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Bt E-Serv (India) Pvt. Ltd v. Cit

Income Tax Appellate Tribunal
Oct 30, 2017
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Tribunal Order Summary — BT e-Serve (India) Pvt. Ltd. (Appeals for AY 2010-11 & 2011-12)

Factual and Procedural Background

This consolidated opinion records the Income Tax Appellate Tribunal's consideration of two appeals filed by BT e-Serve (India) Private Limited against assessments framed under section 143(3) read with section 144C(3) of the Income Tax Act, 1961 for assessment years 2010-11 (ITA No. 565/Del/2015) and 2011-12 (ITA No. 99/Del/2016).

In both years the Assessing Officer, acting on transfer pricing adjustments proposed by the Transfer Pricing Officer (TPO) and directions of the Dispute Resolution Panel (DRP), made additions: (a) transfer pricing adjustments under section 92CA(3) relating to benchmarking of international transactions (including adjustment for outstanding receivables) and (b) disallowances under section 10AA relating to export-linked deductions where the revenue authority found that export consideration had not been realised within six months of the end of the previous year. The tribunal heard grounds contesting inclusion/exclusion of comparable companies, denial of working-capital and risk adjustments, imputing interest on outstanding receivables as an international transaction, disallowance of part of section 10AA deduction, initiation of penalty proceedings, and levy of interest under sections 234B/234D.

The Tribunal composed of an Accountant Member and others considered documentary material including the assessee's Transfer Pricing (TP) study (FAR analysis), annual reports of comparable companies, the service agreement between group entities, the TPO and DRP orders and foreign inward remittance certificates, and gave specific directions concerning comparables, rectification requests, and grant/denial of portions of section 10AA deduction.

Legal Issues Presented

  1. Whether the transfer pricing adjustments made under section 92CA(3) — including (a) alteration of the comparable set, (b) denial of working capital and risk adjustments, and (c) separate benchmarking of outstanding receivables (imputing interest) — were correct and sustainable.
  2. Whether outstanding receivables (beyond an accepted credit period) constitute an "international transaction" or capital financing under the Act and whether interest should be imputed and benchmarked.
  3. Whether the deduction under section 10AA should be denied for export consideration not realised within six months from the end of the previous year (including whether section 10AA incorporates a time-limit analogous to section 10A(3)).
  4. Whether certain comparable companies relied upon by the TPO/DRP are functionally comparable to the assessee and therefore properly included or required to be excluded from the comparable set.
  5. Whether working-capital and risk adjustments claimed by the assessee should be accepted in computing arm's length margins.
  6. Whether the Assessing Officer's initiation of penalty proceedings under section 271(1)(c) and levy of interest under sections 234B and 234D were justified.

Arguments of the Parties

Appellant's (Assessee) Arguments — summarized

  • The assessee argued that its TP study using TNMM and a specific set of comparables (and using OP/OC PLI) established arm's length pricing and that many comparables rejected by TPO should be accepted (including R Systems in some years).
  • It argued the TPO/DRP erred in (a) excluding comparables selected by the assessee and including companies that earned "super normal" profits, (b) applying filters such as different accounting year or turnover thresholds improperly, (c) rejecting multiple-year data and using only a single year of comparable data, and (d) not making appropriate working-capital and risk adjustments.
  • The assessee contended that outstanding receivables for SEZ units are not subject to a time-limit for repatriation under RBI Master Circular and therefore delays do not automatically convert receivables into separate international transactions or justify imputing interest; it relied on decisions such as Bechtel India and Ameriprice (as distinguishing authorities).
  • On section 10AA, the assessee contended section 10AA(8) does not import section 10A(3)'s time limit; that RBI guidance for SEZ units shows no prescribed time limit; and that amounts subsequently received in India should qualify as export turnover for deduction purposes.
  • The assessee also argued miscalculation of total adjustments and filed a rectification application to correct the amounts claimed to have been miscomputed.

Respondent's (Revenue / Departmental Representative) Arguments — summarized

  • The DR supported the TPO/DRP adjustments, arguing that TPO had validly rejected and added comparables based on comparability analysis and available records and that the DRP's directions were properly applied by the AO.
  • On outstanding receivables, the DR argued such overdue receivables operate as capital financing/loan to associated enterprises and therefore constitute an international transaction (relying on the explanation to section 92B and on authorities such as Instrumentation Corpn. Ltd.), justifying imputation of interest. The DR maintained the RBI Master Circular does not determine whether an international transaction exists.
  • The DR contended that where no agreed credit period exists, long overdues (in some cases >300 days) show that the assessee had effectively extended interest-free credit, which must be benchmarked and interest imputed; 30 days was treated by the TPO as a normal credit period and was not challenged before the Tribunal.
  • The DR defended disallowance of sums treated as unbilled revenue (work-in-progress) for 10AA purposes and the AO/DRP's reliance on Form 56F certification and statutory provisions where relevant.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Padmasundara Rao v. State of Tamil Nadu (255 ITR 147) (SC) Cited by assessee for the principle of casus omissus (gap in statute) and related interpretive consequences. The decision was cited by the assessee; the opinion records the citation but applies reasoning on section 10AA primarily on statutory text and does not rest the decision's outcome solely on this principle. The Tribunal recorded that the assessee relied on this authority (AY discussions) but granted relief on section 10AA based on textual analysis rather than declaring a novel casus omissus principle.
Tarulata Shyam (Smt) v. Commissioner of Income-tax (108 ITR 345) (SC) Cited along with Padmasundara Rao in support of casus omissus principle. Recorded as relied upon by the assessee. Tribunal did not base its primary statutory holding on this precedent but noted the reliance; relief on section 10AA was given on statutory interpretation and facts (receipts in India).
Bechtel India Pvt. Ltd. (Delhi High Court) (cited) Cited by assessee as authority where an agreed credit period (60 days) meant receivables were not treated as separate international transactions warranting interest imputation. The Tribunal distinguished Bechtel: in Bechtel there was an agreed credit period of 60 days; in the present case the assessee had not established any agreed credit period and had many receivables outstanding beyond reasonable time, so Bechtel was not applicable.
Pr. CIT v. Ameriprise India (P.) Ltd. (ITA No. 461/2016) (cited) Cited by assessee as a decision where agreed credit period affected treatment of receivables and comparability considerations in ITES context. The Tribunal distinguished Ameriprise on facts (presence of contractual credit periods in that case) and followed a coordinate bench decision in Ameriprise that excluded e-Clerx as a comparable. For the receivable issue the Ameriprise facts were found distinguishable from the present assessee's lack of a specified credit period.
Instrumentation Corpn. Ltd. v. Asstt. DIT (I.T. Appeal Nos. 1548 & 1549 (Kol.) of 2009, dated 15-7-2016) (Special Bench) Relied upon by the revenue to support the proposition that outstanding receivables can amount to capital financing / an international transaction and justify imputing interest. The Tribunal referenced this authority as part of the revenue's submissions. The Tribunal ultimately agreed with the revenue's position in the facts of this case, holding that overdue receivables fall within the Explanation to section 92B and can be benchmarked (and interest imputed) where not within accepted credit terms.
Rampgreen Solutions (P.) Ltd. v. CIT ([2015] 60 taxmann.com 355 / 234 Taxman 573) Held that e-Clerx Services Ltd is a KPO and functionally dissimilar to simple IT-enabled services providers; used to exclude e-Clerx as a comparable. The Tribunal followed the coordinate-bench holding and directed exclusion of e-Clerx Services Ltd from comparability analysis on the basis that it is a KPO providing higher-end services and possesses significant intangibles, rendering it functionally dissimilar to the assessee.
Sony India P. Ltd. v. Commissioner Of Income-Tax ([2015] 62 taxmann.com 237 (Delhi - Trib.)) Cited by the assessee in support of its broader comparability/transfer pricing contentions (contextual authority). The Tribunal recorded the citation; however the Tribunal's decisions on exclusion/inclusion of particular comparables were based on its own comparative functional analysis and on other coordinate-bench precedents where applicable (e.g., Ameriprise/Rampgreen). The opinion does not indicate reliance on Sony India as a decisive precedent for the contested issues.
Coordinate-bench decisions in Ameriprise India Pvt. Ltd. (ITA 2010/Del/2014) and other cited tribunal orders Used to show prior practice of excluding particular comparables (e.g., e-Clerx) and to support comparability principles in ITES sector. The Tribunal expressly followed the coordinate-bench reasoning that excluded e-Clerx and applied similar reasoning to TCS e-Serve in the facts before it; accordingly it directed exclusion of those comparables for the relevant years.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded in a structured way, addressing comparability and FAR, working-capital and risk adjustments, the character of outstanding receivables, rectification/amount computation, and section 10AA issues. The court's reasoning relied heavily on the documented functional analysis (FAR) of the assessee and the available financial/segmental data of comparables.

1. Functional analysis and comparables

The Tribunal accepted as final for comparability the FAR in the assessee's TP study (management, provision of services, quality assurance, HR, and risk analyses) because it was not disputed by the TPO or DRP. Therefore, any proposed comparable had to be tested against that functional profile.

On Accentia Technologies Ltd (AY 2010-11): after reviewing the annual report and segmental descriptions, the Tribunal found Accentia carried on medical transcription, medical coding and billing. The Tribunal held medical transcription is functionally dissimilar to the assessee's routine back-office corporate services, and because Accentia's financial results were aggregated across dissimilar segments (with no segmental information), Accentia had to be excluded on grounds of functional dissimilarity and lack of segmental results.

On R Systems Ltd: although it had a different financial year, Tribunal noted that as a listed company quarter-wise results were publicly available and the assessee could produce audited results relevant to the comparable period. The Tribunal directed the assessee to produce such authentic and reliable information to the TPO, and directed the TPO to verify and include R Systems if appropriate.

For AY 2011-12, the Tribunal followed coordinate-bench authority to exclude e-Clerx Services Ltd (held to be a KPO with significant intangibles and functionally different) and TCS e-Serve Ltd (found on similar previous-year reasoning to be functionally dissimilar and excluded). The Tribunal directed exclusion of those comparables and permitted consideration of R Systems if relevant data were produced.

2. Working-capital and risk adjustments

The assessee sought working-capital and risk adjustments. The Tribunal required demonstrations/workings of the claimed adjustments. The assessee failed to produce the necessary computations or workings before the Tribunal (or before the TPO/AO). In absence of relevant detailed workings and supporting data, the Tribunal rejected the request for working-capital and risk adjustments for both assessment years.

3. Outstanding receivables and imputing interest

The TPO treated outstanding receivables beyond 30 days as a separate "international transaction" and imputed interest (CUP method) — for AY 2010-11 applying 14.88% p.a. producing an interest computation of Rs. 31,577,050 and for AY 2011-12 applying 11.69% giving Rs. 35,368,064 (figures drawn from assessment records). The Tribunal examined the service agreement (BT group policy), the assessee's TP report (which had earlier avoided credit-and-collection risk), the absence of any contractual credit period in the assessee's agreements, and the fact of very long outstanding periods in some cases (e.g., over 300 days).

The Tribunal observed that after insertion of Explanation 2 to section 92B (Finance Act 2012) receivables/debts are encompassed within "capital financing" and thus can constitute international transactions. It held that where receivables remain outstanding beyond accepted commercial credit terms and no contractual credit period exists, they may be considered capital financing and benchmarked; imputing interest is a natural corollary. The Tribunal found no infirmity in the TPO selecting 30 days as a normal credit period (which was not contested before it) and confirmed the TPO's CUP-based benchmarking and interest imputation for outstanding receivables in the facts of this case.

4. Rectification of arithmetic / computational error

The assessee contended miscalculation of total adjustment amounts and had filed a rectification application. The Tribunal directed the AO to consider the rectification application under section 154 and, if tenable, rectify within 30 days after hearing the assessee. This direction resulted in allowance of ground challenging miscalculation (ground No.13 in AY 2010-11) to the extent of ordering consideration of the rectification request.

5. Section 10AA (export-linked deduction) — time of realization

The Tribunal analysed section 10AA and its explanatory provisions. It found unbilled revenue (work-in-progress) does not fall within the definition of "export turnover." Therefore, deduction under section 10AA could not be allowed on unbilled revenue amounts.

For credited foreign remittances that were in fact received in India after six months, the Tribunal held section 10AA itself does not prescribe a time-limit for bringing consideration into India (unlike section 10A(3)). The Tribunal observed that section 10AA(8) makes certain provisions of section 10A(5) and (6) applicable but these do not import the time-limit provision of section 10A(3). Accordingly, where the foreign inward remittance certificates showed receipt of export consideration in India (albeit after six months), the Tribunal directed the AO to treat the amounts actually received (e.g., Rs. 4.80 crores in AY 2010-11 and similarly in AY 2011-12) as export turnover for 10AA deduction purposes and grant the deduction. The Tribunal thus allowed part of the assessee's grounds on 10AA for both years while confirming disallowance of unbilled revenue amounts.

6. Penalty and interest under sections 271(1)(c), 234B and 234D

The Tribunal dismissed the grounds impugning initiation of penalty proceedings (section 271(1)(c)) as premature in both years because no detailed arguments were advanced on those aspects. Similarly it dismissed grounds on interest under sections 234B and 234D as they were consequential in nature and no substantive independent argument was advanced.

Holding and Implications

The Tribunal disposed each appeal with specific directions and confirmations:

Core Rulings

  • On transfer pricing and comparables: The Tribunal confirmed several TPO/DRP adjustments (including imputation of interest on overdue receivables treated as international transactions) but directed exclusion of certain comparables (Accentia Technologies; e-Clerx Services Ltd; TCS e-Serve Ltd.) where the Tribunal found functional dissimilarity or lack of segmental data. The Tribunal directed that R Systems may be included if the assessee produces reliable period-relevant financial data for verification by the TPO.
  • On working-capital and risk adjustments: The Tribunal rejected the assessee's claims for such adjustments because the assessee failed to provide the working details and computations to substantiate those claims before the TPO/AO/Tribunal.
  • On outstanding receivables: The Tribunal held that overdue receivables can constitute capital financing/an international transaction (per Explanation to section 92B) and confirmed the TPO's interest imputation using CUP at the rates applied (14.88% for AY 2010-11; 11.69% for AY 2011-12) for receivables beyond the normal credit period of 30 days, producing specified interest adjustments which the Tribunal upheld.
  • On section 10AA deduction: The Tribunal held that (a) unbilled revenue (work-in-progress) does not qualify as export turnover and deduction under section 10AA cannot be allowed on such sums; but (b) foreign exchange receipts that were actually brought into India (supported by foreign inward remittance certificates) after six months nonetheless qualify for deduction under section 10AA because section 10AA does not prescribe the six-month time-limit akin to section 10A(3). The Tribunal therefore directed the AO to allow deduction for the amounts actually received (e.g., Rs. 4.80 crores in AY 2010-11 and corresponding sums in AY 2011-12) and confirmed disallowance on the unbilled revenue portion.
  • On rectification: The Tribunal directed the AO to consider the assessee's rectification application under section 154 and, if valid, rectify the assessment within 30 days after affording the assessee an opportunity of hearing.
  • On penalty and interest grounds: Grounds attacking initiation of penalty proceedings under section 271(1)(c) and imposition of interest under sections 234B/234D were dismissed as premature or consequential where no substantive arguments were advanced.

Final Disposition

For AY 2010-11 (ITA No. 565/Del/2015) the appeal was partly allowed (the Tribunal confirmed many TP adjustments, excluded Accentia as comparable, ordered rectification consideration, and directed allowance of section 10AA deduction for amounts actually remitted into India while upholding disallowance of unbilled revenue). For AY 2011-12 (ITA No. 99/Del/2016) the appeal was similarly partly allowed (exclusion of e-Clerx and TCS e-Serve as comparables, possible inclusion of R Systems subject to data, confirmation of interest imputation on overdue receivables, and allowance of section 10AA deduction for amounts actually remitted into India).

Implications

  • Direct effect on parties: Certain transfer pricing adjustments (notably interest imputation on overdue receivables) were sustained, while specific comparables were excluded and certain section 10AA deductions were ordered to be allowed where foreign remittances were evidenced. The AO is directed to consider rectification claims and to implement exclusions/inclusions as directed by the Tribunal.
  • On broader precedent: The Tribunal applied existing coordinate-bench and higher authorities (as recorded) and distinguished some decisions (e.g., Bechtel, Ameriprise) on factual grounds. The order resolves the particular disputes between the parties for the two assessment years; the opinion does not purport to lay down a novel binding principle beyond the application of statutory provisions and existing authorities in the facts of these cases.

Note: This summary is strictly confined to the content of the provided Tribunal order. Where the opinion itself relied on or cited authorities and factual findings, those have been reported here as recorded in the opinion.

Show all summary ...

