LIONBRIDGE TECHNOLOGIES P.LTD, MUMBAI V. ITO 8(2)(2), MUMBAI

ITA 7498/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79392 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 26-06-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 18-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS S PADMAJA
• Keywords: Business income; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 92F; 234B; 37(1); 263

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI , BEFORE SHRI R.C.SHARMA , A M & SHRI VIJAY PAL RAO , J M ITA NO. 7498 / MUM/20 1 2 ( ASSESSMENT YEAR : 20 0 8 - 09 ) LIONBRIDGE TECHNOLOGIES PRIVATE LIMITED, 6 TH FLOOR, SPECTRA BUILDIG, HIRANANDANI BUSINESS PARK POWAI, MUMBAI - 400 076 VS. ITO - 8(2)(2), MUMBAI - 21 PAN/GIR NO. : A A BCT 3380 Q ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : MR. AJIT KUMAR JAIN & MR. JITENDRA JAIN /REVENUE BY : MRS. S. PADMAJA DATE OF HEARING : 2 6 TH JUNE , 201 4 DATE OF PRONOUNCEMENT : 9 TH JULY , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER PASSED UNDER SECTION 143(3) READ WITH SECTION 144C(13) OF THE I.T. ACT, 1961 , GIVING EFF ECT TO THE ORDER OF DRP PASSED U/S. 144C(5) OF THE I.T. ACT. 2 . THE FIRST EFFECTIVE GRIEVANCE OF THE ASSESSEE REVOLVES AROUND THAT THE ADJUSTMENT OF RS. 10,39,54,664/ - TO THE ARMS LENGTH PRICE (ALP) SUSTAINED BY DRP IN RESPECT OF THE INTERNATIONAL TRANSA CTIONS IN CONNECTION WITH IT AND ITES ACTIVITY UNDERTAKEN BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE (AE). ITA NO. 7498 /1 2 2 3 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF LIONBRIDGE MAURI TIUS LIMITED AS ON MARCH 31, 2008. THE ASSESSEE PROVIDES LOCALIZATION, SOFTWARE SERVICES, INCLUDING E - LEARNING, CONTENT DEVELOPMENT, USER SUPPORT SERVICES. LOCALIZATION SERVICES INVOLVE TAKING A PRODUCT AND MAKING IT LINGUISTICALLY AND CULTURALLY APPROPRIA TE TO THE TARGET LOCALE. CONTENT DEVELOPMENT INCLUDES UPDATING AND MANAGEMENT OF THE CLIENTS LOCALIZED SOFTWARE AND WEB CONTENT. 3.1 THE ASSESSEE HAS BENCHMARKED INFORMATION TECHNOLOGY/SOFTWARE DEVELOPMENT (IT) SERVICES AND LOCALIZATION [LOW END IT ENAB LED SERVICES (ITES)] RENDERED BY IT TO ITS A .E. LIONBRIDGE MAURITIES, ON AN AGGREGATED BASIS. THESE SERVICES INCLUDE E - LEARNING CONTENT DEVELOPMENT, USER SUPPORT, AND LOCALIZATION & APPLICATION SUPPORT SERVICES. THE ASSESSEE ADOPTED THE FOLLOWING METHODOLO GY FOR DETERMINING THE ALP OF TH ESE TRANSACTIONS: THE ASSESSEE HAS ADOPTED TNMM. PROFIT LEVEL INDICATOR (PLI) IS THE OPERATING PROFIT TO OPERATING COST(OP/OC) 27 COMPANIES WERE IDENTIFIED AS COMPARABLES. IN THE TP REPORT, THE MEAN/AVERAGE PLI HAS BEEN DETE RMINED BY TAKING DATA OF FY 2005 - 06 AND 2006 - 07 AND COMPUTING THE TWO YEAR WEIGHTED AVERAGE. THE ASSESSEE IN ITS TP REPORT HAS SUBMITTED THAT ITS PLI FOR INFORMATION TECHNOLOGY/SOFTWARE DEVELOPMENT (IT) SERVICES AND ITA NO. 7498 /1 2 3 LOCALIZATION & APPLICATION SUPPORT SERV ICES IS 18.18%, AS AGAINST THE ARITHMETIC MEAN OF 27 COMPARABLE OF 16.87%. AMOUNT IN RS. PARTICULARS ALLOCATION KEY ASSOCIATED ENTERPRISES THIRD PARTY SALES TOTAL SALES 1,030,971,303 291,322,551 1,322,293,854 OUT SOURCING COSTS ACTUALS 95,711,040 11,197,682 106,908,722 DIRECT COST ACTUALS 610,288,835 154,752,793 765, 041,628 INDIRECT COST ACTUALS/REVEN UE/HEADCOUNT 88,048,057 66,061,846 154,109,903 MANAGEMENT COST ALLOCATION REVENUE 78,301,005 22,125,590 100,426,595 TOTAL COST(TC) 87 2,348,937 254,137,911 1,126,486,848 OPERATING PROFIT (OP) 158,622,366 37,184,640 195,807,006 OP/TC 18.18% 14.63% 17.33% THE ASSESSEE HAS SUBSTANTIATE D ITS BENCHMARKING WITH ITS INTERNAL TNMM ANALYSIS VIDE S UBMISSIONS DATED OCTOBER 4,2011. THE T P O OBSERVED THAT T HE