Income Tax Appellate Tribunal - Hyderabad
Dy.Cit, Circle-1(3),, Hyderabad vs M/S B.A.Continum India Private ... on 28 April, 2017
ITA Nos 1144 and 1145 of 2014
BA Continuum India Private Ltd Hyderabad
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' A ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri S.Rifaur Rahman, Accountant Member
ITA No.1144/Hyd/2014
(Assessment Year: 2008-09)
M/s.BA Continuum India Vs Additional Commissioner of
Private Limited (formerly Income Tax, Range-1
CFC India Services Pvt Ltd), Aayakar Bhavan,
Hyderabad Basheerbagh, Hyderabad
PAN: AACCC 2310 C
ITA No.1145/Hyd/2014
(Assessment Year: 2008-09)
Dy. Commissioner of Vs BA Continuum India Private
Income Tax, Circle 1(3) Limited, Hyderabad
Hyderabad PAN: AACCC 2310 C
For Assessee : Shri S. Raghunathan
For Revenue : Shri P. Chandra Sekhar, DR
Date of Hearing: 01.03.2017
Date of Pronouncement: 28.04.2017
ORDER
Per Smt. P. Madhavi Devi, J.M.
These are cross appeals filed both by the assessee and Revenue for the A.Y 2008-09 against the order of the CIT (A)-II Hyderabad dated 24.03.2014.
ITA No.1144/Hyd/2014 (Assessee's Appeal)2. In the assessee's appeal, the assessee has raised the following preliminary ground as ground of appeal No.1:
Page 1 of 26ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad "l On the facts and in the circumstances of the case and in law, the Additional Commissioner of Income-tax, Range I, Hyderabad ('Ld. AO') and Additional Commissioner of Income-tax (Transfer Pricing), Hyderabad ('Ld. TPO') erred in carrying on the assessment proceedings in the name of the Company and further passing the assessment orders u/s 143(3) r/w section 144C(4) of the Act and U/S 92CA(3) of the Act respectively in the name of the Company (formerly known as CFC India Services Private Limited) which was a non- existing entity and the Commissioner of Income Tax (Appeals) - II, Hyderabad ['Ld. CIT(A)'] further erred in upholding the said action of the Ld. AO and Ld. TPO".
3. In addition to the above, the assessee has also raised other grounds on the merits of the additions confirmed by the CIT (A) and also the T.P. adjustment made by the AO.
4. As regards the preliminary ground of appeal, brief facts are that the assessee, CFC India Services Pvt. Ltd with PAN:
AACCC 3062 D, filed its return of income on 28.09.2008. Since the assessee had entered into international transaction, the determination of the Arm's Length Price (ALP) was referred to the TPO at Mumbai. Subsequently, this company got merged with BA Continuum India Pvt Ltd with PAN: AACCC 2310 C with effect from 1.4.2008 by virtue of the Hon'ble High Court order dated 18.12.2009. Vide letter dated 29.03.2010, this fact was brought to the notice of the AO and it was requested to transfer the file u/s 127 of the Act relating to all open and pending assessments and other proceedings under the Act. Accordingly, the case was transferred to the TPO at Hyderabad and the proceedings in the name of the merged company were taken up and completed.Page 2 of 26
ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad However, the PAN of the assessed company is mentioned as AACCC 3062 D. Aggrieved by the assessment, the assessee raised a ground before the CIT (A) that the assessment proceeding in the name of BACI (formerly known as CFC) which is a non- existing entity is null and void. The assessee had stated that though the assessment is made in the name of BACI (amalgamated company), the PAN No. of CFC is mentioned and not of the amalgamated company. It was submitted that on merger, the identity of Transferor Company is lost as it seizes to exist in the eyes of law and therefore, the assessment made in the name of the non-existent company is not valid.
5. The CIT (A), after considering the above facts observed that the letter dated 29.03.2010 was only to transfer the files from Mumbai to Hyderabad and that the PAN mentioned therein by the assessee was also AACCC 3062 D pertaining to the merged company. She further observed that the assessee did not specifically bring to the notice of the TPO or the AO that the assessment has to be made in PAN AACCC 2310 C i.e. the PAN of the amalgamated company. She also observed that the assessee kept changing its name due to which there might have been some confusion. Further, she also observed that the merger was w.e.f. 1.4.2008 during which period, the assessee was very much in existence. Therefore, the CIT (A) upheld the assessment order in PAN AACCC 3062 D.
