VISUAL GRAPHICS COMPUTING SERVICES INDIA (P) LTD,CHENNAI vs. ACIT CO CLE III (4), CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against an assessment order dated 30.12.2012 passed by the Assistant

Commissioner of Income Tax, Company Circle III(4), Chennai pursuant

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to directions issued by the Dispute Resolution Panel (in short the ‘’ld.

DPR’’) u/s.144C of the Income Tax Act, 1961 (herein after referred to

as ‘the Act’). It has altogether raised eleven grounds apart a from set

of additional grounds numbered as 12 & 13.

Out of these grounds, ground No.1 is general in nature. 2.

Ground No.10 is on levy of interest u/s.234B of the Act which is

consequential in nature. Ld. Counsel for the assessee submitted before

the Bench that he was not pressing ground no.11, on levy of interest

u/s.234C of the Act. This leaves us ground Nos.2 to 9, of which ground

no.8 is on issues relating to Transfer Pricing. Additional ground Nos. 12

and 13 are also on Transfer Pricing. Grounds relating to Transfer

Pricing will be dealt with in the later part of this order.

Vide its grounds 2 & 3, assessee assail exclusion of 3.

telecommunication and foreign travel expenditure from its export

turnover while computing the eligible deduction under section 10A of

the Act. There is also an alternative claim that sums excluded from

export turnover were to be excluded from total turnover also. Claim of

the assessee that telecommunication expenditure and foreign travel

expenditure incurred in foreign currency could not be excluded from

export turnover cannot be accepted in view of definition of ‘’export

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turnover’’ given in Explanation 2(iv) to Sec. 10A of the Act. However,

viz-a-viz its alternative claim that these expenditure if excluded from

export turnover were to be deducted from total turnover also , is

acceptable by virtue of judgment of Hon’ble Karnataka High Court in

the case of CIT vs. Tata Elxsi Limited 349 ITR 98. Accordingly, we

direct exclusion of these expenditure from total turnover also while

computing deduction available to the assessee u/s. 10A of the Act.

Ground Nos. 2 & 3 are partly allowed for statistical purpose.

Vide its ground No.4, grievance raised by the assessee is 4.

that deduction available u/s.10A of the Act had to be given without

setting off losses of its other STPI unit.

unit at Thiruvanthapuram on which deduction �2.94 Crores was

claimed u/s.10A of the Act. As per ld. Authorised Representative, ld.

Assessing Officer had reduced the loss of �55 lakhs incurred by it in

one of its units in Chennai called GFA while completing the

deduction. Ld. Authorised Representative submitted that by virtue of

judgment of Hon’ble Supreme Court in the case of CIT vs. Yokagawa

India Ltd 77 taxmann.com 41 loss of a STPI unit could not be set off

against the profit of the unit on which deduction u/s.10A of the Act

was being claimed.

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profit should be computed after set off of all business loss while

allowing deduction u/s.10A of the Act.

We have considered the rival contentions and perused the 7.

orders of the authorities below. Hon’ble Supreme Court in the case of

Yokogawa India Ltd (supra) had held at para 17 of its judgment as

under:-

‘’17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression “total income of the assessee” in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression “total income of the assessee” in Section 10A as ‘total income of the undertaking’.

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Accordingly, we are of the opinion that loss incurred by the assessee

in its Chennai GFA unit shall not be set off against the profit of its

Thiruvanathapuram unit while calculating deduction available to the

assessee u/s. 10A of the Act. Ground No.4 of the assessee stands

allowed.

Vide its ground No.5, grievance raised by the assessee is 8.

that the lower authorities did not allow set off of its loss in its STPI unit

against profits of non STPI unit. Lower authorities had denied the set

off treating the STPI unit as a stand alone one. The issue in our

opinion is covered in favour of the assessee by virtue of the judgment

of Hon’ble Bombay High Court in the case of Hindustan Unilever

Limited vs. DCIT 325 ITR 102. Para 24 of this judgment is

reproduced hereunder:-

‘’There is merit in the submission which has been urged on behalf of the assessee that the Assessing Officer has while reopening the assessment ex facie proceeded on the erroneous premise that section 10B is a provision in the nature of an exemption. Plainly, section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Section 10B was substituted by the Finance Act of 2000 with effect from April 1, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent. export oriented undertaking, to which the section applies "shall not be included in the total income of the assessee". The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and

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gains as are derived by a 100 per cent. export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The Assessing Officer was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under section 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of section 10B’’.