ORDER

Prashant Maharishi, Accountant Member - This appeal is filed by the BT e- Serve ( India ) Private Limited [ in short assessee] against the order of Income Tax Officer, Ward-5(2), New Delhi [ hereinafter referred to as the Ld AO ] dated 14.12.2014 u/s 143(3) read with section 144C(3) of the Income Tax Act, 1961, [ hereinafter referred to as the Act] wherein against the returned income of the assessee un return filed on 15.10.2010 declaring Nil income, addition on account of restriction of deduction on account of u/s 10AA to Rs. 42306994/- and addition on account of arms length price [ In short ALP] u/s 92CA(3) of Rs. 69156881/- was made as per the order of the ld Transfer Pricing Officer [ In short ld TPO] passed u/s 92CA(3) of the act dated 16.01.2014 which was subjected to direction before the ld Dispute Resolution Panel-1, New Delhi[ in short ld DRP] who passed direction u/s 144C(5) of the Act on 03.11.2014, consequently, the assessed income was determined at Rs. 77425984/- by the ld AO.

2. The assessee is a company engaged in the business of providing ITES [Information Technology enabled services] registered under Special economic Zones [in short SEZ]. The assessee has claimed deduction u/s 10AA of the Act filing audit report in Form 56F. On examination ld Assessing Officer found that assessee has not received export proceeds within 6 months of the end of the year and therefore, claim of the assessee was reduced by granting the deduction only of Rs. 42306994/- denying deduction on non receipt and late receipt of export proceeds of Rs. 75085404/- within 12 months from the date of invoice.

3. Assessee has entered into international transaction of provision of IT enabled services of Rs. 266570625/- and availing of services of Rs. 11584598/- which was benchmarked by the assessee in its T P Study report applying transaction net margin method ( in short TNMM) adopted PLI [ Profit level Indicator] of OP/OC [ Operating profit divided by operating cost] selecting 11 comparable companies having arithmetic mean of PLI of 12.05% compared with the PLI of the assessee of 14.17% claiming that international transaction entered into by it are at arm's length.

4. The ld TPO rejected the TP study of the assessee by rejecting 6 comparables retaining only 5 and he further added 5 comparables, thereby populating the 10 comparables as per para No. 12 at page No. 80 of his order. He computed the average PLI of the comparables at 29.86%. Further, the working capital adjustment as well as the risk adjustment was denied and thereafter computed the ALP of Rs. 311019271/- of the total transaction of Rs. 273439440/- and proposed an adjustment of Rs. 37579831/-. Further, on the outstanding receivables were considered by him as international transactions and computed the ALP of outstanding receivable exceeding 30 days applying interest rate of 14.88% of Rs. 31577050/-. The above adjustment was incorporated in the draft assessment order passed by the ld. Assessing Officer on 12.03.2014 and objections were filed before the ld DRP wherein exclusion and inclusion of comparable by the ld TPO were upheld. However ld TPO was directed to consider the corrected margin of the comparable. The adjustment of interest on receivable was also upheld by rejecting the objection of the assessee. On the quantum of deduction u/s 10AA the action of ld AO was upheld. Therefore, assessee is in appeal before us as per following grounds of appeal:—

"On the facts and circumstances of the case and in law, the learned Assessing Officer AO has erred in passing the assessment order under section 143(3} read with section 144C of the Income-tax Act, 1961 ('the Act') after considering the adjustments proposed by the learned Transfer Pricing Officer (TPO) in his order passed under section 92CA (3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ('DRP').

Each of the ground is referred to separately, which may kindly be considered independent of each other and without prejudice to each other.

That on the facts and circumstances of the case and in law,

Transfer Pricing grounds:

  • 1. the AO / TPO / DRP have erred in making an addition of Rs. 60,786,750 to the total income of the appellant on account of various transfer pricing issues.
  • 2. the learned AO / TPO / DRP have erred by not accepting the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("the Rules").
  • 3. the learned AO / TPO / DRP have erred in making an adjustment under Section 92CA (3) of the Income Tax Act, 1961 {"Act") without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of Section 92C (3) of the Act.
  • 4. The learned TPO / AO / DRP have erred in:
  • a. Not accepting the use of multiple year data, as adopted by the appellant in its Transfer Pricing (TP) documentation; and
  • b. Determining the arm's length margins / prices using data pertaining only to financial Year ('FY') 2009-10 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements.
  • 5. the learned AO / TPO/ DRP have erred by rejecting certain functionally comparable companies identified by the appellant, by applying the following filters:
  • a. rejecting companies having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months)
  • b. rejecting companies with diminishing revenue
  • c. rejecting companies with turnover lower than Rs. 5 crore
  • d. rejecting companies with turnover from IT enabled services lower than 75 percent of total turnover e. rejecting companies with export turnover lower than 75 percent of total turnover
  • 6. the learned AO / TPO / DRP have erred in selecting certain companies which are earning super normal profits as comparable to the Appellant.
  • 7. the learned AO / TPO / DRP have cherry picked comparables with the sole objective of rejecting comparables selected by the appellant and arriving at functionally incomparable companies showing skewed results.
  • 8. the learned TPO/ AO/ DRP have erred in not considering gains/ losses arising out of foreign exchange fluctuations while computing the operating margins of the comparable companies as well as the appellant.
  • 9. the learned AO / TPO / DRP have erred by not making suitable adjustments to account for differences in the risk profile and working capital of the appellant vis-a-vis the comparable companies.
  • 10. the learned AO / TPO / DRP have erred by considering outstanding receivables as a separate international transaction and benchmarking the same using CUP as the Most Appropriate Method.
  • 11. the learned AO / TPO / DRP have erred by considering outstanding receivables as a loan extended by the appellant to its associated enterprise and imputing interest on the same, thereby making an adjustment of Rs. 28,118,006 to the returned income of the. Appellant
  • 12. the CUP analysis undertaken by the TPO and upheld by DRP is flawed and does not represent an uncontrolled transaction.
  • 13. the learned AO / TPO / DRP have grossly erred in miscalculating the total amount of adjustment to be Rs. 60,786,750 instead of Rs. 44,453,875, and ignoring the rectification application submitted by the appellant.
  • Corporate Tax grounds:
  • 14. the learned AO / DRP have erred by disallowing an amount of INR 16,639,234 under Section 10AA of the Act on the basis that the export proceeds have not been realized within a period of six months from the end of the previous year 2009- 10.
  • 15. the learned AO / DRP have erred by failing to consider that provisions of section 10AA(8) of the Act do not intend to import provisions of section 10A(3) of the Act (which provides for realization of export proceeds within a period of six month or within such further period as the competent authority may allow in this behalf)
  • 16. the learned AO / DRP have erred by failing to appreciate that, it is well settled rule for interpretation of law that express provisions as envisaged under the legislation cannot be overruled by the forms. Income tax forms merely act as mode of fulfilling the obligations required to be discharged under the legislation and therefore, legislation shall always have the binding effect over the Forms.
  • 17. the learned AO / DRP have erred by failing to appreciate Master Circular dated July 1, 2009 (applicable for the AY 2010-11) issued by the Reserve Bank of India ('RBI') expressly provides that there is no time limit for realization of the export proceeds in case of SEZ units
  • 18. without prejudice, even if section 10AA of the Act is to be read with section 10A(3) of the Act, the learned AO / DRP have erred, in law and on facts and circumstances of the case, by failing to consider the relaxation provided under Section 10A(3) of the Act with respect to realization of export proceeds
  • 19. the learned AO / DRP have erred by failing to consider the legislative intent that even provision under section 115(11 A) of the Act do not intend to put any restriction on the deduction under section 10AA of the Act where the foreign exchange is not received within the stipulated time period.
  • 20. Without prejudice to the above where time limit of six months is alleged to be incorporated into the provision of section 10AA of the Act, the learned AO/ DRP has failed to appreciate under the law and on the facts and circumstances of the case, by failing to consider that in light of section 155(11A), deduction under section 10AA should be granted to assessee for the AY 2010-11, since the export proceeds that have ^ been disallowed by the learned AO have indeed been realized by subsequently by the assesse.
  • 21. the learned AO / DRP have erred by failing to uphold the principle of Casus Omissus as laid by Hon'ble Supreme Court in Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC) and Tarulata Shyam (Smt) v. Commissioner of Income-tax(108 ITR 345) (SC)
  • 22. without prejudice, the learned AO / DRP have erred by failing to consider that where exemption of Section 10AA of the Act is denied during AY 2010-11, the assessee will not be able to claim the said exemption during any succeeding AY in absence of any such express provision under the Act resulting in gross injustice to the assessee
  • 23. the learned AO has grossly erred in initiating penalty proceedings under section 271(1) (c) of the Act.
  • 24. the learned AO has erred in levying interest under sections 234B and 234D of the Act while completely disregarding the provisions of the Act and the judicial precedence."
  • 5. Though the assessee has raised 24 grounds in this appeal divided into first 13 grounds on Transfer Pricing issues and next 11 grounds (from Ground no. 14 to 24) on corporate tax issues. On the transfer pricing issues the assessee submitted chart and according to that chart assessee has objected to inclusion of comparables by ld TPO of

  • i. Accentia Technologies Ltd,
  • ii. Igate Global Solutions Ltd and
  • iii. Infosys BPO Ltd
  • 6. Further assessee is pressing for inclusion of R Systems Ltd and it has also objected to computation of interest on receivables.

