under these facts and circumstances of the case, once there is no segmental information with regard to the information technical services, i.e., development of software products and also there is an extraordinary event of amalgamation, therefore, this company has rightly been excluded by the ld. CIT(A).
Infosys BPO Ltd. 33. The TPO has included this company as a comparable and this company is engaged in ITES Segment, and therefore, this company is functionally similar to that of the assessee. He rejected the assessee’s contention that assessee has acquired membership interest in mechanic system analysis which is extraordinary event. However, the ld. CIT(A) had excluded this company by following the judgment of Hon'ble Delhi High Court in the case of Magnet India Technology Pvt. Ltd. on the ground that this company had substantial intangible in the form of goodwill and had different risk factors, and therefore, same cannot be included.
After considering the rival submissions and on perusal the relevant findings given in the impugned order as well as
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the material referred to before us, we find that, Infosys BPO Ltd. operates on a large scale of business operations attending to wide variety of customer operating in different industries and has a turnover of more than Rs. 1126.63 crores as against the turnover of assessee which is Rs. 76.73 crores. The company has a high brand value and incurred brand building expenditure of about Rs. 78 crores, whereas assessee does not hold any significant intangibles. Apart from that, it is a substantial selling and marketing expenses which is 6.93% of sales, whereas in case of the assessee, it has not incurred any expenses for business promotion/marketing etc. being a captive service provider. Such a huge brand value and marketing expense has a direct effect in negotiation of prices and impacts profit margins. Now there many decisions where Infosys BPO has been held to non-comparable, including with captive service provider companies, including that of Hon’ble Delhi High Court in the case of Actis Global Service Pvt. Ltd., ITA 94/2017. Thus, we hold that this company cannot be held to be comparable. Accordingly, all the three comparables has rightly been excluded by the ld. CIT(A) which is affirmed.
Now we shall discuss the issues raised on various additions/disallowances on corporate tax issues. In ground no.4 to 4.2, the assessee has challenged the disallowance of deduction u/s.10A on interest income earned from short term deposits by considering the same as income from other sources for sums amounting to Rs.63,67,249/-.
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The facts in brief are that, as discussed in the operating part of this order, the assessee company is engaged in the business of providing ITES services which is registered STPI as 100% EOU under the Software Technology Park Scheme and hence was entitled for claim of deduction u/s.10A. Learned Assessing Officer noted that assessee has received interest on FDRs from Citi Bank amounting to Rs.63,67,249/- which could not be said to be earned from the business activity of the assessee. He observed that there was no business exigency or condition to make FDRs, therefore, the investment in FDRs cannot be regarded as inextricably connected with the business of assessee and accordingly he held that interest received from such FDRs constitutes ‘income from other sources’ and is not eligible for deduction u/s.10A.
Before the ld. CIT(A), the assessee submitted that the assessee has outstanding external commercial borrowings (ECB) amounting to Rs.2,28,55,000/-. It was pointed out that assessee has filed an application before RBI for obtaining ECB on 16th January, 2005, which was granted by RBI on 19th January, 2005 to draw ECB with first repayment installment schedule on 31st December, 2012. On 29th January, 2009 considering the availability of business funds with the assessee, it filed an application with Citi Bank for prepayment of ECB which was duly approved on 17th May, 2010 and on 30th July, 2010, assessee repaid the ECB loan. During the pendency of the approval from the requisite authority, the
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assessee temporarily park its business fund with the bank and also paid applicable interest on such outstanding ECB till its payment. However, ld. CIT(A) held that the assessee could not provide the details of the dates when the funds were kept for fixed deposits and whether these fixed deposits were made prior to the 29th January, 2009 when application was filed for prepayment of ECB; and thus, in absence of any data it is difficult to examine whether the fixed deposits was made for short term for making payment of external borrowings. Accordingly, he confirmed the finding of the Assessing Officer.