Their lordship clearly observed that loss sustained by an unit which

was eligible for deduction u/s. 10B of the Act could be set off against

normal business income. We are therefore of the opinion that

assessee has to succeed in ground No.5. Ground No.5 stands allowed.

Vide its ground No.6, grievance of the assessee is that a 9.

portion of its provision made for expenditure was disallowed by the

ld. Assessing Officer.

Ld. Authorised Representative submitted that ld. Assessing 10.

Officer in the draft assessment order had disallowed provisions totaling

�2,00,24,664/- for a reason that there was no charge of the said

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amount in the profit and loss account. As per ld. Authorised

Representative assessee had objected this before the ld. DRP and ld.

DRP had allowed this ground vide paragraph 16(vi) of its order.

However, as per ld. Authorised Representative, ld. Assessing Officer in

the final assessment order did not allow a portion of such provisions

made for Chennai VA unit, Thiruvanathapuram unit and Chennai GFA

unit based on a wrong presumption that assessee could not produce

any supporting documents. As per ld. Authorised Representative

assessee had produced break-up of such expenditure before ld.

Assessing Officer. Reliance was placed on paper book page Nos.179

to 184 which gave the break-up of the provision.

ld. DRP was obliged to arrive at a specific conclusion. According to

him, ld.DRP did not have power to issue directions for further enquiry.

Reliance was placed on sub section (8) to Sec. 144C of the Act.

orders of the authorities below. Directions of the ld. DRP as it appear

at paragraph 16(vi) of its order is reproduced hereunder:-

Disallowance of provisions of leave encashment, bonus and other expenses by the Assessing Officer – The DRP finds itself in agreement with the contention of the assessee company in principle and directs the Assessing Officer to verify the relevant facts and to

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modify the draft assessment order to the extent required.

Section 144C(8) of the Act on which reliance is placed by ld.

Departmental Representative is reproduced hereunder:-

‘’The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order’’.

We are of the opinion that ld. DRP was obliged to give specific findings

with regard to the claim of the assessee after going through the

records. We are of the opinion that the matter requires a fresh look by

the ld. DRP. We therefore set aside the orders of the ld. Assessing

Officer and ld. DRP on the issue regarding provision for expenditure

and remit it back to the ld. DRP for consideration afresh in accordance

with law. Ground No.6 allowed for statistical purpose.

failed to give directions on its claim for enhanced deduction u/s.10A of

the Act, if the provision for expenditure was disallowed.

assessee relating to disallowance of provision. Since we have set aside

the matter regarding disallowance of provision back to ld. DRP for

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consideration afresh, we are of the opinion that this issue can also to

be dealt by ld. DRP, in case they find that disallowance of any part or

whole of the provisions were justified. Ground No.7 is therefore

treated as allowed for statistical purpose.

TDS of �2,220/-.

return of income but still credit is not given. We are of the opinion that

ld. Assessing Officer has to verify the fact whether tax has been

deducted and claimed by the assessee in its return and decide

accordingly. Ground No.9 is allowed for statistical purpose.

This leaves us with ground No.8 of the original grounds and 17.

ground nos.12 & 13 of additional grounds which are on transfer pricing

related matters.

Ld. Counsel for the assessee submitted that he was seeking 18.

exclusion of M/s. Infosys BPO Ltd and Cosmic Global Limited from the

list of comparables considered by ld. Transfer Pricing Officer for bench

marking the international transactions of the assessee with its

Associated Enterprise abroad. According to him, in case, M/s. Cosmic

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Global Limited was considered to be a good comparable, then one

another comparable suggested by the assessee namely M/s. MCS Ltd

also needed to be included in the list of comparables. In support of the

above pleadings, ld. Authorised Representative relied on the profile of

the assessee which has been extracted by the ld. TPO at para 2 of its

order at 12.09.2011 in which he has classified the assessee as an IT

enabled service provider.

stated that assessee was providing services to its Associated Enterprise

in the form of power point presentations which included preparation of

various visual aid communication materials such as graphics, charts,

exhibits, overhead transparencies and on-screen animated

presentations. As per ld. Authorised Representative its Associated

Enterprise, namely M/s. Mckinsey & Company was situated in USA.