6. Aggrieved, the assessee is in appeal before us reiterating the submissions as made above.
Page 3 of 26ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad
7. Having regard to the rival contentions and the material on record, we find that the assessment for the A.Y 2008-09 in respect of the amalgamating company and also the amalgamated companies have been completed separately, but in the name of the amalgamating company only. The only difference is in the PAN Nos. mentioned in the assessment years. As rightly held by the CIT (A), the amalgamating company was in existence for the A.Y 2008-09, though by the time of the assessment, it had amalgamated with the amalgamated company. On bringing the factum of amalgamation to the notice of the AO, the case has been transferred to the jurisdiction of the AO under whom, the amalgamated company's registered office was located and the assessment is also made in the name of the amalgamated company. The mention of the PAN No. of the amalgamating company is only to differentiate between the amalgamated and amalgamating companies. Therefore, we see no reason to interfere with the order of the CIT (A) and the assessee's ground of appeal No.1 is thus rejected.
8. The other grounds raised by the assessee are as under:
"2 On the facts and in the circumstances of the case and in law, the Ld. AO erred and the Ld. CIT(A) further erred in including other income of Rs. 1,84,60,617 [comprising of foreign exchange fluctuation gain amounting to Rs. 1,51,95,408 and miscellaneous income amounting to Rs. 32,65,209] the 'total turnover' of the Company for the purpose of computing deduction u/s 10A of the Act.
3 Without prejudice to Ground 2 above, on the facts and circumstances of the case, the Ld. Page 4 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad AO/Ld. CIT(A) having held foreign exchange fluctuation gain of Rs. 1,51,95,408 and miscellaneous income of Rs.32,65,209 as part of total turnover, erred in not considering the said foreign exchange fluctuation gain and miscellaneous income as part of export turnover for the purpose of computation of deduction u/s 10A of the Act.
4 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the order of Ld. AO of not allowing deduction u/s 10A of the Act as per the revised computation filed by the Appellant during the course of assessment proceedings and thereby:
a) The Ld. CIT(A) erred in not computing and allowing deduction u/s l0A of the Act separately for each STPI units.
b) The Ld. CIT(A) erred in not setting off the loss of the Hyderabad unit B with the income from other sources and also erred in not allowing the carry forward of the net business loss/depreciation allowance to subsequent assessment year.
5 On the facts and in the circumstances of the case and in law, the Ld. TPO/Ld. AO erred in making a Transfer Pricing ('TP') adjustment amounting of Rs, 13,06,52,257 on Information Technology Enabled Services CITES') provided by the Company to its Associated Enterprise ("AEs") and the Ld. CIT(A) while upholding the said action of the Ld. TPO/ Ld. AO erred by:-
a) not following the decisions of the Hon'ble jurisdictional Income Tax Appellant Tribunal "ITAT') relied upon by the Appellant in its submission with regard to its grounds relating to TP adjustment of Rs. 13,06,52,257;
b) not excluding high profit margin companies;Page 5 of 26
ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad
c) not excluding companies having significant differences in the functions performed;
d) not excluding companies having extraordinary events during the relevant year;
e) not excluding high turnover companies considering several companies having different scale of operations;
f) not excluding companies incurring research expenses and/or marketing expenses;
g) not excluding companies owning proprietary products;
h) not excluding companies which failed the Ld. TPO's own filters;
i) not allowing risk adjustment to the mark-up of the comparable companies; and
j) not allowing the claim of the working capital adjustment to the mark-up of the comparable companies".