Before us, the ld. counsel submitted that the assessee temporarily parked its business funds in short term fixed deposits with the banks until the date of repayment so as to earn maximum possible return to mitigate the cost of interest on ECB to be paid and used the interest income to effectively manage the working capital requirements of the assessee. Since the transaction was effectively connected with the business of assessee and its source was inextricably linked to the business of the assessee, therefore, such interest is to be treated as business income of the assessee. What is required to be determined is “the profits of the business” and not the profits derived from export activities carried on by the business. The words “derived from” which are present in Section 10A (1) are not to be found in Section 10A (4). Thus, all the profits (including interest income) which have nexus with the business of the undertaking will qualify for
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deduction. However, he fairly pointed out that in the preceding assessment year, i.e., 2009-10, this issue has been decided against by the Tribunal which has been confirmed by the Hon'ble High Court also on which SLP has been filed by the assessee before the Hon'ble Supreme Court. However, he pointed out that now there are various judgments of Hon'ble High Court as well as Hon'ble Jurisdictional High Court that if the FDRs made has a link with the business activities of the assessee, then such an interest earned has to be treated as part of total turnover while computing the income u/s.10A(4). He strongly relied upon the judgment of Hon'ble Karnataka High Court in the case of CIT vs. Motorola Electronics Pvt. Ltd.; decision of Hon'ble Delhi High Court in the case of CIT vs. Hritnik Exports Pvt. Ltd., ITA No.219 and 239/2014. Again, he pointed out that there is full Bench decision of Hon'ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd., reported in (2017) 87 Taxmann.com 182; and Hon'ble Karnataka High Court judgment in the case of CIT vs. Hindustan Gums & Chemicals Ltd., reported in (2016) 72 Taxmann.com 90. In all these judgments it has been held that interest on bank deposits are part of profits of business eligible for deduction u/s.10A/ 10B on the ground that the profits of business of undertaking would include its entire business income including receipts on account of interest. Following these judgments, now there are various decisions of the Tribunals including that of ITAT Delhi Bench holding this issue in
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favour of the assessee. Thus, he submitted that earlier judgment in the case of the assessee will have not any binding judicial precedence especially when the Hon'ble Jurisdictional High Court on similar issue has decided the matter in favour the assessee.
On the other hand, learned Department Representative has strongly relied upon the order of the ld. CIT(A) and submitted that, whence in assessee’s own case this issue has been decided against the assessee from the stage of the Hon'ble High Court, then, same view should be followed.
We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as cases referred to before us. The assessee has earned interest on short term fixed deposits amounting to Rs.63,67,249/-. The assessee’s contention has been that it had parked its funds generated out business activities in a short-term fixed deposit for the reasons that; firstly, to mitigate interest cost on outstanding ECBs which it could not repay pending regulatory approvals; secondly, amount was kept as margin money for obtaining bank requirement by STPI authorities; and lastly, amount kept in order to effectively manage the working capital requirement of its business. Assessee had an outstanding ECB amounting to Rs.2,28,55,000/- which was obtained in the earlier years for the purpose of business. As per the terms of ECB loan repayment schedule, the first installment was due on 31st December, 2012. However, on 29
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January, 2009 considering the sufficiency of fund available, the assessee filed an application before the Citi Bank seeking requisite approval for prepayment of outstanding ECB. During the pendency of such approval from regulatory authorities the assessee temporarily parked its business fund with the bank on short term basis and also paid applicable interest on such outstanding ECB till its repayment. Thus, what is required to be seen in Section 10A r.w.s. 10A (4) is to determine profits of the business and not the profits derived from export activities carried on by the undertaking. The words ‘derived from’ which is appearing in Section 10A (1) is not found in Section 10A (4) which provides the computation mechanism of the profit which has been enshrined for the purpose of sub-section (1) and (1A) of Section 10A. In assessee’s case the Tribunal has decided this issue against the assessee on the ground that fixed deposits are not maintained by the bank for the requirement of letter of credit and it this finding of the Tribunal which has been affirmed by the Hon'ble High Court after making following observations: - “In the grounds of appeal before the ITAT no specific challenge was raised by the Assessee to the above factual finding that the FDs were not being maintained to meet any requirement of the Bank for opening LC or for any other business purpose. In that view of the matter, the Court is unable to find any infirmity in the above treatment of interest income as income from other sources. No substantial question arises for consideration on this issue.”
