M/s. Arctern Consulting Pvt. Ltd, Bengaluru V. Deputy Commissioner of Income Tax, Circle-1(1)(2), Bengaluru

ITA 2747/BANG/2017

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 9231 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-11-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 17-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GOPINATH C.H.
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction; Scheme of amalgamation; Set aside
• Section: 271(1)(c); 2; 143(3); 10AA; 234B; 10B; 72; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C” BENCH: BANGALORE BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SMT BEENA PILLAI, JUDICIAL MEMBER IT(TP)A. No. 2747/Bang/2017 Assessment Year: 2013-14 M/s. Arctern Consulting Pvt. Ltd., Embassy Tech Village, Tower 2B, Hibiscus 5 th Floor, Outer Ring Road, Deverabeesanahalli, Bangalore – 560103. PAN: AAECA9113F vs. The Deputy Commissioner of Income Tax, Circle – 1(1)(2), Bangalore. (Appellant) (Respondent) Appellant by : Smt. Tanmayee Rajkumar, Advocate Respondent by : Shri Gopinath C.H., CIT (DR) Date of Hearing : 23.09.2021 Date of Pronouncement : 03.11.2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 17/10/2017 passed under section 143(3) r.w.s. 144C(13) of the Act by the Ld.DCIT, Circle1(1)(2), Bangalore on following Grounds of appeal: “1. That the order of the Respondent / Assessing Officer ('AO' for short) pursuant to the directions of the Dispute Resolution Panel (the DRP' for short). to the extent prejudicial to the Appellant. is bad in law and liable to be set aside. 2 . A d j u s t m e n t t o t h e p r i c e s c h a r g e d b y t h e A p p e l l a n t f o r i n t e r n a t i o na l t r an s a c t i o n s- Page 2 of 36 IT(TP)A No. 2747/Bang/2017 2.1. That, on the facts and circumstances of the case and in law, the Transfer Pricing Officer ('the TPO' in short) erred in and the DRP further erred in confirming the action of the TPO in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which is a pre-requisite condition which must be fulfilled prior to making any adjustment under the provisions of Chapter X of the Income-tax Act, 1961 ('the Act' for short). 2.2. That the TPO erred in rejecting the values of international transactions relating to Software Development Services ('SWD Services' for short) and Information Technology Enabled Services ('ITE Services' for short) as being at arm's length price. The DRP erred in upholding the same. 2.3. That the TPO erred in not accepting the Appellant's economic analysis of its international transactions which was undertaken as per the provisions of the Act read with the Income-tax Rules.1962 ('the Rules' for short). 2.4. That the AO/TPO erred in conducting fresh benchmarking analysis by substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises and in doing so. determining new arm's length prices. The DRP erred in upholding the same. 3. Comparability analysis adopted by TPO for determination of arm's length prices of the transactions of provision of SWD and ITES services- 3.1. That the AO/TPO erred and the DRP further erred in confirming the actions of the AO/TPO who, by exercising the power of issuing notice under Section 133(6), obtained information from the comparable companies and ignoring the information available to public in the websites and the annual reports. 3.2. That the AO/TPO erred in disregarding the application of multiple-year data while computing the margins of alleged comparable companies as such data has an influence in determining the transfer pricing policy of the Assessee. The DRP erred in upholding the actions of the AO/TPO. 3.3. That the AO/ TPO erred in arbitrarily rejecting companies having SWD and ITE services income less than 75% of total operating revenues. The DRP erred in confirming the same. 3.4. That the AO/ TPO erred in rejecting companies having export service incomes < 75% of total sales and the DRP erred in confirming the same. Page 3 of 36 IT(TP)A No. 2747/Bang/2017 3.5. That the AO/ TPO erred in rejecting companies having employee cost less than 25% of turnover and the DRP also erred in confirming the same. 3.6. That the AO/TPO erred in arbitrarily rejecting companies having a different financial year ending (i.e. other than 31' March 2013). The DRP erred in confirming the action of the AO/TPO. 3.7. That the AO/ TPO erred in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. The DRP erred in confirming the same. 3.8. That the AO / TPO erred in not applying the turnover filter at the upper limit so as to reject high turnover companies selected by the TPO in the SWD and ITE service segments. The DRP erred in confirming the same. 3.9. That the AO/ TPO. while applying the turnover filter at the lower limit so as to reject companies having turnovers less than INR 1 crore in FY 2012-13, erred in not applying the said filter at the upper end so as to reject high turnover companies as well. The DRP erred in confirming the same. 3.10. That the AO/TPO erred in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Assessee. The DRP erred in upholding the action of the AO/TPO. 3.11. That the AO/ TPO erred and the DRP further erred in confirming the benchmarking of the transactions of provision of SWD and ITE services of the Appellant with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed. assets employed and risks assumed by the Appellant vis-a-vis the selected companies. 