ASSESSEE HAS COMBINED THE SOFTWARE AND ITS ITES FUNCTIONS FOR ITS AE AND NON AE OPERATIONS. HOWEVER, THE TPO DID NOT ACCEPT THE SAME ON THE PLEA THAT S UCH A METHODOLOGY IS NOT ACCEPTABLE FROM THE TRANSFER PRICING PERSPECTIVE BECAUSE TH E INDIAN REGULATIONS CLEARLY MANDATE THAT EACH FUNCTION OF THE ASSESSEE MUST BE BENCHMARKED SEPARATELY. SIMILARLY, EACH AND EVERY INTERNATIONAL TRANSACTION SHOULD BE BENCHMARKED INDEPENDENT OF EACH OTHER. AS PER AO, THE ASSESSEE HAS FAILED TO ADOPT SUCH PR OCESS WITH RESPECT TO INTERNAL TNMM. HENCE, THE ENTIRE E XERCISE OF JUSTIFYING THE ITA NO. 7498 /1 2 4 BENCH MARKING OF INTERNATIONAL TRANSACTIONS CANNOT BE ACCEPTED BY ADOPTING INTERNAL TNMM. 3. 2 IN VIEW OF THE ABOVE, THE AO/TPO RESORTED TO EXTERNAL TNMM AND USE OF PUBLIC DAT A BASE TO BENCHMARK THE SAID INTERNATIONAL TRANSACTION FOR EACH OF THE IT & ITES FUNCTIONS INDEPENDENTLY AND SEPARATELY. 3. 3 THE TPO/AO OBSERVED THAT IN THE TP STUDY THE ASSESSEE HAS SELECTED 27 AS COMPARABLE COMPANIES OUT OF WHICH ONLY 4 COMPANIES PERFOR M THE FUNCTIONS OF ITES SEGMENT. IT WAS ALSO OBSERVED THAT COMPARABLE COMPANIES RELIED ON BY THE ASSESSEE DO NOT STAND OF SCRUTINY OF COMPARABILITY CHARACTERISTICS AS PER RULE 10. IT WAS ALSO OBSERVED THAT TP REPORT FURNISHED BY THE TAXPAYER IS ERRONEOUS BECAUSE OF USE OF EARLIER YEARS DATA IN INCLUSION OF THE CURRENT YEAR DATA AND THAT NO FACTS HAVE BEEN BROUGHT ON RECORD TO JUSTIFY USE OF EARLIER YEARS DATA. IN VIEW OF THE INADEQUACY OF A REASONABLE NUMBER OF COMPARABLES UNDERTAKING THE ITES FUNCTION I N THE TP REPORT OF THE ASSESSEE, AND THE BROAD LEVEL OF COMPARABILITY ALLOWED UNDER THE TNMM VIDE LETTER DATED 19 - 9 - 2011 THE ASSESSEE WAS GIVEN A SET OF 22 COMPARABLES FOR ITES, WHICH PERFORM FUNCTIONS BROADLY COMPARABLE TO THE ACTIVITIES OF THE ASSESSEE F OR BENCHMARKING THE PROVISION OF SERVICES RENDERED TO THE AES. 3.4 THE DETAILS OF PLI OF THE SE 22 COMPARABLES COMPANIES ARE AS UNDER : - ITA NO. 7498 /1 2 5 SR.NO. NAME OF THE COMPARABLE OP/TC 1 ACCENTIA TECHNOLOGIES LTD. (SEG) 41.76% 2 ACROPETAL TECHNOLOGIES LTD. (SEG) 35.3 0% 3 ADITYA BIRLA MINAC WORLDWIDE 2.20% 4 ASIT C MEHTA FINANCIAL SERVICES LTD.(SEG) 9.42% 5 CALIBER POINT BUSINESS SOLUTIONS LTD. 10.97% 6 CORAL HUBS LTD.(FORMERLY VISHAL INFORMATION TECHNOLOGIES LTD.) 50.68% 7 COSMIC GLOBAL LTD. 23.30% 8 CROSDOMAIN SOLUTIONS LTD. 26.96% 9 DATAMATICS FINANCIAL SERVICES 34.87% 10 E4E HEALTHCARE 16.72% 11 ECLERX SERVICES 65.88% 12 GENESYS INTERNATIONAL CORPORATION LTD 47.40% 13 HCL COMNET SYSTEMS & SERVICES LIMITED 32.90% 14 INFOSYS BPO LTD. 20.01% 15 ISERVICES I NDIA 9.58% 16 JINDAL INTELLICOM PVT. LTD. - 8.68% 17 MAPLE ESOLUTIONS LTD. 20.43% 18 MOLD - TEK 96.66% 19 R SYSTEMS INTERNATIONAL LIMITED 4.30% 20 SPANCO LTD. 11.04% 21 TRITON CORP LTD. 23.81% 22 WIPRO LTD. 30.05% AVERAGE 27.63% 3. 5 AFTER CONSIDE RING ASSESSEES OBJECTION IN RESPECT OF FIVE COMPANIES, SA ME WERE EXCLUDED FROM THE 22 COMPARABLE SELECTED BY TPO IN RESPECT OF REMAINING 1 7 COMPARABLE HAVING AN ARITHMETIC M EAN OF 32.33% AN UP WORD ADJUSTMENT OF RS.16,83,86,191 / - WAS MADE BY THE TPO TO T HE TRANSFER PRICE. ASSESSEE APPROACHED TO DRP AND THE DRP DELETED FURTHER TWO COMPANIES FROM THE SET OF COMPARABLES IDENTIFIED BY TPO. AS A CONSEQUENCE THE REVISED MARGIN WAS COMPUTED AT 30.10%. ACCORDINGLY DRP RECOMPUTED ADJUSTMENT IN RESPECT OF INTERNATI ONAL TRANSACTIONS BY TAKING 15 COMPANIES AT RS.10,39,54,664/ - IN PLACE OF ADJUSTMENT PROPOSED BY TPO AT R S.16,83,86,191/ - ITA NO. 7498 /1 2 6 3. 6 THE TPO/AO HAS ALSO DECLINED CLAIM OF DEDUCTION U/S. 10A ON THE DISALLOWANCE MADE U/S. 10( 10 C) . THE AO/ TPO ALSO DISALLOWED DEDUCTION IN RESPECT OF FOREIGN EXCHANGE LOSS AMOUNTING TO RS. 2.98 CRORES. THE AO/ TPO HAS ALSO EXCLUDED EXPENDITURE INCURRED IN FOREIGN CURRENCY AMOUNTING TO RS. 30.38 CRORES WHILE DETERMINING THE EXPORT TURN OVER FOR THE PURPOSE OF SECTION 10A OF THE ACT. BY THE IM PUGNED ORDER DRP CONFIRMED THE ACTION THE TPO. 4 . AGAINST THE ABOVE ORDER OF DRP, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US HAVING FOLLOWING GROUNDS : - BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APPELLANT RESPECTFULLY SUBMITS THAT THE DISPUTE RESOLUTION PANEL (,DRP'), THE LEARNED ASSESSING OFFICER ('AO') AND THE LEARNED TRANSFER PRICING OFFICER (TPO') ERRED ON THE FOLLOWING GROUNDS WHILE DETERMINING THE TOTAL INCOME OF THE APPELLANT AT RS 18,54,75,020 AS AGAINST THE RETURNED INCOME OF RS 26,83 ,735 BY THE APPELLANT. 1. THE ASSESSMENT ORDER DATED NOVEMBER 21, 2012, PASSED BY THE LEARNED AO UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME - TAX ACT, 1961 ('THE ACT') IS NOT IN ACCORDANCE WITH THE LAW AND IS CONTRARY TO THE FACTS AND CIRCU MSTANCES OF THE PRESENT CASE. TRANSFER PRICING GROUNDS 2. THE DRP HAS ERRED IN LAW AND IN FACTS IN DISPOSING OFF THE OBJECTIONS RAISED BY THE APPELLANT IN RESPECT OF THE IMPUGNED ACTION OF THE TPO REFERRED BELOW IN GROUND NO 3, WITHOUT CONSIDERING THE MERITS OF SUCH OBJECTIONS AND THEREBY DISPLAYING COMPLETE ABDICATION OF THE REMEDIAL AUTHORITY ENTRUSTED WITH IT. 3. THE TPO HAS ERRED IN LAW AND ON FACTS IN PROPOSING AN ADJUSTMENT OF RS.10,39,54,664 TO THE ARM'S LENGTH PRICE ('ALP') DETERMINED BY THE A PPELLANT IN RESPECT OF THE INTERNATIONAL TRANSACTIONS IN CONNECTION WITH IT AND ITES ACTIVITY UNDERTAKEN BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE ('AE). IN DOING SO, THE TPO HAS ERRED IN LAW AND IN FACTS IN: - A) REJECTING THE INTERNAL COM PARABLES AVAILABLE IN CASE OF THE APPELLANT IN RESPECT OF TRANSACTIONS WITH THIRD PARTIES; ITA NO. 7498 /1 2 7 B) PERFORMING A FRESH TRANSFER PRICING STUDY WHI CH INTER ALIA, REJECTED THE COM PARABLES ADOPTED BY THE APPELLANT FOR DETERMINATION OF THE ALP; C) IGNORING THE COMPARABL ES IDENTIFIED AND RELIED UPON BY THE APPELLANT AND SUBSTITUTING THE SAME BY THE STANDARD COM PARABLES IDENTIFIED BY THE DEPARTMENT FOR ITES COMPANIES IGNORING THE NATURE OF ACTIVITIES AND OTHER RELEVANT FACTORS FOR DETERMINING SUCH COMPARABILITY AND WITHOU T GIVING ANY COGENT REASONS FOR SUCH ACTION; D) NOT ELIMINATING MOLD - TEK TECHNOLOGIES LIMITED FOR THE MERGER WHICH WAS APPROVED BY THE SHAREHOLDERS ON JANUARY 25, 2008 AND THE HIGH COURT ON JULY 25,2008; E) USING DATA AND INFORMATION OBTAINED AT THE TIME OF ASSESSMENT PROCEEDINGS, WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS; F) USING DATA AND INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN AND RELYING ON THE SAME FOR CO MPARABILITY PURPOSES; G) REJECTING THE OBJECTIONS RAISED BY THE APPELLANT IN RELATION TO SELECTION/REJECTION OF COMPARABLE COMPANIES IN PASSING THE ORDER UNDER SECTION 92CA OF THE ACT; H) NOT ELIMINATING COMPANIES WITH LARGE TURNOVER FROM THE LIST OF COMPARABLE COMPANIES; I) ARRIVING AT AN ARM'S LENGTH MARGIN OF 30.10 PERCENT FOR THE IT AND ITES SEGMENT OF THE APPELLANT; J) IGNORING THE PROVISIONS OF RULE 10 B (4) OF THE INCOME - TAX RULES, 1962 (RULES'), WHICH AUTHORIZES USAGE OF MULTIPLE YEAR DATA OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINATION OF THE ARM'S LENGTH PRICE AS DEFINED UNDER SECTION 92F OF THE ACT; K) NOT MAKING A FURTHER DOWNWARD MARGIN ADJUSTMENT TO CONSIDER WORKING CAPITAL RISK DIFFERENTIALS BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES; I) APPLYING THE PROVISION OF CHAPTER X OF THE ACT, ALTHOUGH THE APPELLANT IS AVAILING THE RELIEF UNDER SECTION 10A OF THE ACT; IN DOING SO THE TPO HAS ERRED IN NOT CONSIDERING THE RATIO OF THE DECISION IN THE CASE OF PHILIPS SOFTWA RE CENTER PRIVATE LIMITED (119 TTJ 721) THE DRP HAS ERRED IN LAW AND IN FACTS IN DISPOSING OFF THE OBJECTIONS RAISED BY THE APPELLANT IN RESPECT OF THE ABOVE ADJUSTMENT PROPOSED BY THE TPO THE AO HAS ERRED IN LAW AND IN FACTS IN GIVING EFFECT TO THE AD JUSTMENT TO ALP PROPOSED BY THE TPO AND THE DIRECTIONS GIVEN BY THE DRP IN RESPECT OF THE AFORESAID ADJUSTMENT TO THE ALP, WHICH ARE BAD IN LAW. ITA NO. 7498 /1 2 8 CORPORATE - TAX GROUNDS ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED MEMBERS OF THE DRP AND THE AO ERRED ON THE FOLLOWING GROUNDS: DENIAL OF SECTION 10A BENEFIT ON THE DISALLOWANCE MADE UNDER SECTION 10(10C) A. IN NOT RE - COMPUTING / DETERMINING THE PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 10A OF THE ACT, AFTER TAKING INTO ACCOU NT DISALLOWANCES MADE IN RESPECT OF TAXES PAID ON PERQUISITE TO EMPLOYEES UNDER SECTION 10(10CC) OF THE ACT AMOUNTING TO RS 24,85,763. B. DRP AND AO HAVE ERRED IN NOT CONSIDERING THE DECISION OF BOMBAY HIGH COURT IN CASE OF CIT VS GEM PLUS JEWELLERY IND IA PVT LTD (330 ITR 175), WHEREIN HONORABLE JURISDICTIONAL HIGH COURT HAS HELD THAT PLAIN CONSEQUENCE OF DISALLOWANCE AND THE ADD BACK IS AN INCREASE IN THE BUSINESS PROFITS OF THE ASSESSEE AND EXEMPTION UNDER SECTION 10A IS ALLOWABLE WITH REFERENCE TO SUC H ENHANCED INCOME. DISALLOWANCE IN RESPECT OF FOREIGN EXCHANGE LOSS C. IN MAKING THE DISALLOWANCE IN RESPECT OF FOREIGN EXCHANGE LOSSES AMOUNTING TO RS 2,98,03,522 AND NOT CONSIDERING THE JUDGEMENT OF HONORABLE SUPREME COURT IN CASE OF CIT VS WOODWARD GOVERNOR INDIA (P) LTD (312 ITR 254) WHEREIN THE APEX COURT HAVE HELD THAT LOSS SUFFERED BY THE ASSESSEE, MAINTAINING ACCOUNTS REGULARLY ON MERCANTILE SYSTEM AND FOLLOWING ACCOUNTING STANDARDS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF BALANCE - SHEET WAS AN ITEM OF EXPENDITURE UNDER SECTION 37(1) NOTWITHSTANDING THAT THE LIABILITY HAD NOT BEEN DISCHARGED IN THE YEAR IN WHICH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE OCCURRED. DENIAL OF SECTION 10A BENEFIT ON THE DISALLOWANCE IN RESPECT OF FOREIGN EXCHANGE LOSS D. WITHOUT PREJUDICE TO ABOVE, IN NOT RE - COMPUTING / DETERMINING THE PROFITS ELIGIBLE FOR ,DEDUCTION UNDER SECTION 10A OF THE ACT AFTER TAKING INT O ACCOUNT THE DISALLOWANCES MADE IN RESPECT OF FOREIGN EXCHANGE LOSSES. E. DRP AND AO HAVE ERRED IN NOT CONSIDERING THE DECISION OF BOMBAY HIGH COURT IN CASE OF CIT VS GEM PLUS JEWELLERY INDIA PVT LTD (330 ITR 175), WHEREIN HONORABLE JURISDICTIONAL HIGH COURT HAS HELD THAT PLAIN CONSEQUENCE OF DISALLOWANCE AND THE ADD BACK IS AN INCREASE IN THE BUSINESS PROFITS OF THE ITA NO. 7498 /1 2 9 ASSESSEE AND EXEMPTION UNDER SECTION 10A IS ALLOWABLE WITH REFERENCE TO SUCH ENHANCED INCOME. EXCLUSION OF EXPENDITURE INCURRED IN FOREI GN CURRENCY FROM EXPORT TURNOVER F. D RP AND THE AO ERRED IN EXCLUDING EXPENDITURE INCURRED ON FOREIGN CURRENCY AMOUNTING TO RS 30,38,41,097, WHILE DETERMINING THE EXPORT TURNOVER FOR THE PURPOSE OF SECTION 10A OF THE ACT. RE - COMPUTATION OF DEDUCTION F OR THE PURPOSES OF SECTION 10A AND LEVY OF INTEREST G. AO ERRED IN RE - COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT, BY NOT TAKING INTO ACCOUNT THE 'PROFIT OF THE UNDERTAKING' AS LAID DOWN UNDER THE PROVISIONS OF THE ACT. H. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN LEVYING INTEREST UNDER SECTION 234B AND 234D OF THE ACT. 5 . SHRI AJIT KUMAR JAIN, CA APPEARED ON BEHALF OF THE ASSESSEE AND CONTENDED THAT ASSESS EE IS ENGAGED IN PROVIDING LOW E ND BACK OFFICE SUPPORT SERVICES WHICH WAS ALSO RENDERED TO ITS AE. HOWEVER, WHILE SELECTING COMPARABLES, THE TPO/DRP HAVE IGNORED THE FUNCTIONAL PROFILE AND WRONGLY TAKEN MOLD - TEK TECHNOLOGIES LIMITED, ECLERX SERVICES LTD. AND ACROPETAL TECHNOLOGIES LTD. AS COMPARABL ES. HE INVITED OUR ATTENTION TO PAGE 430 - 468 OF PAPER BOOK IN SUPPORT OF CONTENTION THAT MOLD - TEK TECHNOLOGIES LIMITED IS ENGAGED IN PROVIDING KPO SERVICES IN THE FIELD OF ENGINEERING. OUR ATTENTION WAS ALSO INVITED TO THE EXTRAORDINARY EVEN T UNDERTAKEN DURING THE YEAR WITH RESPECT TO DEMERGER OF ITS SUBSIDIARY MOLD - TEK PLASTICS LIMITED W.E.F. APRIL, 2007 . ACCORDINGLY, IT WAS PLEADED THAT THIS COMPANY OUGHT TO BE REJECTED AS COMPARABLE COMPANY. ITA NO. 7498 /1 2 10 5.1 IN RESPECT OF ECLERX SERVICES LIMITED, OUR ATTENTION WAS INV ITED TO PAGE 526, 530 , 531 & 537 OF THE PAPER BOOK IN SUPPORT OF THE CONTENTION THAT THIS COMPANY IS A KNOWLEDGE PROCESS OUTSOURCING (KPO) ENGAGED IN PROVIDING DATA ANALYSIS AND DATA PROCESS SOLUTIONS, ONLINE OPERATION SUPPORT, CUSTOMER RELATIONSHIP MANA GEMENT SUPPORT, DATA DE - DUPLICATION SERVICES ETC AND, THEREFORE, IS NOT COMPARABLE WITH THE A SSESSEE WHICH IS MERELY PROVIDING LOW BACK OFFICE SUPPORT SERVICES. OUR ATTENTION WAS ALSO INVITED TO PAGE 289 OF THE PAPER BOOK IN SUPPORT OF THE CONTENTION THAT MARGIN OF ACROPETAL TECHNOLOGIES LIMITED HAS BEEN WRONGLY COMPUTED BY TPO. FIGURE OF REVENUE ON PAGE NO. 289 DOES NOT MATCH WITH THE FIGURES OF THE SEGMENTAL ACCOUNT AS AVAILABLE IN THE ANNUAL REPORT ON PAGE NO. 434 . HE FURTHER CONTENDED THAT IT IS AN ENGIN EERING DESIGN SERVICES SEGMENT OF THIS COMPANY, WHICH IS NOT COMPARABLE TO THE ASSESSE E COMPANY BEING A LOW E ND BACK OFFICE SUPPORT SERVICE PROVIDER. AS PER LEARNED AR AFTER EXCLUSION OF THESE THREE COMPANIES FROM COMPARABLES, THE ARITHMETIC MEAN WORKS OUT TO BE 21.14% , WHEREAS THE ASSESSEE COMPANYS MARGIN IS 18.18% , HENCE, TAKING THE BENEFIT OF PROVISO TO SECTION 92C(2) I.E. + 5% , NO ADJUSTMENT IS REQUIRED TO BE MADE IN RESPECT OF INTERNATIONAL TRANSACTION FOR ARRIVING AT ARMS LENGTH PRICE. AS PER LEARNED AR THE MEAN OF 12 COMPARABLES FALLS WITHIN + 5% OF THE VALUE OF INTERNATIONAL TRANSACTION AND, THEREFORE, NO ADJUSTMENT IS REQUIRED TO BE MADE. 5.2 IN RESPECT OF CORPORATE TAX, MR. JITENDRA KUMAR JAIN, LEARNED CA ON BEHALF OF THE ASSESSEE CONTENDED THAT W HILE COMPUTING EXEMPTION ITA NO. 7498 /1 2 11 U/S. 10A, THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN REDUCING THE PROFIT ON ACCOUNT OF DISALLOWANCE MADE IN RESPECT OF TAXES PAID ON PERQUISITE TO EMPLOYEES U/S. 10(10CC ). FOR THIS PURPOSE, RELIANCE WAS PLACED ON THE DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF GEM PLUS, REPORTED IN 330 ITR 175 , IN SUPPORT OF THE PROPOSITION THAT CONSEQUENCE OF DISALLOWANCE AND ADD BACK IS AN INCREASE IN THE BUSINESS PROFIT OF THE ASSESSEE AND EXEMPTION U/S. 10A IS ALLOWABLE WITH REFERENCE TO SUCH ENHANCED INCOME. 5.3 WITH RESPECT TO DISALLOWANCE OF FOREIGN EXCHANGE LOSS, LEARNED AR PLACE RELIANCE ON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. , 312 ITR 254 IN SUPPORT OF THE PROPOSITION THAT LOS S SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF BALANCESHEET WAS AN ITEM OF EXPENDITURE U/S. 37(1) NOTWITHSTANDING THAT THE LIABILITY HAS NOT BEEN DISCHARGED IN THE YEAR IN WHICH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE OCCURRED. 5.4 ON THE OTHER HAND LD. C IT DR MRS. S. PADMAJA CONTENDED THAT ASSESSEES OBJECTION THAT SOME OF THE COMPANIES PROVIDE KNOWLEDGE PROCESSING SERVICES (KPO) AND SHOULD THEREFORE BE TAKEN AS FUNCTIONALLY DIFFERENT IS NO T ACCEPTED AS THE BENCHMARKING HAS BEEN DONE USING THE NCP MARGIN AS THE PLI. BESIDES, FROM THE PERUSAL OF THE FUNCTIONS NARRATE D IN THE TRANSFER PRICE STUDY RE PORT FILED BY THE ASSESSEE IT IS SEEN IT HAS ENGAGED 1200 + HIGHLY SKILLED PROFESSIONALS. THUS I T IS CLEAR THAT THE ASSESSEE CANNOT BE CHARACTERIZED AS A LOW END ITA NO. 7498 /1 2 12 SERVICE PROVIDER AND, IN FACT, IT IS SPECIFICALLY HIGH END IN CERTAIN CATEGORIES. EVEN IF SOME OF THE ACTIVITIES OF THE ASSESSEE MAY BE OF LOWER END, THERE IS NO SEGMENTAL BIFU RCATION OF EAC H DIFFEREN T ACTIVITY AND ITS PROFITABILITY. THEREFORE, SHE CONTENDED THAT THE ASSESSEE IS COMPARABLE TO A SET OF COMPANIES WHICH INCLUDE HIGH END SERVICE PROVIDER, SO LONG AS IT FALLS WITHIN THE DOMAIN OF ITES. 6 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT ASSESSEE IS A 100% EXPORT ORIENTED UNIT (EOU) ENGAGED IN PROVIDING LOW END BACK OFFICE SUPPORT SERVICES. AS BOTH THE UNITS OF THE ASSESSEE ARE SITUATED AT SOFTWARE TECHNOLOGY PARK, DEDUCTION U/S. 10A WAS CLAIMED IN THE RETURN OF INCOME. DURING TH E YEAR UNDER CONSIDERATION , ASSESSEE HAD ALSO ENTERED INTO TRANSACTION IN CONNECTION WITH IT & ITES ACTIVITY UNDERTAKEN BY IT WITH ITS ASSOCIATED ENTERPRISES. FOR THIS PURPOSE, THE ASSESSEE HAS BENCHMARKED THE LOW E ND BACK OFFICE SUPPORT SERVICES RENDERED BY IT TO ITS AE ON AN AGGREGATE D BASIS. THE AFFAIR OF THE ASSESSEE COMPANY DEMONSTRATES THAT ASSESSEE COMPANY IS A LOW END BACK OFFICE SUPPORT SERVICES PROVIDER. THE ASSESSEE HAS APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE MET HOD TO TEST THE INTERNATIONAL TRANSACTIONS AND OPERATING PROFIT TO TOTAL COST AS PROFIT LEVEL INDICATOR (PLI) . WE FOUND THAT ASSESSEE HAS SELECTED 27 COMPARABLES, THE PLI OF THE ASSESSEE IS 18.18% , WHICH IS HIGHER THAN ALL COMPARABLE COMPANIES. ACCORDINGLY , IT WAS ARGUED THAT THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WAS AT ARMS LENGTH PRICE. HOWEVER, THE TPO PROPOSED 22 DIFFERENT COMPARABLE COMPANIES ITA NO. 7498 /1 2 13 EN GAGED IN THE IT ENABLE SERVICES. AFTER CONSIDERING THE ASSESSEES OBJECTION FIVE COMPANIES WERE ACCEP TED TO BE NON - COMPA RABLES AND DELETED FROM THE SET OF 22 COMPANIES. THE REMAINING SET OF 17 COMPARABLE COMPANIES W ERE HAVING AN ARITHMETIC MEAN OF 32.33%. AFTER CONSIDERING OVERALL PLI OF ASSESSEE AT 17.38% AN UPWARD ADJUSTMENT OF RS. 16,83,86,191/ - WAS MAD E BY TPO TO THE TRANSFER PRICE. ASSESSEE APPROACHED TO THE DRP. THE DRP DELETED T W O COMPANIES FROM THE SET UP COMPARABLES IDENTIFIED BY THE TPO. AS A CONSEQUENCE THE REVISED MARGIN WAS COMPUTED AT 30.10% AS UNDER : - SR.NO. REVENUES COMPARABLES MAR - 08 1 ACCENTIA TECHNOLOGIES LTD. 41.76% 2 ACROPETAL TECHNOLOGIES LTD. 35.30% 3 ADITYA BIRLA MINAC WORLDWIDE 2.20% 4 COSMIC GLOBAL LTD. 23.30% 5 CROSDOMAIN SOLUTIONS LTD. 26.96% 6 DATAMATICS FINANCIAL SERVICES 34.87% 7 E4E HEALTHCARE 16.72% 8 ECLERX SERVI CES 65.88% 9 HCL COMNET SYSTEMS & SERVICES LIMITED 32.90% 10 INFOSYS BPO LTD. 20.01% 11 ISERVICES INDIA 9.58% 12 MOLD - TEK 96.66% 13 R SYSTEMS INTERNATIONAL LIMITED 4.30% 14 SPANCO LTD. 11.04% 15 WIPRO LTD. 30.05% ARITHMETIC MEAN 30.10% 7 . BY AP PLYING THE ARITHMETIC MEAN OF 30.10% AN ADJUSTMENT OF RS. 10,39,54,664/ - WAS SUSTAINED BY DRP . OUT OF THE COMPARABLES TAKEN BY THE DRP, LEARNED AR HAS CONTENDED AGAINST THREE COMPANIES NAMELY, MOLD - TEK TECHNOLOGIES LIMITED , ECLERX SERVICES LTD & ITA NO. 7498 /1 2 14 ACROPETAL TECHNOLOGIES LTD. WHICH WERE ALLEGED TO BE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY BEING A LOW END BACK OFFICE SUPPORT SERVICE PROVIDER . W E FOUND THAT MOLD - TEK TECHNOLOGIES LIMITED (MOLD - TEK) PROVIDES KPO SERVICES IN THE FIELD OF ENGIN EERING . WE ALSO FOUND THAT MOLD - TEK HAS DEMERGED ITS SUBSIDIARY MOLD - TEK PLASTICS LIMITED W.E.F. APRIL, 2007 WHICH IS AN EXTRA - OR DINARY EVENT. FURTHERMORE, S INCE THE MOLD - TEK IS INTO PROVIDING KPO ENGINEERING SERVICES, HENCE, CANNOT BE FUNCTIONALLY COMPARE D WITH THE ASSESSEE COMPANY WHICH IS ENGAGED IN THE PROVISION OF BACK OFFICE OPERATIONS. FOR THIS PURPOSE, RELIANCE MAY BE PLACED ON THE DECISION OF SPECIAL BENCH IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PRIVATE LIMITED, ITA NO. 7466/MUM /2012 . ACCORDING LY, WE DO NOT FIND ANY JUSTIFICATION IN THE ORDER OF DRP FOR NOT EXCLUDING MOLD - TEK AS COMPARABLE WHICH IS A KNOWLEDGE PROCESSING COMPANY. THUS T HE DRP WAS NOT JUSTIFIED IN THE COMPARING THE SAME WITH THE ASSESSEE WHICH IS FUNCTIONALLY DIFFERENT INSOFAR AS ASSESSEE IS ENGAGED IN PROVIDING LOW END BACK OFFICE SUPPORT SERVICES. 8 . IN RESPECT OF COMPARABLE ECLERX SERVICES LIMITED, AS INCLUDED BY TPO, WE FOUND THAT T HIS COMPANY IS A KNOWLEDGE PROCESS OUTSOURCING (KPO) ENGAGED IN PROVIDING DATA ANALYSIS AND DAT A PROCESS SOLUTIONS, ONLINE OPERATION SUPPORT, CUSTOMER RELATIONSHIP MANAGEMENT SUPPORT, DATA DE - DUPLICATION SERVICES ETC. SINCE FUNCTIONALLY, IT IS DIFFERENT FROM ASSESSEE COMPANY, DRP WAS NOT JUSTIFIED IN NOT EXCLUDING THE SAME FROM THE LIST OF COMPARAB LES. ITA NO. 7498 /1 2 15 9 . WITH REGARD TO THE ACROPETAL TECHNOLOGIES LTD. , THE CONTENTION OF THE LEARNED AR WAS THAT THE TPO HAS TAKEN THE ENGINEERING DESIGN SERVICE SEGMENT OF THIS COMPANY AS A COMPARABLE IN PLACE OF IT SERVICES AND PORTAL DEVELOPMENT AREA. FROM THE RECORD , WE FOUND THAT THE AO HAS CALLED FOR INFORMATION WITH RESPECT TO THIS COMPANY U/S. 133(6), WHEREIN IT WAS FOUND THAT COMPANY IS ENGAGED IN PROVIDING SERVICES UNDER IT SEGMENT AND IT IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE. HOWEVER, THE ALLEGATION OF THE LEARNED AR WAS THAT COMPARISON HAS BEEN MADE BY TPO TAKING REVENUE OF ENGINEERING DIVISION SERVICE SEGMENT. FURTHER THE LD. AR HAS ALSO ALLEGED THAT FIGURE OF REVENUE ON PAGE NO. 289 OF THE PAPER BOOK DOES NOT MATCH WITH THE FIGURE OF THE SEGMENTAL REVENU E OF INFORMATION TECHNOLOGY SERVICE AS AVAILABLE ON THE ANNUAL REPORT AT PAGE 434. WE HAVE GONE THROUGH THE AUDITED ACCOUNT OF THE ACROPETAL TECHNOLOGIES LTD. FOR THE FINANCIAL YEAR 2007 - 08 RELEVANT TO ASSESSMENT YEAR 2008 - 09, UNDER CONSIDERATION, WHEREIN AT PAGE 434 OF THE PAPER BOOK, THE ASSESSEE HAS PLACED SEGMENT - WISE REVENUE IN CASE OF ENGINEERING DIVISION AT RS. 218,000,505/ - , AND IN CASE OF INFORMATION TECHNOLOGY SERVICES DIVISION, AT RS.385,147,981/ - . HOWEVER, AS PER ANNEXURE - B PLACED AT PAGE 289 OF THE PAPER BOOK WHICH IS COMPUTATION OF MARGIN (PLI) - ITES THE SEGMENT OPERATING REVENUE HAS BEEN SHOWN AT RS. 208,000,505/ - AND SEGMENTAL OP/TC(PLI) AT 35.30%. I F WE WILL TAKE CORRECT SEGMENTAL REVENUE OF INFORMATION TECHNOLOGY SERVICE A S PER AUDITED ACCOUN TS AT RS.38 5 , 147,981/ - IN PLACE OF RS.20 8 ,0 00, 505 / - , PLI WILL BE ITA NO. 7498 /1 2 16 MUCH MORE THAN 35.30%. THERE APPEARS TO BE SOME CONTRADICTION/ ERROR WHICH REQUIRES EXAMINATION ON THE PART OF THE LOWER AUTHORITIES. WE ACCORDINGLY, DIRECT THE AO/TPO TO VERIFY AND COMPARE T HE REVENUE OF IT SEGMENT OF ACROPETAL TECHNOLOGIES LTD. WITH THAT OF ASSESSEE COMPANY IN PLACE OF REVENUE OF ITS ENGINEERING DESIGN AND SERVICES. ACCORDINGLY, THE MATTER IS RESTORED BACK TO THE FILE OF THE AO ONLY WITH RESPECT TO COMPARABLE M/S ACROPETAL T ECHNOLOGIES LTD , AND FOR DECIDING AFRESH AFTER GIVING DUE OPPORTUNITY TO THE ASSESSEE. 10 . NOW , COMING TO THE GROUND RAISED BY THE ASSESSEE REGARDING CORPORATE TAX, WE FOUND THAT IN THE COURSE OF ASSESSMENT THE AO/TPO HAS PROPOSED DISALLOWANCE U/S. 40A(V) IN RESPECT OF TAX BORNE BY EMPLOYER WHICH WAS CLAIMED AS EXEMPT BY THE EMPLOYEE U/S. 10(10CC) OF THE ACT. HOWEVER, DEDUCTION U/S 10A WAS NOT ALLOWED ON THE REVISED BUSINESS PROFIT SO ENHANCED BECAUSE OF DISALLOWANCE U/S 40 A (V) . THE ISSUE UNDER CONSIDERATIO N IS SQUARELY COVERED BY THE DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF GEM PLUS (SUPRA) . ACCORDINGLY, WE DIRECT THE AO TO ALLOW DEDUCTION U/S. 10A ON THE ENHANCED BUSINES S PROFIT OF THE ASSESSEE I.E PROFIT TO BE INCREASED BY THE AMOUNT OF DISALLO WANCE MADE U/S. 40A(V) SINCE THE ASSESSEE HAS NO INCOME OTHER THAN THE INCOME ELIGIBLE FOR DEDUCTION U/S. 10A OF THE ACT. 10.1 IN THE DRAFT ASSESSMENT ORDER , THE AO HAS PROPOSED DISALLOWANCE OF FOREIGN EXCHANGE LOSS ON THE GROUND THAT LOSS IS ONLY ITA NO. 7498 /1 2 17 CONTINGE NT AND NOT ALLOWABLE U/S. 37(1). THE CONTENTION OF THE ASSESSEE BEFORE US WAS THAT RELYING ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR (I) PVT. LTD. (SUPRA) , SAME SHOULD BE ALLOWED OR IN ALTERNATIVE THE PROFIT ELIGIBLE FOR DED UCTION TAX U/S. 10A SHOULD BE INCREASE D BY THE CORRESPONDING AMOUNT OF SUCH DISALLOWANCE. 10.2 WE HAVE CONSIDERED RIVAL CONTENTIONS. IN VIEW OF THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF GEM PLUS (SUPRA) , WE DIRECT THE AO TO ALLO W THE CLAIM OF DEDUCTION U/S. 10A ON THE PROFIT OF BUSINESS AS INCREASED BY THE DISALLOWANCE MADE ON ACCOUNT OF FOREIGN EXCHANGE LOSS. WE DIRECT ACCORDINGLY. 11 . THE AO IN HIS DRAFT ORDER PROPOSED THAT EXPENDITURE INCURRED ON FOREIGN CURRENCY SHOULD BE EXC LUDED FROM THE EXPORT TURNOVER. ASSESSEE IN ITS OBJECTION TO DRP SUBMITTED THAT THESE EXPENDITURE HAVE NOT BEEN IN CLUDED IN TURNOVER, THEREFORE, SAME SHOULD NOT BE EXCLUDED FROM EXPORT TURNOVER. THE DRP IN ITS ORDER HAS DIRECTED FOR EXCLUDING SUCH EXPENDIT URE FROM EXPORT TURN OVER. WE FOUND THAT IN ASSESSEES OWN CASE FOR THE A.Y.2004 - 05 IN ITA NO. 7261/MUM/2008 , ORDER DATED 8 TH DECEMBER, 2009, MATTER WAS RESTORED BACK BY ITAT TO THE FILE OF THE AO WITH THE FOLLOWING OBSERVATIONS : - THE PURPOSE OF EXCLUDING SOME ITEMS OF EXPENDITURE MENTIONED IN THE DEFINITION OF EXPORT TURNOVER IS TO ENSURE THAT DEDUCTION IS GIVEN ONLY FOR THE CONSIDERATION FOR THE EXPORT OF THE SOFTWARE AND NOT FOR AMOUNTS RECEIVED MERELY AS REIMBURSEMENT OF THE EXPENSES. IT DEPENDS ON THE MANNER IN WHICH BILLS ARE RAISED BY THE ASSESSEE. THE ASSESSEE HAS MADE A SPECIFIC CLAIM BEFORE THE CIT THAT IT HAS EXCLUDED THOSE RECEIPTS WHICH IT RECEIVED ITA NO. 7498 /1 2 18 MERELY AS REIMBURSEMENT OF EXPENSES, AND THEREFORE, THERE IS NO NEED TO EXCLUDE THOSE ITEMS FURTH ER AS HAS BEEN DONE BY THE CIT. WE SHOULD HAVE THOUGHT THAT THIS CLAIM SHOULD HAVE BEEN EXAMINED AT THE HANDS OF THE ASSESSING OFFICER ESPECIALLY WHEN THE CIT TOOK PROCEEDINGS UNDER SECTION 263 ON THE GROUND THAT THE ASSESSING OFFICER DID NOT MAKE A PROPER ENQUIRY INTO THE CLAIM FOR DEDUCTION UNDER SECTION 10A AND MORE PARTICULARLY INTO THE FIGURE OF EXPORT TURNOVER. WE FOUND THAT ASSESSEE HAS ALSO PLACED ON RECORD THE ORDER PASSED BY THE AO DATED 5 - 5 - 2010 TO GIVE EFFECT TO THE ORDER OF TRIBUNAL. RESPECTF ULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, THIS ISSUE IS ALSO RESTORED TO THE FILE OF THE AO WITH THE SIMILAR DIRECTION AS GIVEN BY THE TRIBUNAL IN THE ASSESSMENT YEAR 2004 - 05. WE DIRECT ACCORDINGLY. 1 2 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED IN PART IN TERMS INDICATED HEREIN ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 9 TH JU LY , 201 4 . 9 TH JU LY ,2014 SD/ - SD/ - ( ) ( VIJAY PAL RAO ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 09 /0 7 /2014 /PK M , PS ITA NO. 7498 /1 2 19 COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//