Thus, in that year the issue was decided against by the Hon'ble High Court on the ground that there was a factual
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finding that the FDRs were not maintained to meet any requirement of bank for opening LC or for any other business purpose. In this year, the assessee has given the explanation as to why the FDRs were placed to mitigate the interest cost and was kept as margin money obtaining bank guarantee and also for making prepayment of ECB pending approval from the liquidator authority. Since, ld. CIT(A) in a very cursory manner has rejected this contention on the ground that no details of dates have been given when the funds were kept for FDR. The Assessing Officer without examining the correct provision of law especially enshrined in sub section (4) of Section 10A has blanketly held that interest on FDRs is ‘income from other sources’ which is not allowable for deduction u/s.10A. Now there are catena of judgment of Hon'ble High Court including that of Hon'ble Jurisdictional High Court in the case of CIT vs. Hrithnik Export Pvt. Ltd. (supra) and Full Bench judgment of Hon’ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd. (supra). First of all, we find that Hon'ble Delhi High Court in the case of XLNC Fashions, ITA No. 438/2014, vide judgment dated 1st September, 2014 dealing with similar formula laid down in sub Section (4) of Section 10B had observed that sub Section (4) is a special provision which enables the assessee to compute the profits derived from the export of article or things or computer software and there is no conflict between sub-section (1) and sub-section (4). Both the provisions have to be read harmoniously, because later
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provides formula for finding out or compute what is eligible for deduction under sub-section (1). This ratio and principle were discussed by the Hon'ble High Court in the case of Hrithnik Export Pvt. Ltd. (supra) also, wherein the judgment of Hon'ble Karnataka High Court in the case of CIT vs. Motorola India Electronics Pvt. Ltd. (supra) was followed. Now full bench of Hon'ble Karnataka High Court has discussed this issue threadbare while examining the profits & gains of 100% EOU as to whether income by way of interest of bank deposits would be entitled to 100% deduction u/s.10A or not. Hon'ble High Court has discussed all the judgments of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT, CIT vs. Sterling Foods, and catena of other judgments, has observed and held as under: - “34. We are of the considered opinion that the above referred decisions relied upon by the learned counsel for the Revenue, Mr. Aravind do not cover the cases under Sections 10-A and 10-B of the Act which are special provisions and complete code in themselves and deal with profits and gains derived by the assessee of a special nature and character like 100% Export Oriented Units (EOUs.) situated in Special Economic Zones (SEZs), STPI, etc., where the entire profits and gains of the entire Undertaking making 100% exports of articles including software as is the fact in the present case, the assessee is given 100% deduction of profit and gains of such export business and therefore incidental income of such undertaking by way of interest on the temporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings and these cases cannot be compared with deductions under Sections 80-HH or 80-IB in
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Chapter VI-A of the Act where an assessee dealing with several activities or commodities may inter alia earn profits and gains from the specified activity and therefore in those cases, the Hon'ble Supreme Court has held that the interest income would not be the income "derived from" such Undertakings doing such special business activity.
The Scheme of Deductions under Chapter VI-A in Sections 80- HH, 80-HHC, 80-IB, etc from the 'Gross Total Income of the Undertaking', which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI-A under Section 80-HH, etc. The computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Profits and Gains of Business as per Sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income' as defined under Section 80-B(5) is computed and after which the consideration of various Deductions under Chapter VI-A in Section 80HH etc. comes into picture. Therefore, analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10-A or 10-B of the Act. The words 'derived by an Undertaking' in Section 10-A or 10-B are different from 'derived from' employed in Section 80-HH etc. Therefore, all Profits and Gains of the Undertaking including the incidental
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income by way of interest on Bank Deposits or Staff loans would be entitled to 100% exemption or deduction under Section 10-A and 10- B of the Act. Such interest income arises in the ordinary course of export business of the Undertaking even though not as a direct result of export but from the Bank Deposits etc., and is therefore eligible for 100% deduction.................
xxxxxxxxx
On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as 'Income from other Sources' under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act.”