3.12. That the AO/TPO erred in applying arbitrary filters to arrive at fresh sets of companies as comparables to the Assessee. without establishing functional comparability. The DRP erred in confirming the action of the AO/TPO. 4 . D e t e r m i n a t i o n o f A r m ' s L e n g t h P r i c e f o r S o f t w a r e D e v e l o p m e n t S e r v i c e s- 4.1. That CG-VAK Software Exports Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., and Persistent Systems Ltd. ought to be excluded from the list of comparables as the functions performed. assets employed and risks assumed by the said companies are entirely dissimilar and incomparable to that of the Appellant. Page 4 of 36 IT(TP)A No. 2747/Bang/2017 4.2. That, furthermore, Larsen & Toubro Infotech Ltd. ought to be excluded from the list of comparables also because it had significant related party transactions in FY 2012-13. 4.3. That, in addition, Persistent Systems Ltd. is liable to be excluded from the list of comparables because it had significant related party transactions in FY 2012-13 and also because of the acquisitions and amalgamations that took place in FY 2012-13 in respect of which no adjustment can be made to their margins to eliminate the materials effects thereof. 4.4. That, without prejudice and in any event, the margins of CG-VAK Software Exports Ltd. and Persistent Systems Ltd. ought to be recomputed. 4.5 That Akshay Software Technologies Ltd., Evoke Technologies Pvt. Ltd.. Goldstone Technologies Ltd.. Helios & Matheson Information Technology Ltd., and R Systems International Ltd. ought to be included in the list of comparables as they are functionally comparable to the Appellant. 4.6. That. in directing the exclusion of Tech Mahindra Ltd. from the list of comparables, the DRP erred in not accepting the other contentions put forth by the Appellant for exclusion of the said company as well. 5 . D e t er min at io n of A rm' s L en gth Pri ce fo r I nf or ma tio n T e ch no lo g y En abl e d S e r vi c es - 5.1. That Capgemini Business Services (I) Pvt. Ltd.. Hartron Communications Ltd. and Infosys BPO Ltd are liable to be excluded from the list of comparables as the functions performed. assets employed and risks assumed by the said companies are entirely dissimilar and incomparable to that of the Appellant. 5.2. That, furthermore, Hartron Communications Ltd. ought to be excluded from the list of comparables as it also fails the export revenue and ITE service revenue filters applied by the TPO and upheld by the DRP. 5.3. That, in addition. Infosys BPO Ltd. is liable to be excluded from the list of comparables also because it had significant related party transactions in FY 2012-13 and due to the acquisitions effected by it in FY 2012-13 in respect of which no adjustment can be made to its margin to eliminate the materials effects thereof. 5.4. That. without prejudice and in any event, the margins of Capgemini Business Services (I) Pvt. Ltd. and Hartron Communications Ltd. ought to be recomputed. Page 5 of 36 IT(TP)A No. 2747/Bang/2017 5.5. That Caliber Point Business Solutions Ltd. and Informed Technologies India Ltd. ought to be included in the list of comparables as they are functionally comparable to the Appellant. 5.6. That, in directing the exclusion of Tech Mahindra Ltd. and Acropetal Technologies Ltd. from the list of comparables, ,the DRP erred in not accepting the other contentions put forth by the Appellant for exclusion of the said companies as well. 6. Non-allowance of appropriate adjustments to the margins of the comparable companies - 6.1. That the AO/ TPO erred and the DRP further erred in not allowing appropriate adjustments under Rule 10B to account for. inter alia. differences in (i) accounting practices, (ii) marketing expenditure adjustment. (iii) research and development expenditure adjustment. (iv) working capital. and (v) risk profile between the Appellant and the comparable companies. 6.2. That the AO/ TPO also erred in not granting an adequate opportunity to the Appellant before making an adjustment on account of negative working capital. 