Income Tax Appellate Tribunal - Hyderabad
Acit, Circle-17(1), Hyderabad, ... vs Dst Worldwide Services India Pvt. Ltd., ... on 18 July, 2018
ITA No 291 and CO No 24 of 2015
DST Worldwide Services India P Ltd Hyderabad.
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' A ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri B. Ramakotaiah, Accountant Member
ITA No.291/Hyd/2015
(Assessment Year: 2010-11)
Asstt. Commissioner of Vs M/s. DST Worldwide
Income Tax, Circle 17(1) Services India Pvt. Ltd
Hyderabad Hyderabad
PAN: AAACI7097L
(Appellant) (Respondent)
C.O. No24/Hyd/2015
(Arising out of ITA No.291/Hyd/2015)
A.Y 2010-11
M/s. DST Worldwide Vs Asstt. Commissioner of
Services India Pvt. Income Tax, Circle 17(1)
Ltd, Hyderabad Hyderabad
PAN: AAACI7097L
(Cross Objector) (Respondent)
For Revenue: Shri J. Siri Kumar, DR
For Assessee: Shri Abhiroop Bhagrav
Date of Hearing: 23.05.2018
Date of Pronouncement: 18.07.2018
ORDER
Per Smt. P. Madhavi Devi, J.M.
These are Revenue's appeal as well as the Cross Objection of the assessee for the A.Y 2010-11, against the final assessment order passed by the Asstt.CIT, Circle 17(1) Hyderabad, dated 21.01.2015 u/s 143(3) r.w.s. 144C of the I.T. Act.
Page 1 of 7ITA No 291 and CO No 24 of 2015 DST Worldwide Services India P Ltd Hyderabad.
2. Brief facts of the case are that the assessee company, engaged in the business of providing software development and IT enabled services, filed its e-return for the A.Y 2010-11 on 07.10.2010 declaring total income of Rs.1,67,92,830. Since the assessee had entered into international transactions with its AE, the determination of the ALP of the said transaction was referred to the TPO u/s 92CA(3) of the Act. The TPO vide order dated 21.01.2014 proposed an adjustment of Rs.1,62,05,938. In accordance with the order of the TPO, a draft assessment order was proposed against which the assessee filed its objections before the DRP. The DRP granted partial relief to the assessee and against the relief granted by the DRP, the Revenue is in appeal before us by raising the following grounds of appeal:
"1. The order of ORP is erroneous both in law and facts of the case.
2. Whether on the facts and in the circumstances of the case, the ORP is justified in rejecting M/s Infosys BPO Ltd and M/s TCS-E-Serve limited as comparable companies on the ground of exceptionally large scale of operations and thereby ignoring the fact that high or low turnover do not influence the margins of the comparables?
3. Whether on the facts and circumstances of the case, the ORP is justified in deleting M/s e-Clerx Services Ltd regarded as KPO by ITAT ignoring the fact that such a minute comparison reduces transfer pricing study to comparison between replicas of companies?
4. Whether on the facts and circumstances of the case, the ORP is right in law in directing the Assessing Officer to take export turnover of rupees 63,40,59,883/instead of 65,97,10,413/-taken by the Assessing Officer to calculate benefit under section 10A.
5. Whether on the facts and circumstances of the case, the ORP is right in law in directing the Assessing Officer to take Rs. 21,68,353/- as Communication expenses ignoring the fact that the Assessing Officer had rightly taken the amount of Rs. 39,03,927/- towards communication expenses debited under the head 'Internation Privately Leased Circuit and Internet Charges. I Page 2 of 7 ITA No 291 and CO No 24 of 2015 DST Worldwide Services India P Ltd Hyderabad.
6. In the facts and circumstances of the case, whether Hon'ble ORP is correct in law to exclude communication charges both from export turnover as well as total turnover though such an adjustment to the total turnover is not contemplated in the provisions laid down under section 10 A of the Income Tax Act, 1961.
7. Any other ground that may be urged at the time of hearing the appeal".
3. Grounds 1 & 7 are general in nature and need no adjudication.
4. As regards Grounds 2 and 3 are concerned, it is the case of the Revenue that the DRP should not have rejected M/s. Infosys BPO, M/s. TCS-E-Serve Ltd as comparable companies on the ground of exceptionally large scale of operation and should not have rejected M/s. e-Clerx Services Ltd, by regarding it as KPO.
5. The learned DR supported the orders of the AO and the TPO, while the learned Counsel for the assessee supported the orders of the DRP and also placed reliance upon the decisions of various Benches of the ITAT, wherein the above three companies were considered and directed to be excluded on the above grounds.
6. Having regard to the rival contentions and the material on record, we find that the TPO, after making the FAR analysis, has held the assessee to be an ITES provider. After aggregating the transactions, the operating revenue was arrived at Rs.66,44,89,983, whereas, as seen from the financials of Infosys Page 3 of 7 ITA No 291 and CO No 24 of 2015 DST Worldwide Services India P Ltd Hyderabad.
BPO, its total operating revenue was Rs.1130/- crores and odd and the operating revenue of TCS E-Serve Ltd was Rs.1405/- crores which is more than ten times of the total revenue of the assessee. The Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd in ITA No.1204 of 2011 dated 10th July 2013, has held that Infosys BPO is engaged in high end services and therefore, it is functionally dissimilar and its brand undisputedly is a huge brand and definitely results of that brand go to opening higher profit to the said company. Various Coordinate Benches of the Tribunal have followed this decision to hold that Infosys BPO and similarly, TCS E-Serve International Ltd are not comparable to ITES companies like the assessee. Further, M/s. e-Clerex Services (P) Ltd has also been considered as a KPO company, by following the decision of the Hon'ble Delhi High Court in the case of Rampgreen Solutions (P) Ltd vs. CIT reported in (2015) 234 Taxman 573 (Del.). We find that the DRP has followed various decisions of the ITAT to hold these companies to be uncomparable to the assessee company. Since the CIT (A) has followed the precedents on the issue and the learned DR has not been able to point out any decision to the contrary, we do not see any reason to interfere with the directions of the DRP. Accordingly grounds 2 & 3 are rejected.
7. As far as Grounds 4 to 6 are concerned, we find that these grounds are now covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT vs. HCL Technologies Ltd in CIVIL APPEAL NO. 8535 and others of 2013, dated 24th April, 2018 wherein it was has held that while computing the deduction u/s 10A of the Act, if any expenditure is Page 4 of 7 ITA No 291 and CO No 24 of 2015 DST Worldwide Services India P Ltd Hyderabad.
to be excluded from the export turnover, then the same is to be excluded from the total turnover as well. Respectfully following the same, and as the decision of the learned DRP, is in consonance with the said decision, we do not see any reason to interfere with the order of the AO on this issue as well.
8. In the result, Revenue's appeal is dismissed C.O. No.24/Hyd/2015.
9. The assessee has raised the following objections:
"1. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in making an addition of Rs.42,68,103 to the provision of Information Technology enabled services and in doing so, the Ld. AO erred in not granting the benefit of the proviso to section 92C(2) the Act.
2. On the facts and in the circumstances of the case and in law, the Ld. DRP and Ld. AO erred including companies namely TCS e-Serve International Ltd. and Accentia Technologies Ltd. in the comparability analysis which are different from the Cross-objector in functions, asset base and risk profile.
3. On the facts and in the circumstances of the case and in law, the Ld. DRP and Ld. AO erred in not granting adjustment on account of risk differential between the Cross-objector and the comparable companies.
4. On the facts and in the circumstances of the case and in law, the Ld. DRP and Ld. AO erred in excluding the telecommunication expenses, being 'Data Com- Connectivity' expenses amounting to Rs 39,03,927 while computing deduction under section 10A of the Act.
5. Without prejudice to above, even assuming but not admitting that the above telecommunication expenses incurred in foreign currency are to be reduced from Export Turnover and Total Turnover, the Ld. AO erred in considering a higher amount for the telecommunication expenses as Rs.39,03,927 whereas the expenses pertaining to the telecommunication expenses were Rs.21,68,353".
10. As regards the ground No.1, the assessee is aggrieved because the AO has not given the benefit of the proviso to sub-
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section (2) of section 92C of the Act. we find that the AO is bound to give the benefit of variation (+_)5% margin under the proviso to sub-section (2) of section 92C of the Act and if the assessee's margin is within (+_)5% of the average margin of the comparables, then no adjustment is to be made. The AO is directed accordingly.
11. As regards Ground Nos. 2 & 3, we find that the assessee is seeking exclusion of these two companies on the ground of functional dissimilarity. However, by exclusion of three companies by the DRP, which is confirmed by us in the Revenue's appeal, the assessee's margin falls within +_5% of the average margin of the comparables and the adjudication about the comparability of these two companies at this stage will only result in an academic exercise. Therefore, the said grounds are not adjudicated at this stage and accordingly rejected.
12. As regards the grounds 4 & 5, we find that in the Revenue's appeal, we have already held that the telecommunication charges have to be excluded from both the export as well as total turnover. We however, direct the AO to consider the correct figure for such exclusion. Therefore, grounds are treated as partly allowed for statistical purposes.
13. In the result, Revenue's appeal is dismissed, while cross objections of the assessee are partly allowed.
Pronounced in the Open Court on 18th July, 2018.
Sd/- Sd/-
(B. Ramakotaiah) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 18th July 2018.
Vinodan/sps
Page 6 of 7
ITA No 291 and CO No 24 of 2015
DST Worldwide Services India P Ltd Hyderabad.
Copy to:
1 Asstt. CIT, Circle 17(1), 6th Floor, B-Block, IT Towers, AC Guards, Hyderabad 2 M/s.DST Worldwide Services India Pvt Ltd, 5th Floor, Block-B, Q City, Nanakramguda, Gachibowli, Hyderabad 500032 3 TPO/Addl.CIT (TP) Hyderabad 500004 4 CIT - (International Taxation)IT Towers, 10-2-3, AC Guards, Hyderabad 500004 5 CIT-5, Hyderabad 6 The DR, ITAT Hyderabad 7 Guard File By Order Page 7 of 7