9. As regards Ground No.2 & 3 are concerned, brief facts are that while computing deduction u/s 10A of the Act, the AO observed that the assessee had claimed other income of Rs.1,84,60,617 as a deduction u/s 10A of the Act. The AO observed that this sum cannot be part of export turnover. He therefore, excluded the same from export turnover but did not exclude it from the total turnover. On appeal, the CIT (A) observed that the other income of Rs.1,84,60,617 includes forex gain of Rs.1,51,95,408 and miscellaneous income of Rs.32,65,209. The CIT (A) was of the opinion that the forex gain or loss is part of the operating income and hence part of export turnover and therefore, Page 6 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad the gain should be allowed as a deduction u/s 10A of the Act. However, as regards the other income is concerned, the CIT (A) held that it is not part of the export turnover. Against this finding of the CIT (A), the assessee is in appeal before us stating that if it is treated as part of the total turnover, then it should also be considered as part of export turnover. We find that the Revenue is also in appeal before us against treating the forex fluctuation gain as export turnover as well as total turnover. We find that the forex gain is on account of the export turnover of the assessee and therefore, it is to be part of the export and total turnover as rightly held by the CIT (A). The CIT (A) had followed the decisions of various High Courts and the Tribunal which are reproduced at Para 6.4 of the CIT (A)'s order. The CIT (A) has also brought out the distinguishing facts in the case of Shah Originals (2010) 191 Taxmann.com 81 that in that case the forex gain or loss was on account of re-statement of EEFC account and not as to whether it pertains to difference in billed amount as per the invoices and realized amount. Therefore, we see no reason to interfere with this finding of the CIT (A). However, as regards the miscellaneous income of Rs.32,65,209 is concerned, there is no breakup of the income and as to the exact nature of such income. Therefore, we are of the opinion that the same is to be excluded both from the export turnover as well as the total turnover for computing the deduction u/s 10A of the Act. Ground of appeal No.3 is accordingly treated as allowed for statistical purposes.
10. As regards Ground No.4(a), brief facts are that the assessee had three STPI Units which are all entitled for benefit u/s 10A of the Act. Out of these three, one unit is in Mumbai Page 7 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad while the two other Units are at Hyderabad. One of the Unit, Hyderabad-A was making profit while the other unit i.e Hyderabad-B was making loss. The AO set off the loss of the Hyderabad Unit-B against the profits of the other two eligible units for computing the deduction u/s 10A of the Act. Aggrieved, the assessee preferred an appeal before the CIT (A) stating that as per the direction of the Hon'ble Supreme Court in the case of CIT vs. Yokogawa India Ltd in Civil Appeal No.8498 of 2013, the profit of each unit is to be computed on a stand alone basis. The CIT (A) however, held that in the case of the assessee, all the three units are having export activities and therefore, there is no reason why each unit is to be considered separately for the purpose of 10A benefit. Aggrieved, the assessee is in appeal before us.
11. The learned Counsel for the assessee submitted that each of the eligible Unit is entitled to claim deduction u/s 10A of the Act in accordance with the directions of the Hon'ble Supreme Court in the case of Yokogawa India Ltd (cited Supra) and therefore, the profits and gains of each of the Unit have to be computed separately on a stand alone basis and the loss of the eligible unit Hyderabad-B should be allowed to be carried forward for the next A.Y. He placed reliance upon the decision of the Hon'ble Supreme Court in the case of Yokogawa India Ltd (Supra).
12. The learned DR however, supported the orders of the CIT (A).
13. Having regard to the rival contentions and the material on record, we find that the issue before the Hon'ble Supreme Page 8 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad Court in the case of Yokogawa India Ltd (Supra) was with regard to the true and correct meaning of the provisions of section 10A of the I.T. Act. The Hon'ble Supreme Court at Para No.3 has framed the following specific questions thereunder for adjudication.
"(i) Whether Section 10A of the Act is beyond the purview of the computation mechanism of total income as defined under the Act. Consequently, is the income of a Section 10A unit required to be excluded before arriving at the gross total income of the assessee?
(ii) Whether the phrase "total income" in Section 10A of the Act is akin and pari materia with the said expression as appearing in Section 2(45) of the Act?
(iii) Whether even after the amendment made with effect from 1.04.2001, Section 10A of the Act continues to remain an exemption section and not a deduction section?
(iv) Whether losses of other 10A Units or non 10A Units can be set off against the profits of 10A Units before deductions under Section 10A are affected?