6.3. That the AO/ TPO erred and the DRP further erred in making a negative working capital adjustment without appreciating the fact that the Appellant is a captive service provider and does not bear any working capital risks 7. That the AO/ TPO erred in not granting the benefits of the proviso to Section 92C(2) of the Act to which the Appellant is entitled. 8. That the AO erred in recomputing the deduction under Section 10AA of the Act by reducing travel expenses incurred in foreign currency of Rs. 6.02,725/-and telecommunication charges of Rs 81.71.552/- from the export turnover. 9. That without prejudice to the above and in any event, the AO erred in not making a corresponding reduction of the aforesaid travel expenses and telecommunication charges from the total turnover as well in accordance with the Hon'ble High Court of Karnataka's decision in CIT v. Tata Elxsi Ltd. (349 ITR 98). The DRP further erred in upholding the same. 10. That, furthermore, the AO erred in setting-off brought forward business losses of Rs.1.51,97,641/- relating to earlier assessment years before allowing the deduction under Section 10AA of the Act and thereby failed to appreciate that the said Page 6 of 36 IT(TP)A No. 2747/Bang/2017 action is directly contrary to the Hon'ble Supreme Court's decision in CIT v Yokogawa India Ltd. [(2017) 77 taxmann.com 41 (SC)]. The DRP further erred in upholding the same. 11. That the AO erred in passing the assessment order without considering the computation of revised total income that was filed by the Appellant during the assessment proceedings and thereby erred in failing to appreciate that the Appellant is entitled to a higher amount of credit under Section 115JA of the Act based on the revised computation. 12. That the AO erred in levying interest under Section 234B of the Act. 13. That the AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act. 14. That the impugned order passed by the AO is otherwise unsustainable in law and on facts and is thus liable to be set aside by this Hon'ble Tribunal. Each of the foregoing grounds is without prejudice to the other and the Appellant craves leave to add to, amend or delete all or any of the above grounds of appeal either before or at the time of hearing.” Brief facts of the case are as under: 2. The assessee is a subsidiary of Volt Asia and provides software development services and information technology enabled services to its Associated Enterprises. Volt Asia is the immediate holding company of the Assessee and Volt Information Sciences Inc. is the ultimate holding company of Volt Asia. It filed its return of income on 30/11/2013 declaring total income of Rs. 2,87,50,130/-. Subsequently, the case was selected for scrutiny as assessee’s international transaction exceeded Rs. 15 crores. 2.1. From the Transfer Pricing order passed by Ld.TPO under 92CA of the Act, we note that, assessee had following international transactions: Page 7 of 36 IT(TP)A No. 2747/Bang/2017 Particulars Amount Software Development Services 39,69,43,199 Information Technology Enabled Services 8,98,61,181 During the year under consideration, the assesssee provided SWD services and ITE services to its AE for a price of Rs.39,69,43,199/- towards software development services and Rs. 8,98,61,181/- towards Information Technology services. 2.2 Software Development Services: It is observed that, assessee used TNMM as the most appropriate method and computed its margin at 14.21% by using OP/OC as PLI. The Ld.TPO observed that, assessee used following 13 comparables with average margin of 12.61% and held the transaction to be at arms length. SI. No. Name of the company Average NPI (in %) 1. Akshay Software Technologies Ltd. 6.75 2. Avani Cimcom Technologies Ltd. 5.02 3. CG-VAK Software & Exports Ltd. 1.62 4. Evoke Technologies Pvt. Ltd. 10.52 5. E-Zest Solutions Ltd. 26.66 6. Goldstone Technologies Ltd. 11.14 7. Helios & Matheson Information Technology Ltd. 18.22 8. Mindtree Ltd. 15.02 9. RS Software (India) Ltd. 16.40 10. R Systems International Ltd 7.62 11. Sasken Communications Technologies Ltd. 17.57 12. Tata Elxsi Ltd. 8.65 13. Thirdware Solutions Ltd. 18.68 Arithmetical Mean 12.61 2.3 The Ld.TPO dissatisfied with the comparables selected by assessee applied following filters and shortlisted following final set of 7 comparables with arithmetic mean of 21.94%. Page 8 of 36 IT(TP)A No. 2747/Bang/2017 Filters used by the Ld.TPO: Description 1. Companies whose data is not available for FY 2012- 13-excluded. 