Again as per ld. Authorised Representative the final set of ten

comparables considered by the ld. TPO included M/s. Infosys BPO Ltd

and M/s. Cosmic Global Ltd. As per ld. Authorised Representative

though M/s. Cosmic Global Ltd was assessee’s own comparable it had

objected before ld. DRP and sought exclusion of the said company

from the list of comparables, due to its very low employee cost to

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total cost ratio. As per ld. Authorised Representative such low rate of

employee cost to total cost proved that it was outsourcing its work and

thus its functional profile was different from that of the assessee,

which was not doing any outsourcing. Contention of the ld. Authorised

Representative was that M/s. Cosmic Global Ltd had employee cost

which was 25.2% of the total cost and was noted by ld. TPO himself.

If its outsourcing translation work was also considered, as per ld.

Authorised Representative such ratio would be still lower. According to

him, M/s. Cosmic Global Limited could not be taken as a good

comparable to that of the assessee. Reliance was placed on the

decision of Pune Bench of the Tribunal in the case of Maximize

Learning Private Limited vs. ACIT ( ITA No.2235/PN/2012, dated

02.02.2015 for assessment year 2007-08) and also the judgment of

Hon’ble Andhra Pradesh High Court in the case of CIT vs. M/s. Market

Tools Research (P) Ltd ( I.T.T.A. No.471 of 2014, dated 25.07.2014).

In so far as M/s. Infosys BPO limited was concerned, ld. 20.

Authorised Representative submitted that it had a turnover which was

more than �850 crores whereas that of assessee was only �64.27

crores. Contention of the ld. Authorised Representative was that M/s.

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Infosys BPO was working at a much higher scale than the assessee.

As per the ld. Authorised Representative by virtue of Hon’ble Bombay

High Court judgment in the case of CIT vs. M/s. Pentair Water India

Pvt. Ltd, (2016) 381 ITR 216 M/s. Infosys BPO Limited could not be

considered as a good comparable. Reliance was also placed on the

judgment of Delhi High Court in the case of CIT vs. Agnity India

Technologies Pvt. Ltd (2013) 93 DTR 375.

Contra, ld. Departmental Representative submitted that M/s. 21.

Cosmic Global Limited was assessee’s own comparable and therefore

assessee could not now seek exclusion. Viz-a-viz M/s. Infosys BPO

Limited, submission of the ld. Authorised Representative was that

volume of activity was not relevant when functional profiles were

similar. Thus, he supported the orders of the lower authorities.

orders of the authorities below. No doubt M/s. Cosmic Global Limited

was one of the comparables considered by the assessee in its own TP

study. However, assessee had before the ld. TPO itself pointed out

that M/s. Cosmic Global Limited had very low employee cost to total

cost ratio, proving that it was getting its work done through

outsourcing. Assessee had raised this issue before ld. DRP as well. By

virtue of decision of Special Bench in the case of Dy. CIT vs. Quark

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Systems P. Ltd (2010) 42 DTR 414 which was upheld by Hon’ble

Punjab and Haryana High Court (62 DTR 182) , an assessee cannot be

estopped from seeking exclusion of a comparable which was on its

own list. Assessee had specifically pointed out that M/s. Cosmic Global

Limited had employee cost which was 25.2% of the total cost.

However, ld. TPO as well as ld. DRP has held that if the outsourcing

translation work of �2.86 crores incurred by the said company was

considered as a part of its employees cost, then the employees cost

would swell to 85%. In our opinion expenditure incurred on by M/s.

Cosmic Global Ltd for outsourcing translation cannot be considered as

part of its employee cost. We also find that Pune Bench of the

Tribunal in the case of Maximize Learning Private Limited (supra)

where also the concerned assessee was into ITES service, had with

regard to comparability of M/s. Cosmic Global Ltd held as under in

para 24 of its order:- ‘’We have carefully considered the rival submissions. The pertinent point made out by the Ld. Representative for the assessee is that the said concern is operating in a different business model wherein much of it’s activities are outsourced whereas the business model of the assessee is different. In an outsourcing business model obviously the expenditure incurred on employee costs would be low in comparison to the expenditure incurred on outsourcing. Ostensibly, where IT enabled services are outsourced to a third party vendor then the margin derived by the said concern would be attributable to services rendered by the outsourced vendor. Per contra, where IT enabled services are being rendered by a concern through its own employees, the margins from rendering of services by the said concern would be attributable to its own employees. Obviously, the level of margins in the two business models would not be comparable. The

