Shri B. Ramakotaiah And Shri Saktijit Dey

ORDER

The order of the Bench was delivered by

Saktijit Dey, J.M.:--These cross appeals are against the directions of the Dispute Resolution Panel (DRP) u/s 144C(5) and the assessment order passed u/s 143(3) read with section 144C(13) in consequence thereto. The appeals are pertaining to AY 2009-10.

2. Briefly the facts are assessee an Indian company is wholly owned subsidiary of HSBC Holdings Plc (together with its associates referred to as “HSBC Group”), one of the leading banking and financial services organizations in the world. Assessee provides a range of back office services including contact centre, data entry, data processing and related services (BPO services) to its group companies/Associated Enterprises (AE) across the globe. Assessee’s service centres in India are registered as 100% export oriented unit under the Software Technology Parks of India (STPI) scheme. Assessee has also established a branch in the UK to facilitate the identification and effective migration of work to India from AEs. Assessee renders services as a captive contract service provider and is remunerated on a full time equivalent/cost budgeted plus mark-up basis for providing services to its AEs. For the AY under consideration, assessee filed its return of income on 29/09/2009 declaring total income of Rs. 38,81,449 after claiming deduction u/s 10A of the Act in respect of the profits from export of services from the STPI units. Assessee also declared book profit of Rs. 226,59,06,197 under MAT provisions. During the assessment proceeding, AO while verifying the details, noticed that assessee has entered into the following international transactions with its AEs.:

3. Noticing that assessee has entered into international transactions with its AEs, to find whether price charged by assessee is within arm’s length, AO made a reference to the Transfer Pricing Officer (TPO) for determining Arm’s Length Price (ALP) of international transactions. In course of proceeding before TPO, assessee furnished its TP study, books of account and other informations as were called for. After verifying the informations furnished, TPO found that for establishing ALP of its international transactions with AEs, assessee had undertaken TP study carried out through an independent external consultant. As per the analysis made, assessee being a risk mitigated contract service provider was selected as tested party. Transaction Net Margin Method (TNMM) was adopted as the most appropriate method for determining the ALP with operating profit to operating cost as the Profit Level Indicator (PLI). By applying certain filters, a search was conducted in Prowess and Captaline Data bases and taking into consideration the financial data of FY 2006-07 & 2007-08, 12 comparables with weighted average arithmetic mean of 9.82% were selected. As Assessee’s net margin from the provision of services to its AEs during the year was shown at 16.75%, the price charged was found to be within arm’s length requiring no further adjustment. TPO, though, accepted selection of TNMM as most appropriate method with operating profit to operating cost as PLI, but, he did not accept the economic analysis in the TP study, inter-alia, on the ground that assessee has used multiple year data in stead of contemporaneous, which have made analysis defective. Further, he observed that assessee has selectively applied filters which has resulted in selection of uncomparables as comparables whereas comparables have been excluded. After rejecting TP study, TPO undertook a search in the data bases independently by applying certain additional filters which yielded 12 companies including two selected by assessee with average margin of 28.06% after making a negative working capital adjustment of 0.64%. As a result, ALP was determined at Rs. 1928,12,74,956 as against the price shown by assessee of Rs. 1742,63,06,354. The resultant shortfall of Rs. 185,49,68,602 was treated as adjustment to be made u/s 92CA. In terms with the adjustment made by TPO u/s 92CA(3) to the price charged for international transaction, AO passed a draft assessment order proposing additions on account of TP adjustment. Further, AO also recomputed the deduction claimed u/s 10A of the Act, as a result of which, exemption was reduced to a lesser figure. Being aggrieved of the draft assessment order, assessee filed objections before the DRP by raising various issues on transfer pricing adjustment as well as corporate matters.

4. The DRP after considering the submissions of assessee, however, did not find merit in any of the objections raised with regard to transfer pricing issues. However, as far as corporate tax issues are concerned, DRP granted relief to assessee by directing AO to reduce lease-line charges from export turnover as well as total turnover while computing exemption u/s 10A. It also directed AO to allow set off of losses. AO, though, complied to the directions of DRP in so far as exclusion of lease-line charges from total turnover, however, as far as the issue of set off of losses is concerned, AO did not comply to the direction of DRP on the pretext of CBDT Circular dated 16/07/2013. Being aggrieved with the directions of DRP as well as assessment order, both assessee and department are before us.

