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Techbooks International Pvt. Ltd., A-37, Sector 60, Noida. Vs. DCIT, Circle-3, Noida.
July, 07th 2015
         IN THE INCOME TAX APPELLATE TRIBUNAL
              DELHI BENCHES : I : NEW DELHI

   BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM

                          ITA No.240/Del/2015
                        Assessment Year : 2010-11

Techbooks International Pvt. Ltd.,           Vs. DCIT,
A-37, Sector 60,                                 Circle-3,
Noida.                                           Noida.

PAN: AAACT6050A

  (Appellant)                                        (Respondent)


             Assessee By         :    Shri C.S. Aggarwal, Sr. Advocate &
                                      Shri R.P. Mall, Advocate
             Department By       :    Shri R.K. Jha, Sr. DR &
                                      Shri Vijay Choudhary, Sr. DR


          Date of Hearing                :      02.07.2015
          Date of Pronouncement          :      06.07.2015


                                     ORDER
PER R.S. SYAL, AM:
     This appeal by the assessee emanates from the final assessment

order passed by the Assessing Officer (AO) on 22.12.2014             under

section 143(3) read with section 144C of the Income-tax Act, 1961
                                                         ITA No.240/Del/2015


(hereinafter also called `the Act') in relation to the assessment year

2010-11.

2.   The first major issue raised in this appeal is against the addition

made by the AO on account of transfer pricing adjustment to the tune of

Rs.20,48,76,996/- in the international transaction of `Provision of IT

Enabled data conversion services' (hereinafter also referred to as `the

ITES' for brevity).   Succinctly, the assessee was incorporated as a

wholly owned subsidiary of Aptarausa. It is engaged in the development

of customized electronic data. It converts data from hard copy or files

into XML/SGML/HTML, creating electronic style files and modifying

the user interface for CD-ROM delivery.       In the process, raw data

received from the customers in hard copy/electronically, is converted

into electronic form. Thereafter, the data is arranged and formatted.

Thus, it can be said that the assessee is primarily engaged in providing

ITES to its associated enterprise (AE).           Apart from certain

reimbursement of expenses, the assessee reported an international

transaction of `Provision of IT enabled data conversion services' with


                                   2
                                                          ITA No.240/Del/2015


the transacted value of Rs.129,58,11,907/-. The assessee adopted the

transactional net margin method (TNMM) as the most appropriate

method for demonstrating that this international transaction was at arm's

length price (ALP). On a reference made by the AO to the Transfer

Pricing Officer (TPO) for determining the ALP of the assessee's

international transactions, the latter accepted the TNMM as the most

appropriate method.     However, the use of multiple-year data was

discarded. After considering the Transfer pricing study report along

with various objections raised by the assessee during the course of

proceedings before him, the TPO shortlisted nine comparable companies

with their arithmetic mean of the Profit level indicator (PLI) of

Operating Profit/Operating Costs (OP/OC) at 33.71%. By applying this

profit margin    to the operating costs incurred by the assessee in

rendering the ITES, the TPO worked out a transfer pricing adjustment of

Rs.20,48,76,996/-. The assessee largely remained unsuccessful before

the Dispute Resolution Panel (DRP).       That is how, the AO made

addition of Rs.20.48 crore on account of transfer pricing adjustment in



                                    3
                                                              ITA No.240/Del/2015


the international transaction of `Provision of IT enabled data conversion

services.' The assessee is in appeal against this addition.

3.   We have heard the rival submissions and perused the relevant

material on record.     The assessee has agitated certain issues about

determination of the ALP of the international transaction of the

provision of ITES before us, which we will consider herein below.

I. FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS

4.1. The first issue argued before us is against the exclusion of foreign

exchange fluctuation gain/loss from the operating revenue/cost of the

assessee as well as the comparables. We find merit in the contention

raised on behalf of the assessee about the inclusion of foreign exchange

gain/loss in the operating revenue/costs of the assessee as well as that of

the comparables. When we advert to the nature of such foreign exchange

gain earned by the assessee, it prima facie appears that the same is in

relation to the revenue earned from its AE in connection with the

provision of the ITES. When the foreign exchange gain directly results

from the consideration received for rendering ITES to AE, we fail to

                                     4
                                                          ITA No.240/Del/2015


appreciate as to how such foreign exchange fluctuation gain can be

considered as non-operating. What is true for foreign exchange gain

from the transactions of the revenue nature being considered as part of

operating revenue is equally true for the foreign exchange loss being

considered as part of operating costs from the transactions of the revenue

nature.

4.2.       The Special Bench of the Tribunal in ACIT Vs Prakash I.

Shah (2008) 115 ITD 167 (Mum)(SB) has held that the gain due to

fluctuations in the foreign exchange rate emanating from export is its

integral part and cannot be differentiated from the export proceeds

simply on the ground that the foreign currency rate has increased

subsequent to sale but prior to realization. It went on to add that when

goods are exported and invoice is raised in currency of the country

where such goods are sold and subsequently when the amount is realized

in that foreign currency and then converted into Indian rupees, the entire

amount is relatable to the exports. In fact, it is only the translation of

invoice value from the foreign currency to the Indian rupees. The


                                    5
                                                         ITA No.240/Del/2015


Special bench held that the exchange rate gain or loss cannot have a

different character from the transaction to which it pertains. The Bench

found fallacy in the submission made on behalf of the Revenue that the

exchange rate difference should be detached from the exports and be

considered as an independent transaction. Eventually, the Special Bench

held that such exchange rate gain arising from exports cannot be viewed

differently from sale proceeds.

4.3.    In the context of transfer pricing, the Bangalore Bench of the

Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156

(Bangalore) has held that foreign exchange fluctuation gain is part of

operating profit of the company and should be included in the operating

revenue. Similar view has been taken in Trilogy E Business Software

India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). The

Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT (2013) 32

taxman.com 196 has also laid down to this extent. In view of the

foregoing discussion, we are of the considered opinion that the amount




                                   6
                                                          ITA No.240/Del/2015


of foreign exchange gain/loss arising out of revenue transactions is

required to be considered as an item of operating revenue/cost.