Thus, the ratio and principle laid down in the aforesaid judgments is quite clear that the computation of profit as given in sub-section (4) of Section 10A has to be seen in the context of entire income derived from income of export from such eligible undertaking including interest income derived from parking of funds. The words ‘derived by’ undertaking in
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Section 10A are derived from the words enshrined in Chapter VI A, and therefore, Profits & Gains of undertaking including incidental income by way of bank deposits is also entitled for 100% deduction u/s.10A. Keeping in view this principle of law, we remand the issue for a limited purpose to the file of the Assessing Officer to examine the contention of the assessee that, whether the fixed deposits made by the assessee was made for over margin money obtaining bank guarantee; or for making prepayment of ECB for which funds were parked on temporary basis pending approval from the requisite authorities; or is in any manner inextricably linked with the assessee’s business. If the contention of the assessee is found to be correct on facts then deduction of such an interest has to be allowed while computing the profits u/s.10A. With this limited direction, the matter is restored back to the file of the Assessing Officer who shall decide after giving due opportunity to the assessee. Thus, grounds no.4 to 4.2 is treated as partly allowed for statistical purposes.
The next issue relates to reconciliation of interest with TDS certificates. The learned Assessing Officer has noted that assessee has declared interest income of Rs.63,67,249/- whereas in the details of TDS claimed, it was shown as interest income credit at Rs.64,69,690/-.
Before the Assessing Officer, the assessee has submitted as under: “It is imperative to note that the difference in interest income is
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arising only on account of estimations done by the Assessee based on accrual/mercantile system of accounting followed from year to year. From the interest reconciliation, you would appreciate that (he Assessee has offered higher interest income to tax in preceding year viz AY 2009-10. The shortfall in estimation of interest income during FY 2009- ID has been duty offered to tax in the subsequent year, viz. AY 2011- 12 Considering that the interest income earned by the Assessee has already been offered to tax in various years, no further interest income should be added back while assessing the income for AY 2010-11.”
However, the Assessing Officer added the difference of Rs.1,02,261/-.
Ld. CIT(A) has directed the Assessing Officer to verify the record and held that if this income has been offered to tax then the addition should be deleted.
Before us, the learned counsel submitted that interest income has been recognized in the books on the basis of accrual system of accounting which is being followed by the assessee. Before the Assessing Officer, FDR-wise reconciliation was filed and was pointed out that such a difference has duly been offered to tax in the year of accrual.
After considering the relevant observation and finding of the ld. CIT(A) and the contention raised by the learned counsel, we do not find any infirmity in the order of the ld. CIT(A), because if the difference of interest amount has
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already been offered to tax in the year of accrual then there is no point for taxing the same in this year. In any case, we have already held while deciding ground no.4 to 4.2 subject to certain verification by the Assessing Officer if the interest income is subject to deduction, then ostensibly no addition can be made. Accordingly, in view of the direction given in ground no.4 and also in line with the direction of the ld. CIT(A), we hold that the Assessing Officer shall verify and delete the addition accordingly.
Next issue as raised in grounds no.6 and 7 whether unbilled revenue of Rs.49,59,670/- was realized within the stipulated period for the purpose of computing the export turnover and whether sundry debtors amounting to Rs.2,59,241/- were to be excluded from the export turnover. The Assessing Officer has reduced the export turnover of assessee to the tune of Rs. 52,18,911 alleging that assessee has failed to realize unbilled revenue of Rs.49,59,670/- and amount receivable to the tune Rs.2,59,241/- within six months, i.e., time stipulated for deduction u/s.10A.
Before the ld. CIT(A), it was submitted that entire details of outstanding amount in respect of export sales was realized within the period of six months from the end of the financial year 2009-10. Ld. CIT(A) accordingly directed the AO to verify the record and if the amount has been realized within the stipulated period of six months then exemption has to be allowed.
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The grievance of the assessee before us is that, instead of ld. CIT(A) holding that exemption can be disallowed it should have been read as exemption can be allowed.