(v) Whether brought forward business losses and unabsorbed depreciation of 10A Units or non 10A Units can be set off against the profits of another 10A Units of the assessee.
Thus, it is seen that Question No.4 refers to the losses of other 10A Units or non 10A units. It means that the losses of eligible units cannot be set off against the profits of other eligible units before allowing the deduction u/s 10A of the Act. The Hon'ble Supreme Court, after deliberation of the provisions of the Act, has at Paras 16 to 18 has held as under:
Page 9 of 26ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad "16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision."
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 Page 10 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad 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'.
18. For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. All the appeals shall stand disposed of accordingly".
14. Thus, it can be seen that the profits and gains of each of the eligible unit is to be computed independently for allowing deduction u/s 10A of the Act with regard to an undertaking. Therefore, Ground No.4(a) is allowed and Ground No.4(b) is remanded to the file of the AO for re consideration in accordance with law and to allow the carry forward of the losses.
15. In the result, Ground No.4 (a) is allowed and Ground No.4(b) is allowed for statistical purposes.
16. As regards Ground of appeal No.5, the assessee had entered into an international transaction with its AE for providing information technology software services and I.T. enabled services. During the proceedings u/s 92CA of the Act, the TPO observed that the TNMM is the most appropriate method for determining the ALP of the ITES segment of the assessee. The TPO rejected the comparables selected by the assessee and adopted certain other comparables and arrived at the margin of the comparables at Rs.29.16% as against the assessee's margin of Page 11 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad Rs.22.20%. He accordingly proposed the addition of Rs.13,06,52,257. Aggrieved the assessee preferred an appeal before the CIT (A) challenging the comparability of the following 5 companies.
(i) Mold-tek Solutions Ltd (ii) Eclerx Services Ltd (iii) Coral Hub Ltd (iv) Genesys International Corporation Ltd (v) Accentia Technology Ltd
17. The CIT (A) confirmed the comparability of all these 5 companies against which the assessee is in appeal before us.
18. The learned Counsel for the assessee submitted that the comparability of these 5 companies had arisen in the assessee's own case for the A.Y 2007-08 and also in the case of the amalgamated company for the A.Y 2008-09 and in both the cases, the Tribunal had directed the exclusion of these companies from the final list of comparables. Copies of the said orders have been filed before us.
19. The learned DR however, supported the orders of the authorities below.
20. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in ITA No.221/Hyd/2014 and 301/Hyd/2014 had considered the comparability of Accentia Technologies Ltd, Mold-tek Solutions Ltd and Eclerx Services Ltd as not comparable to the assessee. Further, in the case of the amalgamated company also, the Page 12 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad comparability of all the 5 companies has been considered and it has been held that they are not comparable to the assessee. For the sake of clarity and ready reference, the decision in the case of the amalgamated company for the very same A.Y 2008-09 are reproduced hereunder:
"I. Accentia Technologies Limited (Accentia):
10. It was the submission that there was an Extraordinary situation during the year. Accentia's annual report for the financial year 2007-08 clearly shows business restructuring/peculiar economic circumstances during the year under consideration. It was further contended that the employee cost of Accentia is only 16.81 % of total operating cost. The relevant employee cost calculation of Accentia was given below to substantiate the contention:
Particulars Amount (Rs.) Reference
Total 34,93,32,496 As per TPO's
operating order
cost as per
TPO's
order(A)
Employee
cost:
Salary & Allowance to 5,48,44,678 AR Pg.58
staff
Contribution to ESI 38,507 AR pg.58
Contribution to PF 5,76,925 AR pg. 58
Staff welfare expenses 17,08,901 AR pg.58
Total employee cost 5,71,69,011
(B)
Employee cost % 16.37%
10.1. The TPO did not agree to the contentions of assessee with regard to extraordinary business operations. Assessee did not raise its contentions with regard to employee cost filter before the TPO. Ld. CIT(A) has rejected the contention of assessee with regard to Accentia's extraordinary situation. With regard to employee cost, Ld. CIT(A) has rejected the contention of assessee as it was not raised before the TPO.Page 13 of 26
ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad 10.2. Assessee has placed reliance on the following Judicial precedents for rejection of Accentia as a comparable company:
• Symphony Marketing Solutions India Pvt. Ltd. - IT(TP)A No. 1316/Bang/2012;
• Vodafone India Services Private Ltd. [Formerly Known as 3 Global Services Private Ltd, ('GSPL'/'3GSPL')] (ITA No. 7514/Mum/2013);
• HSBC Electronic Data Processing India P. Ltd. ITA.No.1647/Hyd/2012;
• Hyundai Motors India Engineering P. Ltd. Hyderabad - 152/ITD/112];
• Capital IQ Information Systems (India ) Pvt. Ltd vs. DCIT (lnt. Taxation) (ITA No. 1961/Hyd/2011) (Hyd. ITAT); • Zavata India Private Limited vs. DCIT (ITA No. 1781/Hyd/ 2011) (Hyd. ITAT);
• Cognizant Technology Services Pvt. Ltd., vs. ACIT (ITA. Nos. 2106 & 1864/Hyd/2011) (Hyd. ITAT);
In view of the above, assessee requests to exclude Accentia Technologies Limited as a comparable.
10.3. We have considered the rival contentions and perused the orders of earlier coordinate benches. As far as this comparable is concerned, the same has been decided by the Co-ordinate Bench in the case of Hyundai Motors India Engineering P. Ltd., Vs. ITO in ITA No. 1850/Hyd/2012 (AY. 2008-09) dt. 21-02-2014, wherein the Co-ordinate Bench held as under:
"I. ACCENTIA TECHNOLOGIES LTD. (Seg.) 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 drawn 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. was mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India ITA No.1316/Bang/2012 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 Page 14 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad the said company cannot be compared as a 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.
10. 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 ITA No.1316/Bang/2012 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."
11. 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 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 Page 15 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad 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. Similar View was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. 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".
10.4. Respectfully following the decision of the Co- ordinate Bench, we direct the AO/TPO to exclude Accentia Technologies Limited from the list of comparables. II. Coral Hub Limited ('Coral') Formerly known as Vishal Information Technologies Limited:
11. It was submitted that Coral Hub Limited (formerly known as Vishal Information Technologies Limited) is functionally different and operates on a different business model. It primarily outsources its work to the vendor's vis-a- vis the Assessee which carries out the entire work on its own. The relevant details are tabulated below:
Computation of outsourcing cost to total cost of Coral:
Particulars Amount (Rs.) Reference
Salary cost 21,68,01,923 AR pg. 84
Total cost 25,07,83,662 As per TPO's order pg.100
11.1. Even though Assessee did not raise objections on Coral before TPO, it has raised ground on Coral before Ld. CIT(A). However, Ld. CIT(A) has rejected the contentions of assessee as it was not raised before the TPO.
11.2. Assessee placed reliance on the following Judicial precedents for rejection of Coral:
• United Health Group Information Services Pvt. Ltd. [ITA No.6312/Del/2012/AY 2008-09];Page 16 of 26
ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad • Techbooks International Pvt. Ltd. [ITA No.722/Del/2014/AY 2009- 10];
• BNY Mellon International Operations (India) Pvt. Ltd. [ITA No.2380/PN/2012/AY 2008-09];
• Maersk global Service Center (India) P. Ltd. [ITA No.3774/Mum/2011/AY 2005-06];
In view of the above, assessee requests to exclude Coral as a comparable.
11.3. We have considered the rival contentions and perused the orders relied on. As far as this comparable is concerned, the same has been decided by the Co-ordinate Bench of Delhi in the case of United Health Group Information Services Pvt.
Ltd. Vs. ACIT [ITA No.6312/Del/2012-AY 2008-09] dt. 28-08-2014, wherein the Co-ordinate Bench held as under:
"Vishal Informatics 12.1. The TPO included this company in the list of comparables by noticing that it was engaged in providing BPO services. The assessee failed to convince him and the DRP that it was incomparable.