2. Companies having different financial year ending or data of the company which does not fall within 12 months period of 01.04.2012 to 31.03.2013 - rejected 3. Companies whose income 75% of total sales, which filter the company satisfied. In this regard it is submitted that the service revenue filter is applied to select companies which are predominantly engaged in the provision of the services under consideration. In such circumstances, the ALP erred in implying that the service income to total income filter cannot be applied when segmental details are available. Such a view, if accepted, renders the filter otiose. In addition, the ALP erred in holding that the company generates revenues only from rendering ITE services. The ALP failed to note that although the company has reported its business segment to be the primary segment, the company has earned significant revenues from other two segments being from rental income and real estate. As a result, although the primary segment of the company is the business segment, the income from the relevant services constitutes merely 55.65% to the total income. As the company fails the ALP’s filter of service income to sales in excess of 75%, the company ought to be excluded from the final list of comparables. Detailed submissions in this regard are made at pages 264-267 of the appeal set and pages 9991002 of the paperbook. Page 25 of 36 IT(TP)A No. 2747/Bang/2017 Further, there are wide fluctuations in the margins of the company. The company has suffered from losses during the preceding two financial years and margins for Financial Years 2010-11 to 2012-13 vary between (40.53%) to 33.43%. While the company registered profits during the year under consideration, it has consistently registered losses of -40.53% for the FY 2010- 11, -27.09% for the FY 2011-12, -2.46% for the FY 2013-14 and - 20.65 for the FY 2014-15. Considering the wide fluctuations in the margins, it is submitted that the said company ought to stand excluded from the list of comparable companies. Further, as per the annual report of the Company, the policy followed by it for recognition of revenue/expenditure is as under “All revenues and expenses are accounted for on accrual basis except for processing charges (export income), interest on calls in arrears, listing fee and leave encashment which are accounted for on cash basis.” The above note suggests that cash basis of accounting is followed for export income (office back-up operations segment) as against accrual system of accounting followed for recording expenses, which is contrary to the matching principles of accounting. In view of the above, the company ought to be excluded from the final list of comparables. Reliance in this regard is placed on the decision of this coordinate bench of this ALP in the cases of ISG Novasoft Technologies Ltd. v. DCIT(supra) and Microfocus Software ALP Pvt Ltd. v. ACIT vide order dated 06.12.2019 passed in IT(TP)A 2778/bang/207 for assessment year 2013-14, this company came to be excluded from the final list of comparable. Page 26 of 36 IT(TP)A No. 2747/Bang/2017 This ALP in case of ISG Novasoft Technologies Ltd. v. DCIT(supra) relied on observation of coordinate bench decision in case of M/s. Cameron Manufacturing ALP (P)Ltd. Vs.DCIT reported in (2018) 95 taxman.com 24 and observed and held as under: “10. We heard rival submissions and perused material on record. We found the learned AR has referred to financial profile of the comparable and at pages No.133 & 134 of paper book the assessee-company is in the software development services for the last 8 years and also involved in intellectual property services. Further at page 135 and 136 of the paper book containing the Annual Report of the assessee was filed and in particular income from operations are negative and hence, the profit figures for earlier years cannot be relied upon. We found strength in the submission of the learned AR that financial results are fluctuating and will not give correct picture. We found in the case of Principal CIT vs. Allscripts (ALP) (P.) Ltd. (2016) (72 taxmann.com 305)(Gujarat), the following observations are made at paras.6 and 7 : “6. With respect to Bodhtree Consulting Ltd., we notice that the ALP in case of another assessee had noted the company’s financial results for financial year 2005-06 to financial year 2012-13 as under : Particulars FY05-06 FY 06-07 FY 07-08 FY 08-09 FY 09-10 FY 10- 11 FY 11- 12 FY 12- 13 OP/TC 13.87% 80.15% 19.89% 62.27% 33/42% -4.46% 3.29% - 11.53% 8. Term ‘OP’ stands for operation profit and ‘TC’ stands for total cost. It can thus be seen that this ratio has fluctuated widely from -11.53% to 80.15% in a span of about 7 years. From year to year also, this ratio has fluctuated between 13.87% to 80.15%, back to 19.89% up again to 62.27% and so on. Therefore, on account of such widely fluctuating and erratic results of the company, the ALP found that it would be unsafe to assess arm’s length price based on ALP taking into account the results of this company We do not find the decision of the ALP gives rise to any substantial question of law. The Revenue’s objection in this regard therefore, must be turned down.” Further the learned AR emphasized that this comparable company is also engaged in real estate activity. The learned AR referred to page 1344 and 1350 of the paper book 2 and emphasized the entry into real estate business. The learned AR made submissions on the trading of shares of this company and relied on the observations of the Auditors. We found that the Chennai Bench of ALP in the case of M/s.Cameron Manufacturing ALP Pvt. Ltd. vs. DCIT in ITA No.336/Chny/2018 dated 16/10/2018 has observed at para 7 which read as under: Page 27 of 36 IT(TP)A No. 2747/Bang/2017 “7. Ground No.2.3: M/s. Hartron Communications as the company:- Ld.AR submitted before us that M/s. Hartron Communications had operations amongst which many relates to activities that are not similar to the activity of the assessee company. Further it was submitted that the company M/s. Hartron Communication’s profit from BPO business both export and domestic for the current year is 18.43 crores while as for the previous year the profit was 3.81 crores which shows an increase of profit to the tune of 483.72%. Therefore in the relevant assessment year there was extraordinary operations and hence 8 ITA No.336/Chny/2018 cannot be taken as comparable company. Before us the facts presented by the Ld.AR could not be disputed by the Ld.DR. After considering the issue, we are of the view that when the company is functionally dissimilar and when in a particular year there is an extraordinary profit, then the company cannot be taken as a comparable company. In the case of M/s. Hartron Communication, it is apparent that the company has achieved extraordinary profits during the relevant assessment year and further it has diversified activities and therefore functional y dissimilar to that of the assessee company. Hence as pleaded by the Ld.AR, we are of the considered view that M/s. Hartron Communication cannot be accepted as a comparable company.” We, considering the submissions of the learned AR and the decision of co-ordinate bench of ALP in the case of M/s.Cameron Manufacturing ALP Pvt .Ltd.(supra) are of the opinion the company has extraordinary profits/losses in subsequent years. We are of the substantive opinion that this company cannot be considered as comparable to the assessee’s functional profile and accordingly, direct the ALP/ALP to exclude this this comparable for determining ALP.” Therefore, this company ought to be excluded from the final list of comparables. (c) Infosys BPO Ltd.: Infosys BPO ought to stand excluded from the final list of comparables on numerous counts. The company is engaged in the provision of integrated IT and business process outsourcing solutions across a variety of verticals including Banking and Capital Markets, Communication Media and Entertainment, Manufacturing, Emerging Market Solutions, Insurance and Healthcare, Retail, Energy, Utilities and Resources, Automotive Page 28 of 36 IT(TP)A No. 2747/Bang/2017 and Aerospace, Transportation and Services. The services rendered consist of Sourcing and procurement, customer service, financing and accounting, knowledge services and human resources. Further, the company is engaged in providing consultancy, management and strategic transformation services wherein business metrics and benchmarks developed by the company is used in assisting the client. The company is also engaged in provision of cloud based services such as `E-Discover as well as services in relation to compliance in Health, Safety and Environment. These services cannot be compared to the routine back office services provided by the Assessee. The company focuses of delivering solutions to its clients which goes beyond rendering routine ITE services. From the above, it is evident that Infosys BPO is engaged in rendering business solutions and consultancy to its customers which is different from the functional profile of the Assessee. In addition, it is also submitted that this company enjoys significant brand value and owns several intellectual properties which place it in different from that Assessee. In view of its substantial brand value, the company enjoys an advantage in the market and has high bargaining power. The company also suffers from peculiar economic circumstances as it acquired the BPO division of Marsh Inc., which would have an impact on the margin of the company. As a result of the brand value, the company receives a premium in the market. Relevant submissions in this regard are made at pages 258-262 of the appeal set and pages 994-999 of the paperbook. Page 29 of 36 IT(TP)A No. 2747/Bang/2017 Reliance in this regard is placed on the decision of this Tribunal in assessee's own case for the assessment year 2012-13 where the said company was directed to be excluded. This company has been consistently rejected in cases of assessees placed similarly to that of the Assessee. Reliance is placed on the decision of this Tribunal in ISG Novasoft Technologies Ltd. v. DCIT(supra), wherein this company came to be excluded from the final list of comparable for the assessment year 2013-14, in the cases of similarly placed assessee. This Tribunal in case of ISG Novasoft Technologies Ltd. v. DCIT(supra) observed and held as under: “12. Similarly, the learned AR submitted for exclusion of M/s.Infosys BPO stating that this company cannot be comparable considering the brand value, functional dissimilarity and the company’s turnover is Rs.1831.36 crores which is 10 times more than turnover filter and works as under: 1. The company earns revenue from provision of high end ITES in the nature of both KPO Et BPO, whereas the Appellant provides low end ITES in the nature of BPO. Therefore, the company is functionally different. 2. The company is an established player a market leader and also operates as a full fledged risk bearing enterpreneur. 3. It has significant selling, marketing & brand building expenses. 4. It commands a very high brand value as it enjoys premium pricing. 5. It owns significant intangibles in the form of goodwill. 6. Extraordinary event occurred during the year under consideration (i.e, acquisition of Marsh BPO). 7. It fails export earning filter of 75% (i.e, 74.06%) 8. Fails upper turnover filter of Rs.200 crores. 9. Incorrect margin computation. Further M/s. Infosys BPO Ltd., fails the revenue filter of 75% and functionally different and has large company intangibles brands and acquisition. The learned AR referred to Annual Report and the export turnover filter and emphasized on functionality and extraordinary filters and relied on assessee’s own case for the assessment year 2009-10 on exclusion of the the company in IT(TP)A No.60/Bang/2014 dated 15/02/2019 which reads as under: “8. We heard the rival submissions and perused material on record. The learned AR has argued ground No.8 in respect of exclusion of comparables and other grounds as envisaged by Page 30 of 36 IT(TP)A No. 2747/Bang/2017 learned AR shall become academic. Therefore, we consider it appropriate to deal with ground No.8 and exclusion of comparables. We found, the TPO has considered Infosys BPO for the TP study whereas the assessee-company is providing IT products and solutions catering to all aspects of Mortgage lending and also engaged in servicing the residential mortgage industry and also providing full spectrum of mortgage technology services for its group companies and adopted TNMM method for international transactions. The learned AR contention that Infosys BPO Ltd., is providing high end integrated services and also diversified services like business platforms, customer service outsourcing, finance and accounting, human resourcing outsourcing and whereas the assessee’s functionality is ITES. The turnover of Infosys BPO is Rs.1081.5 croes and fails in the upper turnover filter of Rs.200 crores and has High brand value and enjoys premium which the assessee company does not own. The learned AR referred to relevant Extract of Annual Report of the said company placed at page No.657 of the paper book 2. Further similar exclusion considered by the co-ordinate bench of the Tribunal in the case of e4e Business Solutions India Pvt. Ltd., vs. Deputy Commissioner of Income-tax in IT(TP)A No.1845/Bang/2013 dated 10/11/2015. We find there is strength in the arguments of the learned AR duly supported with evidence on segmental details and functional dissimilarities. The Infosys BPO was dealt by the coordinate bench in above case for the assessment year 200910 at page 21 at para. 11.3(ii) which reads as under: ii) We have considered the rival submissions as well as relevant material on record. We note that in para 16 2.15 of the Annual Report of this company, it has been reported that there was amalgamation w.e.f 1/4/2008. The relevant part of the information provided in the Annual Report reads as under: Amalgamation of PAN Financial Services India Private Limited The Board of Director in their meeting held on October 6. 2008. approved subject to the approval of the Honorable High Courts of Karnataka and Chennai, a Scheme of amalgamation ("the Scheme") to amalgamate PAN Financial Services India Private Limited (-PAN Financial"), a wholly owned subsidiary of the Company engaged in providing business process management of services, with the Company with effect from April 1. 2008 ("effective date"). The approval of the High Court was received on April 6, 2009 and filed with the respective Registrar of Companies of Karnataka and Tamilnadu on April 6, 2009 and March 10, 2009 respectively. Accordingly on the scheme becoming effective, the financial statement of PAN Financial has been merged with the company. It is clear that there was extraordinary event of amalgamation during the year under consideration. Therefore, in view of the extraordinary Page 31 of 36 IT(TP)A No. 2747/Bang/2017 development of amalgamation of another company, this company cannot be considered as a good comparable for the assessment year under consideration. Apart from this, we further note that as per the segment reporting in para.16.2.21 this company is providing business process management services as under: Segment reporting The company's operations primarily relate to providing business process management services to organizations that outsource their business processes. Accordingly. revenues represented along industry classes comprise the primary basis of segmental information set out in these financial statements. Secondary segmental reporting is performed on the basis of the geographical location of customers. The accounting principles consistently used in the preparation of the financial statements are also consistently applied to record income in individual segments. These are set out in the note on significant accounting policies. Thus it is clear that the revenue earned by this company is from the activity inclusive of operation primarily relates to providing business process management services to other organization engaged in outsourcing business process. This company is not engaged in direct activity of BPO but it provides service to BPOs and that too management service to BPO Therefore, in our considered view, this company is engaged in a different nature of activity to that of the assessee provided to its AE. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables.” We found that there is similarity of the segmentation and the assessee company is engaged in ITES. Therefore, we, considering the turnover, functionality and brand value of the company, are of the view that the company cannot be chosen as a comparable to functional profile of the assessee company. Accordingly, we are of the substantive opinion that Infosys BPO Ltd., be excluded and direct the AO/TPO to exclude this company from the list of comparables for calculating adjustment of the ALP.” We rely on factual aspect and judicial decision and direct the TPO to exclude M/s.Infosys BPO for determination of ALP.” In view of the above, the company ought to be excluded from the final list of comparables. Accordingly, this ground stands allowed. 8. Ground No. 6.2: Is against adjustment on account of negative working capital. It has been submitted that all the sub grounds of Page 32 of 36 IT(TP)A No. 2747/Bang/2017 Ground 6 are on the same issue, however the effective ground is Ground 6.2. 8.1 In this regard, it is submitted that Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee however is not an entrepreneur but a captive service provider which is entirely funded by the AEs. This being so, the assessee does not stand to lose anything as it is compensated on a total cost plus basis. The assessee is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise. 8.2 The Ld.Counsel relied on following decisions passed by this coordinate bench of this Tribunal, where it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated.  Tivo Tech Private Limited v. DCIT (2020) 11 taxman.com 209,  Lam Research India Pvt Ltd v. DCIT (2021) 127 taxman.com 676  DCIT v. Software AG Bangalore Technologies Pvt Ltd (order dated 31.03.2016 in ITA No. 1628/2014) 8.3 We note that in case of Lam Research India Pvt Ltd v. DCIT(supra) this Tribunal observed and held as under: 21. It was submitted that Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee however does not bear any risk and has no working capital contingencies. The Assessee has not incurred any expenses for meeting the working capital requirement. The Assessee is running the business without any working capital risk as compared to the comparables. The Assessee does not bear any market risk as the services are provided only to Tavant US. Therefore, requirement for adjustment of negative working capital does not arise. 22. The Ld. AR placed reliance on decision of coordinate bench of this Tribunal in assessee's own case Tavant Technologies India (P.) Page 33 of 36 IT(TP)A No. 2747/Bang/2017 Ltd. v. Dy. CIT [2020] 120 taxmann.com 122/185 ITD 309 (Bang - Trib) and Lam Research India (P.) Ltd. v. Dy. CIT [IT Appeal Nos. 1473 & 1385 (Bang.) of 2014, dated 30-4-2015], Tivo Tech (P.) Ltd. v. Dy. CIT [2020] 117 taxmann.com 259/185 ITD 209 (Bang - Trib) and Dy. CIT v. Software AG Bangalore Technologies (P.) Ltd. [IT Appeal No. 1628 of 2014, dated 31-3-2016], where it has been held that negative working capital adjustment shall not be made. 23. We have considered the rival submissions. We find that in the case of Lam Research India (P.) Ltd. (supra) and Software AG Bangalore Technologies (P.) Ltd. (supra) passed by this Tribunal, it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. We therefore direct Ld.TPO to compute the ALP in accordance with the directions contained in this order after affording assessee opportunity of being heard. Respectfully following the above view, we direct the LdAO/TPO to recomputed the ALP based on the directions in case of Lam Research India Pvt Ltd v. DCIT(supra). Accordingly this ground stands allowed for statistical purposes. 9. Ground No.7 is general in nature therefore do not require adjudication. 10. Ground Nos. 8 and 9: These grounds are in respect of re-computation of deduction under Section 10AA of the Act by reducing expenses towards telecommunication charges and travel expenditure incurred in foreign currency from the export turnover. 10.1 It is submitted that the assessee claimed for deduction under Section 10AA of the Act. The Ld.AO while computing the deduction claimed by the assessee, recomputed the same by reducing the expenses incurred in foreign currency only from the export turnover without making corresponding reduction from its total turnover. 10.2 The DRP upheld the addition made by the Ld.AO. Page 34 of 36 IT(TP)A No. 2747/Bang/2017 10.3 In this regard it is submitted that it is a well settled position that any adjustment made to the export turnover ought to be correspondingly made to the total turnover as parity is to be maintained between the two. 10.4 The Ld.Counsel placed reliance in this regard is placed on the decision of the Hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. reported in (2012) 349 ITR 98 which is affirmed by Hon'ble Supreme Court in CIT v. HCL Technologies Ltd reported in (2018) 404 ITR 719. The legal position enunciated by Hon’ble Supreme Court could not be disputed by Ld.CIT.DR. Accordingly, this ground stands allowed. 11. Ground No 10: This ground is in respect of disallowing set off of current year business losses prior to the deduction under Section 10AA of the Act. 11.1 It is submitted that, Assessee is challenging the DRP directions in granting set off the business loss incurred during the current year against the income of the exempt unit. In this regard, it is submitted the benefit of deduction under Section 10AA of the Act has to be allowed before setting off any brought forward losses and the said position has been upheld by Hon'ble Supreme Court in the case CIT v. Yokogawa India Ltd and others reported in (2017) 77 taxmann.com 41 (SC). The Ld.CIT.DR placed reliance on the decision of authorities below. 11.2 The Hon'ble Supreme Court in the case of CIT v. Yokogawa India Ltd(supra), held that deduction under section 10A should Page 35 of 36 IT(TP)A No. 2747/Bang/2017 be computed and allowed while computing the income of the eligible undertaking under Chapter IV of the Act. Relevant observations from the judgment extracted hereunder. "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 9- 8-2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 of the Act would be premature for application. The deductions under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression "total income of the assessee" in section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in Section 10A as 'total income of the undertaking'. Respectfully following the above vies, we direct the Ld.AO to in accordance with principles laid down by Hon’ble Supreme Court in case of CIT v. Yokogawa India Ltd(supra). Accordingly, this ground stands allowed. 12. Ground No.11 is raised by assessee seeking direction to consider the computation of revised total income for purposes of computing MAT under section 115JA. Ld.AO is directed to consider the revised computation of income in accordance with law for computing MAT. Accordingly this ground is allowed for statistical purposes. 13. Ground No.12-13 are consequential in nature therefore do not require adjudication. Page 36 of 36 IT(TP)A No. 2747/Bang/2017 14. Ground no.14 is general in nature, therefore do not require adjudication. In the result appeal filed by assessee stands partly allowed. Order pronounced in open court on 03 rd November, 2021. Sd/- Sd/- (B.R. BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 03 rd November, 2021. /MS/ Copy to 1. The Appellant 2. The Respondent 3. CIT(A) 4. Pr. CIT 5. DR, ITAT, Bangalore. 6. Guard File By order Assistant Registrar Income-tax Appellate Tribunal Bangalore