BT e-Serv (India) (P) Ltd. Vs ITO (ITAT Delhi)
ITAT held that There is no time-limit prescribed for bringing the consideration of export into India under section 10AA. Admittedly, the consideration had been received in India, albeit subsequent to filing of the return by the assessee. However, merely because the consideration had been received after 6 months from the close of the financial year the deduction, cannot be denied to the assessee on the sum. Therefore, AO was directed to grant deduction to the assessee under section 10AA of Income Tax Act, 1961.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
1. 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. 31 577050/-. 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 (TPO1) 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 (TP1) 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 anJd 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 L 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 L 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 L 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 L 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 AOL 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 vs. State of Tamil Nadu (255 ITR 147) (SC) and Tarulata Shyam (Smt) Vs. 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.
