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Income Tax Appellate Tribunal, BENGALURU BENCH A, BENGALURU
Before: SHRI. SUNIL KUMAR YADAV
PER S. JAYARAMAN, ACCOUNTANT MEMBER :
This is an appeal filed by the assessee against the order passed by the DCIT, Circle -11(3), Bengaluru, dt.21.09.2011, in pursuance to the directions of the DRP for the assessment year 2007-08,.
M/s Global-e Business Operations Pvt. Ltd (Global eBiz or Global-e) is part of the Hewlett- Packard group (HP Group). Its ultimate Holding Company is Hewlett- Packard Company, USA. Global-e Business Operations Pvt. Ltd., is wholly owned subsidiary of HP Global Investments By, IT(TP)A.1092/Bang/2011 Page - 2 Netherlands (HP Investments). Global –e undertakes HP's worldwide accounting and transaction processing work as part of HP's worldwide strategy of consolidating backroom operations. It manages operations that cover functionalities like fixed assets ,intra-corporate accounting like debit and credit records, vendor payables, fixed asset tracking and non- finance operations like data processing & other IT enabled services, freight cost management and order processing for certain geographies. There is no change in the ownership structure from the preceding year. During the FY 2006-07, Global-e Business Operations Pvt. Ltd, the assessee, provided data processing and other IT enabled services to its AEs located in various parts of the world. It is registered under the Software Technology Parks of India Scheme and is claiming tax holiday benefit in respect of the profits earned by it from the research and development services. It filed its return for ay 2007-08 on 30.10.2007 declaring an income of Rs 1,84,82,610/-.
On a reference, the TPO decided the adjustments to Arms Length Price at Rs. 85,93,91,410/- to its international transactions. On the Corporate Tax front, the AO excluded Rs.20,51,19,242/, the expenditure incurred in foreign currency on travel, from export turn over for the purpose of computing deduction u/s10A. The AO found that the assessee has debited Rs.2,62,94,302/ towards foreign exchange loss and reduced it from the export turnover as well as from the total turnover . The AO held that it should be reduced from export turn over alone and accordingly reworked the deduction u/s10A . The assessee incurred Rs.6,83,81,220/ towards leave encashment which remained outstanding as on the last day of the PY.
IT(TP)A.1092/Bang/2011 Page - 3 The AO disallowed it u/s 43B(f). Aggrieved, the filed its objections before the DRP. The DRP upheld the additions made under TP as well as the on the Corporate Tax front . In view that the assessee filed this appeal with various grounds but argued on the following grounds alone.
IT(TP)A.1092/Bang/2011 Page - 4
The assessee also raised the following additional grounds of appeal :
5. Reasons for raising additional grounds of appeal & the plea for their admission:
The AR sought our attention to the additional grounds of appeal to reject Maple eSolutions Limited, Triton Corp Limited, Accurate Data Converters Private Limited and Infosys BPO Limited as comparable to the assessee , as these grounds have not been raised before the lower authorities and are being raised for the first time before the Tribunal.
In this regard, the AR submitted that these four companies should be rejected as comparable to the assessee , as they fail to meet the legally acceptable criteria for comparability. All of them were considered as comparables by the TPO based on the fresh search process undertaken by him, he has mentioned in his order that Maple eSolutions Limited as a comparable selected by the assessee , though the assessee rejected it as a comparable in the qualitative analysis as it was acquired by Triton Corporation Limited in 2007 and it has resulted in an abnormal variation in the financials of Maple. Thus, the AR submitted that the contention of the IT(TP)A.1092/Bang/2011 Page - 5 TPO is factually incorrect.
With regard to Accurate Data Converters Limited, the assessee contended before the DRP that company along with three other comparables was not comparable to it, as all of them had earned super profits. In the case of lnfosys BPO Limited, the assessee contended before the TPO that it was not comparable to the assessee , as certain information relating to the company which was not available on the public domain was obtained using the powers vested in the TPO under section 133(6) and on account of the fact that the said comparable operated in many countries. Similarly, it was contended that Maple eSolutions Limited and Triton Corp Limited could not be treated as comparable to it on the grounds of functional dissimilarity and the presence of peculiar business circumstances" owing to business restructuring respectively.
The AR submitted that several rulings of this Honourable Tribunal, pronounced subsequent to the assessee finalizing its TP study, have rejected the above mentioned companies as not comparable for benchmarking ITeS businesses . It has further been held that both Maple eSolutions Limited and Triton Corporation Limited cannot be considered as comparables due to their financial statements being unreliable owing to their directors' involvement in fraudulent activities and pleaded that these rulings should equally apply to its case as well. The TPO has therefore erred in finalizing the TP Order by retaining them as comparable to the assessee. Thus, the AR submitted that admission of the additional grounds of appeal raised would be necessary to assess the appropriate Arm's Length Price of the international transactions undertaken by it, being the subject matter of appeal and to render substantial justice.
We have considered rival contentions, find that the above submissions are meritorious and hence admit the additional grounds.
IT(TP)A.1092/Bang/2011 Page - 6
On the TP matters, the AR submitted that the following comparables are to be rejected , as many of them are functionally different from it, some of them have low employee cost or have peculiar circumstances or unreliable financials etc . The gist of his arguments and the cases relied on are as under:
1. Accentia Technologies Ltd (Seg) :
A. Extra-ordinary events during the year 1. The company has acquired 51 percent stake in Geosoft Technologies (Trivandrum) Ltd - leading company in health care segment an lndium Technologies (India) Pvt Ltd - emerging software products company 2. The company plans to merge the subsidiary companies to strengthen the business 3. The company has increase in profits due to the sale of investments made by the company in its group concerns B. Functionally different 1. The company is engaged in the activity of medical transcription, billing and coding, and software development and implementation 2. The company operates in the BPO, software products and services segment C. Low employee cost Employee cost less than 25 % (15 percent), Low employee cost represents outsource of services Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
1. Asit C Mehta Financial Services Ltd :
A. Functionally different 1. The company has three business segments ITeS and software development, Portfolio Management Services, Investments Activities IT(TP)A.1092/Bang/2011 Page - 7
2. The company also develops products - GIS software 3. The company outsources work The company has incurred data processing charges of Rs 1.23 crores B. Low employee cost The employee cost of the company is 24.79 percent of sales Relied on :
1.Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2.AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
Bodhtree Consulting Ltd (seg) :
A. Functionally different 1. The company provides open and end-to-end web solutions, software consultancy, design and development of solutions which cannot be compared to BPO company 2. The company provides data cleansing services to those companies for which they have developed the software B. Peculiar circumstances 1. The company hived off certain businesses without hiving off the revenue stream 2. The company formed another company by name Learnsmart (India) Private Limited and expenditure of Rs 2.89 crores and Rs 1.09 crores has been debited to this company which has resulted in growth of Bodhtree profits 3. The revenue of the company grew at 91.63 percent C. Absence of segmental results The company operates in only one segment - software development D. Intangibles The company has incurred trade mark expenses E. Segmental information obtained under 133(6) contrary to the Annual Report F. Fluctuating margins IT(TP)A.1092/Bang/2011 Page - 8 Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2.AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
4.eClerx Services Ltd :
A. Functionally different 1. The company provides industry specialized services like Data Analytics, Operations Management and Audits & Reconciliation services which cannot be compared to a BPO or an IT offshoring company
2. The company is categorized as a KPO Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
HCL Comnet SYSTEMS & Services Ltd (seg) :
A. Functionally different: 1. The company is a leader in global delivery infrastructure management. The company provides remote IT infrastructure services 2. The company has two segment - Telecommunication services and ITeS 3. The ITeS services comprises of data centre management services, end user computing services, managed security services, networking services and tools and process consulting services B. Different year ending -June year ending Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08] IT(TP)A.1092/Bang/2011 Page - 9
6. Informed Technologies India Ltd :
A. Functionally different 1. The company is engaged in collecting and analysing the data on financial fundamentals, corporate governance, director-executive compensation and capital market 2. Employee cost to sales is 21.76 percent suggesting outsource of work 3. Business promotion expenses is 15 percent of sales B. Abnormal growth The company has recorded a growth of 132.86 percent over the previous year Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
7. Infosys BPO Ltd :
A. Functionally different 1. The company provides diversified services like end-to-end voice data and knowledge process outsourcing services 2. The company is a market leader 3. The company also delivers services from onshore locations in Brno, China and Philippines Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
8. iServices India P. Ltd :
A Fuctionally different B. Abnormal profits - 50.27% IT(TP)A.1092/Bang/2011 Page - 10 C. Use of 133(6) data -
Annual Report was not available D. Use of non-contemporanoeus data Relied on: 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08]
Maple eSolutions Ltd : A. Unreliable financials Director involved in fraud B. Extra-ordinary event during the year The company has become a subsidiary of Triton Corp Ltd C. Extra-ordinary growth D. Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
Mold-Tek Technologies Ltd (seg) : A. Functionally different 1. The company provides engineering design services for construction of building by using design tools like CAD/CAM, stadd pro by employing highly skilled software engineers B. Abnormal growth Growth of 204 percent in sales over previous year after C. Extraordinary event during the year The company acquired Cross Road Detailing Inc an engineering services KPO in USA Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A IT(TP)A.1092/Bang/2011 Page - 11
No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
11. Spanco Ltd (seg) :
A. Functionally different The company is Involved in telecom business, BPO services B. low employee cost The company has a employee to sales ratio of 7.20 percent suggesting outsourcing of services Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
12. Triton Corp Ltd :
A. Unreliable financials Director involved in fraud B. Functionally different C. Trading of IT peripherals, providing call centre services and support services D. Absence of segmental information E. Extraordinary event during the year The company acquired 100 percent equity of Maple eSolutions Limited Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08] IT(TP)A.1092/Bang/2011 Page - 12
Vishal Information Technologies Ltd :
A. Low employee cost The company has employee cot to sales ratio of 2.30 percent suggesting outsource of services B. Functionally different The company is engaged in providing solutions to print production industry with services like e-publishing, e-book, print on demand, data and document management, data conversion.
Relied on :
Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08] 3. Rampgreen Solutions P. Ltd [ ITA.102/2015 (Del HC) – a. y. 2008-09]
Wipro Ltd (seg) :
A. Market leader B. Extra-ordinary event during the year C. Owns intantibles D. Incurs R & D expenditure Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] 2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
Accurate Data Converters Ltd : Fails employee cost filter :
Relied on : 1. Magma Design Automation India P. Ltd [IT(TP)A No.1214/Bang/2011 – A. Y. 2007-08] IT(TP)A.1092/Bang/2011 Page - 13
2. AOL Online India P. Ltd [IT(TP)A.1036/Bang/2011 – A. Y. 2007-08]
We have heard rival submissions and gone through the order of this Tribunal in Magma Design Automation India P. Ltd in IT(TP)A No.1214/Bang/2011 ay 2007-08 dt 29.8.2016. Following the decision in AOL Online India P. Ltd in IT(TP)A No.1036/Bang/2011 – ay 2007- 08 dt 18.3.2016, this Tribunal held that all the above comparables except M/s I Services India P Ltd should not considered as comparables with reference customer service segment. Based on the decision of this Tribunal in M/s e4e Business solutions India P Ltd in IT(TP)A No.819/Bang/2011 dt 26.05.15 , since the Annual Report and required particulars were not available , remitted the comparable M/s I Services India P Ltd to the TPO for fresh decision. Thus, following the decision of Magma Design Automation India P. Ltd, supra, except M/s I Services India P Ltd and Accurate Data Converters Ltd, all other comparables are directed to be excluded from the list of comparables.
The TPO is directed to obtain the Annual Report of M/s I Services India P Ltd for FY 2006-07 and furnish a copy of it along with the information obtained u/s133(6) to the assessee and after affording due opportunity to the assessee , decide its comparability afresh. With regard to the comparable Accurate Data Converters Ltd, the assessee pleaded exclusion on the ground of employee cost filter. This matter is remitted back to the TPO for fresh decision after affording due opportunity to the assessee. Thus, the corresponding appeal grounds IT(TP)A.1092/Bang/2011 Page - 14 are allowed and treated as allowed for statistical purposes.
The next issue is on the adjustments made in respect of computation u/s 10A.
The AO excluded Rs. 20,51,19,242/, the expenditure incurred in foreign currency on travel, from export turn over for the purpose of computing deduction u/s.10A . The assessee pleaded that it is rendering BPO Services and ITES. Since it is not engaged in rendering technical services, the expenditure incurred in foreign currency on travel should not be excluded from the export turnover for the purpose of computing deduction u/s.10A.
Further, the assessee has debited Rs.2,62,94,302/ towards foreign exchange loss and reduced it from the export turnover as well as from the total turnover . The AO held that it should be reduced from export turn over alone and accordingly reworked the deduction u/s 10A . On appeal , the DRP confirmed the additions.
Before us, it was submitted that aforesaid expenditure need not be excluded from the export turnover as per the definition of set of given in sec.10A of the Act. The plea of the assessee is that if the aforesaid amount is excluded from the export turnover, the same should also be excluded from the total turnover. Similar matter came up before this Tribunal in assessee’s own case for A. Y. 2008-09 in IT(TP)A.1678/Bang/2012. This Tribunal by its order dt.04.09.2015 decided as under :
IT(TP)A.1092/Bang/2011 Page - 15 “33. The plea of the assessee is that the aforesaid expenditure need not be excluded from the export turnover as per the definition of set of given in sec.10A of the Act. The plea of the assessee is that if the aforesaid amount is excluded from the export turnover, the same should also be excluded from the total turnover.
As far as the alternative claim is concerned, we find that the Hon’ble High Court of Karnataka in the case of CIT v Tata Elxsi Ltd [(2012) 349 ITR 98 (Kar)] has held that while computing deduction u/s.10A of the Act, expenditure incurred by the assessee, if excluded from the export turnover, should also be excluded from the total turnover. In view of the aforesaid decision of the Hon’ble High Court of Karnataka, the AO is directed to reduce the expenses incurred for travelling and internet connection charges from the export turnover as well as the total turnover, while computing deduction u/s.10A of the Act. We hold and direct accordingly.
Similarly in the additional ground, the assessee has prayed that the foreign exchange loss should also be added to the total turnover and export turnover as against the action of the AO in excluding the said loss only from the Export turnover following the decision in the case of Tata Elxsi (supra) of the Hon’ble Karnataka High Court. We held that the said loss should be excluded both from ETO and TTO. We hold and direct accordingly.”
Following the above decision, the AO is directed to exclude the above expenditure both from ETO and TTO. The assessee’s appeal in this regard is allowed.
9. The next issue is that the assessee incurred Rs.6,83,81,220/- towards leave encashment which remained outstanding as on the last day of the PY. The AO disallowed it u/s 43B(f). Aggrieved, the assessee filed its objections before the DRP. The DRP upheld the additions.
IT(TP)A.1092/Bang/2011 Page - 16
10. Before us, the AR submitted that originally, under section 43B certain payments were held allowable only on actual payment. Section 43B was amended by inserting clause (f) to disallow the liability towards leave encashment on due basis. No reasons for such amendment was disclosed.
When a challenge was made before the Hon’ble Calcutta High Court in Exide Industries Ltd and another v. UOI & others, it struck down section 43B(f) being arbitrary, unconscionable and dehors the Apex Court decision in the case of Bharath Earth Movers Ltd (2000) 245 ITR 428 as the amendment did not disclose the reasons which would be consistent with the provisions of the Constitution and the laws of the land and not for the sole object of nullifying the apex Court decision. On SLP in 22889/2008, the SC on 08.05.2009 held that “Pending hearing and final disposal of the Civil Appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case civil appeal of the Department is allowed.
We further make it clear that the assessee would during the pendency of the civil appeal, pay tax as if section 43B(f) is on the statute book but at the same time it would be entitled to make a claim in its returns.”
IT(TP)A.1092/Bang/2011 Page - 17
We heard the rival submissions. The facts are not in dispute. In the circumstances, this issue is remitted back to the AO to decide the issue based on the outcome of the Hon’ble Supreme Court’s decision in the above case. Ordered accordingly.
In the result, appeal of the assessee is allowed /treated as allowed.