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Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) has held that concerns who act as intermediateries having outsourced it activity cannot be said to be comparable with a concern who is rendering services through its own employees. The said proposition has also been upheld by the Hyderabad Bench of the Tribunal in the case of Brigade Global Services Private Limited (supra). Having regard to the aforesaid discussion, in our view, the said concern is not a good comparable to be included for the purposes of comparability analysis as it operates under a different business model which impacts operating margins. As a consequence, we direct the Assessing Officer to exclude the said concern from the final set of comparables’’.

We are therefore of the opinion that M/s. Cosmic Global Limited has

to be excluded from the list of comparables. Ordered accordingly.

Hon’ble Bombay High Court in the case of M/s. Pentair Water India

Pvt. Ltd, (supra) had upheld the order of the Tribunal in the case,

wherein it was observed as under:-

‘’Infosys BPO Ltd. :- In this case also we noted the turnover in respect of this Company is Rs.649.56 crores while the turnover of the Asseessee company is around Rs. 11 crores which is much more than 65 times of the Assessee's turnover. We, therefore, do not find any illegality or infirmity in the order of CIT(A) in excluding this Company out of the comparables. Accordingly, we confirm the order of the CIT(A)’’. No doubt here turnover of the assessee was �64.27 crores. However

the turnover of M/s.Infosys BPO Ltd for the impugned assessment year

was �850 Crores which was more than ten times that of assessee.

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Therefore we are of the opinion that M/s. Infosys BPO Ltd was

operating at a different level and could not have been compared with

assessee. We, therefore direct the ld. Assessing Officer to exclude

M/s. Infosys BPO Ltd from the list of comparables. Ordered

accordingly.

regarding working capital adjustment, ld. Authorised Representative

stated that ld. DRP had given a specific direction to verify the

working capital position between the assessee and the comparables.

However, according to ld. Authorised Representative working capital

adjustment for advances from customers recoverable in cash or kind

from four companies were not considered. As per ld. Authorised

Representative observation of the ld. Assessing Officer was that break

up was not available from the downloaded financials of the four

companies namely Sparsh BPO Service Ltd, Aditya Birla Minacs

Worldwide Ltd, Professional Management Consultants Pvt Ltd and

Sundaram Business Services Ltd. Relying on paper book II, page nos.

14 to 23, ld. Authorised Representative submitted that these details

were readily available but still not considered.

Per contra, ld. Departmental Representative strongly 25.

supported the orders of the authorities below.

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orders of the authorities below. Grievance of the assessee is that

advance recoverable in cash or kind of the four companies mentioned

above were part of the Audited account and annual report of these

companies but still not considered. We find that schedule 8 of

balance sheet of Sparsh BPO Services Ltd does give the breakup of

loans and advances and other current asset which interalia include

advances of �61,69,150/- recoverable in cash or kind or the value to

be received. Such details are available at schedule 9 of the audited

accounts of the Aditya Brila Minacs Worldwide Limited, Schedule 6 of

Sundaram Business Services Limited and Schedule 7 of Professional

Management Consultants Private Limited. Accordingly, we are of the

opinion that ld. Assessing Officer /TPO has to rework the working

capital adjustment, necessary after considering the value of advance

and deposits recoverable in cash or kind or for the value to be

receivable from the above four companies also. Ordered accordingly.

relation to Transfer Pricing issue, we allow the grounds seeking

exclusion of Infosys BPO Ltd and M/s. Cosmic Global Ltd from the list

of comparables and also direct the ld. Assessing Officer to rework the

working capital adjustments considering the advances/deposits

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recoverable in cash or kind or value to be received from the four companies listed at para 26 above. Ld. Counsel for the assessee did not advance arguments on any other grounds relating to the Transfer Pricing issue. Accordingly, ground No.8 of the original ground and the grounds No.12 & 13 in the additional ground are treated as partly allowed.

In the result, the appeal of the assessee is partly allowed for 28. statistical purpose.

Order pronounced on Friday, the 10th day of February, 2017, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन)) (अ�ाहम पी. जॉज�) (N.R.S. GANESAN) (ABRAHAM P. GEORGE) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated: 10th February, 2017.

KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF