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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ C ’
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI JASON P. BOAZ
O R D E R Per Shri Jason P. Boaz, A.M. : These are cross appeals, one by the assessee and the other by Revenue, directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.8.10.2013 for Assessment Year 2008-09. 2. The facts of the case, briefly, are as under :-
2 IT(T.P) A Nos.1765 & 1783/Bang/2013 2.1.1 The assessee (formerly known as iSeva Systmes P. Ltd.) is engaged in the business of providing customer relationship management services and related Business Process Outsourcing (‘BPO’) service. For Assessment Year 2008-09, the assessee filed its return of income on 30.9.2008 declaring total income of Rs.1,42,99,895. The return was processed under Section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The Assessing Officer, on observing that the assessee had reported international transactions in the year under consideration, made a reference under Section 92CA of the Act to the Transfer Pricing Officer (‘TPO’) to examine and compute the Arm’s Length Price (‘ALP’)of the assessee's international transactions with its Associated Enterprises (‘AEs’). 2.1.2 For Assessment Year under consideration, the assessee had filed a T.P. Study in which it adopted Transactional Net Margin Method (‘TNMM’) as the Most Appropriate Method (‘MAM’) and selected 13 comparables whose average profit margin on cost was 13.65%. As the margin of the assessee was higher at 15.26%, the assessee held its international transactions in the ITES segment to be at arm’s length. The TPO after examining the assessee's T.P. Study, rejected the same and proceeded to carry out a fresh search for comparables. The TPO accepted the assessee's adoption of TNMM as the MAM and after carrying out his search and considering the objections put forth by the assessee, selected the following 20 companies as comparables to the assessee in which 5 of the companies chosen as comparables by the assessee was retained.
3 IT(T.P) A Nos.1765 & 1783/Bang/2013 Sl.No. Name of the company OP/TC % 1. Accentia Technologies Ltd. (Seg.) 41.77 2. Acropetal Technologies Ltd. (Seg.) 35.30 3. Aditya Birla Minacs Worldwide Ltd.(Earlier known as - 4.00 Transworks Information Services Ltd.) 4. ASit C Mehta Financial Services Ltd. (Seg.) 9.42 5. Caliber Point Business Solutions Ltd. 10.97 6. Coral Hubs Ltd. (Earlier Vishal Information Technologies 50.68 Ltd.) 7. Cosmic Global Ltd. 23.30 8. Crossdomain Solutions Ltd. 27.03 9. Datamatics Financial Services Ltd. (Seg.) 29.11 10. E4e Healthcare Solutions Ltd. (Formerly known as NIttany 18.54 Outsourcing Services Pvt. Ltd.) 11. Eclerx Services Ltd. 58.80 12. Genesys International Corporation Ltd. 47.40 13. Infosys BPO Ltd. 19.66 14. IServices India Pvt. Ltd. 10.77 15. Jindal Intellicom Pvt. Ltd. - 10.29 16. Mold-Tek Technologies Ltd. 96.66 17. R Systems International Ltd. (Seg.) 4.30 18. Spanco Ltd. (Seg.) (Earlier known as Spanco Telesystems & 8.81 Solutions Ltd.
19. Wipro Ltd. (Seg.) 30.05 20. Allsec Technologies Ltd. - 13.29 Average : 24.75 2.1.3 The average profit margin of the comparables selected by the TPO was 24.75%. After granting working capital adjustment of 0.07% the TPO computed out the ALP of the assessee’s international transactions with its AEs, and proposed an adjustment of Rs.6,40,54,571 which was computed as under :- Arithmetic Mean 24.75% Less – Working Capital Adjustment 0.07% Adjusted Arithmetic Mean 24.68%
4 IT(T.P) A Nos.1765 & 1783/Bang/2013 ALP @ 124.68% of operating cost. Rs.84,81,59,579 Price Charged in international transactions Rs.78,41,05,008 Short fall being adjustment u/s. 92CA Rs.6,40,54,571 The TPO passed an order under Section 92CA of the Act on 26.10.2011 proposing an adjustment of Rs.6,40,54,571 to the ALP of the assessee's international transactions with its AEs. 2.2 After receipt of the TPO’s order under Section 92CA of the Act dt.26.10.2011, the Assessing Officer completed the assessment under Section 143(3) rws 144C of the Act vide order dt.30.1.2012 determining the income of the assessee at Rs.8,23,14,946 as against the returned income of Rs.1,42,99,890 in view of the following additions / disallowances :- (i) Disallowance of excess claim u/s.10A : Rs.53,51,850. (ii) T.P. Adjustment u/s.92CA : Rs.6,40,54,571. 2.3 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.30.8.2012, the assessee preferred an appeal before the CIT (Appeals) – IV, Bangalore. The learned CIT (Appeals) vide order dt.8.10.2013 disposed off the appeal allowing the assessee partial relief. The learned CIT (Appeals) issued the following directions in respect of the following issues :- (i) to exclude functionally dis-similar companies from the list subject to the observations of the Delhi Bench of ITAT in Actis Advisers P. Ltd. 20 ITR (Trib) 138; (ii) to apply the turnover filter of Rs.1 Crore to 200 Crores and to exclude companies having turnover in excess of Rs.200 Crores; (iii) to apply the ratio of the Hon'ble Karnataka High Court in the case of CIT V Tata Elxsi Ltd. (349 ITR 98).