12.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it is mainly engaged in e-publishing business. It has more than 10,000 classic books to its credit which are also converted into large font titles for visually challenged. Apart from e- publishing, this company is also engaged in Documents scanning & Indexing. It can be seen from the financial results of this company that both the segments viz., e- publishing and Documents scanning etc. have been combined and there are no separate financial results in respect of Documents scanning work, which may be comparable with the assessee to some extent. As the assessee is not engaged in any e-publishing business and the financials given by this company are on consolidated basis, we direct to exclude this company from the list of comparables. The assessee succeeds".
11.4. Respectfully following the decision of the Co- ordinate Bench, we direct the AO/TPO to exclude Coral Hub Limited (Formerly known as Vishal Information Technologies Limited) from the list of comparables.
Page 17 of 26ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad III. Eclerx Services Limited ('Eclerx'):
12. It was submitted that this company is functionally different as it is engaged in providing high end services in the nature of KPO activities like Data Analytics, and customized process solutions. These include data analytics, operations management, audits and reconciliation, metrics management and reporting services. Further there was an extraordinary situation of merger during the year. Eclerx acquired UK-based Igentica Travel Solutions Limited on July 27,2007. The integration process was on track as of March 2008. This fact was evident as per Page Nos. 14, 18 & 19 of annual report of Eclerx. The TPO did not agree to the contention of assessee that Eclerx is functionally different and involved in high end KPO services. However, assessee has not raised contention on extraordinary situation before TPO. Ld. CIT(A) rejected the contentions of assessee on functional difference, however has not commented on contention of assessee with regard to extraordinary situation of Eclerx.
12.1. Assessee placed reliance on the following Judicial precedents for rejection of Eclerx as a comparable company:
• Maersk Global Centres (India) Private Limited vs. ACIT, Mumbai (I.T.A. No.7466/Mum/2012/AY 2008-09); • United Health Group Information Services Pvt. Ltd. [ITA No.6312/Del/2012/AY 2008-09];
• Calibrated Healthcare Systems India Pvt. Ltd. [ITA No.5271/De1/2012/AY 2007-08];
• Hyundai Motors India Engineering P. Ltd. [ITA No. 1850/Hyd/2012/AY 2008-09] Accordingly, assessee requests to exclude Eclerx Services Limited as a comparable.
12.2. We have considered the rival contentions and perused the orders of earlier assessment years. As far as this comparable is concerned, the same has been decided by the Co-ordinate Bench in the case of Hyundai Motors India Engineering P. Ltd., Vs. ITO in ITA No. 1850/Hyd/2012 (AY. 2008-09) dt. 21-02-2014, wherein the Co-ordinate Bench held as under:
"IV ECLERX SERVICES LTD. :
This company is listed at Sl.No.10 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company Page 18 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad 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.
15. 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 having extraordinary event and super normal profits. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench.
12.3. Respectfully following the decision of the Co- ordinate Bench, we direct the AO/TPO to exclude Eclerx Services Limited from the list of comparables. IV. Mold-tek Technologies Limited ('Moldtek'):
13. It was submitted that this company is functionally different as it is engaged in providing engineering design services for construction of buildings by using design tools like CADI CAM, Stadd Pro by employing highly skilled software engineers for the purpose. These services are in nature of KPO and sharp contrast to the nature of work undertaken by assessee. Further, Teck-men Page 19 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad Tools Pvt. Ltd. Was amalgamated with the Moldtek with effect from 01 October, 2006. There was a de-merger of Plastic Division of Mold-Tek which has been named as Mold Tek Plastics Limited after de-merger. This de-merger from the Mold Tek took place with effect from 01 April. 2007. As per page nos. 9, 10,41 & 42 of the annual report shows that there were mergers and demergers during the year under consideration.
13.1. The TPO did not agree to the contentions of assessee that Moldtek functionally different and involved in high end KPO services. However, assessee has not raised contention on extraordinary situation before TPO. Ld. CIT(A) rejected the contentions of assessee on functional difference, however has not commented on contention of assessee with regard to extraordinary situation of Moldtek. 13.2. In this regard, assessee placed reliance on the following Judicial precedents for rejection of Moldtek as a comparable company on account of functionally different and extraordinary situation:
• Maersk Global Centres (India) Private Limited vs. ACIT, Mumbai (ITA. No.7466/Mum/2012/AY 2008-09);
• Symphony Marketing Solutions India Pvt. Ltd. - IT(TP)A No. 1316/Bang/2012);
• Capital IQ Information systems (India) Pvt. Ltd., Hyderabad (ITA No. 1961/Hyd/2011);
In view of the above explanations and submissions, assessee prays to exclude Mold-tek Technologies Limited from the list of comparable companies.
13.3. We have considered the rival contentions and perused the orders relied on. As far as this comparable is concerned, the same has been decided by the Co-ordinate Bench of Bangalore in the case of Symphony Marketing Solutions India Pvt. Ltd., Vs. ITO in IT(TP)A No. 1316/Bang/2012 (AY. 2008-09) dt.14-08-2013, wherein the Co-ordinate Bench held as under:
"(8) Mold-tek Technologies Ltd.
25. 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 Page 20 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad 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".
13.4. Respectfully following the decision of the Co-
ordinate Bench, we direct the AO/TPO to exclude Mold-tek Technologies Limited from the list of comparables. V. Genesys International Corporation Limited ('Genesys'):
Page 21 of 26ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad
14. It was submitted that this company is functionally different as it is engaged in the business of providing Geographical Information Services comprising Photogrammetry, Remote Sensing, Cartography, Data Conversion services as per page no. 38 of the annual report.
Further there was an abnormal growth. Genesys has witnessed abnormal growth of around 605.43% for its Geospatial services for the FY 2007-08. Therefore, Genesys needs to be rejected. Assessee did not raise its contentions on Genesys before TPO. Ld.CIT(A) disregarded the submission of assessee on abnormal growth and on functional difference. 14.1. Assessee reiterates its contentions. In this regard, assessee placed reliance on the following Judicial precedents for rejection of Genesys as a comparable company on account of functionally different and abnormal growth:
• TNS India Pvt. Ltd., Hyderabad (ITA No. 1875/Hyd/2012); • BP India Services Private Limited (ITA No. : 6977/Mum/2012); • Symphony Marketing Solutions India Pvt. Ltd. [IT(TP)A No. 1316/Bang/2012)] ;
• Hyundai Motors India Engineering P. Ltd. Hyderabad (152/ITD/112);
• Sapient Corporation Pvt. Ltd. vs. DCIT [(2011) 11 taxmann.com 69 (Del. ITAT];
• ITO vs. Saunay Jewels (P.) Ltd. [(2010) 42 SOT 4 (Mum. ITAT)];
In view of the above explanations and submissions, assessee prays to exclude Genesys International Corporation Ltd., from the list of comparable companies.
14.2. We have considered the rival contentions and perused the orders relied on. As far as this comparable is concerned, the same has been decided by the Co-ordinate Bench in the case of Hyundai Motors India Engineering P. Ltd., Vs. ITO in ITA No. 1850/Hyd/2012 (AY. 2008-09) dt. 21-02-2014, wherein the Co-
ordinate Bench held as under:
"V. GENESYS INTERNATIONAL CORPORATION LTD.
This company is listed at Sl. No.11 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the stand of the assessee has been that this company is functionally not comparable and that it has a different employee skill set and that this company performs R&D services and also owns intangibles. This company is a Page 22 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad geospatial services content provider specialising in land based technologies. From the notes to accounts of this company, it is seen that this company is engaged in providing geographical information services comprising of photogrammetry, remote sensing cartography, data conversion related computed based services and other related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. Besides the above, this company also carries out R&D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. In view of the above, we are of the view that this company cannot be regarded as a comparable and deserves to be excluded from the list of comparables".
14.3. Respectfully following the decision of the Co- ordinate Bench, we direct the AO/TPO to exclude Genesys International Corporation Ltd., from the list of comparables".
21. Respectfully following on the same set of facts, we direct that these companies be excluded from the final list of comparables.
22. The ground No.5(j) is against not allowing the claim of the working capital adjustment to the mark-up of the comparable companies. We find that this issue also has been considered in ITA No.1143/Hyd/2014 at Para 15 which is reproduced hereunder:
"15. Working Capital Adjustments :
Ground no. 4: On the facts and circumstances of the case and in law, the TPO erred and the Ld. CIT(A) further erred on facts by committing arithmetical error while calculating the average receivables of the tax payer to ascertain the working capital adjustment in the instance case and thus erred in computing the working capital adjustment to the mark- up of the comparable companies.
15.1. Assessee during the course of assessment proceedings made submission before the TPO for giving working capital adjustment. Assessee filed detailed calculation for the working capital adjustment before the TPO. As per the Page 23 of 26 ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad calculation provided by assessee, the working capital adjustment was coming to 3.42%. The TPO provided working capital adjustment of 2.80% to assessee. It was submitted that the TPO while calculating the average receivables of assessee committed arithmetical error resulting in erroneous computation of working capital adjustment.
15.2. Ld. CIT(A) rejected the contention of assessee with regard to calculating the average receivables and relied on the TPO's order in calculation of the working capital adjustment.
15.3. Assessee submitted that the TPO at the time of calculating the working capital adjustment considered the average receivables as Rs. 47,37,03,063/- instead of Rs.
23,68,51,532/- and thus resulted in erroneous computation of working capital adjustment. Once the correct average receivables is considered for computing the working capital adjustment, the ALP after working capital adjustment will come to 25.74% instead of 26.36%, as calculated by the TPO and the margin earned by assessee would fall within the +/- 5% range as provided in proviso section 92C(2) of the Act and thus there will be no TP adjustment to assessee.
15.4. We have considered the rival contentions and perused the orders of earlier assessment years. As far as working capital adjustments are concerned, there is no dispute about the adjustment per se. the dispute is regarding the working of adjustment only. As regards the quantum of working capital adjustment, we direct the AO/TPO to verify the correctness of the amount of working capital adjustment claimed by the assessee and then decide as per facts and law. The ground is allowed accordingly".
23. Respectfully following the same, this ground of appeal is also allowed.
24. In the result, assessee's appeal is partly allowed.
25. As regards Revenue's ground of appeal, the Revenue has raised the following grounds:
Page 24 of 26ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad "(i) The order of the Ld. CIT(A) is erroneous in law and fats of the case.
(ii) The Ld. CIT(A) erred in not appreciating that communication charges are to be excluded from export turnover only while computing deduction u/s. l0A of the I.T. Act and not from total turnover as well as export turnover as definition of 'turnover' is not provided in Explanation-2 of Sec.10A for exclusion of such charges from total turnover also.
(iii) The Ld. CIT(A) while directing the Assessing Officer not to exclude communication charges from export turnover on the ground that the same were already excluded by the assessee in the computation of total income ought to have directed the AO to add such charges to the total turnover as the assessee has excluded the said charges from total turnover also while computing the deduction u/s. l0A.
(iv) The LD. CIT(A) erred in holding that foreign exchange gain of Rs. 1,51,95,408/is entitled for deduction u/s. l0A of the LT. Act disregarding the decision of Bombay High Court in the case of Shah Original(191 Taxman81)".
26. In the assessee's appeal, we have already held that the foreign exchange gain is part of the operating income of the assessee and therefore, to be included both in export as well as total turnover for computing deduction u/s 10A of the Act. Therefore, Revenue's appeal is dismissed.
Page 25 of 26ITA Nos 1144 and 1145 of 2014 BA Continuum India Private Ltd Hyderabad
27. In the result, assessee's appeal is partly allowed for statistical purposes and the Revenue's appeal is dismissed.
Order pronounced in the Open Court on 28th April, 2017.
Sd/- Sd/-
(S.Rifaur Rahman) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 28th April, 2017.
Vinodan/sps
Copy to:
1 M/s. B.A. Continuum India Pvt. Ltd, Building No.5 Mind Space,
Raheja IT Park, Hi-Tech City, Madhapur, Hyderabad 500081 2 Add.CIT, Range-1, Aayakar Bhavan, Basheerbagh, Hyderabad 3 Dy.CIT Circle 1(2) B Block, 7th Floor, IT Towers, AC Guards, Masab Tank, Hyderabad 4 CIT (A)-II Hyderabad 5 CIT - I Hyderabad 6 The DR, ITAT Hyderabad Guard File By Order Page 26 of 26