After considering the submissions made by the learned counsel and on perusal of the relevant findings in the impugned order, we find that assessee has filed relevant FIRC evidencing the realization of unbilled revenue of Rs.49,59,670/- which was duly billed in the subsequent year and realized within six months. This document has been stated to be filed before Assessing Officer and ld. CIT(A). Similarly, with regard to amount receivable to Rs.2,59,241/- it has been stated that the said amount does not form part of the export turnover of the assessee. Under these circumstances and facts, the matter should have been examined by the ld. CIT(A) and allowed. Since, he has simply given the direction for verification, therefore, we hold that Assessing Officer should verify the same and allow the exemption of unbilled revenue u/s.10A if it has been realized within six months of the end of the relevant financial year. The Assessing Officer shall also verify, whether the amount of Rs.2,59,241/- forms part of the export turnover of the assessee or not. Thus, with this direction grounds no.6 and 7 are treated as partly allowed for statistical purposes.
The next issue raised in grounds no.8 to 8.4 relates to disallowance made u/s.40A(2)(b). During the course of the assessment proceedings, the Assessing Officer noted that
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three persons of the company have been given undue benefit because they are related parties. The details of payment made to these three persons and the disallowance made by the Assessing Officer u/s.40A(2)(b) reads as under:
Employee Amount paid by Amount assessed Disallowance Name the Assessee by Ld. Assessing u/s.40A(2)(b) Officer u/s.40A(2)(b) Philippe 55,07,503 18,00,000 37,07,503 Lutgen Priti singh 73,79,009 36,00,000 37,79,009 Rahul 41,85,939 36,00,000 5,85,939 Bhattacharya Total 80,72,451
Before the Assessing Officer and ld. CIT(A) and also before us assessee’s contention has been that Philippe Lutgen being a Country Manager of the assessee played a pivotal role in bringing efficiency in day to day working of XL India. The specific roles and responsibility of Philippe Lutgen included the following: - • Build a high quality sustainable operational center to maximize the performance of each and every service delivered by Appellant • Create a culture of continuous improvement and ensure that Appellant operates as a fully integrated component of XL Group • Manage various teams to ensure smooth service deliver by Appellant • Look after functions and supervise activities performed by Appellant. Philippe Lutgen worked exclusively for the assessee so as to
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ensure that service delivery standards of the assessee meet the global standards. Further, remuneration paid to Rahul Bhattacharya and Priti Singh is justified looking to their significant role played in the business of the assessee. In light of above facts, the remuneration paid by the assessee to its employees including Philippe Lutgen is fully allowable on account of commercial expediency for the business of the appellant. Various judicial precedents were relied upon to contend that the expenditure must first be proved as excessive and unreasonable from the point of commercial expediency of the business of the assessee in order to be disallowed u/s.40A(2)(b) of the Act. Apart from that, it was also submitted that the assessee is operating on cost plus mark up on the service income, wherein all the operating cost is being marked up in accordance with the transfer pricing regulation, and therefore, the salary cost is part of operating expenditure while calculating the operating profit of the assessee in view of disallowance to the salary cost will reduce the cost resulting in the lower taxable profits. However, the ld. CIT(A) rejected the assessee’s contention and upheld the action of the Assessing Officer on the ground that cost plus mark up does not deprive the Assessing Officer to see the applicability of Section 37/40A(2)(b). Apart from the above submissions, the learned counsel, also pointed out that in the Assessment Year 2009-10, this issue has been decided in favour of the assessee by the Tribunal.
On the other hand, Learned Department Representative
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has strongly relied upon the order of the Assessing Officer and ld. CIT(A).