5 IT(T.P) A Nos.1765 & 1783/Bang/2013 3. Aggrieved by the order of the CIT (Appeals) – IV, Bangalore dt.8.10.2013 for Assessment Year 2008-09, both the assessee and revenue has preferred appeals before the Tribunal raising the following grounds :-
3.1 IT(TP)A No.1783/Bang/2013 – Assessee's appeal for A.Y. 2008-09. “ Grounds of Apepal on Transfer Pricing matters.
1. That the learned CIT (Appeals) erred in upholding the rejection of Transfer Pricing documentation by the learned TPO/A.O and the adjustment made to the transfer price of the appellant in respect of the IT enabled services provided to its AEs.
2. That the learned CIT (Appeals) erred in upholding the determination of a new arm’s length price as determined by the learned TPO.
3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in : a) Upholding the rejection of comparability analysis of the appellant in the TP documentation by the learned TPO. b) Upholding the application of the following additional filters and selection of comparable by the learned TPO in his order, during the course of a fresh comparability analysis for determining the arm’s length price; i. accepting companies that fall employee cost filter; ii. accepting companies incurring abnormal profits; iii. accepting companies that fall export turnover filter; iv. accepting companies having unreliable financial data and inconsistent financial performance. c) Disregarding application of multiple year / prior year data as used by the appellant in the TP documentation and holding that current year (i.e. Financial Year 2007-08) data for companies should be used for comparability; d) Upholding the approach adopted by the learned TPO of collecting selective information of the companies by exercising powers granted to him under Section 133(6) of the Income Tax Act, 1961 (in short 'the Act') although the same was not in the public domain and was not available to the appellant at the time of conducting the TP Study or at the time of assessment. e) Upholding the TPO’s approach of making an adjustment even in respect of transactions with Non AEs; f) Upholding the TPO’s approach in not using data as prescribed in Rule 10B(4) and the proviso thereto, while arriving at arm’s length price; g) Not providing any adjustments under Rule 10B towards the difference in the risk profile, working capital position, depreciation adjustment and market adjustment between the appellant and the entrepreneurial companies selected as comparables while determining the arm’s length price; 6 IT(T.P) A Nos.1765 & 1783/Bang/2013 h) Upholding TPO’s approach of arbitrarily granting an adhoc working capital adjustment of 2%, without calculating the same. i) Upholding the learned TPO’s approach of not granting 5% standard deduction under Section 92C(2) which is available at the option of the a.s irrespective of whether ALP falls within + / - 5% range of actual price. Corporate tax matters.
4. That the learned CIT (Appeals) erred in upholding the ACIT’s approach of reducing entire ‘telecommunication expenses’ of Rs.31,027,567 (includes cost of transmission within the territories of India) from the ‘export turnover’ as attributable to the delivery of services outside India while computing the deduction under Section 10A of the Act; 5. The learned CIT (Appeals) erred in upholding the Assessing Officer’s approach in reducing the un-attributable portion of ‘travel expenditure incurred in foreign currency’ of Rs.2,679,067 from the ‘export turnover’ while computing the deduction under Section 10A of the Act; 6. That the learned CIT (Appeals) erred in upholding the Assessing Officer’s approach in not considering the decision of favourable judgment of appellant’s own case for A.Y. 2003-04, wherein it was held that only to extent of 50% of the telecommunication expenditure should be reduced from export turnover.
7. That the learned CIT (Appeals) erred in upholding the ACIT’s approach in making computation of interest under 234B of the Act.” 3.2.1 In the course of appellate proceedings, the assessee also raised additional grounds :- “1. The learned TPO has, in his fresh study, erred in selecting Accentia Technologies Ltd., Crossdomain Solutions Ltd. and Elclerx Services Ltd. as comparable to the appellant despite the same failing to meet the legally acceptable criteria for comparability. The Hon'ble CIT (Appeals) has also erred in confirming the order of the TPO inthis regard. These companies should be rejected as comparables, notwithstanding that these grounds were not contended before the lower authorities, or were contended on a different parameters.” 3.3 We have heard the rival contentions of both the learned Authorised Representative for the assessee and the learned Departmental Representative for revenue in the matter of admission of the additional ground of appeal. Admittedly, these three companies Accentia Technologies Ltd., Crossdomain Solutions Ltd. and Eclerx Services Ltd. were selected both by the assessee and retained by the TPO in their respective list of comparables after conducting independent searches for comparables. According to the learned Authorised Representative for 7 IT(T.P) A Nos.1765 & 1783/Bang/2013 the assessee the assessee seeks exclusion of these 3 companies from the list of comparables on the grounds that after it had finalized its TP Study, information available in the public domain has resulted in several judgments of the co-ordinate bench of this Tribunal wherein these companies have been held to be not purely engaged in ITES activities and excluded for reasons such as being functional dis-similar, having an extra-ordinary events, etc. Taking into account the factual matrix of the case on this issue and in the light of the judgment of the co-ordinate benches of this Tribunal referred to in respect of the exclusion of these three comparables, we are of the opinion that, in the interest of equity and justice, this ground be admitted for consideration and adjudication in the light of facts / judicial pronouncements placed before on record. The additional ground raised
by the assessee is accordingly admitted for adjudication. 3.4 IT(TP)A No. 1645/Bang/2013 – Revenue’s appeal for Assessment Year 2008-09. “
1. The order of the learned CIT (Appeals) is opposed to law and the facts and circumstances of the case.
2. The learned CIT (Appeals) erred in directing the TPO to exclude companies which are functionally dissimilar subject to the guidelines laid down by the Delhi Bench of the Tribunal in Actis Advisers P. Ltd. V DCIT 20 ITR (Trib) 138 without appreciating the fact that the directions issued are beyond the mandate of the provisions of section 251(1)(a) of the IT Act which does not empower the CIT (Appeals) to set aside the issue.
3. The learned CIT (Appeals) erred in not appreciating the fact that when any filter or criteria applied by the assessee is accepted or if any filter or criteria applied by the TPO is relaxed, the entire accept / reject matrix changes resulting in a new set of comparables including those comparables which are neither taken by the assessee or the TPO and which do not find a place in the order under Section 92CA.
4. The CIT (Appeals) erred in directing the Assessing Officer to follow the ratio of the Hon'ble Court in the case of Tata Elxsi Ltd 349 ITR 98 and exclude Rs.1,55,13,784 being the communication charges and Rs.26,79,667 being expenditure in foreign currency from the total turnover also while computing the deduction under Section 10A of the IT Act as the decision of the High Court is binding, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced form the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only form the export turnover.
8 IT(T.P) A Nos.1765 & 1783/Bang/2013 5. The CIT (Appeals) erred in not appreciating the fact that the jurisdictional High Court’s decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court.
For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed and that of the Assessing Officer be restored.
7. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”
At the outset of the hearings the learned Authorised Representative for the assessee submitted that the assessee would not urge or press, the general grounds and would like to make submissions only in respect of exclusion of certain comparables from the TPO’s final set of comparables. In the light of the above observations, we now proceed to adjudicate both the assessee's as well as Revenue’s appeal hereunder. Assessee's appeal for Assessment Year 2008-09 – IT(TP)A No.1783/Bang/2013 5. The Grounds raised
at S.Nos.1 to 3(a), 3(c) to (i) of the assessee's appeal being general in nature and not pressed or urged before us in this appeal are rendered infructuous and accordingly dismissed.
6. Ground No.3(b) – Assessee's appeal for exclusion of certain companies from the TPO’s list of comparables. 6.1 As mentioned earlier in this order at para 4 (supra), in the course of proceedings before us, the learned Authorised Representative submitted that he would make and put forth arguments only questioning the comparability of individual companies included in the final set of comparables by the TPO. In this regard, the learned Authorised Representative submitted a chart and arguments seeking to explain the assessee's position regarding the non-comparability
9 IT(T.P) A Nos.1765 & 1783/Bang/2013 of eight companies, which in its opinion , were wrongly included by the TPO in his final set of comparables and which are listed as under :-
1. 1. Accentia Technologies Ltd. (Seg.) 2. Aeropetal Technologies Ltd. (Seg.) 3. Coral Hubs Ltd.
4. Crossdomain Solutions Ltd. 5. Eclerx Services Ltd. 6. Infosys BPO Ltd. 7. Mold-Tek Technologies Ltd.
8. Wipro Ltd. (Seg.) In support of the assessee's claim for exclusion of these 8 companies from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co- ordinate bench of the Tribunal in the cases of Symphony Marketing Solutions Ltd., in IT(TP)A No.1316/Bang/2012 dt.14.8.2013 and Global Business Operations P. Ltd. in IT(TP)A No.1678/Bang/2012 dt.4.7.2015. It was submitted that both these cases being for Assessment Year 2008-09, in which like the assessee they were engaged in ITES activities and in which the TPO had adopted the very same 20 comparables, the decision therein would squarely cover the issue of exclusion of the aforesaid 8 comparables in favour of the assessee. 6.2 Accentia Technologies Ltd. 6.2.1 The learned Authorised Representative for the assessee submitted that certain extraordinary events have occurred in this company during the relevant previous year that warrant exclusion of this company as a comparable. It was submitted before the bench that as per the Annual Report of this company for the F.Y. 2007-08 it evidences that this company has 10 IT(T.P) A Nos.1765 & 1783/Bang/2013 made acquisitions of Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc., etc. It is submitted that it is for these reasons that the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India (P) Ltd. (supra) has rejected this company i.e. Accentia Technologies Ltd. as comparable to an ITES company providing business support services for this year. 6.2.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee in the case on hand. 6.2.3 We have heard the rival contentions and perused and carefully considered the material on record including the judicial pronouncement cited by the assessee. We find that the co- ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. in IT(TP)A No.1316/Bang/2013 dt.14.8.2013 for Assessment Year 2008-09 has rejected this company, Accentia Technologies Ltd. as a comparable to assessees who were providing ITES based support services in this year, as there were extraordinary events that took place in this company like acquisition of other concerns, etc. holding as under at paras 10 & 11 thereof :-
“ (1) Accentia Technologies Ltd. (Seg.)
10. This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007-08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a 11 IT(T.P) A Nos.1765 & 1783/Bang/2013 comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows:- “I. Accentia Technologies Ltd.
It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- "17.5. In addition to the above, the Director's Report of the company for the FY 2007-08 revealed the merger and the demerger. A company known as Techmen Tools Pvt. Ltd. had amalgamated with Mold-tek Technologies Ltd. with effect form 1st October, 2006. There was a de-merger of Plastic Division of the company and the resulting company is known as Moldtek Plastics Limited. The de-merger from the Moldtek Technologies took place with effect from 1st April, 2007. The merger and the de-merger needed the approval of the Hon'ble High Court of Andhra Pradesh and also the approval of the shareholders. The shareholders of the company gave approval for the merger and the de-merger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger."
On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes 12 IT(T.P) A Nos.1765 & 1783/Bang/2013 place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded.” We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable.”
Following the above decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra), we are of the view that in the case on hand also, where the assessee is providing ITES based support services, this company i.e. Accentia Technologies Ltd. requires to be excluded from the set of comparable companies. We, accordingly, hold and direct the TPO to exclude this company from the list of comparables. 6.3 Acropetal Technologies Ltd. 6.3.1 The learned Authorised Representative for the assessee submitted that this company, selected by the TPO, is functionally different from the assessee as apart from being engaged in the business of export of software services, it is also engaged in rendering engineering design services and software development services which are high end service and require highly skilled employees, whereas the assessee in the case on hand is engaged in providing low end, routine BPO services. In support of its proposition for exclusion of this company from the list of comparables on grounds of functional differences, the learned Authorised Representative of the assessee, inter alia, placed reliance on the decision of the co-ordinate bench of this Tribunal in 13 IT(T.P) A Nos.1765 & 1783/Bang/2013 the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for A.Y. 2008-09 wherein this company was excluded from the list of comparables. 6.3.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.3.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement cited by the assessee. We find that the co- ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt ltd. (supra) held this company to be functionally different from the assessees performing ITES / BPO back end support services whereas Acropetal Technologies Ltd.; segmental revenues show that its major source of income is from providing engineering design services and information technology services which are knowledge process outsourcing services (KPO) and not BPO/ITES low end BPO services, like those performed by the assessee in the case on hand. At paras 12 and 13 of its order, the co-ordinate bench has held as under :-
“12. This company is listed at Sl.No.2 of the comparables chosen by the TPO. As far as this company is concerned, the objection of the assessee is that this company is not functionally comparable. The assessee is a BPO company that provides market analytics and data management services. To provide market analytics solutions, the assessee gives strategies that impact on client revenue including data based marketing strategies for customer acquisition, devising customer retention strategies and excluding loss mitigation strategies through cutting edge forecasting tools. The data management services provided by the assessee include routine business data reporting and management, website management, marketing data analysis and top line reporting. As far as Acropetal Technologies Ltd. is concerned, this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fall in the definition of ITES.
14 IT(T.P) A Nos.1765 & 1783/Bang/2013 13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No.15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO].” Following the above decision of the co-ordinate bench in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing ITES / BPO based low end support services, this company i.e. Acropetal Technologies Ltd. providing KPO services is to be excluded from the list of comparables as it not functionally comparable to the assessee, in the case on hand. We hold and direct the TPO accordingly. 6.4 Coral Hubs Ltd. (earlier known as Vishal Information Technologies Ltd.) 6.4.1 In respect of this comparable, selected by the TPO, the learned Authorised Representative for the assessee submitted that a perusal of the Annual Report of this company i.e. Vishal Information Technologies Ltd. shows that a major portion of its costs pertain to data entry charges, which indicates that its business model is different whereby it outsources most of its work to third party vendors, whereas the assessee in the case on hand does most of its work in-house. In support of its proposition for exclusion of this company from the list of comparables, the learned Authorised Representative, inter alia, placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) wherein this company was excluded from the list of comparables.
15 IT(T.P) A Nos.1765 & 1783/Bang/2013 6.4.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.4.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement placed reliance on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) held this company, formerly known as Vishal Information Technologies Ltd. to be functionally not comparable with low end ITES providers as it has outsourced most of its work, whereas the assessee in the case on hand is carrying out the work by itself. Further, this company has entered into an area of business known as new vertical digital library and print on demand whereas it is seen that the assessee in the case on hand provides ITES / BPO back end support services only. At paras 14 to 17of its order, the co-ordinate bench has held as under :- “ (3) Coral Hubs Ltd.
This company is listed at Sl.No.6 of the list of comparable companies chosen by the TPO. As far as this company is concerned, it is seen that this company was earlier known as Vishal Information Technologies Ltd. The comparability of this company in the case of an ITES company by name 24 x 7 Customer.com Pvt. Ltd. was considered by the Tribunal in and by order dated 09.11.2012 the Tribunal held that this company is not functionally comparable with ITES for the following reason:- “17.3 Vishal Information Technologies Ltd. (VIT) - In the case of this comparable, we find that the Mumbai Tribunal in the case of Mearsk Global Services (I) Pvt Ltd in ITA No.3774/Mum/2011 by order dt.9.11.2011 has held that since Vishal Information Technologies Ltd is outsourcing most of its work it has to be excluded from the list whereas the assessee in the cited case was carrying out the work by itself. In the instant case of the assessee also the assessee was carrying out its work by itself whereas in the case of VITL, it is outsourcing most of its work. We are therefore of the considered opinion that the decision of the ITAT, Mumbai in the cited case on the issue of excluding VITL as a comparable squarely applies. This decision was followed by the decision of the co-ordinate bench of this Tribunal in the case of Netlinx India(P) Ltd in ITA No.454/Bang/2011 dt.19.10.2012 wherein it was held that Vishal Information Technologies Ltd cannot be considered as a comparable. We, therefore, respectfully following the decision of the Mumbai 16 IT(T.P) A Nos.1765 & 1783/Bang/2013 Tribunal in the case of Mearsk Global Services (I) Pvt Ltd, direct the Assessing Officer / TPO to exclude Vishal Information Technologies Ltd. from the list of comparables.”
15. Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library & Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- “IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it sub- contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by outsourcing its works to the third party vendors. In this context, the assessee relied upon the order of the DRP in assessee's own case for the assessment year 2008- 09, wherein the DRP, after taking into consideration, the aforesaid aspect, has accepted the claim of the assessee. The assessee further submitted that the Income-tax Appellate Tribunal Mumbai Bench in the case of Asstt. CIT v. Maersk Global Service Centre (India) (P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.), a copy of which is submitted before us, has also directed for the exclusion of the aforesaid company since it has outsourced a considerable portion of its business.
17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand(POD), wherein it prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped from the final list of comparables."
17 IT(T.P) A Nos.1765 & 1783/Bang/2013 In case of Maersk Global service Centre India (P.) Ltd. (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner- "Insofar as the cases of Tulsan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded." In view of the observations made by the DRP as well as the decision of the ITAT Mumbai in the case of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable.”
It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT, IT(TP)A No.1086/Bang/2011, order dated 30.4.2013, has taken the following view:- “36. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee’s own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR’s argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where comparably less skilled employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the ITES sector is also justified. In view of the same, we direct the TPO to apply the employee cost filter to exclude companies with employee cost of less than 25% from the list of comparables for the computation of ALP.”
Applying the aforesaid decisions, we are of the view that Coral Hubs Ltd. cannot be considered as a comparable.” Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing ITES / BPO based 18 IT(T.P) A Nos.1765 & 1783/Bang/2013 support services, this company, i.e. Coral Hubs Ltd. is to be excluded from the list of comparables as it is not functionally comparable to the assessee, in the case on hand. We hold and direct the TPO accordingly. 6.5 Crossdomain Solutions Ltd. 6.5.1 In respect of this comparable, selected by the TPO, the learned Authorised Representative for the assessee submitted that this company i.e. Crossdomain Solutions Ltd. should be excluded from the list of comparables being functionally dis-similar to the assessee in the case on hand as it is engaged in rendering high end KPO services, development of product suites and information systems which are totally different from the low end ITES functions rendered by the assessee in the case on hand. In support of this proposition, the learned Authorised Representative placed reliance on, inter alia, the decision of the co-ordinate bench in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for A.Y. 2008-09 wherein this company was excluded from the list of comparables. 6.5.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.5.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited by the assessee. We find that the co- ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 excluded this company i.e. Crossdomain Solutions Ltd. from the list of comparables as it was providing high end KPO services, and development of product suites etc. rendering it functionally different from assessee's providing low end ITES / 19 IT(T.P) A Nos.1765 & 1783/Bang/2013 BPO Support Services and at paras 18 & 19 of its order, the co-ordinate bench has held as under :- “ (4) Crossdomain Solutions Ltd.
This company was considered as a comparable and listed at Sl.No.8 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. As observed in the case of Coral Hubs Ltd., the TPO rejected the plea of the assessee on the basis of a non-existent TP order passed for the A.Y. 2007-08. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. These activities are totally different from the activities of the assessee which perform very limited/low end functions back office services. The review and business functions of Cross Domain is as follows:- “With a decade of experience in Payroll Outsourcing, Crossdomain has created a re-engineered payroll service EFFIPAY – that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours*. With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000.” “Crossdomain’s IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn-around-time for business critical processes.” Source: http://www.cross-domain.com As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider.
We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. We hold accordingly.” Following the above cited decision of the co-ordinate bench in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view 20 IT(T.P) A Nos.1765 & 1783/Bang/2013 that in the case on hand also, where the assessee is only providing low end ITES / BPO support services, this company i.e. Crossdomain Solutions Ltd. is to be excluded from the list of comparables it is not functionally comparable to the assessee in the case on hand. We hold and direct the TPO accordingly. 6.6 Eclerx Services Ltd. 6.6.1 The learned Authorised Representative for the assessee submitted that this company is functionally dis-similar from the assessee in the case on hand as its business profile shows that it renders high end KPO services in the field of data analytics and operations management which require a high level of skill sets in comparison to the assessees which performs routine, low and ITES/BPO support services. In support of its proposition for excluding this company i.e. Eclerx Services Ltd., from the list of comparables, the learned Authorised Representative, inter alia, placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the set of comparables. 6.6.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.6.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied upon by the assessee. We find that the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) has excluded this company i.e. Eclerx Services ltd. from the list of comparables to low end ITES / BPO support service providers as it renders high end KPO services in the field of 21 IT(T.P) A Nos.1765 & 1783/Bang/2013 data analytics and operations management which requires high level of skill sets. At paras 20 & 21 of its order, the co-ordinate bench has held as under :-
“ (5) Eclerx Services Ltd.
This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extra ordinary events and peculiar circumstances prevail in the case of the assessee in as much as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- “14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that that the concerned company is engaged in providing Knowledge Process Outsourcing(KPO) Services.
On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, which is distinct from the nature of services provided by the assessee.”
We are of the view that in the light of the decision of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was functionally different. “ Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES support services, this company, i.e. Eclerx Services Ltd. is to be excluded from the list of comparables as 22 IT(T.P) A Nos.1765 & 1783/Bang/2013 it is functionally dis-similar from the assessee in the case on hand. We hold and direct the TPO accordingly. 6.7 Infosys BPO Ltd. 6.7.1 As far as this company, chosen by the TPO as comparable, is concerned, the learned Authorised Representative for the assessee submitted that this company, being a wholly owned subsidiary of Infosys Technologies Ltd. would enjoy a premium in the market, due to brand value and goodwill of the parent company, whereas the assessee is a low end provider of BPO / ITES support services. It is submitted that Infosys BPO Ltd. incurred huge selling and marketing expenses and is not only a market leader but also has huge, breadth in terms of economies of scale with diversity and worldwide geographical dispersion of customers. It is submitted that in view of these factors, Infosys BPO Ltd. is functionally dis-similar and different from the assessee in the case on hand. In support of its proposition for excluding this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the set of comparables. 6.7.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.7.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the co- ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd.
23 IT(T.P) A Nos.1765 & 1783/Bang/2013 (supra) for Assessment Year 2008-09 has excluded this company i.e. Infosys BPO Ltd. from the list of comparables to low end ITES / BPO support service providers as it is functionally different being an established market leader, enjoying huge brand value and goodwill, with huge economies of scale and diversity and geographical dispersion of customers. At para 24 of its order, the co-ordinate bench has held as under :- “ (7) Infosys BPO Ltd 24. This company is listed at Sl.13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit & loss account of this company for the F.Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F.Y. 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at Rs.31,863 Crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comaparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable.” Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES / BPO support services, this company i.e. Infosys BPO Ltd. is to be excluded from the list of comparables to the assessee in the case on hand. We hold and direct the TPO accordingly.
24 IT(T.P) A Nos.1765 & 1783/Bang/2013 6.8 Mold-Tek Technologies Ltd. 6.8.1 In respect of this company chosen by the TPO as a comparable, the learned Authorised Representative submits that it cannot be taken as a comparable to the assessee as it is functionally dis-similar; being engaged in KPO services providing structural design and detailing / structural engineering services, plant engineering, mechanical product design, IT Services and GIS Services, etc. which do not fall in the domain of provision of low end ITES support service, provided by the assessee in the case on hand. In support of the arguments put forth for excluding this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the list of comparables. 6.8.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.8.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the co- ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded this company i.e. Mold-Tek Technologies Ltd., holding it to be functionally different and dis-similar as it is providing KPO services and a host of engineering services like plant engineering, mechanical product designs, civil and structural engineering services, etc and therefore not comparable to assessee's providing ITES 25 IT(T.P) A Nos.1765 & 1783/Bang/2013 / BPO low end support services, at para 25 of its order, the co-ordinate bench has held as under :- “ (8) Mold-tek Technologies Ltd.
This company is listed at Sl.No.16 of the list of comparable companies chosen by the TPO. As far as this company is concerned, the submission of the assessee before us is that it is in the business of Knowledge Process Outsourcing and cannot be considered as a comparable. The functional profile of this company is as follows:- As per the annual report for the F.Y. 2007-08, the company primarily operates in two business segments: Plastic division: The plastic division is engaged in the manufacture of tube & oils, paints, pet products, consumer products, etc. The company demerged the said segment effective 1 April, 2007 and transferred the business unit to the Company Plastics Lt. The extract from the annual report confirms the fact that the Company had restructured its operations resulting in demerging the plastic segment business. Information Technology (IT) division: The IT division (also referred to as the KPO division by the company) of the company specializes in providing structural design and detailing services which can be categorized as structural engineering services. The structural engineering services provided by the IT division of the company cannot be classified as falling with the scope and ambit of ITES services. On the contrary, the said services would fall under the category of engineering services. Excerpts from the Annual Report of the company Page 10 of the Annual Report for the FY 2007-08 contains the following observation regarding the KPO division of the Company: ‘The Company has achieved about 56.49% growth in 2007-08 to register a turnover of Rs.17.86 crore. The company having established its credentials in structural engineering services to US clients is devising aggressive marketing strategy to achieve rapid growth.” This company is also engaged in providing a host of engineering services like civil and structural engineering services, mechanical product design, plant engineering, IT services and GIS services. As we have already seen, this company is to be classified as KPO and cannot be compared with the assessee. The decision of the Bangalore Bench of the ITAT in the case of First Advantage Offshore Services Ltd. (supra) which we have referred to in the earlier part of this order will clearly apply to this company. We therefore direct this company to be excluded from the list of comparables.”
26 IT(T.P) A Nos.1765 & 1783/Bang/2013 Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES / BPO support services, this company i.e. Infosys BPO Ltd. is to be excluded from the list of comparables to the assessee in the case on hand. We hold and direct the TPO accordingly. 6.9 Wipro BPO Ltd. 6.9.1 This company was selected by the TPO as a comparable. In respect of this company, the learned Authorised Representative for the assessee submitted that the arguments and contentions put forth in respect of Infosys BPO Ltd. (supra) are similar and are reiterated. It is submitted that this company i.e. Wipro BPO Ltd. is functionally different and different from an ITES / BPO support service provider as it also owns substantial IPRs on software products, apart from massive brand value and goodwill of Wipro Ltd. and being a market leader has huge economies of scale and clients dispensed worldwide, whereas the assessee in the case on hand is a mere ITES / BPO provider of low end support services. In support of its contentions for exclusion of this company from the list of comparables in the case on hand, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein Wipro BPO Ltd. was excluded from the list of comparables. 6.9.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee.
27 IT(T.P) A Nos.1765 & 1783/Bang/2013 6.9.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements relied on by the assessee. We find that the co- ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the list of comparables by holding as under at para 26 of its order :- “ (8) Wipro Ltd.
This company is listed at Sl.No.18 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the discussion made while deciding Infosys BPO Ltd. as a comparable will equally apply to this company also. This company owns substantial intellectual property on software products. This company cannot therefore be regarded as a comparable. For the reasons given while disregarding Infosys BPO Ltd. as a comparable, this company is also directed to be excluded from the list of comparables.” Following the above cited decision of the co-ordinate bench in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra), for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES / BPO support services, this company, i.e. Wipro BPO Ltd. is to be excluded from the list of comparables to the assessee in the case on hand. We hold and direct the TPO accordingly.
Grounds No.4 to 6 of assessee's appeal : Deduction u/s.10A of the Act. 7.1 In these grounds the assessee challenges the action of the learned CIT (Appeals) in upholding the Assessing Officer’s action in reducing telecommunication expenses attributable to the delivery of services outside India (Rs.1,55,13,784) and travel expenditure (Rs.26,79,067) incurred in foreign currency from ‘export turnover’ while computing the eligible deduction under Section 10A of the Act. Before us, the learned Authorised Representative for the assessee submitted that the above issue is covered by the decision of the Hon'ble jurisdictional High 28 IT(T.P) A Nos.1765 & 1783/Bang/2013 Court of Karnataka in the case of Tata Elxsi Ltd. & Others (349 ITR 98) wherein it has been held that the deduction is to be computed by reducing from the ‘total turnover’, the same amount by which the ‘export turnover’ has been reduced. 7.2 We have heard both sides and carefully perused and considered the material on record. On this very issue, the Hon'ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd and Others reported in (2011) 247 CTR 334 (Kar); (2011-TIOL-684-HC-KAR-II), has held that while computing the deduction under section 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, then the same should also be excluded from the total turnover in the denominator. The relevant operative portion of the finding of the Hon'ble jurisdictional High Court is extracted and reproduced as under : “ if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover in the denominator also. The reason being that the total turnover includes export turnover. The components of the export turnover in the numerator and denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in section 10-A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes 'export turnover', the very same meaning given to the 'export turnover' by the legislature is to be adopted while understanding the meaning of the 'total turnover', when the 'total turnover', includes 'export turnover'. If what is excluded in computing the 'export turnover' is included while arriving at the 'total turnover', when the 'export turnover' is a component of 'total turnover', such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the 'total turnover' means, then, when the 'total turnover' includes 'export turnover', the meaning assigned by the legislature to the 'export turnover' is to be respected and given effect to, while interpreting the 'total turnover' which is inclusive of the 29 IT(T.P) A Nos.1765 & 1783/Bang/2013 'export turnover'. Therefore the formula for computation of the deduction under section 10A, would be as under : Profits of the business x Export turnover of the undertaking (Export turnover + domestic turnover) Total Turnover.” In the light of the above facts and respectfully following the decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. & Others (supra), we direct the Assessing Officer to exclude the above mentioned expenses on communication and travel incurred in foreign currency both from export turnover as well as from the total turnover while calculating the eligible deduction under section 10A of the Act.
In Ground No.7, the assessee has denied itself liable to be charged interest under Section 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B of the Act, if any, while giving effect to this order.
In the result, the assessee's appeal for Assessment Year 2008-09 is partly allowed. Revenue’s appeal for A.Y. 2008-09 I IT(TP)A No.1675/Bang/2013 10. The Grounds raised at S.Nos.1, 6 & 7 are general in nature and therefore no adjudication is called for thereon. 11.1 In the Ground at S.No.2 : Revenue contends that the learned CIT (Appeals) erred in directing the TPO to exclude the companies which are functionally dis-similar to the assessee by 30 IT(T.P) A Nos.1765 & 1783/Bang/2013 following the decision of the ITAT, Delhi Bench in the case of Actis Advisers P. Ltd. 20 ITR (Trib) 138, as such a direction is beyond the mandate of the learned CIT (Appeals) to set aside such issue since the learned CIT (Appeals) is not empowered to do so under Section 251(1)(a) of the Act. 11.2.1 We have heard both the learned Departmental Representative and the learned Authorised Representative in the matter. The learned CIT (Appeals) while disposing off the assessee's appeals for Assessment Years 2004-05, 2005-06 and 2008-09 by way of a common order at para 17 thereof which pertains to the impugned A.Y. 2008-09 has directed the TPO to apply the test of functional dis-similarity and exclude comparables selected by him as laid down in the order for A.Y.2004-05. At para 6.5 of the said order for Assessment Year 2004-05, the learned CIT (Appeals) has held as under :- “6.5 Recently, the Bangalore Bench of the Hon'ble Tribunal in Witness Systems Software India (P) Ltd. V. DCIT, Circle 11(1), (2013) 34 taxmann.com 183 (Bangalore-Trib.) has held that functionally dissimilar companies cannot be upheld as comparables. The Bangalore Bench of the Hon'ble Tribunal has ruled that functionally dissimilar companies cannot be upheld as comparables, whereas the Delhi Bench has categorically stated that companies who are in engaged in the business of Information Technology Services cannot be rejected just because it is operating in that very sector in a different line. It is not open to the as to demand that Information Technology enabled services be further dissected because in such a case, there will be not be any end to the matter. Hence, it is ordered that functionally dissimilar companies have to be excluded, but however, business of the same sector but operating in a different line need not be considered as a functionally dissimilar. The TPO is directed to exclude functionally dissimilar companies subject to the observations of the Delhi Bench of the Hon'ble Tribunal.” 11.2.2 On a perusal of the relevant portion of the order of the learned CIT (Appeals), it is clear that the learned CIT (Appeals) has not factually examined the issue of the comparability of the comparable companies selected by the TPO or decided whether or not the comparables the assessee sought exclusion of, were functionally dis-similar to the assessee or not. No 31 IT(T.P) A Nos.1765 & 1783/Bang/2013 finding of fact has been rendered by the learned CIT (Appeals) as to the comparability of any of the TPO’s list of comparables or as to which of them were functionally dis-similar. The learned CIT (Appeals) has merely directed the TPO to apply the test of functional dis-similarity in the light of the decision of the ITAT, Delhi Bench in the case of Actis Advisers P. Ltd. (supra); which action, in our considered opinion, is tantamount to setting aside the matter to the file of the Assessing Officer without rendering any factual finding as to which of the comparable companies are functionally dis-similar to the assessee and which the Act does not empower him to do. It was for the learned CIT (Appeals) to apply the test of functional dis-similarity and the concerned judicial decisions in the matter before him and after examining the judicial and factual position, to come to a finding in respect of the exclusion or otherwise of each of the concerned comparable companies rather than to direct the TPO to examine the matter and adjudicate thereon. We, therefore, finding merit in the contentions of Revenue that the learned CIT (Appeals) had acted beyond mandate in section 251(1)(a) of the Act in setting aside the issue of adjudication on the function dis-similarity of comparable companies raised by the assessee to the file of the TPO rather than adjudicate on it himself which he ought to do. However, this issue is now only of academic nature since we have in this order at paras 6 to 6.9 (supra) considered and adjudicated on the comparability of companies on the grounds of functional dis-similarity based on the material placed before us and the judicial pronouncements cited in the matter. This Ground No.2 is, therefore, disposed off as indicated above.
In Ground No.3, the Revenue alleges that the learned CIT (Appeals) did not appreciate that when any filter or criteria applied by the assessee is accepted and that of the TPO is 32 IT(T.P) A Nos.1765 & 1783/Bang/2013 relaxed, the result is that a new set of comparables emerges which are other than those comparables which were neither chosen by the assessee on the TPO in the order under Section 92CA of the Act. Before us, neither was this ground urged, nor was any material brought on record by Revenue to substantiate the claims made in the ground raised
. In this view of the matter, this ground is rendered infructuous and is accordingly dismissed.
13. Ground Nos.4 & 5 – Deduction u/s.10A of the Act. 13.1 In these grounds, the Revenue challenges the order of the learned CIT (Appeals) in directing the Assessing Officer to recompute the deduction under Section 10A of the Act by excluding telecommunication expenses of Rs.1,55,13,784 and travel expenditure of Rs.26,79,667 incurred in foreign currency both from ‘export turnover’ as well as ‘total turnover’ in accordance with the decision of the Hon'ble High Court of Karnataka in Tata Elxsi Ltd. & Others reported in 349 ITR 98, without appreciating that the said decision of the Hon'ble High Court has been challenged before the Hon'ble Apex Court, the outcome of which is pending. 13.2 We have heard both sides and perused and considered the material on record. This issue is now covered by the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. & Others (supra) and we therefore uphold the order of the learned CIT (Appeals) in following the decision of the Hon'ble High Court (supra) in directing the Assessing Officer to exclude the above mentioned expenses on telecommunications and travel incurred in foreign exchange both from ‘export turnover’ as well as ‘total turnover’ while computing the eligible deduction under Section 10A of the Act. Consequently, Revenue’s Grounds at S.Nos. 4 & 5 are dismissed.
33 IT(T.P) A Nos.1765 & 1783/Bang/2013 14. In the result, the Revenue’s appeal for Assessment Year 2008-09 is treated as partly allowed. 15. To sum up, both the assessee's appeal for A.Y. 2008-09 and Revenue’s cross appeal are partly allowed. Order pronounced in the open court on 4th Nov., 2015.