    7. During the course of hearing the ld Authorised Representative did not press against the inclusion of IGATE Global Solutions Ltd and Infosys BPO Ltd by ld TPO and therefore only comparable contested is Accentia Technologies Ltd.

    8. For this ld AR vehemently submitted that there is an extra ordinary event of amalgamation, functional dissimilarity, and non availability of segmental information and therefore this comparable company should be rejected.

    9. The ld DR submitted that amalgamation does not have any impact on the business performance of the company and further it is functionally comparable, so it cannot be excluded. He further relied on the order of the ld DRP as well as the ld Transfer Pricing Officer where they have given reasons for inclusion of this comparable.

    10. To decide on the inclusion or exclusion of any comparable for comparability analysis, prime requirement is to compare the functions performed by assessee with the functions of the comparable selected. Therefore, firstly, we refer to the functional profile of the assessee company. According to the transfer pricing study report the FAR analysis of the assessee is as under: —

    4.02.2. Functions performed

    The purpose of this section is to identify economically important activities performed by each of the related parties and to explain the significance that each function has in creating value for the business. This section provides a broad overview of the various functions performed by BT e-Serv and BT Pic in relation to the identified international transaction. Based on our discussions with BT e-Serv, summarised below are the functions performed by BT e-Serv and BT Pic in relation to the services provided by BT e-Serv to BT Pic.

    Management functions

    • Strategic management functions

    Strategic management functions such as corporate strategy, treasury etc., involves decision making on business strategy, selecting lines of business, choosing organisation structure, operating procedures, analysing and undertaking acquisitions and disinvestments, responding to competitors and to market forces.

    BT Pic determines the overall strategy for the group. BT e-Serv is responsible for only day to day management activities.

    • Marketing and business development

    Marketing strategy functions are those activities that determine the positioning of a firm's product in a market and that establish marketing techniques that bring the products to the customers' attention.

    BT e-Serv does not undertake any marketing or business development functions. It only renders services to its group companies as per specifications provided by them. Further, services of BT e- Serv are not required to be sold to end customers. Hence, BT e-Serv is an in-house service provider and the services are purely in the nature of routine back office work.

    • Provision of services

    The provision of the above mentioned services comprises of the following activities:

    • Conceptualisation of services

    Conceptualisation of services is the process by which a firm decides what product characteristics are needed to meet the market demands, the types of services that will be developed to satisfy these demands and the selection of inputs and processes that will create these services.

    BT Pic is responsible for conceptualisation of services to be rendered by BT e-Serv.

    • Execution of services

    Pursuant to the assignment of agreed services, BT e-Serv is responsible for rendering such services according to pre-determined terms and conditions.

    • Performance/Quality assurance

    Quality control activities involve establishing and enforcing minimum standards to ensure that inferior goods/services are not sold to consumers. This process involves testing and analysing the finished product/service. Quality control can be pursued by employing a combination of automated guality control eguipment and qualified inspectors.

    With respect to the services rendered, BT e-Serv is responsible for ensuring that the requisite quality/ performance standards prescribed by BT Pic are met while rendering services. In the event of a quality failure, BT e-Serv may be asked to rework the same. However, the STPP mechanism ensures that BT e-Serv earns an arm's length return.

    • Human resources

    BT e-Serv undertakes the recruitment, hiring and training process and is responsible for day-to-day supervision and control of its employees.

    The functions performed by BT e-Serv and BT Pic with respect to the provision of IT- enabled services by BT e-Serv are summarised in the table below.

      BT e-Serv BT Pic
      Management functions
      Strategic management functions No Yes
      Marketing and business development No No
      Provision of services
      Conceptualization of services No Yes
      Execution of services Yes No
      Performance/ Quality assurance Yes Yes
      Human resources Yes No

    4.02.2. Risk analysis

    Briefly summarised below are some of the key risks, faced by BT e-Serv and BT Pic in relation to the IT-enabled services rendered by BT e-Serv.

    • Business risk

    Business risk arises when a firm is subject to adverse sales conditions due to either increased competition in the marketplace, adverse demand conditions within the market, the inability to develop markets or position products to service targeted customers or product technology obsolescence.

    BT e-Serv is routine service provider. The STPP is designed to insulate BT e-Serv from any business risk. The services rendered by BT e-Serv are intended for in-house consumption by the Group.

    This risk relates to the possibility of non-recovery of fixed costs being incurred. This may happen due to circumstances such as, lack of production, to lack of demand, inability to recover prices, etc.

    BT e-Serv is responsible for optimally utilising its resources. However as per the STPP, in case of any under utilisation of resources the costs associated with that are borne by the AEs.

    • Service liability risk

    Service liability risk is borne by a company when its service offerings fail to perform at accepted or advertised standards and the company is reguired to compensate the customer or undertake defect resolution at its own cost.

    Since, AEs use the services of BT e-Serv for their internal purposes; there is no contractual liability of these entities with the end customer for the services rendered. BT e-Serv renders services only to its AEs which do not hold BT e-Serv liable for any failure in services provided. Consequently, BT e-Serv does not bear any service liability risk.

    • Credit and collection risk

    When an entity supplies products or services to a customer in advance of customer payment, the firm runs the risk that the customer will fail to make payment. BT e-Serv provides service for in-house consumption and invoices its AEs. It bears no credit and collection risk since it receives charges from its AEs.

    • Foreign exchange risk

    Foreign exchange risk occurs when purchases of materials, resources, or services are denominated in one currency while sales of finished product are denominated in another currency. It relates to the potential variability of profits that can arise because of changes in foreign exchange rates.

    BT e-Serv invoices BT Pic for its services in Indian Rupee, which is same as its functional currency. Accordingly, BT e-Serv does not bear any the foreign exchange risk.

    Briefly tabulated below are the risks, which are faced by BT e-Serv and BT Pic in relation to the IT- enabled services, provided by BT e-Serv:

    Type of risks BT e-Serv BT Pic
    Business / market risk No Yes
    Capacity utilisation risk No Yes
    Service liability risk No No
    Credit and collection risk No No
    Foreign exchange risk No Yes

    11. Above functional profile of the company is not disputed by the ld TPO as well as ld DRP. Before us, the ld DR has also not disputed the same. Therefore, for comparability analysis the above functional profile of the assessee company has become final and the comparable selected by the assessee as well as by the ld TPO are required to be tested on that parameter only.