After considering the rival submissions and on perusal of the relevant findings given in the impugned order, we find that Assessing Officer has made the disallowance u/s.40A(2)(b) on the ground that these persons were paid huge salary who are related parties and accordingly, part of the amount have been disallowed by him. The assessee had pointed out that these persons played pivotal role and has illustrated their specific roles, responsibility and duties carried out by them and hence it was submitted that these were for commercial expediency for the assessee’s business. Apart from that, it was also pointed out that since assessee is operating on reimbursement of cost plus mark up, therefore, salary cost of these employees constitutes operating expenditure which has the effect in calculating the operating profits of the assessee. We find substantial strength in this the contention of the learned counsel, that if the assessee is working on cost plus mark up model and if the salary cost is part of operating expenditure, then any disallowance of such operating expenditure will reduce the operating profit. The reason being, the assessee is reimbursed with mark up on the cost incurred. If the cost is reduced then at the same time, mark up on such cost also gets reduced. Therefore, in such a business model there could not be any disallowance on the salary expenses. In any case assessee is a 100% export-
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oriented unit eligible for deduction u/s.10A and if while computing the profits of the undertaking Assessing Officer has allowed the deduction u/s.10A, then such a disallowance ostensibly will only go to enhance the income of the assessee which again would be subject to deduction u/s.10A. Therefore, such a disallowance in the case of the assessee becomes purely academic. In any case, when this issue has been decided in favour of the assessee in the Assessment Year 2009-10, then on this ground also, we do not find any reason to deviate from such a precedence and accordingly, disallowance made u/s.40A(2)(b) is directed to be deleted.
The next issue relates to disallowance of provisions for bonus by considering it as unascertained liabilities at Rs.3,08,21,090/- for the purpose of computing the book profits u/s.115JB. The Assessing Officer noted that assessee has declared book profit of Rs.10,24,90,804/- and found that assessee has not added amount of Rs.3,08,21,090/- being provision for bonus created during the year. Since bonus has been paid next year, therefore, the exact liability is ascertained at the time of payment. Accordingly, he treated it to be unascertained liability and added back while computing the book profit u/s.115JB.
Ld. CIT(A) too confirmed the said addition on the ground that provision of bonus has not been proved to be made on scientific calculation and assessee could not provide figures of earlier year provision and its utilization to show that provision
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has been made on rational basis.
Before us, the learned counsel submitted as under: - “Appellant maintains its books of account on a mercantile basis. Accordingly, to conform with the accounting principles, as at the end of the financial year it creates a provision for various expenses which inter-alia includes provision for bonus. Appellant has an obligation to pay out bonuses as a result of its business activities. This result in a certain outflow of resources in order to settle the obligation in respect of which a reliable estimate can be made. The provision for bonus is a definite and certain liability which is computed on a scientific basis with a reasonable degree of estimation. Variation in estimate cannot convert it into a contingent or unascertained figure.” He also strongly relied upon the judgment of Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT, 245 ITR 428 (SC). He further submitted that the liabilities were ascertained in the case of assessee, because in the month of March itself based on the grade of the employees’ bonus was determined and provision was made.
On the other hand, learned Department Representative has strongly relied upon the order of the ld. CIT(A).
After considering the rival submissions and on perusal of the relevant findings given in the impugned orders as well as material referred to before us, we find that the only dispute
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is, whether the provision for bonus payment has been made on scientific basis or is ascertained liability or not. It is a well settled law that if a business liability has arisen in the accounting year then the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is incurring of the liability and it should also be capable of being estimated with reasonable certainties and there should be some rational basis for quantification, for making the provision. If liability is capable of being quantified on the basis of reasonable certainty, then it cannot be held to be contingent. Learned counsel had submitted that here in this case liability was ascertained as in the month of March itself the assessee has made the provision on the basis of actual bonus to be paid which is on the basis of grant of the employee. However, no detail or working has been given before us in this regard, therefore, we deem it fit to restore this issue to the file of the Assessing Officer who shall examine, whether the provision has been made on the basis of rational or scientific basis or not and assessee shall demonstrate that such a reasonable degree of estimation has been considered while making the provision. If it is found that provision has been made on rational and reasonable basis, then such a provision needs to be allowed and cannot held to be contingent or unascertained. With this direction, this matter is restored back to the file of the Assessing Officer who shall decide this issue after giving due opportunity to the
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assessee.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 3rd August, 2018.
Sd/- Sd/- [R.K. PANDA] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER
DATED: 3rd August, 2018 PKK: