Income Tax Appellate Tribunal - Hyderabad
M/S. Avineon India Private Ltd, , ... vs Assessee on 19 September, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 1989/Hyd/2011
Assessment Year : 2007-08
M/s Avineon India Pvt. Ltd., vs. Dy. Commissioner of Income-
Hyderabad tax, Circle - 1(1), Hyderabad.
PAN: AAACN7323G
(Appellant) (Respondent)
Assessee by : Mr. K. Pradeep &
Ms. K. Neeraja
Revenue by : Shri P. Soma Sekhar Reddy
Date of hearing : 19-09-2013
Date of pronouncement : 31-10-2013
O RDE R
PER B. RAMAKOTAIAH, A.M.:
This appeal preferred by the Assessee is directed against the order of the DCIT, Circle - 1(1) passed u/s 143(3) read with section 92CA and section 144C of the IT Act, consequent to the directions issued by the Dispute Resolution Panel (DRP), Hyderabad.
2. Assessee has originally raised grounds of appeal running to 10 along with Appeal Memo and vide letter dated 02-11-2012 amended grounds and filed detailed amended grounds running to 8 in number. Vide petition under Rule 11 of IT Rules, Assessee prayed for admission of additional ground with reference to working capital adjustments. Ground No. 8 is a summary of other 7 grounds and 2 ITA No. 1989/Hyd/2011 M/s Avineon Ltd.
states that such other grounds that may be advanced at the time of hearing. Assessee's counsel filed written submissions in which some of the comparables contested in the grounds are not pressed and comparables were contesteded without there being any ground. Grounds are considered based on the written submissions as well as amended grounds raised by Assessee and also on the basis of paper books filed in this regard.
3. We have heard the learned counsel and the learned DR in detail.
4. Briefly stated, Assessee is a company registered in India and is engaged in the business of information technology, engineering and GIS services. Assessee filed its return of income for AY 2007-08 on 30-10-2007 declaring gross profit originally at Rs. 1,77,13,278/- and claiming exemption u/s 10A on the above business income and offering other income at Rs. 1,45,963/- to tax. During the course of assessment proceedings, Assessee filed revised computation along with revised Form 56F claiming deduction at Rs. 2,01,58,456/-, which was accepted by the AO but the exemption was restricted to the gross total income available under the head 'business'. In the course of assessment proceedings, as Assessee has transactions with its Associated Enterprise (AE), transactions were referred to TPO for analyzing the arm's length price of transactions. Assessee reported international transactions in four categories, namely, a) provision of information technology enabled services, b) provision for GIS, c) provision for engineering services, and d) reimbursement of expenses. There is no dispute with reference to the method adopted by Assessee i.e. Transaction Net Margin Method (TNMM). Profit Level Indicator (PLI) by the assessee was Operating Profit by Total Cost (OP/TC). Assessee reported the margin for the FY 2006-07 as under:
3 ITA No. 1989/Hyd/2011M/s Avineon Ltd.
Description With AE With Non AE Total
Operating 9,40,92,833 6,96,05,178 16,36,98,011
revenue
Operating Cost 7,98,11,709 6,80,03,741 14,78,15,451
Operating 1,42,81,123 16,01,427 1,58,82,560
Profit (PBIT)
Operating 17.89% 2.35% 10.74%
Profit to Cost
Ratio
Assessee filed transfer pricing report and Form 3CEB benchmarking its transactions. Assessee selected 22 companies as comparable companies while benchmarking its transactions. During the TP proceedings, Assessee suggested additional filters in addition to the filters already adopted in its own study, but, the TPO rejected some of the filters adopted by Assessee and finally considered the data. Assessee accepted final analysis adopted by the TPO with a request that contemporaneous data along with earlier two years data should also be considered. However, the TPO did not agree and considered only the data for the relevant assessment year. Assessee, however, objected to the threshold limit adopted for the filters such as 'Related party transactions' and 'Employee cost.' These filters were also not considered by the TPO. One of the objection raised by Assessee before the TPO was that Assessee is following Business Process Outsourcing (BPO) and some of the comparable companies are in the Knowledge Process Outsourcing (KPO), therefore, those comparables should be excluded. Finally, the TPO selected 27 companies as comparables. Out of 22 companies selected by Assessee at the time of TP study and two companies additionally suggested by Assessee, the TPO accepted 9 comparable companies and rejected balance companies.
5. Before us, Assessee has not raised grounds with reference to comparables rejected by the TPO, therefore, to that extent the matters got concluded. In addition to the 9 companies out of 4 ITA No. 1989/Hyd/2011 M/s Avineon Ltd.
Assessee's choice, TPO selected another 18 companies as comparable companies and finally arrived at arithmetical mean PLI at 30.21% and suggested an adjustment of Rs. 2,78,56,195/- on the entire turnover of Assessee. Assessee objected before the DRP about adopting entire turnover for benchmarking as against turnover pertaining to AE transactions and further objected to various comparables. The DRP in the order rejected various objections raised by Assessee but only accepted about one comparable in the case of Maple e Solutions Ltd, which was directed to be excluded. Consequently, the AO while giving effect to the order of the DRP reworked out the arithmetic mean PLI at 30.06% thereby making an addition of Rs. 2,76,28,627/- being adjustment recommended and confirmed by the DRP.
6. Assessee in its original grounds has contested the amount of Rs. 2,78,56,195/- but in the amended grounds contested the amount of Rs. 2,77,75,000/-. This amount is taxable income, which included other income returned by Assessee. The Actual addition made, which should have been correctly contested by Assessee is only Rs. 2,76,28,627/-, therefore, this amount is only considered. While arriving at the adjusted arithmetic mean PLI, TPO allowed working capital adjustment at 1.38%. Assessee objected to the working capital adjustment wherein the TPO excluded the advance received from customers thereby affecting the percentage of relief. This objection was rejected by the DRP. Since the original ground was not raised on working capital adjustment, Assessee filed the additional ground, which is as under:
"The ld. TPO failed to make appropriate calculation of working capital adjustment by ignoring the amount of advance from customers as on 31 st March 2007 and also as on 31 St March 2006 and thereby is not justified in denying the appropriate working capital adjustment."5 ITA No. 1989/Hyd/2011
M/s Avineon Ltd.
While allowing deduction u/s 10A, AO set off losses in engineering unit against profits of eligible units which resulted in denying losses of Rs. 24,45,178/- eligible to be set off and carried forward. Assessee has raised this issue as one of the ground.
7. Before us, the learned counsel summarized the objections raised in various grounds as under:
A) Rejecting the contemporaneous data and undertaking fresh comparable.
B) Ignoring segment wise data provided by Assessee C) W rongly applying ALP at entity level instead of restricting to transactions with AEs.
D) Selection of wrong comparables by the TPO E) Using a higher threshold for related party transactions F) Employee Cost filter, and G) Improper calculation of working capital adjustment
8. Under these heads, AR submitted detailed submissions as under:
A) Rejecting the contemporaneous data and undertaking fresh comparable.( Ground 3(i) ).
1. The learned counsel submitted that the TPO used the comparable data which was not available to Assessee at the time of preparing the TP documentation which is against the principle of natural justice and further the information obtained by the TPO is not freely available in the public domain. It was submitted that the TPO should have given an opportunity to Assessee to re-prepare the TP documentation considering the data available at the time of assessment proceedings.
6 ITA No. 1989/Hyd/2011M/s Avineon Ltd.
2. After considering rival contentions, proceedings before the TPO as well as DRP and paper book filed before us, we are not convinced with the objection raised by Assessee. Even though relevant data was not available at the time of preparing TP documentation, the Tribunal uniformly is holding that comparable data available at the time of analysis by the TPO should also be used provided information available with either in the public domain or specifically obtained by the TPO was made available to Assessee for its objections, if any. Since TPO has given enough opportunity to Assessee, we do not find any merit in the contentions raised. There is no necessity for re- preparing the TP documentation, which has already been furnished to the TPO at the time of filing return as exercise of verifying arm's length price is with the TPO and in the proceedings before the TPO enough opportunity was given to Assessee. In fact, Assessee also suggested fresh comparables and the comparables rejected by the TPO out of the selected companies of Assessee were also accepted. In view of this factual position, we do not find any merit in the contention on this issue. Accordingly, ground No. 3(i) stands rejected.
B) Segment wise data ( ground Nos. 3(ii) & 3(v):
a) It was submitted that Assessee company has three business verticals, namely, a) GIS Services - STPI Unit, b) Software Services
- Non STPI Unit and Engineering Services - STPI Unit, and the operating performance of the said three units is as under:
Particulars GE Services Software services Engineering services AE Total AE Total AE Total Operating 87297078 87593978 948046 4709526 5847709 71394507 Income Operating 72528291 72774961 1917122 9523519 5366297 65516970 expenses Profit 14768787 14819016 (969076) (4813993) 481411 5877537 Margin on 20.36 20.36 (50.55) (50.55) 8.97 8.97 Costs% 7 ITA No. 1989/Hyd/2011 M/s Avineon Ltd.
b) It was further submitted that books of accounts are maintained with each unit as a separate profit centre and the common expenses are allocated on the basis of revenue. (PB-284)
c) Further, it was submitted that the above segmentation is the basis for claiming section 10A relief and the same is certified by a CA and was submitted for the consideration of TPO. It was submitted that around 90% of the AE transactions were from GIS segment which earned an operating margin of 20.36%. The TPO as well as DRP have ignored this fundamental fact and have erred in not considering this aspect of the economic substance of the company. The reason for rejection of segment as stated by the TPO is that these were not audited. It may be noted that the requirement under Companies Act for disclosure of separate segment arises only in terms of AS-17. If the segments are functionally same and do not meet threshold limit the same are considered as one segment which in fact is the case with Assessee. The books were audited and there is only one segment in accordance with AS-17. The TPO has rejected the segment results shown above merely on this ground, without looking at the details and reconciliation with trial balance that was submitted.
d)The learned counsel relied on the decision of Delhi Bench of ITAT in the case of Benetton India Pvt. Ltd. Vs. ITO [2012-TII-05-ITAT-
DEL-TP) to submit that when Assessee is in different segments only the segmental profits should be arrived at and that can only be benchmarked independent of each other. He also relied on the decision of coordinate bench of Mumbai ITAT in the case of Hinduja Ventures Ltd. Vs. ACIT, TS-212-ITAT-2012 (Mum.)
e) The learned DR, however, submitted that the segmental data is not audited and as per the annual report there is no segmental reports, 8 ITA No. 1989/Hyd/2011 M/s Avineon Ltd.
therefore, allocation of expenditure and profits arrived at by Assessee cannot be relied upon.
f) After considering rival contentions, we are of the opinion that Assessee has a valid ground on this issue. First of all, as seen from the order of the AO, the AO while considering deduction u/s 10A himself categorised the profits earned by various units, as under:
GIS Division Rs. 1,64,45,398
IT Division (-) Rs. 47,97,187
Engineering Division Rs. 60,62,067
Total Rs. 1,77,13,278
=============
This indicates that Assessee's computation of profits on different units, two units being eligible units i.e. GIS and Engineering Division and one non-eligible unit of IT Division are available separately and the AO has neither raised any objection on the profit computation nor made any adjustments to the working given by Assessee. Even though Assessee's entire business activity is coming under one segment under Company Law, but for the purpose of transfer pricing these activities are entirely different. As held by the coordinate bench in the case of Benetton India Pvt. Ltd. (supra) each activity has different factors in respect of source, identification of vendors, merchandise, designs quality control, handling, etc. The FAR analysis in each of the activity will have distinct and separate considerations. When there are different segmental activities, which are independent of each other, they are required to be analysed transaction to transaction basis and not by combining all activities. Therefore, TPO/AO should have considered GIS services, Engineering Services and Software services separately for benchmarking should not have combined all of them into one. Coming to business verticals, Assessee had very meager non-AE transactions in GIS Services ( a meager Rs. 2.96 lakhs) when compared to total turnover of Rs. 8.76 9 ITA No. 1989/Hyd/2011 M/s Avineon Ltd.
crores. So far as in Engineering Services, out of Rs. 7.14 crores of turnover, the AE transactions are only 58.47 lakhs. Likewise in software services also, AE transactions are 9.48 lakhs against total of Rs. 47.09 lakhs. The TPO/AO should have analysed separate activities and should have benchmarked separately. One objection, which can be raised in this regard is that Assessee itself has benchmarked transactions combining all the three transactions in TP report. However, when this was brought to the notice of TPO and particularly when segmental reports are available on the basis of claims made u/s 10A, the TPO should have taken them into consideration. The TPO as well as DRP have ignored this fundamental fact and have erred in not considering this aspect of the economic substance of the transactions. The requirement under Companies Act for disclosure of separate segment arises only in terms of AS-17, but, under the TP provisions, the segments are functionally different and they do not meet threshold limits. Accordingly, this objection of Assessee is to be upheld.
C) TPO wrongly applied ALP at entity level instead of restricting to transactions with AEs GroundNo.3(iii):
a) It was submitted that its operational margin indicated that transactions with AE resulted in operating profit to cost ratio of 17.89% and with non-AE at 2.35% and total operating profit to cost is at 10.74%. It is further submitted that the TPO made the addition on the basis of overall profit of 10.74% in stead of considering the margin of 17.89% submitted by Assessee from AE. This has resulted in making addition with reference to the transaction with non-AE also and it was submitted that it resulted in addition of Rs. 1,80,04,041/-
on the non-AE transactions, which are almost on par with AE transactions. The learned counsel brought out the facts to our notice and submitted that segmental data as provided for the claim of section 10A is available with AO, which are duly signed by CA. It was 10 ITA No. 1989/Hyd/2011 M/s Avineon Ltd.
further submitted that TPO as well as DRP rejected this on the reason that segment-wise data is unaudited and cannot be relied, in a way of violating of principles of natural justice.
b) The learned DR, however, relied on the contentions raised by the TPO and DRP and submitted that segment-wise details are not available, therefore, they do not have any option but to adopt enterprise profit alone.
c) In the rejoinder, the learned counsel referring to the objections made before DRP submitted that DRP also noted that there is strong merit in the claim of Assessee but,rejected the same that the issue is pending before various appellate-fora and, hence, not reached finality. In view of this, it was submitted that adjustment should be made only with reference to AE transactions and not on the entire business turnover.
d) After considering the rival contentions, we are of the opinion that Assessee has merit in its contentions. In fact, Assessee has suffered losses in software services where the AE transactions are less as stated earlier. Like-wise, Assessee also had very meager AE transactions in Engineering Services and there are separate profits which were already arrived at and accepted by AO in the order itself as discussed earlier while accepting segmental data. When profit margins of different units are available separately, we are not in a position to understand as to why TPO and DRP should adopt total profit at 10.74%, which included non-AE transactions on which according to Assessee, profit margin was less. Be that as it may, since segmented profits are available and profits are separately computed under the provisions of section 10A, it is not difficult to arrive at the correct profit margin on cost, on the basis of information available on record and making the addition accordingly.
11 ITA No. 1989/Hyd/2011M/s Avineon Ltd.
e) However, as seen from the details placed in the written submissions, Assessee has arrived at marginal cost at 20.36% in segment wise data whereas in the separate computation for AE and non-AE transactions, profit was arrived at 17.9%. These amounts are to be reconciled with reference to turnovers and expenses claimed for the purpose of deduction u/s 10A from GIS Services and Engineering Services. Since separate segmented data is available by way of CA's certificate under the provisions of section 10A, the AO can reconcile these amounts and arrive at correct profit margins and make the adjustments thereon. Therefore, we uphold the objections raised by Assessee and direct the AO to re-workout the addition, if any, only with reference to AE transactions and not on non-AE transactions.
f) In the case of DCIT Vs. Firestone International, 712-ITAT-2012 (Mum), the coordinate bench held as follows:
"..........Since the arm's length price has to be determined only with reference to the international transactions, whatever be the method followed or adopted for arriving at the ALP, the ALP can only be considered on the value international transactions alone and not on the entire turnover of assessee. If this sort of adjustment is permitted this will result in increasing the profit of assessee on the entire non-AE sales also, which is not according to the provisions of Transfer pricing mandated by the Act for the impugned assessment year."
g) Similar decision was also taken in other cases relied upon by the learned counsel as under:
i) Genisys Integrating Systems (India) Pvt. Ltd. (ITA No. 1231/Bang/2010)
ii) DCIT Vs Starlite (40 SOT 421 (Mum)
iii) DCIT Vs. Ankit Diamonds (43 SOT 523 (Mum).
h) Respectfully following the decisions of the coordinate bench, we direct the AO/TPO to re-workout the addition accordingly.12 ITA No. 1989/Hyd/2011
M/s Avineon Ltd.
D) Selection of wrong comparables by the TPO Ground No 3(iv), 3(viii) and 4:
a) In the written submissions, Assessee however limited its objections to the following companies:
1. Accentia Technologies Ltd
2. Eclerx Services Ltd
3. Mold Tek Technologies Ltd
4.Vishal Information Technologies Ltd.
5. HCL Comnet Systems & Services Ltd.
6. Infosys BPO Ltd.
7. Wipro Limited
8. Asit C Mehta Financial Services Ltd.
9. Triton Corporation
b) The details of summary of arguments are as under:
S Comparable Issue Justification
No
1 Accentia Extraordinary Capital IQ information
Technologies Ltd event of systems (India) Pvt. Ltd.
amalgamation Vs. DCIT (Intl Taxation,
Hyd.) & Zavata India Pvt.
Ltd., (TS-156-ITAT-2013
(Hyd)
2 Eclerx Services Supernormal Market Tools Research
Ltd profits and high Pvt. Ltd. Vs. ACIT (TS-35-
end KPO ITAT-2013 (Hyd.) & Zavata
India Pvt. Ltd., (TS-156-
ITAT-2013 (Hyd)
3 Mold Tek Extraordinary Capital IQ information
Technologies Ltd event of systems (India) Pvt. Ltd.
amalgamation/ Vs. DCIT (Intl Taxation,
merger, fails Hyd.) & Zavata India Pvt.
employee cost Ltd., (TS-156-ITAT-2013
filter and has (Hyd)
supernormal
profits
4 Vishal Information Extremely low Brigade Global Services
Technologies Ltd. employee cost Pvt. Ltd. Vs. IT) (TS-730-
(fails employee ITAT-2012(Hyd) & Zavata
cost filter) India Pvt. Ltd., (TS-156-
ITAT-2013 (Hyd)
13
ITA No. 1989/Hyd/2011
M/s Avineon Ltd.
5 HCL Comnet High turnover Patni Telecom Solutions
Systems & companies and Pvt. Ltd. Vs. ACIT,
Services Ltd. giants in industry Hyderabad (TS-102-ITAT-
2013 (Hyd) & Zavata India
Infosys BPO Ltd. Pvt. Ltd., (TS-156-ITAT-
6
2013 (Hyd)
7 Wipro Limited
8 Asit C Mehta Functionally Functionally different
Financial different company not comparable
Services Ltd. company and with the business of
RPT > 10% Assessee & Zavata India
Pvt. Ltd., (TS-156-ITAT-
2013 (Hyd)
9 Triton Comparable Directions of DRP
Corporation indicted for
money
laundering
offences.
c) The learned DR, however, relied on the orders of TPO and the
DRP and explained that these comparables are selected after due analysis and nothing should be excluded.
d) We have considered and examined various comparables selected as well as perused various orders of the coordinate benches on the issue. It is true that in the transfer pricing analysis comparability is at the heart of transfer pricing analysis. The foundation for comparability analysis is the need for a comparison between conditions made or imposed between AE and those which will be made between independent enterprises. As per the provisions, FAR analysis is must. As per Rule 10B if there are any differences between comparables, relevant transactions should be taken and differences to be adjusted to arrive at the ALP for the reason that after taking number of companies as comparables, the TPO should allow adjustments towards differences in depreciation, differences in risk perceptibility, of working capital adjustments, etc depending on the facts of the case. But selecting a company, which is not comparable at all or which affects comparison due to unusual 14 ITA No. 1989/Hyd/2011 M/s Avineon Ltd.
features cannot be taken as a comparable company. Assessee's objection is with reference to such companies, which are selected by the TPO as comparable but in fact there are certain extraordinary events or different business models, which make it uncomparable. Now coming to the companies objected by Assessee, the analysis is as under:
1) Accentia Technologies Ltd.
The learned counsel submitted that during the FY 2006-07 an extra ordinary event of amalgamation occurred in December 2006, As a part of the expansion plan, the said company took over a Mumbai listed company named Hitech Entertainment Ltd. through open offer, which in turn took over Geosoft and Iridium. We find that the said fact of amalgamation was brought to the notice of the DRP, but the DRP preferred to not consider this aspect. In the case of Capital IQ Information Systems (India) Pvt. Ltd. Vs Dy DCIT for AY 2007-08, on which reliance placed by Assessee, the coordinate bench ruled in the case of this comparable as under:
"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 FY 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 amalgamation in fact has taken place, then the aforesaid comparable has to be excluded."
Assessee placed reliance on the decision of coordinate in the case of Zavata India Pvt. Ltd (supra) wherein also similar decision was taken that the said company should be excluded from the list of comparables. In view of the above, we direct the AO/TPO to exclude the said company as comparable from the list of comparables.
15 ITA No. 1989/Hyd/2011M/s Avineon Ltd.
2) Eclerx Services Ltd.
We find that the PLI for Eclrex Services Ltd for the AY 2007-08 is 89.33% and is in the business of high end KPO. As ruled by the coordinate bench in the case of Capital IQ Systems (India) Pvt. Ltd. (supra), supernormal profit companies must be excluded for determination of ALP. In the case of Market Tools Research Pvt. Ltd. Vs. ACIT, 35-ITAT-2013 (Hyd), on which reliance was placed by Assessee, the coordinate bench held as follows:
"We find that comparability of this company has been dealt with in detail in the case of Capital IQ Information Systems (India) Pvt. Ltd. Vs. DCIT ITA No. 1961/H/2011 dt. 23-11-12 for the AY 2007-08 at para 14 & 15 they have held that Eclerx Services Ltd. cannot be taken into account in view of their extra ordinary profits and that company was engaged with knowledge process outsourcing business which is distinct and different from the line of nature of activities of the assessee. Hence this company should be excluded while determining ALP"
Even in the case of Zavata India Pvt. Ltd. Vs. DCIT (supra), on which Assessee relied, similar view was taken. Respectfully following the said decisions of the coordinate bench, we direct the AO/TPO to exclude the said company while determining ALP.
3) Mold Tek Technologies Ltd.
We find that there is merger in the company and also fails employee filter cost. We find that in the case of Capital IQ Information Systems India Pvt. Ltd. (supra), for the AY 2007-08, the coordinate bench of ITAT, Hyderabad held as under:
"The assessee has objected for this company being taken as comparable mainly on the ground that since there is a merger from 1 st October, 2006, the financial results of the company cannot be taken as a comparable. The assessee, relying upon the observations of the DRP, in the case of this particular company, in the proceeding for the AY 2008-09, which has been extracted in para 10 hereinabove, has submitted that the assessment year under dispute also, is an exceptional year of 16 ITA No. 1989/Hyd/2011 M/s Avineon Ltd.
performance as there is impact of amalgamation of a company, namely, Techman Tools P. Ltd., with effect from 1 st October, 2006 and the concerned company also revised its financial statement, after closure of the previous year. It has been submitted by the AR for the assessee that the amalgamation was also approved by the shareholders on 25-01-2008 and the High Court has also approved the same on 25-07-2008. In this context, the assessee relied upon the annual report of the company for the FY 2007-08. The assessee has further submitted that the activity of the company is also functionally different since it is engaged in providing High End Engineering Consulting Services and Structural Engineering Consulting Services, which are in the nature of Knowledge Process Outsourcing (KPO) service. The AR for the assessee has submitted that the aforesaid company is providing highly technical and specialized engineering services, and use of information technology is only incidental. Lastly, it has been submitted that the company was having supernormal profit at 113%. Therefore, it cannot be taken as a comparable."
The employee cost of the Mold Tek Technologies Ltd. during the AY 2007-08 is mere 7.6% of sales and when this fact was brought to the notice of the TPO and DRP by Assessee, they did not consider the same. This indicates that part of job was outsourced. Following the said coordinate bench decision, we direct the AO/TPO to exclude the said company from the list of comparables while determining ALP.
4) Vishal Information Technologies Ltd.
We find that employee cost of the said company for The AY 2007- 08 is mere 2% as against 49% in the case of Assessee and the industry average of 30 to 40%, as the employee's cost forms major cost base in ITES companies. Therefore, the said adopts different methods of rendering services and is not akin to the business relating to Assessee and hence, we direct the AO/TPO to exclude the said company from the list of comparables while determining ALP. Cordinate benches in the case of Brigade Global Services Pvt. Ltd., Vs. ITO, (TS-73--ITAT-2012(Hyd) and Zavata India Pvt. Ltd. (supra) held a similar view to exclude.
17 ITA No. 1989/Hyd/2011M/s Avineon Ltd.
5. HCL Comnet Systems & Services Ltd.
6. Infosys BPO Ltd.
7. Wipro Ltd.
Assesse relying on the following decisions of the coordinate bench, submitted to exclude the said companies from the list of comparables on the ground that the said companies turnover is many times more as compared to that of Assessee.
1. Patni Telecom Solutions Pvt. Ltd. Vs. ACIT, Hyderabad (TS- 102-ITAT-2013 (Hyd)
2. Zavata India Pvt. Ltd. Vs. DCIT (TS 156 ITAT 2013) We find that in the case of Patni Telecom Solutions Pvt. Ltd., the coordinate bench excluded the high turnover companies. Therefore, there is justification in the claim. However, we are not able to examine whether there are any companies accepted by assessee with lower turn over when compared to assessee's turnover. The norm should be uniform. Therefore, we direct the AO/TPO to exclude the said companies from the list of comparables only if there are no companies with similar ratio of lower turn over, in the other accepted comparables, while determining ALP. AO is directed to examine this and decide accordingly.
8. Asit C Mehta Financial Services Ltd.
After considering the submissions and perusing the record, it is observed that the TPO had included the said company which was also engaged in portfolio management services and investment activities and such services cannot be compared to Assessee as both are in divergent sectors. In this connection, we refer to Rule 10B(2), which is as under:
"...........the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:
a) the specific characteristics of the property transferred or services provided in either transaction.18 ITA No. 1989/Hyd/2011
M/s Avineon Ltd.
b).....
c)........
d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
The learned TPO had considered the said company in spite of the related parties exceeding 15% of the turnover. Assessee submitted said company has RPT of 15.72%. The co-ordinate bench in the case of LG Soft India Pvt. Ltd. Vs. DCIT, Bangalore [IT(TP)A No. 1121/Bang/2011, AY 2007-08] and 24/7 Customer.com Pvt. Ltd. Vs. DCIT, Bangalore [ITA No. 227/Bang/2010] has considered similar facts and excluded the same. Therefore, we direct the AO/TPO to exclude the said company from the list of comparables while determining ALP.
9. Triton Corporation We find that the DRP in its order had directed the TPO to remove the said company from the comparable list as there was merger/ acquisition of Maple E solutions by Triton. DRP concluded that both should be excluded. However, the same was not mentioned in final conclusion and only Maple was directed to be excluded. Therefore, we direct the AO/TPO to exclude the said company Triton also from the list of comparables while determining ALP.
9. In view of the above discussion, the TPO is directed to work out the average arithmetic mean of PLI, subject to verification on turnover filter of comparables at Para 8 (d) - 5,6,7 above.
10. Assessee contested as a general principle about higher threshold for related party transactions, employee cost filter as stated 19 ITA No. 1989/Hyd/2011 M/s Avineon Ltd.
above in Items (E) & (F). while we are not objecting to the contentions per se, there is no need to separately adjudicate on these filters as Assessee's objection with reference to other comparables selected by the TPO have already been addressed in the above grounds. Therefore, giving any finding on these objections will only be academic in nature, as the specific objections to the comparables were already dealt with. Hence, these two objections raised by Assessee in Ground No. 3(vi) and 3(vii) are considered academic in nature and accordingly rejected.
ADDITIONAL GROUND
11. The additional ground raised by Assessee is with reference to improper calculation of working capital adjustment by the TPO.
12. It was the contention that the TPO by not taking into consideration the amount of advances from customers as on 31-03- 2007 as also on 31-03-2006 did not calculate the adjustment correctly. Assessee prayed for inclusion of advance from customers under trade payables for calculation of working capital adjustment. It was submitted that if the account payables of Assessee was considered on 31-03-2007 and 31-03-2006 (both of trade payables) working capital adjustment would be 3.30% as against 1.38% percent. Assessee furnished detailed working of the capital adjustment after considering advances by way of annexure. It was further submitted that in the case of M/s Bearing Point Business Consulting Pvt. Ltd. vs. DCIT in ITA No. 1124/Bang/2011, for AY 2007-08 dated 21-12- 2012, the coordinate bench remitted the issue to the file of TPO to verify the facts once again and consider the trade payable for computation of working capital adjustment.
20 ITA No. 1989/Hyd/2011M/s Avineon Ltd.
13. The learned DR, however, contested that this was already considered by the TPO and, therefore, no further adjustment is required.
14. We have considered the rival submissions and perused the record. Even though Assessee has raised this additional ground, the same was also made as an objection before the DRP and the DRP did discuss it in page 19 of the order and rejected the contention on the reason that bifurcation of debtors and creditors to compute working capital adjustment becomes meaningless exercise. It is further opined that in the absence of cogent reasons, there is no case for reworking the working capital adjustment. We are not in agreement with the opinion of the DRP. Assessee contends that trade practice of advances and subsequent adjustment of these advances against invoices raised, being captive service provider has a bearing on profit margin, therefore, working capital requirement should be taken care of by way of adjustments. Whether similar conditions exist for other comparables require examination and adjustment towards working capital. Before us, the AR furnished detailed annexure making working capital adjustment to justify 3.30% sought by Assessee as against 1.38% given the TPO. Similar issue was discussed in the case of bearing Point Business Consultancy Pvt. Ltd. (supra) and the coordinate bench restored to the file of TPO vide para 5.4.2. Since working capital adjustment require verification by the TPO, in the interest of justice, we restore the issue to the file of TPO with a direction to examine the veracity of Assessee's claim and take proper decision in correctly computing the working capital adjustment. With these directions this additional ground is considered allowed for statistical purposes.
21 ITA No. 1989/Hyd/2011M/s Avineon Ltd.
15. The AO/TPO is directed to exclude comparables and determine the ALP by restricting to the international transactions with AEs only and while doing so, consider segmental profits, based on the reports submitted for claiming u/s 10A of the Act. After arriving the arithmetic mean of PLI, if any further adjustment towards working capital is required, the same may be considered after verification as directed above. If required, the TPO or AO can seek information from the Assessee and decide accordingly.
16. The other ground raised is with reference to setting off of brought forward losses and unabsorbed depreciation before giving effect to deduction u/s 10A
17. As briefly stated above, the AO has set off of losses of Rs. 47,97,187/- of non 10A unit before providing deduction u/s 10A. It was the contention that deduction u/s 10A is undertaking specific and should be computed without considering losses of the other units. It was submitted that this contention is supported by the judgment of the Hon'ble High Court of Karnataka in the case of CIT Vs. Yokogawa India Ltd., 341 ITR 385 (Kar.). The learned counsel also relied on the decision of the coordinate bench in the case of M/s Genisys Integrating System (India) Pvt. Ltd. in ITA No. 908/Bang/11, for AY 2007-08, dated 29-01-2013. The learned DR, however, relied on the orders of the AO.
18. We have considered rival contentions and perused material on record. The Hon'ble Karnataka High in the case cited supra had categorically held that deduction u/s section 10A of the Act is to be allowed prior to setting off of losses of non eligible units. The relevant finding of the Hon'ble Karnataka High court at paras 18 & 19 and 29 to 31, are as under:
22 ITA No. 1989/Hyd/2011M/s Avineon Ltd.
"18. It is after the deduction under Chapter VI-A that the total income of an assessee is arrived at. Chapter VI- A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at after giving effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions.
19. From the aforesaid discussion it is clear that the income of 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of lOA unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of section 10A in this context means the global income of the assessee and not the total income as defined in section 2(45). Hence, the income eligible for exemption u/s 10A would not enter into computation as the same has to be deducted at source level.
29. After making all such computation the assessee would be entitled to the benefit of set off or carry forward of loss as provided u/s 72 of the Act. That is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carrying on. The said benefit is available even to undertakings u/s 10B of the Act. The expression "deduction of such profits and gains as derived by an undertaking shall be allowed from the total income of the assessee': has to be understood in the context with which the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarifies this position. It provides that the profits derived from export of articles or things from computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Therefore, it is clear that though the assessee may be having more than one undertaking for the purpose of section 10A it is the profit derived from export of articles or things or computer software from the business of the undertaking alone that has to be taken into consideration and such profit is not to be included in the total income of the assessee. It is only after the deduction of the said profits and gains, the income of the assessee has to be computed.23 ITA No. 1989/Hyd/2011
M/s Avineon Ltd.
30. The provisions of this sub-section will apply even in the case where an assessee has opted out of section 10A by exercising his option under sub-section (8). As discussed, it is permissible for an assessee to opt in and opt out of section 10A. In the year when the assessee has opted out, the normal provisions of the Act would apply. The profits derived by him from the STP undertaking would suffer tax in the normal course subject to various provisions of the Act including those of Chapter VI-A. If in such a year, the assessee has suffered losses, such losses would be subject to inter source and inter head set off The balance if any thereafter can be carried forward, for being set off against profits of the subsequent assessment years in the normal course. Unabsorbed depreciation also merits a similar treatment.
31. As the income of 10A unit has to be excluded at source itself before arriving at the gross total income, the loss of non 10A unit cannot be set off against the income of 10A unit u/s 72. The loss incurred by the assessee under the head profits and gains of business or profession has to be set off against the profits and gains if any, of any business or profession carried on by such assessee. Therefore as the profits and gains under section 10A is not be included in' the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current years depreciation u/s 32(2) is to be set off As deduction u/s 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 10A to be assessee. Hence, the main substantial question of law is answered in favour of the asses sees and against the revenue".
19. Respectfully following the above decision of the Hon'ble Karnataka High court and also following the decision of coordinate bench in the case of M/s Genisys Integrating System (India) Pvt.
24 ITA No. 1989/Hyd/2011M/s Avineon Ltd.
Ltd. in ITA No. 908/Bang/11, for AY 2007-08, dated 29-01-2013, we hold that deduction u/s 10A of the Act has to be computed prior to setting of losses of other industrial units. Accordingly, ground of Assessee is considered as allowed. The AO is directed to rework out the computation of income accordingly.
20. In the result, appeal of Assessee is treated as Partly allowed for statistical purposes.
Pronounced in the open court on 31 st day of October'13
Sd/- Sd/-
(SAKTIJIT DEY) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 31 st October, 2013.
kv
Copy to:-
1) M/s Avineon India Pvt. Ltd., 'Cyber Gateway', Block 1A, 1 st Floor, Hitech City, Madhapur, Hyderabad - 500 081
2) DCIT, Circle 1(1), Hyderabad.
3) DRP, Hyderabad.
4) TPO concerned
5) The Departmental Representative, I.T.A.T., Hyderabad.
25 ITA No. 1989/Hyd/2011M/s Avineon Ltd.
Description Date Intls
S.No.
1. Draft dictated on Sr.P.S./P.S
2. Draft placed before author Sr.P.S/PS
Draft proposed & placed before the JM/AM
3 second Member
4 Draft discussed/approved by second JM/AM
Member
5 Approved Draft comes to the Sr.P.S./P.S
Sr.P.S./PS
6. Kept for pronouncement on Sr. P.S./P.S.
7. File sent to the Bench Clerk Sr.P.S./P.S
8 Date on which file goes to the Head
Clerk
9 Date of Dispatch of order