    12. We have carefully considered the rival contentions and perused the annual accounts of the Accentia Technologies Limited submitted at page No. 1 to 108 of the paper book. As per page no 42 of the annual report the nature of services performed by this company are functions of medical transcription. 'Medical transcription' services are IT enabled services that require specialized skills in utilizing information technology in converting the voice data of the doctors who are located anywhere across the globe, consisting of patient history and medical advices into electronic documents. Such confidential information is converted in to a written text document by medical transcription. This written text may be printed and hand placed in the patient's record, archived and/or retained only as an electronic medical record. The medical transcription can be performed in a hospital via remote transmission to the hospital or directly to the actual providers of services i.e. doctors etc. Medical transcription is still the primary mechanism for physician to clearly communicate with other health care providers accessing the patient's records to advise them on the state of the patient's health and past, current treatment and assure continuity of care. Further it is mentioned that a medical transcriptionist must be aware of the latest drugs introduced in the concerned market. This can be done with the pharmacology reference books which should always be part of its library. It is further mentioned that because of the diverse nature of the activities concerned the medical transcription profession is considered a skilled work which can be done only after undergoing 6 to 8 months of rigorous training. The next service that is being provided by this company is medical coding. The above company has already developed a sizeable number of certified coders deployed in outsourced medical coding work. It is further mentioned that as the margin from medical coding is on a higher side compared to medical transcription, medical coding is also known as insurance coding because it is assigning codes to diagnose and procedures which help in financial reimbursement from insurance companies and other government organizations, consulting firm, software companies etc. The next service area of the above company is medical billing which is a medical practice management and the doctor's key to getting paid and it maintains patient's financial accounts for collecting money. On looking at the income stream of the assessee on perusal of the profit and loss accounts, it is apparent that its earnings are from medical transcription, billing and collection and coding. On looking at the functional profile of medical transcription which is required to be carried out by well-trained persons who must be knowledgeable in the field of pharmacology. Further the comparable company has considered all the 3 segments as one segment. On perusal of page No. 78 of the annual report of the company it is noted that w.e.f 1st April 2008 the company which is engaged in the similar line of business has been amalgamated with this company. However, we do not find any reason to exclude this company for the reasons of amalgamation because the functions performed by the amalgamated company and amalgamating company are similar. But on comparison of the functional profile of the comparable with assessee company, which provides corporate services, marketing and business development services etc which are of routine administrative nature, we find that functions of the assessee company are not at all comparable with the medical transcription function of the comparable company. But same cannot be said with respect to the medical coding and medical billing activities of the comparable company which are almost similar to the support functions performed by the assessee. However, in absence of segmental information available in case of comparable company with respect to the medical transcription business and medical coding and medical billing, it deserves to be rejected. It is apparent that financial results of the comparable company include profits of medical transcription business as well as medical coding and billing activities. As the functions of the medical transcription are not at all comparable with the functions performed by the company as already stated by us above, the above comparable company is required to be excluded on account of functional dissimilarity and non availability of segmental results, with the assessee. In view of this, we direct the Ld. Transfer pricing officer to exclude the Accentia technologies from the comparability analysis.

    13. Another comparable M/s. R Systems was included by the assessee in its transfer pricing study; however, the ld TPO rejected the same stating that it has a different financial year compared to the appellant. The ld DRP upheld the action of the ld TPO. Before us the ld AR submitted that different year end is not an appropriate filter, anyway, he submitted that audited results of R System for the comparable period are available. Ld DR did not state that this company is functionally not comparable with the functions of the assessee but stated that only reason for its exclusion is unavailability of the audited accounts.

    14. We have carefully considered the rival contentions. Undisputedly the R Systems Ltd is having different financial year. However, this company is listed company and quarter to quarter its financial results are available in public domain. Such financial results are also produced by the ld AR before us. In view of this we are of the opinion that once a comparable is found functionally similar and further authentic and reliable financial data are available relevant to the accounting period of the appellant then merely the comparable has different financial year, it cannot be excluded. In view of this we direct the assessee to produce this information and demonstrate before ld TPO that relevant, authentic and reliable information with respect to the comparable is available in public domain and the ld Transfer Pricing Officer to verify the same, if found appropriate, to include the above comparable.

    15. With respect to the risk adjustment as well as the working capital adjustment to the operating margin of the appellant as well as the comparable companies the ld Authorised Representative vehemently argued that same may be granted to the assessee. The ld Transfer Pricing Officer has rejected both the above adjustment as para No. 15 and 16 of his transfer pricing order for the reason that assessee could not demonstrate that there is difference in the level of working capital employed by the assessee company vis-a-vis comparable.

    16. With respect to the risk adjustment the ld Assessing Officer rejected the contention of the assessee that appellant is a risk mitigating entity as it has a single customer risk.

    17. Before us ld DR vehemently relied upon those paragraphs of the order of the ld TPO and submitted that in absence of proper relevant details these adjustments cannot be given to the assessee.

    18. We have carefully considered the rival contentions and specifically sought the details of such workings from the assessee. We also asked ld AR that whether working of such adjustment claim was given to the Assessing Officer or not. We have also sought copies of such claim for the workings of adjustment. However, no such working was also given to us. In view of this we reject the request for adjustment of margins of the comparable on account of working capital and risk.

    19. The grounds No. 10 to 13 are with respect to adjustment made by the ld Transfer Pricing Officer against the adjustment made by the ld TPO on account of interest on receivables. It was found during the course of transfer pricing audit that certain invoices raised by the assessee were outstanding as on 31.03.2009 and realized in FY 2009-10 and further certain invoices raised during the year were outstanding for more than 30 days. Therefore, ld TPO computed interest @ 14.88% on such amount considering the outstanding receivable beyond stipulated period as a separate „international transaction? and computed interest of Rs. 31577050/-. The ld Dispute Resolution Panel also confirmed the above adjustment.

    20. The ld Authorised Representative submitted before us that there is no time limit prescribed by the RBI with respect to the realization of export proceeds of units in SEZ. He referred to the Master Circular on export of goods and services issued by the Reserve Bank of India and referred to the condition of the export proceeds repatriation pertaining to SEZ units. He further relied upon the decision of the Hon'ble Delhi High Court in case of CIT v. Bechtel India Pvt. Ltd dated 21.07.2016 and of Pr. CIT v. Ameriprice India (P.) Ltd. in [ITA NO. 461/2016, dated 19.10.2016]. He therefore submitted that such delay in receiving outstanding receivable is not an 'international transactions', hence, it cannot be benchmarked separately, further there is no interest cost which can be imputed.

    21. The ld DR vehemently contested that outstanding sum of invoices is akin to loan advanced by the assessee to its foreign AE., hence it is an international transaction as per explanation to section 92 B of the act. He therefore, submitted that TP adjustment on that account is required to be made in view of the decision of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT [I.T. Appeal No. 1548 and 1549 (Kol.) of 2009, dated 15-7-2016]. He further submitted that Master Circular of the RBI does not determine whether there is an international transaction or not. He submitted that ld Transfer Pricing Officer as well as the ld DRP has given detail reasons for the same. With respect to the decision of the Hon'ble High Courts he referred that in case of Ameriprice there was a specific clause in the agreement of credit period up to 60 days and in case of Bechtel there is a agreed period of 60 days whereas in the case of the assessee there is no such period stated by the assessee. He therefore, submitted that in such event the assessee has kept the outstanding amounts for more than 300 days under many cases. He vehemently referred to page No. 111 of the order of the ld. Transfer Pricing Officer. He further submitted that whether the assessee is a debt free company or debt laden company, is not at all a criterion for imputing interest on outstanding.

    22. We have carefully considered the rival contentions. The service agreement dated 01st August 2009 is placed at page No. 294 to 311 of paper book. The service fees are governed by clause 4 of the agreement. According to clause No. 4.9 subsequent to confirmation of the invoices it is provided that the paying party will pay the invoice amount to the invoicing party in accordance with the BT group policy for the settlement of intra-group transaction. Schedule 1 of that agreement is with respect to the services, Schedule -2 is with respect to BTGS transfer pricing policy. According to para No. 3.4 of that policy the service fee for the provision and receipt of services are calculated in the order that BT, BT Ltd and OPCO receive an arm's length return for the services provided and received. Therefore, according to that policy it is evident that the policy of the group is to charge the services at arm's length. In this background it needs to be examined that whether a third party in a given circumstances would allow it's outstanding to drift to such an extent. The apparent answer to this query would be emphatic 'No'. Further on reading the transfer pricing study report prepared by the assessee, in the credit and collection risk it has been mentioned that when an entity supplies products or services to a customer in advance of customer payment, the firm runs the risk that the customer will fail to make payment. BT e-serv provides service for in house consumption and invoices its AEs. It bears no credit and collection risk since it received charges from its AEs. Therefore it is evident that assessee has not stated credit and collection risk in its TP report. Looking at the period of outstanding invoices it is apparent that it is the not the case of mere sale but it is a case of sales as well as loan to its AE in the form of overdue outstanding receivables. The argument that assessee is an interest free entity and does not pay any interest and therefore no interest shall be imputed in the outstanding invoices is also devoid of merit because it is not a case of allowance of interest expenditure in the hands of the assessee but an 'international transaction' to be benchmarked at arm's length. It is a case of determination of arm's length price of a transaction. Undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an 'international transaction'. The natural corollary would be of imputing interest on such 'capital financing', if same is not charged at arm's length. Therefore, we reject the contention of the assessee that outstanding receivable is not an 'international transaction' and therefore, hence, according to us, interest on it requires to be imputed. Now the next question arises is that if outstanding receivables are within the terms of agreement of rendering of services than it may be argued that interest on such outstanding is already covered in the sale price of the goods. Naturally such is not the case of the assessee before us as some of the outstanding are for more than 300 days. Decision relied upon by the ld AR in the case of Ameriprice and Bechtel are distinguishable on the facts as they had credit period as per agreement but in case of assessee it is not so. The arguments that master circular of RBI does not prescribe any conditions for repatriation of exports proceeds for SEZ, it cannot be said that for determining ALP of export receivable, which becomes capital financing, if outstanding is beyond agreed or reasonable time limit, does not have any impact on the benchmarking of the same, as the purposes of RBI policy and Income Tax Act are on different footings. However, even if the agreement does not specify the term of the payment even then assessee must be given benefit of credit period which is accepted business practice in the trade. Before the ld Transfer Pricing Officer as well as before the ld DRP the assessee could not establish what is the accepted business practice in its trade about the credit period and what the group policy is in this regard. Therefore, there cannot be any grievance where the ld Transfer Pricing Officer has considered as 30 days credit period. Even before us this credit period was not challenged. In view of this we do not find any infirmity in the order of the ld Transfer Pricing Officer of considering 30 days as normal credit period. The subsequent question arises about the benchmarking analysis and computing the arm's length price. In the present case the ld Assessing Officer has computed interest @14.88% applying the CUP method using external CUP. Before us as well as before the ld DRP the assessee could not demonstrate how the method employed by the ld Transfer Pricing Officer using external CUP is erroneous. In view of this we do not have any hesitation in confirming the Transfer Pricing adjustment made by the ld. Transfer Pricing Officer on outstanding receivable beyond 30 days credit period applying the interest rate of 14.88% p.a. and computing the interest receivable at Rs. 31577050/-. In the result, grounds Nos. 10 to 12 of the grounds of the appeal are dismissed.

    23. Ground No. 13 of the appeal of the assessee is with respect to miscalculation of the total amount of adjustment of Rs. 60786750/-instead of Rs. 44453875/-. It was submitted that the assessee has filed rectification application; however, same has not been attended to. We direct the ld Assessing Officer to consider the rectification application of the assessee and if the rectification request is found in accordance with the provision of section 154 of the Act, same may be rectified within 30 days of the receipt of this order, after granting the assessee appropriate opportunity of hearing. In view of this ground No. 13 of the appeal of the assessee is allowed with above direction.

    24. Ground Nos. 14 to 22 are with respect to disallowance of deduction of Rs. 16639234/- u/s 10AA of the Act on the basis that export proceeds have not been realized within a period of six months from the end of the previous year. Ld Assessing Officer was of the view that as the assessee is a unit established under SEZ, therefore, if the proceeds have not been received in convertible exchange on or before 30th September 2010 then, the deduction u/s 10AA cannot be granted. Assessee submitted that there is no specific provision u/s 10AA requiring the realization of export proceeds within a prescribed time limit. Further, assessee relied on the master circular on export of goods and services issued by the RBI under FEMA. The ld Assessing Officer rejected the contention of the assessee for the reason that according to section 10AA(8) which makes applicable sub-section 5 and 6 of section 10A to this section i.e. 10 AA of the act, and according to form No. 56F, the realization of export proceeds is required to be shown. In that form assessee has shown that full consideration in convertible foreign exchange for exports made by the undertaking was brought into in India within a period of 6 months from the end of the previous year. The auditor has also certified the above fact as correct. Therefore, the ld Assessing Officer considered the export turnover at Rs. 190912493/- instead of Rs. 265997897/- and computed the deduction at Rs. 42306994/. The ld DRP on objection by the assessee confirmed the action of ld Assessing Officer. Therefore, assessee is in appeal before us.

    25. The ld AR reiterated the same argument as advanced before the lower authorities and ld DR vehemently relied upon the orders of lower authorities.

    26. We have carefully considered the rival contentions. According to section 10 AA of the act the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the undertaking. Explanation 1(i) For the purposes of this section, defines "export turnover", it means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India. Explanation 1 (ii) defines export as "export in relation to the Special Economic Zones" taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise. Therefore primarily there should be export and consideration for export should be brought in to India. The Ld. assessing officer as well as the Ld. DRP has disallowed the claim of the assessee on the sum of Rs. 75085404/. The above sum comprises of a sum of Rs. 480000000/-being foreign currency received of the export amount received by the assessee on 04/02/2011 and 24/2/2011. A sum of Rs. 27085404/- is unbilled revenue of the assessee. The unbilled revenue is like work in progress in case of ITES industries. The explanation 1 (ii) defines export means taking goods or providing services out of India from SEZ by land, sea, or by any other mode whether physical or otherwise. Regarding the unbilled revenue the assessee has not exported the goods and therefore such sum do not fall in the definition of export and therefore it cannot fall into the definition of export turnover. Hence, according to us the deduction under section 10 AA of the income tax act cannot be allowed on this sum as it does not qualify the definition of export and export turnover. Even otherwise assessee has not given any details of receipt of foreign exchange and therefore the consideration in respect of that is either received in or brought into India by the assessee. Hence, we confirm the finding of the lower authorities regarding disallowance of deduction under section 10 AA of the income tax act on this sum. With respect to the other sum of Rs. 4.80 crores The assessee has given foreign inward remittance certificates and such sum has also been received in India on 04/02/2011 and 24/2/2011. The provisions of section 10 AA does not provide any time- limit of bringing such consideration into India like section 10 A (3) which provides for receipt of consideration or sale proceeds in India in convertible foreign exchange within a period of 6 months from the end of the previous year, or within such further period as the competent authority may allow in this behalf. Further the contention of the revenue that provision of section (5) and (6) of section 10A shall apply by virtue of the provision of section 10AA (8) of the act. The provision of section 10A (5) speaks about the audit of the accounts and submission of report of an accountant in specified Performa. In this case same has been complied with by the assessee. Further section 10A (6) speaks about the restrictions of other deduction during the holiday period, which is not the dispute in this case. In view of this it is apparent that there is no time-limit prescribed for bringing the consideration of export into India. Admittedly, the consideration has been received in India, albeit Subsequent to filing of the return by the assessee. However, merely because the consideration has been received after 6 months from the close of the financial year the deduction cannot be denied to the assessee on the sum. In view of this we direct the Ld. assessing officer to consider a sum of Rs. 4.80 crores as export turnover of the assessee and accordingly grant deduction to the assessee under section 10 AA of the income tax act. Accordingly, Ground No. 14 to 22 of the appeal of the assessee are partly allowed.

    27. Ground No. 23 of the appeal of the assessee is against initiation of penalty proceedings under section 271 (1) ( c) of the income tax act. No specific arguments were advanced against this action of the Ld. assessing officer and as such this ground is premature, hence dismissed.

    28. Ground No. 24 of the appeal of the assessee is against levy of interest under section 234B and 234D of the income tax act. No specific arguments were advanced before us on these grounds. As charging of interest under section 234B and 234D of the income tax act are consequential in nature, this ground of appeal is dismissed.

    29. In the result ITA No. 565/del/2015 for assessment year 2010 - 2011 filed by the assessee is partly allowed.

    ITA No. 99/Del/2016

    AY 2011-12

    30. This appeal is filed by the assessee arising out of the order of Income Tax Officer, Ward-5(2), New Delhi dated 27.11.2015 u/s 143(3) read with section 144C(3) of the Income Tax Act, 1961, wherein against the return income of the assessee filed on 23.04.2012 addition on account of disallowance of deduction on account of u/s 10AA of Rs. 29086105/- and addition on account of arms length price u/s 92CA(3) of Rs. 76391345/- was made as per the order of the ld Transfer Pricing Officer dated 07.01.2015 which was subjected to direction before the ld Dispute Resolution Panel-1, New Delhi passing a direction u/s 144C(5) of the Act on 05.10.2015, consequently, the assessed income was determined at Rs. 105503756/-.

    31. The assessee is a company engaged in the business of providing ITES registered under SEZ. The assessee has claimed deduction u/s 10AA of the Act of Rs. 117451538/- filing audit report in Form 56F. on examination ld Assessing Officer found that assessee has issued invoice on 31.03.2011 for Rs. 104980126/- and out of which only Rs. 3092732/- was received within 6 months. Therefore, the applying the provisions of section 10A(3) of the Act the disallowance of Rs. 101887394/- was made.

    32. On the transfer pricing issue the assessee has entered into international transaction of provision of IT enabled services of Rs. 411427780/- which was benchmarked by the assessee applying transaction net margin method (TNMM) adopted PLI of OP/OC selected 14 comparable company having arithmetic mean of PLI of 18.09% compared with the PLI of the assessee of 23.42% claiming that international transaction entered into by it are arms length.

    33. The ld TPO rejected the TP study of the assessee rejected 11 comparables retaining only 3 and further added five comparables and thereby populating the 8 comparables as per para No. 10.5 at page NO. 79 of this order computed the average PLI of the comparables at 29.53%. Further, the working capital adjustment as well as the risk adjustment was denied and thereafter computed the AMP of Rs. 454714639/- of the total transaction of Rs. 411427780/- and proposed an adjustment of Rs. 43286859/-. Further, on accounts of the receivables remaining outstanding, he computed the ALP of outstanding receivable exceeding 30 days applying interest rate of 11.69% and computed the interest of Rs. 35368064/-. The above adjustment was incorporated in the draft assessment order passed by the Assessing Officer on 16.03.2015 and objections were filed before the ld DRP wherein exclusion and inclusion of comparable by the ld TPO was upheld. The ld TPO was directed to consider the corrected margin of the comparable. The second addition of interest on receivable was also upheld by rejecting the objection of the assessee. On the quantum of deduction u/s 10AA the action of TPO was upheld. Therefore, assessee is in appeal before us as per following grounds of appeal in ITA No. 99/Del/2016 for AY 2011-12:—

    On the facts and circumstances of the case and in law, the learned Assessing Officer ("AO") has erred in passing the assessment order under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act') after considering the adjustments proposed by the learned Transfer Pricing Officer ('TPO') in his order passed under section 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel {'DRP').

    Each of the ground is referred to separately, which may kindly be considered independent of each other and without prejudice to each other.

    That on the facts and circumstances of the case and in law, Transfer Pricing grounds:

  • 1. The transfer pricing adjustment of INR 76,391,345 made by the learned AO based on the order of learned TPO and confirmed by the learned DRP is bad in law inter-alia for the reason that:
  • ( a) the order of the learned TPO is bad in law in as much as based on an invalid reference made by the Ld. TPO without complying with the statutory requirements;
  • ( b) the Appellant's income being eligible for deduction under section 10AA of the Act, there was no question of any erosion of the Indian tax base; and
  • ( c) the Appellant's AE being chargeable to tax at a higher rate in the UK, there was no question of shifting of any profit from a low tax paying country to a high tax paying country
  • 2. the learned AO / TPO / DRP have erred by not accepting the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("the Rules").
  • 3. the learned AO / TPO / DRP have erred in making an adjustment under Section 92CA(3) of the Income Tax Act, 1961 ("Act") without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of Section 92C(3) of the Act.
  • 4. The learned TPO / AO / DRP have erred in:
  • a. Not accepting the use of multiple year data, as adopted by the appellant in its Transfer Pricing (TP1) documentation; and
  • b. Determining the arm's length margins / prices using data pertaining only to financial Year ('FY') 2010-11 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements.
  • ANNEXURE B
  • 5. the learned AO / TPO/ DRP have erred by rejecting certain functionally comparable companies identified by the appellant, by applying the following filters:
  • a. rejecting companies having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months)
  • b. rejecting companies with diminishing revenue
  • c. rejecting companies with turnover lower than Rs. 5 crore
  • d. rejecting companies with export turnover lower than 75 percent of total turnover
  • 6. the learned AO / TPO / DRP have erred in selecting certain companies which are earning super normal profits as comparable to the Appellant.
  • 7. the learned AO / TPO / DRP have cherry picked comparables with the sole objective of rejecting comparables selected by the appellant and arriving at functionally incomparable companies showing skewed results.
  • 8. the learned TPO/ AO/ DRP have erred in not considering gains/ losses arising out of foreign exchange fluctuations while computing the operating margins of the comparable companies as well as the appellant.
  • 9. the learned AO / TPO / DRP have erred by not making suitable adjustments to account for differences in the risk profile and working capital of the appellant vis-a-vis the comparable companies.
  • 10. the learned AO / TPO / DRP have erred by considering outstanding receivables as a separate international transaction and benchmarking the same using CUP as the Most Appropriate Method.
  • 11. the learned AO / TPO / DRP have erred by considering outstanding receivables as a loan extended by the appellant to its associated enterprise and imputing interest on the same, thereby making an adjustment of Rs. 22,216,096 to the returned income of the appellant
  • 12. the CUP analysis undertaken by the TPO and upheld by DRP is flawed and does not represent an uncontrolled transaction.
  • Corporate Tax grounds:
  • 13. the learned AO / DRP have erred by disallowing an amount of INR 29,086,105 under Section 10AA of the Act on the basis that the export proceeds have not been realized within a period of six months from the end of the previous year 2011-12.
  • 14. the learned AO / DRP have erred by failing to consider that provisions of section 10AA(8) of the Act do not intend to import provisions of section 10A(3) of the Act (which provides for realization of export proceeds within a period of six months or within such further period as the competent authority may allow in this behalf)
  • 15. the learned AO / DRP have erred by failing to appreciate that, it is well settled rule for interpretation of law that express provisions as envisaged under the legislation cannot be overruled by the forms. Income tax forms merely act as a mode of fulfilling the obligations required to be discharged under the legislation and therefore, legislation shall always have the binding effect over the Forms.
  • 16. the learned AO / DRP have erred by failing to appreciate Master Circular dated July 1, 2009 (applicable for the AY 2011-12) issued by the Reserve Bank of India {'RBI'} which expressly provides that there is no time limit for realization of the export proceeds in : case of SEZ units.
  • 17. without prejudice, even if section 10AA of the Act is to be read with section 10A(3) of the Act, the learned AO / DRP have erred, in law and on facts and circumstances of the case, by failing to consider the relaxation provided under Section 10A(3) of the Act with respect to realization of export proceeds
  • 18. the learned AO / DRP have erred by failing to consider the legislative intent that even provisions under section 155(11 A) of the Act do not intend to put any restriction on the deduction under section 10AA of the Act where the foreign exchange is not received within the stipulated time period.
  • 19. Without prejudice to the above, where time limit of six months is alleged to be incorporated into the provisions of section 10AA of the Act, the learned AO/ DRP has failed to appreciate under the law and on the facts and circumstances of the case, by failing to consider that in light of section 155(11A), deduction under section 10AA should be granted to the assessee for the AY 2011-12, since the export proceeds that have been disallowed by the learned AO have indeed been subsequently realized by the assesse.
  • 20. the learned AO / DRP have erred by failing to uphold the principle of Casus Omissus as laid down by the Hon'ble Supreme Court in Padmasundara Rao v. State of Tamil Nadu (255 ITR 147) (SC) and Tarulata Shyam (Smt) v. Commissioner of Income-tax shi (108 ITR 345) (SC)
  • 21. without prejudice, the learned AO / DRP have erred by failing to consider that where exemption of Section 10AA of the Act is denied during AY 2011-12, the assessee will not be able to claim the said exemption during any succeeding AY in absence of any such express provision under the Act resulting in gross injustice to the assessee
  • 22. the learned AO has grossly erred in initiating penalty proceedings under section 271(1)(c)of the Act."
  • 23. the learned AO has erred in levying interest under sections 234B and 234D of the Act while completely disregarding the provisions of the Act and the judicial precedence.
  • The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.
  • The appellant prays for appropriate relief based on the said grounds of appeal and the facts, and circumstances of the case.
  • 34. Briefly stated in this case the assessee has submitted a chart. According to that on the transfer pricing issues with respect to comparability analysis, assessee is contesting for exclusion of e-Clerx Services Ltd and TCS e-Serve Ltd. it is also contesting for inclusion of R Systems International Ltd which was excluded by ld TPO. Therefore, first we consider the issue of comparable in the appeal.

    35. E-Clerx Services ltd having a margin of 56.82% has been included by the ld Transfer Pricing Officer stating that it is functionally comparable as its functions are similar to the functions of the assessee under the ITES segment. It is further held by him that this comparable does not own any significant intangibles. The assessee contested this comparable before the ld DRP who upheld the action of the ld TPO.

    36. Before us, the assessee has contested that the above company is functionally not comparable as it is rendering different set of services such as data analytics, computer added simulations. It was further submitted that it is considered as a knowledge process outsourcing service provider as per Hon'ble Delhi High Court in Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573 . It was further submitted that it has exceptionally high margin and high turnover and further segmental data is also not available. In the end the ld AR relied upon the decision of Sony India P. Ltd. v. Commissioner Of Income-Tax [2015] 62 taxmann.com 237 (Delhi - Trib.) .

    37. The ld DR defended the order of the ld TPO as well as the ld DRP.

    38. We have carefully considered the rival contentions and also perused the orders of the lower authorities with respect to this comparable. With respect to this comparable coordinate bench in ITA No. 2010/del/2014 for assessment year 2009 - 10 in case of Ameriprise India private limited (who is also an ITES company) was excluded this comparable holding as under.:—

    "14.2 After considering the rival submission and perusing the relevant material on record, we find that it is a knowledge process outsourcing (KPO) company providing data analytics and data process solutions to global clients. This company provides end to end support through trade life cycle including trade confirmation and settlements etc. it also provides sales and marketing support services to leading global manufacturing, retail, travel and leisure companies through its pricing and profitability services. From the above narration of the nature of business carried on by e-Clerx Services Ltd, it is manifest that the same being a KPO company is quite different from the assessee, providing only IT enabled services to it AE. Apart from that, it is further observed that this company has significant intangible which it uses in rendering KPO services, against which the assessee does not have any intangibles. As such, e-Clerx Services ltd. cannot be considered as comparable. The same is directed to be eliminated."

    39. We also find that assessee is also engaged in this appeal in ITES industry and therefore the judgment of the coordinate bench cited by the Ld. authorized representative appropriately applies to the facts of this case also. In the above decision, it has been held that the e-Clerx services Ltd is a knowledge process outsourcing company providing data analytics and data process solutions to global clients. It is further held that it is a KPO company and is quite different from the assessee providing only IT enabled services. Therefore, respectfully following the decision of the coordinate bench we direct the Ld. transfer pricing officer/assessing officer to exclude the above comparable from the comparability analysis.

    40. Now we come to the next comparable contested by the assessee by the name of TCS e-serve Ltd., The Ld. authorised representative submitted that above comparable has a margin of 69.06 percentage and same was not included in the transfer pricing study report of the assessee, but it is included by the Ld. transfer pricing officer stating that it is functionally comparable to the assessee and does not own any significant intangibles. The contentions of the Ld. transfer pricing officer for inclusion of the above company were also upheld by the Ld. dispute resolution panel. Before us. The Ld. authorized representative submitted that this company is functionally different as it earns revenue from 4 different activities such as financial information processing, customer contract voice services, business process management and analytics. It was further stated that during the year it was taken over by the TCS Ltd and therefore it has an exceptional year of operation. It was further contested that it be high risk and also earns super normal profit and further it has insufficient segmental information. He further held that this comparable has been excluded by the Ld. dispute resolution panel in assessment year 2010 - 11 on account of being functionally dissimilar to the assessee. He further relied on the decision of the coordinate bench in case of capita India private limited versus ACIT and Actis global services private limited versus ITO.

    41. The Ld. departmental representative vehemently contested the arguments of the Ld. authorized representative and submitted that above comparable is functionally carrying on the same activities and therefore has rightly been included by the Ld. transfer pricing officer for comparability analysis.

    42. We have carefully considered the rival contention and also perused the orders of the lower authorities with respect to this comparable. We also perused the direction given by the Ld. dispute resolution panel for assessment year 2010 - 11 in case of the assessee dated 30-11- 2014 at page No. 26 of the direction with respect to this comparable. It has been held by the Ld. dispute resolution panel in case of the assessee that the comparable companies is involved in both high end services including transaction processing, technical services involved software testing, verification and validation of software at the time of implementation and management activities and also low and services. Therefore it can be seen that such a high-end service which require personnel with those set of technical expertise cannot be compared to the simple back-office support and procurement support services provided by the taxpayer. Therefore, the Ld. dispute resolution panel directed the Ld. transfer pricing officer to exclude the above company from the list of comparable for that year. Before us. The Ld. departmental representative could not point out that how the finding of the Ld. dispute resolution panel given in assessment year 2010-2011 are not pertinent with respect to the functional profile of the assessee as well as the comparable company for this year. In view of this we direct the Ld. transfer pricing officer/assessing officer to exclude the above comparable for the similar reasons given by the Ld. dispute resolution panel for this year also.

    43. Regarding inclusion of the R systems Ltd, we've already given our finding in appeal of the assessee for assessment year 2010 - 11. Therefore, for the reasons given therein, we direct he assessee to produce relevant information and demonstrate before ld TPO that relevant, authentic and reliable information with respect to the comparable is available in public domain and the ld Transfer Pricing Officer to verify the same, if found appropriate, to include the above comparable

    44. In view of the above facts we direct the Ld. Transfer pricing officer to exclude e- Clerx services Ltd and TCS e-serve Ltd and include R systems Ltd subject to our direction above. Accordingly Ground No. 1 - 8 of the appeal of the assessee are partly allowed.

    45. Ground No. 9 of the appeal of the assessee is with respect to making the suitable adjustment to the account of differences in the risk profile and working capital of the appellant vis-a-vis the comparable companies. As we have already decided this ground of appeal in the appeal of the assessee for assessment year 2010 - 11 wherein we have stated that assessee has not produced any working before ld TPO as well as before us, therefore we do not find any infirmity in the order of Ld. assessing officer/transfer pricing officer/Ld. dispute resolution panel for this year also. In the result ground No. 9 of the appeal of the assessee is dismissed.

    46. Ground No. 10-12 are with respect to the adjustment made by the Ld. assessing officer/transfer pricing officer with respect to the outstanding receivable considering the same as an international transaction and making an adjustment to the extent of Rs. 22216096/-. This ground of appeal of the assessee are identical to ground No. 10 - 13 in the appeal of the assessee for assessment year 2010 - 11. Both the parties agreed before us that there is no change in the facts in the present appeal compared to the appeal of the assessee for that assessment year. Therefore, following our own decision and for the same reasons as given by us in appeal of the assessee for assessment year 2010 - 11, we dismiss ground No. 10 - 12 of this appeal.

    47. Ground No. 13 - 21 of the appeal of the assessee are with respect to the disallowance made by the Ld. assessing officer and confirmed by the Ld. dispute resolution panel of Rs. 29086105/- under section 10 AA of the act on the basis that the export proceeds have not been realized within the period of 6 months from the end of the previous year. In the present case the assessee has claimed a deduction under section 10 AA amounting to Rs. 117451538/- for which the assessee has filed the relevant documents and the report of an accountant in form No. 56. F of the act. The Ld. assessing officer has noted that the company is issued, invoice of Rs. 104980126/- on 31/03/2011 and out of which only Rs. 3 092732/- was received within 6 months from the end of the previous year and the balance amount were received after 6 months and therefore as assessee has realized Rs. 101887394/- after 6 months from the end of the financial year the deduction on this amount was disallowed. The Ld. dispute resolution panel has also confirmed the disallowance proposed by the Ld. assessing officer.

    48. Both the parties agreed before us that the facts of the case are similar to the facts of the case in appeal of the assessee for assessment year 2010 - 11. It was also agreed by both the parties that the above sum has been received by the assessee but after 6 months from the end of the previous year.

    49. We have carefully considered the rival contentions and also perused the orders of the lower authorities. Admittedly, the assessee has made invoice on 31/03/2011 of a sum of Rs. 101887394/- the consideration for which has been received on 03/10/2011, 17/10/2011, 01/11/2011 and 30/11/2011. Admittedly, the copies of the foreign inward remittance certificates evidencing the receipt of the above mentioned export proceeds were also produced before the ld assessing officer but as the sums were received after 30/09/2011, Ld. assessing officer disallowed the claim of the assessee. The identical issue has been decided by us in the appeal of the assessee for assessment year 2010 - 11 wherein we have held that there is no time limit prescribed for receipt of the foreign exchange in India with respect to the export of goods/services under section 10 AA of the income tax act. Therefore, for similar reasons as given in deciding the appeal of the assessee on this issue for assessment year 2010 - 11, we direct the Ld. assessing officer to grant the deduction of the above sum under section 10 AA of the income tax act to the assessee as the foreign exchange has already been received in India. In view of this ground No. 13 - 21 of the appeal of the assessee are allowed accordingly.

    50. The ground No. 22 of the appeal of the assessee is with respect to the initiation of penalty proceedings under section 271 (1) (c ) of the act. As this issue is premature, we dismiss this ground of appeal.

    51. Ground No. 23 of the appeal of the assessee is against the levy of interest under section 234B and 234D of the income tax act. As the charging of interest under these sections are consequential in nature and therefore this ground of appeal is dismissed.

    52. In the result appeal No. 99/Del/2016 filed by the assessee for assessment year 2011 - 12 is partly allowed.

    sunil