4.4.    Since, the TPO has computed PLI of the assessee as well as

comparables by ignoring the amount of forex gain/loss, we set aside the

impugned order and remit the matter to the file of TPO/AO to recompute

the assessee's margin as well as that of the comparables by considering

foreign exchange gain/loss as an item of operating revenue/cost. We

want to make it clear that our finding in this regard is restricted to

considering forex gain/loss from the transactions of the revenue nature

as part of operating revenue/cost. If some part of forex gain/loss turns

out to be relatable to transactions on capital accounts, then that part

cannot be considered as part of operating revenue/cost. Similar view has

been taken by the Tribunal in the assessee's own case for the

immediately preceding assessment year, namely, 2009-10, a copy of

which order has been placed on page 908 of the paper book.




                                    7
                                                          ITA No.240/Del/2015


II. BANK CHARGES

5.1. The ld. AR submitted that the bank charges incurred by it should

have been considered as non-operating expenses which have been taken

by the TPO as operating expenses. It was further submitted that the

TPO erred in making an effective comparison of the operating costs by

considering such bank charges as non-operating in the case of

comparables.

5.2. Having heard both the sides and perused the relevant material on

record, it is obvious that the assessee incurred bank interest which has

been treated as non-operating. There is, as such, no bifurcation available

of the bank interest and bank charges in the Annual accounts of the

assessee. It is noticed that the assessee is not aggrieved against the

treatment of bank interest as non-operating.      We do not see much

difference between the nature of bank charges and bank interest. As the

amount of bank interest has been admitted as an item of non-operating

expense, the amount of bank charges also assumes the same character as

that of bank interest. In our considered opinion, both the bank charges

                                    8
                                                          ITA No.240/Del/2015





as well as bank interest should have been considered as non-operating in

the case of the assessee as well as comparables. The TPO is directed to

verify whether the treatment of bank interest and bank charges in the

case of the assessee's computation of ALP and that of the comparables

is in accordance with our above observations. Needless to say, the

assessee will be afforded a reasonable opportunity of being heard.

III. PROVISION FOR DOUBTFUL ADVANCES

6.1. The ld. AR contended that the TPO erred in taking Provision for

doubtful advances amounting to Rs.17,11,167/- as operating in its case

and provision for doubtful debts as non-operating in the case of the

comparables. In the oppugnation, the ld. DR submitted that there is no

amount of provision for `doubtful debts' in the case of the assessee for

the year in question and the only provision appearing in its books is that

of `doubtful advances'.

6.2. Having heard both the sides and perused the relevant material on

record, we find that the assessee has not created any provision for

`doubtful debts'. The only provision made by it is of `doubtful

                                    9
                                                          ITA No.240/Del/2015


advances'.   Both the provision for bad debts as well as doubtful

advances are in the realm of the operations of the business. It is not the

case of the either side that the assessee made any excess provision. In

our considered opinion, the same has been rightly taken as an item of

operating expense of the assessee. The TPO is directed to treat the

amount of provisions for doubtful debts/advances as operating in the

case of the comparables as well.

IV. RISK ADJUSTMENT

7.1. The ld. AR vehemently argued that the TPO erred in not allowing

any risk adjustment. It was submitted that the assessee is a captive unit

providing ITES to its AE alone, thereby running no risk of any bad debts

etc. Per contra, the ld. DR opposed the grant of risk adjustment by

relying on the relevant parts of the order of the TPO.


7.2. We have heard the rival submissions and perused the relevant

material on record. The TPO has referred to several tribunal decisions in

which risk adjustment has been denied to the assessee. At the same

time, the ld. AR has also drawn our attention towards some of the
                                    10
                                                           ITA No.240/Del/2015


tribunal decisions, in which such an adjustment has been allowed. In

fact, there cannot be a general rule of allowing or not allowing risk

adjustment. Risk is nothing but a possible adverse perception in the

given circumstances, which may or may not finally fructify. Generally,

risks and rewards go side by side. Higher the risk, more the profit; and

vice versa. Level of risk depends on the facts and circumstances of each

case.   Where the assessee succeeds in ably demonstrating that the

comparables finally selected bore relatively more risks than it, then there

should be no denial of the risk adjustment. If, however, the assessee

fails in specifically pointing out the extra risks undertaken by the

comparables, then, of course, there cannot be any question of granting

risk adjustment. Under the transfer pricing regime, initial onus is always

on the assessee to show the reasons for claiming any specific adjustment

by pointing out differences between it and the comparables. Risk

adjustment can be allowed provided the assessee places on record some

appropriate material to demonstrate that the risks undertaken by the

comparable companies were relatively more than it, warranting

downward adjustment in their profit rates. Further, the variation in such
                                    11
                                                          ITA No.240/Del/2015


risks, if any, should be capable of quantification on some reasonable and

logical basis.

7.3. The ld. AR stated before us that the assessee was not having any

risk at all inasmuch as its services were to be compensated by the AE

with an appropriate mark-up in comparison with the full-fledged risk

bearing comparable companies. We are not inclined to accept such a

generalized and bald statement. The mere fact that the assessee is a

captive unit rendering ITES to its AE alone, does not per se make it a

no-risk entity. There are several risks attached to such entities dealing

with a single customer. If such lone customer, on whom the enterprise's

entire survival depends, closes down its business either voluntarily or

due to reasons beyond his control, the possibility of realization of debts

for the services already rendered, becomes a potential risk. Further, the

fear of termination of agreement between such an enterprise and the

solitary customer also poses a grave threat to the existence of such an

enterprise. In that sense of the matter, an enterprise serving a single

customer, also assumes marked risks.        As the assessee is wholly

dependent on its AE for securing business, its entire existence also
                                    12
                                                           ITA No.240/Del/2015


depends on the same AE. If such AE runs out of business or its business

is reduced, the assessee is bound to bear severe jolts. The contention of

the ld. AR that the assessee did not have any risk is prima facie not

acceptable in view of Schedule 13 of its Profit & Loss Account

containing details of operating and other expenses. It transpires from

such Schedule that the assessee has claimed deduction for `Provision for

doubtful advances' amounting to Rs.17,11,167/-. On a pointed query,

the ld. AR submitted that this provision was created in respect of

expenses incurred by the assessee in rendering the services to the AE

and not on the realization of sale proceeds. We fail to appreciate the

rationale of this contention that the assessee assumes no risk of

realization of invoices from its AE, but there may be a risk of advances

given for expenses incurred during the course of rendering services.

Ultimately risk is risk, whether it is of realization of invoices or of

advances given for conducting operations. Since the aspects of incurring

expenses and earning revenue are two sides of the same coin, we find

that the existence of risk to the assessee cannot be denied. Be that as it

may, it is further found that though there is no Provision for doubtful
                                    13
                                                           ITA No.240/Del/2015


debts (arising from realization of invoices) during the year, but, the

assessee did create provision for doubtful debts in the preceding year

amounting to Rs.10,79,665/-. This provision for bad debts is from the

revenue side. To contend that the assessee was not running any risk in

providing the services is, therefore, patently incapable of acceptance.

Since the ld. AR has failed to objectively demonstrate the relatively

higher risks undertaken by the comparables on an overall basis vis-à-vis

the assessee, we are disinclined to grant any risk adjustment.

V. SELECTION OF COMPARABLES

8.   The assessee is aggrieved against the inclusion of five companies

in the list of comparables and the exclusion of six companies selected by

it. In order to analyze whether the disputed companies are comparable

or not, we need to concentrate on the nature of work performed by the

assessee. It is has been noted above that the assessee is engaged in

rendering ITES by converting data from hard copy or files into

XML/SGML/HTML, thereby processing raw data received from the




                                    14
                                                          ITA No.240/Del/2015


customers in hard copy/electronically into electronic form, which is

then arranged and formatted.

A.   Challenge to the inclusion of some companies.

9.1. Firstly, we will deal with the companies which have been included

by the TPO in the final set of comparables and the assessee claims them

to be incomparable. A submission common to some of such companies

was made by the ld. AR that certain Benches of the Tribunal in other

cases have held them to be not comparable. In that view of the matter, it

was urged that those companies, being ex facie incomparable, be

automatically excluded from the list of comparables drawn by the TPO.


9.2. We express our reservations in accepting such a broad proposition.

It is axiomatic that if company `A' is functionally different from

company `B', then, such company cannot be considered as comparable.

Two companies can be considered as comparable when both are

discharging the overall similar functions, though there may be some

minor differences in such functions, not marring the otherwise

comparability. Notwithstanding the functional similarity, many a times a
                                   15
                                                          ITA No.240/Del/2015


company ceases to be comparable because of other reasons as well. To

cite an example, if company `A', though functionally similar to

company `B', but has related party transactions (RPTs) breaching a

particular level, then, such company cannot be considered as comparable

to company `A' in the year in which the RPTs breach such a level. If,

however, in the subsequent year, the related party transactions fall below

that barrier, then such company would again become comparable. To put

it simply, if company `A' has been held to be incomparable vis-a-vis

company `B', then it is not essential that company `A' would be

incomparable to company `C' also. What is relevant to consider is,

firstly, the functional profile of company `A' vis-a-vis company `C'. If

both are functionally similar, then notwithstanding the fact that company

`A' was held to be incomparable to company `B', it may still be

comparable to company `C'. Despite the fact that company `A' is

functionally similar to company `B', it may still have been declared as

incomparable to company `B' because of other relevant reasons. If

company `A' passes the same reasons         vis-a-vis company `C', then

company `A' will find its place in the list of comparables of company
                                    16
                                                         ITA No.240/Del/2015


`C', notwithstanding the fact that it was held to be incomparable to

company `B'. The crux of the matter is that the mere fact that company

`A' has been held to be not comparable in a judicial order passed in the

case of company `B', does not per se make it incomparable in all the

subsequent cases to follow. Not only company `A' held to be

incomparable to company `B' can be comparable to company `C', but

company `X' held to be comparable to company `Y' can also be

incomparable to company `Z', depending upon the functional profile and

the applicability or otherwise of the related factors. There can be no

hard and fast rule that if a particular company has been held to be not

comparable in the case of another company, then such former company

would also cease to be comparable to the assessee company also. The

comparability of each company needs to be ascertained only after

matching the functional profile and the relevant reasons of the other

company. Ergo, this contention raised on behalf of the assessee cannot

be accepted. With the above parameters and the factual matrix, we will

distinctly examine the companies chosen by the TPO to ascertain if they

are really comparable.
                                   17
                                                          ITA No.240/Del/2015


i)   Accentia Technologies Ltd.

10.1.1.    The assessee objected to the inclusion of this company in the

list of comparables on several reasons including peculiar economic

circumstances owing to acquisition of Asscent Infoserve Pvt. Ltd. during

the financial year relevant to the assessment year under consideration.

The TPO discussed the functional comparability of this company and, in

the ultimate analysis, came to hold that it was functionally comparable

with the assessee company and hence includible.

10.1.2.    We have heard the rival submissions and perused the relevant

material on record. We have also gone through the Annual report of this

company, a copy of which has been placed on page 435 onwards of the

paper book. Notes to Accounts of this company, which have been

placed on page 443 of the paper book, indicate about the amalgamation

of Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in

the court convened meeting held on 25.4.2009 and, subsequently,

sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai

Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154

                                   18
                                                             ITA No.240/Del/2015


TTJ (Mum) 176, has held that a company cannot be considered as

comparable    because    of   exceptional      financial   results   due     to

mergers/demergers. Similar view has been bolstered by the Delhi Bench

of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT

(ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the

fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia

Technologies Ltd. by way of amalgamation during the year itself, we

hold that this company cannot be considered as comparable due to this

extra-ordinary financial event. Accordingly, the same is directed to be

excluded from the final list of comparables.

ii)   TCS E-Serve International Ltd.

10.2.1.    The assessee objected to the inclusion of this company on the

ground that it provided financial information processing and customer

contact services with high level of foreign expenditure and abnormal

profits. The TPO noticed that this company was also offering ITES. He

did not treat high turnover of this company as a relevant factor in




                                   19
                                                          ITA No.240/Del/2015


considering the comparability. Eventually, this company was included in

the final set of comparables.

10.2.2.    We have heard the rival submissions and perused the relevant

material on record. Relevant parts of the Annual report of this company

are available on pages 458 onwards of the paper book.            Notes to

Accounts indicate that this company is engaged in the business of

providing IT enabled services/BPO services primarily to Citigroup

entities globally. The operations of this company : `broadly comprise of

transaction processing and technical services. Transaction processing

includes the broad spectrum of activities involving processing,

collections, customer care and payments in relation to the services

offered by Citigroup to its corporate and retail clients.       Technical

services involve software testing, verification and validation of software

at the time of implementation and data centre management activities.'

It is manifest that this company is engaged in rendering BPO services to

the banking and financial services industry (BFSI) and Travel, Tourism

and Hospitality (TTH). It is providing services to BFSI and TTH and


                                    20
                                                           ITA No.240/Del/2015


such services include `Transaction processing' and `Technical services'.

In other words, the remuneration of this company from the above

referred two segments includes compensation for rendering `Technical

services' and `Transaction processing'. Insofar as the `Transaction

processing' services are concerned, these are ITES, which are broadly

similar to those rendered by the assessee, though not specifically similar.

However, the `Technical services' involve software testing, verification

and validation of software item, implementation and data centre

management activities.     The `Technical services' rendered by this

company are in the nature of servicing and maintenance of software. At

this stage, it is relevant to note that a company providing software

services may    be of two types, viz., a company providing software

development services and a company providing software services other

than software development services (hereinafter also called `a company

providing non-development software services'). In order to properly

appreciate the vital difference between these two types of companies, it

is significant to note that a company which develops software is called a

company     rendering    software    development     services.    Software
                                    21
                                                           ITA No.240/Del/2015


development services also include maintenance of software and updation

of the software so as to suit the ever changing requirements of the users.

A company using, inter alia, a software for obtaining the desired results,

is called a company providing non-development software services. Thus,

it is crystal clear that there is a phenomenal difference between a

company providing software development services and a company

providing software non-development services in terms of expertise,

professional qualification and experience required for rendering such

services. A company providing software non-development services

performs a relatively low-end service. Thus the line of distinction is that

whereas a company providing software development services helps in

the creation, maintenance or updation of a software, on the other hand, a

company providing non-development software services obtains the

desired result with the use of an existing software. Further, whereas the

output of the former is a software in itself or a stage in the ultimate

creation of a software, the output of the later is the processed

information from the raw data obtained with the help, inter alia, of a

software. From the above discussion, it is overt that a company
                                    22
                                                          ITA No.240/Del/2015


providing software development services is distinct from and

incomparable with a company providing non-development software

services.

10.2.3.     We find that the assessee is a company providing non-

development software services, in the nature of conversion of data from

hard copy or files into electronic format. The assessee is not providing

any software development services to its AE. On the other hand, this

company is also providing `Technical services' to its AE involving

software testing, verification and validation of software, which are akin

to software maintenance services falling, within the overall category of

software development services. The TPO has taken entity level figures

of TCS E-Serve International Ltd. for comparison.          There is no

bifurcation available in respect of the revenues of this company from

Transaction processing (which are in the nature of ITES, the same as

provided by the assessee) and Technical services (which are in the

nature of software development, absent in the assessee's case). In the

absence of the availability of any such segregation of the total revenue


                                   23
                                                            ITA No.240/Del/2015


of this company, it is not possible to separately consider its profitability

from rendering of `Transaction processing services'. As such, the entity

level figures render this company as unfit for comparison. Ergo, we

order for the removal of this company from the final set of comparables.

iii)   TCS e-Serve Ltd.

10.3.1.    The TPO proposed to treat this company as comparable. The

assessee objected to its inclusion by contending that it was providing

financial information processing and customer contact services with

high operating revenue and peculiar economic circumstances leading to

abnormal profits.    The TPO repelled the assessee's objections and

included it in the final set of comparables.

10.3.2.   We have heard the rival submissions and perused the relevant

material on record. A copy of the Annual report of this company is

available on page 466 of the paper book. The company's overview has

been discussed on page 467 of the paper book, which divulges that this

company : "is in the business of providing business process management

services in the banking and financial services (BFSI), vertical ( i.e.

                                     24
                                                          ITA No.240/Del/2015





industry vertical) to help its customers achieve their business objectives

by providing innovative best-in-class services." We find that this

company is also providing ITES. Unlike TCS e-Serve International

Ltd., this company is not providing any technical services involving

software testing, verification and validation of software etc. Since the

functional profile of this company on a broader basis is no different from

that of the assessee, both being involved in rendering ITES, we are not

inclined to treat this company as incomparable. The ld. AR argued that

the nature of the ITES provided by this company is different from that of

the assessee and hence the same be excluded. We are disinclined to

sustain this objection. Matching of the exact functional similarity is

dispensed with under the TNMM, which is not so under the Comparable

uncontrolled price method. The TNMM approves comparability on the

basis of broader overall similarity.     When we consider the nature of

services provided by this company, being the ITES, which is similar to

that of those rendered by the assessee, again the ITES, we cannot order

its exclusion simply for the reason that the verticals of ITES are

somewhat different. If one goes to make a comparison in the way
                                    25
                                                           ITA No.240/Del/2015


suggested by the ld. AR under the TNMM, then it will be very difficult,

if not impossible, to find out a ditto comparable. A company which

satisfies the broader parameters of comparability in the overall same

segment, cannot be excluded due to somewhat different nature of such

overall activity.   An examination of the comparables chosen by the

assessee, which have been accepted by the TPO, also satisfy only the

test of overall similarity and not the peculiar similarity, as has been now

contrastly contended for the exclusion of this company. This argument,

therefore, fails.

10.3.3.     In so far as the objection of the ld. AR about the high

profit/high turnover of this company is concerned, we find that the

Hon'ble Delhi High Court in ChrysCapital Investment Advisors (India)

P. Ltd. Vs. DCIT has held , vide its judgment dated 27.4.2015, that high

profit or high turnover is not a criteria to exclude an otherwise

comparable company. It is further noticed that the Hon'ble Delhi High

Court in CIT Vs. Agnity India Technologies (P.) Ltd. (2013 ) 219

Taxman 26 (Del) examined the comparability of Infosys Technologies


                                    26
                                                          ITA No.240/Del/2015


from the angle of its inclusion or otherwise in the list of comparable of

Agnity India Technologies, a captive unit providing ITES to its AE

alone. In that case, the TPO treated three companies as comparable,

namely, Satyam Computer Service Ltd., L&T Infotech Ltd. and Infosys

Technologies. The DRP excluded Satyam Computer only. The Tribunal

excluded only Infosys Technologies Ltd., by impliedly retaining L&T

Infotech Ltd. as a good comparable. On appeal by the Revenue, the

Honourable High Court upheld the Tribunal order excluding Infosys on

the strength of certain relevant distinguishing features including its

giantness in terms of sales, nature of work and other factors. Thus it

follows that L&T Infotech Ltd., which is otherwise a vast company with

much higher turnover, finally found the status of a comparable with a

captive company providing ITES to its AE alone.

10.3.4.   Coming back to the facts of our case, we find that since TCS e-

Serve Ltd. is functionally comparable with the assessee company on an

overall basis and no special reasons for its higher profit/turnover have

been brought to our notice. Consequently, we hold that the authorities


                                   27
                                                          ITA No.240/Del/2015


below were justified in including this company in the list of

comparables.

iv)   i-Gate Global Solutions Sdn. Bhd.

10.4.1.    The TPO included this company in the list of comparables

despite the assessee's objections about such company offering both IT

and ITES services and the peculiar circumstance of amalgamation of i-

Gate Global Solutions Sdn. Bhd., with this company during the financial

year 2009-10.

10.4.2.    We have gone through the Annual report of this company

which is available on page 446 onwards of the paper book. Notes to

accounts of this company indicate amalgamation of i-Gate Global

Solutions Sdn. Bhd. This amalgamation took place with the approval of

the members of the company on 12.8.2009 and subsequently sanctioned

by the Hon'ble High Court by its order dated 24.2.2010.            As the

financial results of this company also include the results of

amalgamating company, in our considered opinion, this is an

extraordinary financial event, which renders it unfit for comparison with

                                   28
                                                          ITA No.240/Del/2015


the assessee company. While discussing the comparability of Accentia

Technologies Ltd. (supra), we have referred to certain decisions in

which it has been held that a company loses the tag of comparability due

to amalgamations, mergers, etc., taking place during the year in

question. Adopting the same reasoning, we order for the exclusion of

this company from the list of comparables.

v)    Infosys BPO

10.5.1.    The TPO included this company in the list of comparables.

The assessee's objections against its inclusion were overturned.

10.5.2.    After considering the rival submissions and perusing the

relevant material on record, we find from the Annual report of this

company, which is available on page 449 onwards of the paper book,

that there was acquisition by this company of McCamish Systems LLC.

Such information is available on page 456 of the paper book.

Acquisition of McCamish Systems LLC during the year, being an

extraordinary financial event, renders it incomparable. Following the



                                   29
                                                          ITA No.240/Del/2015


reasons taken note of above,     we order for the elimination of this

company from the final set of comparables.

B.    Challenge to the exclusion of some companies.

11.   The assessee is aggrieved against the exclusion of six companies

from the final set of comparables by the TPO. We will deal with these

companies hereinafter.

i)    R. Systems International Ltd. (Seg.); Jindal Intelicom Pvt. Ltd.;

      and Caliber Point Business Solutions Ltd.

12.1.1.    The assessee included these three companies in its list of

comparables. However, the TPO eliminated R. Systems (Seg.) on the

ground that it was following different year ending, namely, 31st

December and, hence, was not comparable. Jindal Intelicom Pvt. Ltd.,

was excluded on the ground that March, 2010 ending financials of the

company were for 15 months. Since the annual figures for the financial

year ending 31.3.2010 were not available, this company was also

rejected. Caliber Point Business Solutions Ltd. was also rejected because

of different year ending. The ld. AR fairly accepted that the above
                                   30
                                                          ITA No.240/Del/2015


referred three companies were either following calendar year for

maintaining their accounts or their figures were for more than 12 months

in contrast to the assessee following financial year ending 31st March. It

was, however, submitted that these three companies should not have

been excluded for this reason alone when they were otherwise

functionally similar, a fact which has not been disputed by the TPO.

The ld. DR opposed this contention by submitting that the data for the

year ending of these companies was not similar to that of assessee

company and hence such companies were rightly excluded.

12.1.2.    After considering the rival submissions and perusing the

relevant material, it is noticed that the assessee company is having

financial year ending covering the period 1.4.2009 to 31.3.2010. In that

view of the matter, a valid comparison can be made only if the

comparable companies too have the same financial year. In this regard,

we consider it appropriate to note the relevant part of sub-rule (4) of

Rule 10B which provides that: "the data to be used in analyzing the

comparability of an uncontrolled transaction with an international


                                    31
                                                           ITA No.240/Del/2015


transaction shall be the data relating to the financial year in which the

international transaction had been entered into." It is obvious from the

language of sub-rule (4) that the comparability of an uncontrolled

transaction can be analyzed only with the "data relating to the financial

year" in which the international transaction has been entered into. In

other words, if the tested party has March year ending, then, the

comparables must also have the data relating to the financial year ending

31st March itself. If such a data is not available, then, a company albeit

comparable, also disqualifies. Espousing the facts of the extant case, we

find that insofar as the functional comparability of these three companies

is concerned, the TPO has not disputed the same. The only reason given

for their exclusion is the non-availability of data for the relevant

financial year. The ld. AR contended that though the year ending of the

above referred three companies was either different or financial year

included results for 15 months, yet, the assessee was in a position to put

forward the data of these three companies for the financial year 1.4.2009

to 31.3.2010 from their Annual reports only. It was so stated on the

basis of the availability of the quarterly data from the Annual reports of
                                    32
                                                            ITA No.240/Del/2015


these companies, which could be adjusted for the financial year ending

31.3.2010. If the contention of the assessee is correct, that the relevant

data for the concerned financial year can be deduced from the

information available from their annual reports, then, there can be no

objection to the inclusion of these companies in the list of comparables

with the adjusted data for the relevant financial year itself. Under such

circumstances, we set aside the impugned order and remit the matter to

the file of TPO/AO for examining this aspect of the matter.              It is

clarified that only if the assessee succeeds in providing the relevant data

of these companies for the concerned financial year on the basis of the

information available from their Annual reports only, the TPO should

include these companies in the list of comparables by considering their

OP/OC on the basis of the financial year ending 31.3.2010. If however,

even though their quarterly data is available and can be compiled for the

relevant financial year, but the amounts of operating profit or operating

cost etc. for the relevant financial year are not directly available without

any apportionment or truncation, then these companies should not be

considered as comparable.
                                     33
                                                         ITA No.240/Del/2015


ii)   CG-VAK Software and Exports Ltd. (Seg.)

12.2.1.     The assessee included the segmental figures of this company

in the list of comparables. The TPO eliminated this company on the

ground that it was providing software services and ITES and its turnover

from ITES was only 0.83 crore, which was less than the requisite

turnover.

12.2.2.     Having heard both the sides on this issue, we find that the

TPO has accepted the functional comparability of this company on

segmental level. The ld. DR was also fair enough to candidly accept the

functional similarity of the relevant segment of this company. In such

circumstances, the question arises as to whether the relevant segment of

this company can be excluded from the list of comparables merely on

the ground that the revenue from this segment is only Rs.83 lacs? In

our considered opinion, the quantum of turnover can be no reason for the

exclusion of a company which is otherwise comparable.          We have

noticed above the judgment of the Hon'ble jurisdictional High Court in

the case of ChrysCapital Investment Advisors (India) P. Ltd (supra) in

                                   34
                                                          ITA No.240/Del/2015


which it has been held that high turnover or high profit can be no reason

to eliminate an otherwise comparable company. The same applies with

full force in the converse manner as well to a low turnover/low profit

company. We, therefore, hold that a company cannot be excluded from

the list of comparables on the ground of its low turnover. In principle,

we direct the inclusion of the relevant segment of this company in the

list of comparables.      The TPO is directed to include the operating

profit/operating costs of the ITES segment of this company in the list of

comparables, after due verification of the necessary figures for

determination of the operating profit margin etc.

iii) Micro Genetics Systems Ltd.

12.3.1.     The TPO excluded this company from the list of comparables

by observing that its turnover was only Rs.2.44 crore and, hence, it

failed the turnover filter.

12.3.2.     We do not find any reason to exclude this company from the

list of comparables merely on the ground that its turnover is less. The

reasons given above while considering the comparability of CG-VAK

                                    35
                                                           ITA No.240/Del/2015


Software and Exports apply to this company as well. We, therefore,

order for the inclusion of this company in the list of comparables.

However, the TPO is directed to verify the correctness of OP/OC of this

company before its inclusion in the set of comparables.

iv) Axis IT & T Ltd.

12.4.1.    The TPO excluded this company by mentioning that it failed

export filter as the total exports of this company were only 43.16% of

the total operating revenue. Here again, we find that the only reason

given by the TPO for the exclusion of this company is its failing export

filter. Relevant details of the figures of this company have not been

made available. We, therefore, set aside the impugned order on this

score and remit the matter to the file of TPO/AO for examining the

functional comparability of this company. If this company is found to

be similar on entity or segment level, then, the entity or the relevant

segment should be included in the final set of comparables after due

verification of the rate of operating profit margin etc.




                                     36
                                                            ITA No.240/Del/2015


12.5.      In view of the foregoing discussion, we set aside the

impugned order and remit the matter of determination of ALP of the

international transaction of `Provision of IT enabled data conversion

services' to the file of TPO/AO for a fresh decision in accordance with

our above observations/directions and also the interest aspect as

discussed infra.   Apart from the issues discussed in this order, the

decision of the TPO on all other aspects of the determination of the ALP

of this international transaction should be considered as final, as no other

issue has been agitated before us.

VI. INTEREST ON DELAYED/NON-REALIZATION OF EXPORT

PROCEEDS

13.1.      On going through the Master Service Agreement between the

assessee company and its AE, it was observed by the TPO that the AE

was allowed much longer period for payment than was allowed normally

in an uncontrolled situation.    The TPO considered the prescription of

clause 8.4 of the Agreement which provides that all amounts under this

Agreement should be paid within 150 days from the date of invoice. In

                                     37
                                                          ITA No.240/Del/2015


his opinion, 60 days credit facility is ordinarily given without any

interest payment and any delay in payment thereafter was liable to be

compensated with interest @ 1.5% to 2% per month on the outstanding

amount. The assessee was required to give working of interest on late

realization or non-realization of export proceeds during the financial

year 2009-10. Such working given by the assessee has been made

Annexure-1 to the order of the TPO. On a perusal of the statement of

non/late realization of export invoices furnished by the assessee, the

TPO held that the assessee ought to have charged @ 15% p.a. on

receivables as on 1.4.2009 which were outstanding for more than 60

days; and export proceeds not realized within 60 days from the date of

invoice during the year. These two amounts were calculated at Rs.3.16

crore and Rs.2.69 crore, making total TP adjustment for interest at

Rs.5.86 crore. That is how, the TP adjustment on account of interest to

be charged on non-realisation of export proceeds to the tune of Rs.5.86

crore and odd was proposed and added           by the AO in the final

assessment order. The assessee is aggrieved against this addition.



                                    38
                                                         ITA No.240/Del/2015


13.2.   The ld. AR contended that the Agreement between the assessee

and its AE does not provide for any charging of interest and, hence,

there can be no question of any notional/hypothetical interest income as

has been determined by the TPO.         To support the non-charging of

interest, he relied on the judgment of the Hon'ble Bombay High Court in

the case of Vodafone India Services Pvt. Ltd. Vs. Union of India and

Others (2014) 368 ITR 1 (Bom.). He buttressed the same argument by

relying on the judgment of the Hon'ble jurisdictional High Court dated

27.3.2015 in CIT vs. Cotton Naturals (I) Pvt. Ltd. (Del.). The view

canvassed by the ld. AR against the not making addition on account of

interest was strongly countered by the ld. DR.

13.3.      We are not persuaded to accept this argument. The argument

that the Agreement does not provide for charging any interest on late

realization of invoice value and hence no interest can be charged,

deserves the fate of dismissal under the transfer pricing provisions.

Chapter X of the Act has been enshrined to determine the income from

an international transaction at ALP, being in the same manner as is


                                   39
                                                         ITA No.240/Del/2015


determined between two independent parties. It means that if an income

is not charged or under charged by an Indian entity from its foreign AE,

which ought to have been properly charged if the transaction had been

between two independent parties, then such under charged or uncharged

income needs to be brought to tax by determining the ALP of the

international transaction giving rise to such income.

13.4.   Coming to other argument that no interest is chargeable under

the present circumstances on the strength of the judgment in the case of

Vodafone India Services Pvt. Ltd. (supra), we find that the point of

controversy in that case was quite distinct. Addition on account of the

excess share premium was made which, in the opinion of the TPO,

should have been received by that assessee from the issuance of shares.

It is on this excess share premium short received, that the amount of

interest was also charged. The Hon'ble Bombay High Court overturned

the opinion of the TPO by holding that the amount of less share

premium received over and above the actual premium received cannot

be added as TP adjustment because the receipt of premium itself, being a


                                    40
                                                             ITA No.240/Del/2015


capital receipt, is not chargeable to tax. When the amount of premium is

a capital receipt, the Hon'ble High Court held that the so called short

premium charged also cannot assume the character of revenue. Apart

from the deletion of addition on account of share premium, the Hon'ble

Bombay High Court in Vodafone India Services Pvt. Ltd. Vs. Union of

India and Others (2014) 369 ITR 511 (Bom.) and Shell India Markets

P. Ltd. VS. ACIT (2014) 369 ITR 516 (Bom) has held that interest on

such short realized premium also cannot be construed as an item of

transfer pricing adjustment. It is obvious that the facts of the instant case

are absolutely different from those considered in the case of Vodafone

India Services Pvt. Ltd. (supra). The base amount on which interest was

calculated by the TPO in the case of Vodafone India (supra) was itself a

capital receipt not chargeable to tax and not a trading debt arising during

the course of business, which issue has been discussed in the

immediately succeeding paras. Instantly, we are concerned with the late

realization by the assessee of trading debt from its AE which is

otherwise a revenue receipt and has also been offered for taxation.



                                     41
                                                                         ITA No.240/Del/2015


13.5. At this juncture, it is apposite to note that the Finance Act, 2012

has inserted Explanation to section 92B with retrospective effect from

1.4.2002. Clause (i) of this Explanation, which is otherwise also for

removal of doubts, gives meaning to the expression `international

transaction' in an inclusive manner. Sub-clause (c) of clause (i) of this

Explanation, which is relevant for our purpose, provides as under:-


 ` Explanation.--For the removal of doubts, it is hereby clarified that--

        (i) the expression "international transaction" shall include--

             (a) ............

            (b) ...........

            (c) capital financing, including any type of long-term or short-term
            borrowing, lending or guarantee, purchase or sale of marketable
            securities or any type of advance, payments or deferred payment or
            receivable or any other debt arising during the course of business;....'


13.6.        On circumspection of the relevant part of the Explanation

inserted with retrospective effect from 1.4.2002, thereby also covering

the assessment year under consideration, there remains no doubt that

apart from any long-term or short-term lending or borrowing, etc., or

any type of advance payments or deferred payments, `any other debt

arising during the course of business' has also been expressly
                                           42
                                                          ITA No.240/Del/2015


recognized as an international transaction. That being so, the payment

of interest or receipt of interest on the loans accepted or allowed in the

circumstances as mentioned in this clause of the Explanation, also

become international transactions, requiring the determination of their

ALP. If the payment of interest is excessive or there is no or low receipt

of interest, then such interest expense/income needs to be brought to

ALP. The expression `debt arising during the course of business' in

common parlance encompasses, inter alia, any trading debt arising from

the sale of goods or services rendered in the course of carrying on the

business. Once any debt arising during the course of business has been

ordained by the legislature as an international transaction, it is, but,

natural that if there is any delay in the realization of such debt arising

during the course of business, it is liable to be visited with the TP

adjustment on account of interest income short charged or uncharged.

13.7.   The Hon'ble Bombay High Court in the case of CIT vs. Patni

Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.) dealt, inter

alia, with the following question of law:-


                                    43
                                                           ITA No.240/Del/2015


    "(c)      Whether on the facts and circumstances of the case and
    in law, the Tribunal did not err in holding that the loss suffered
    by the assessee by allowing excess period of credit to the
    associated enterprises without charging an interest during such
    credit period would not amount to international transaction
    whereas section 92B(1) of the Income-tax Act, 1961 refers to
    any other transaction having a bearing on the profits, income,
    losses or assets of such enterprises?"

13.8. While answering the above question, the Hon'ble High Court

noticed that an amendment to section 92B has been carried out by the

Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside

the view taken by the Tribunal, the Hon'ble High Court restored this

issue to the file of the Tribunal for fresh decision in the light of the

legislative amendment.

13.9.      The foregoing discussion divulges that non-charging or under-

charging of interest on the excess period of credit allowed to the AE for

the realization of invoices amounts to an international transaction and

the ALP of such an international transaction is required to be

determined.

                                    44
                                                           ITA No.240/Del/2015


13.10.     In so far as the reliance of the ld. AR on the judgment in

Cotton Naturals (I) Pvt. Ltd. (supra) is concerned, we find the facts of

that case to be distinguishable. In that case, a loan was advanced by that

assessee to a wholly owned subsidiary in the USA.            The assessee

selected the Comparable Uncontrolled Price (CUP) method to

benchmark the interest received on the loan and claimed that the interest

received @ 4% was comparable. The TPO held that the arm's length

interest rate should be taken at 14% per annum. This was reduced to

12.20% by the DRP by adopting the prime lending rate fixed by the RBI.

The Tribunal relying on certain decisions upheld the assessee's claim.

When the matter finally came up before the Hon'ble High Court, it held

that the amount in question was given in foreign currency, i.e., in US

Dollars and was also to be repaid in the same currency, i.e., US Dollars.

In that view of the matter, it was held that the currency in which the loan

is to be repaid normally determines the rate of return on the money lent

and the interest rate applicable to loans granted and to be returned in

Indian rupee would not be a relevant comparable. The prime lending

rate was, therefore, held to be not applicable. From the above narration
                                    45
                                                                ITA No.240/Del/2015


of facts, it is clear that, firstly, in the case of Cotton Naturals (I) Pvt. Ltd.

(supra), that assessee charged interest on loans given to its AE. The

controversy was only about the rate of interest, which ought to have

been charged. In the case under consideration, the assessee did not

charge any interest on the amounts remaining parked with its foreign AE

due to late or non-realization of invoices in time. As the assessee before

us did not charge any interest, the judgment in Cotton Naturals (I) Pvt.

Ltd.(supra) rather supports the view canvassed by the Revenue on the

basic issue of chargeability of interest. Be that as it may, the amendment

to section 92B made with retrospective effect from 1.4.2002 sets the

controversy to rest inasmuch as it provides in unambiguous terms that

any other debt arising during the course of business is an international

transaction. Ex consequenti, transfer pricing adjustment on account of

interest income is mandated in case of late/non realization of invoice

value from AE. The view canvassed by the ld. AR on this issue is,

therefore, found to be devoid of merit and hence jettisoned.




                                       46
                                                            ITA No.240/Del/2015


13.11.       Now, we come to the computation of the ALP of the

international transaction of `debt arising during the course of business.'

This has two ingredients, viz., the amount on which interest should be

charged and the arm's length rate at which the interest should be

charged.




13.12.     In so far as the first aspect is concerned, we find that the TPO

has taken normal credit period of 60 days and accordingly made addition

on account of transfer pricing adjustment for the period in excess of 60

days. In our considered opinion, transfer pricing adjustment on account

of interest for the entire period of delay beyond 60 days cannot be

treated as a separate international transaction of trading debt arising

during the course of business. It is noticed that the assessee entered into

an agreement with its AE for realization of invoices within a period of

150 days. This implies that the interest amount on non-realization of

invoices up to 150 days was factored in the price charged for the

services rendered.    Annexure-1 to the TPO's order gives details of the

instances of late realization or non-realization of advances up to the year


                                     47
                                                          ITA No.240/Del/2015


ending. First three and a half pages of this Annexure indicate number of

days for which there was delayed realization. Such delay ranges from

175 days to 217 days. The remaining pages disclose no realization of

invoices up to 31st March, 2010.         When we consider the dates of

invoices in the remaining pages, it is manifested that in certain cases

these invoices have been raised on 31st August, 30th     or September or

31st October, 2009. In all such cases, the period of 150 days already

stood expired as on 31st March, 2010 and the assessee ought to have

charged interest on the delay in realizing such invoices along with the

first three and a half pages in which there is an absolute and identified

delay in realization of invoices beyond the stipulated period. When the

interest for realization of trade advances up to 150 days is part and

parcel of the price charged from the AE, then the delay up to this extent

cannot give rise to a separate international transaction of interest

uncharged. Rather interest for the period in excess of normally realizable

period in an uncontrolled situation upto 150 days needs to be considered

in the determining the ALP of the international transaction of the

`Provision of IT Enabled data conversion services'. This can be done by
                                    48
                                                          ITA No.240/Del/2015


increasing the revenue charged by the comparable companies with the

amount of interest for the period between that allowed by them in

realization of invoices and 150 days as allowed by the assessee, so as to

bring such comparables at par with the assessee's international

transaction of provision of the ITES. To illustrate, if the comparables

have allowed credit period of,    say,   60 days and the assessee has

realized its invoices in 180 days, then interest for 90 days (150 days

minus 60 days) should be added to the price charged by the comparables

and the amount of their resultant adjusted operating profit be computed.

Rule 10B permits making such an adjustment. Sub-rule (2) to rule 10B

stipulates that for the purposes of sub-rule (1), the comparability of an

international transaction with an uncontrolled transaction shall be

judged, inter alia, with reference to the : `(c) the contractual terms

(whether or not such terms are formal or in writing) of the transactions

...' . Then sub-rule (3) mandates that an uncontrolled transaction shall

be comparable to an international transaction if `reasonably accurate

adjustments can be made to eliminate the material effects of such

differences'. Applying the prescription of rule 10, it becomes vivid that
                                   49
                                                            ITA No.240/Del/2015


difference on account of the `contractual terms of the transactions',

which also include the credit period allowed, needs to be adjusted in the

profit of comparables. As the TPO has taken the entire delay beyond

that normally allowed as a separate international transaction, which

position is not correct, we hold that the effect of delay on interest up to

150 days over and above the normal period of realization in an

uncontrolled situation, should be considered in the determination of the

ALP of the international transaction of `Provision of IT Enabled data

conversion services' and the period of delay above 150 days, namely,

30 days in our above illustration (180 days minus 150 days) should be

considered as a separate international transaction in terms of clause (c)

of Explanation to section 92B.

13.13.   In so far as the question of rate of interest is concerned, we find

that this issue is no more res integra in view of the judgment of the

Hon'ble jurisdictional High Court in the case of Cotton Naturals (I) Pvt.

Ltd. (supra), in which it has been held that it is the currency in which

the loan is to be repaid which determines the rate of interest and hence


                                    50
                                                                  ITA No.240/Del/2015


the prime lending rate should not be considered for determining the

interest rate. Under such circumstances, we set aside the impugned

order and remit the matter to the file of TPO/AO for a fresh

determination of addition on account of transfer pricing adjustment

towards interest not realized from its AE on the debts arising during the

course of business in line with our above observations.

14.       In the result, the appeal is allowed for statistical purposes.

          The order pronounced in the open court on 06.07.2015.

                Sd/-                                            Sd/-

   [A.T. VARKEY]                                      [R.S. SYAL]
 JUDICIAL MEMBER                                  ACCOUNTANT MEMBER

Dated, 06th July, 2015.
dk
Copy forwarded to:
     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                                                      AR, ITAT, NEW DELHI.

                                          51

 
 
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