ITA No. 247/Hyd/2014 by assessee

5. Assessee has raised as many as 14 grounds. While Ground Nos. 1 to 11 are on transfer pricing issues, Ground Nos. 12 to 14 are on corporate issues. At first we propose to deal with TP issues. As far as TP issues are concerned, ld. AR confined his argument to ground nos. 6 & 9 only. In view of this, the other grounds raised by assessee on TP issues are dismissed as not pressed.

6. As far as ground No. 6 is concerned, out of the 12 comparables selected by TPO and confirmed by DRP, assessee raised objections with regard to the following five companies:

1. Accentia Technologies Ltd.
2. Acropetal Technologies Ltd. (seg.)
3. Cosmic Global Ltd.
4. Eclerx Services Ltd.
5. Genesys International Ltd.
7. The submissions of the parties in relation to selection of aforesaid comparables are as under:
7.1 Accentia Technologies Limited.

i) This company was objected to by assessee on the reason, there were multiple acquisitions and amalgamations by the company during the year indicating exceptional factors, which impacted the financial results of the company. In this context, he referred to the annual report of the company placed in the paper book. The ld. AR submitted, for the very same reason TPO has rejected Allsec Technologies Ltd., selected by assessee.

7.2 Acropetal Technologies Ltd. (seg.)

Ld. AR referring to the annual report of this company for the FY 2008-09 submitted, it is functionally different as the company is engaged in the business of engineering design services. Hence, cannot be a comparable to assessee. Further, it was submitted, 65% of the operating cost of the company is in foreign currency under the head onsite development expenses, indicating that the company provides substantial onsite services and also could have outsourced services.

7.3 Cosmic Global Ltd. Objecting to selection of this company, ld. AR submitted, a reference to the annual report of the company for FY 2008-09 will indicate, the company has outsourced its work and does not undertake the BPO services by itself which is proved from the low employee cost. Hence, it cannot be treated as a comparable.

7.4 Eclerx Services Ltd. With reference to this company, ld. AR submitted, it should be rejected on the functionality test as it is engaged in providing high end KPO services in the field of data analytics operations management and audit reconciliation services. In support of his contention, ld. AR referred to the annual report of the company for the FY 2008-09.

7.5 Genesys International Ltd. Ld. AR referring to the annual report of this company submitted, it cannot be selected as comparable as it is engaged in the business of geographical information services comprising photogrammetry, remote sensing, cartography, data conversion, related computer based services and other related services.

8. Ld. AR submitted, in various rulings of the ITAT for the same AY, functionality of these companies were examined and it was held that these companies cannot be treated as comparable to ITE service providers. In support, ld. AR relied on the following decisions:

1. Capital IQ Information Systems (India) Pvt. Ltd., ITA No. 124/Hyd/2014.
2. Excellence Data Research, ITA No. 159/Hyd/2014
3. Hyundai Motor India Engineering P. Ltd., ITA No. 255/Hyd/2014.

9. Ld. DR, though, agreed that issue relating to comparability of companies objected by assessee are more or less covered by the decisions of the Tribunal, but, he nevertheless relied upon the reasonings of the TPO.

10. We have considered the submissions of the parties with reference to the materials on record as well as decisions of the coordinate benches placed before us by ld. AR. As could be seen, TPO has classified the assessee as ITE Service Provider. Further, comparability of aforesaid companies objected by assessee came up for consideration by the coordinate bench of this Tribunal in case of Capital IQ Information Systems (India) Pvt. Ltd. Vs. Addl. CIT (supra) for AY 2009-10. The Tribunal after examining the functionality of these companies held them not to be comparable with ITE service provider. The relevant extract from the order of the Tribunal is reproduced hereunder for ready reference:

“(2) Genesys International Ltd.

17. It was the contention that this company functions in two horizontals, and is having super profits. It was further submitted that this company is not only in software development but also in Geospatial Services, which are highly technical. It also involves in consulting activity. It was the contention that this company was analysed by the coordinate Bench of the Tribunal at Delhi in the case of M/s. Mercer Consulting (India) Ltd. V/s DCIT (vide order dated 6th June, 2014 in ITA No.966/Del/2014), wherein this company was excluded in that case. Learned counsel for assessee relied upon the findings of the Tribunal vide paras 14.2 and 14.3, in that case, which read as follows-

“14.2. We have heard the rival submissions and perused the rival materials on record. It has been noticed supra that assessee is basically providing various services to the customers of its AEs in relation to human resources which are more or less centered around the employees of the prospective clients. When we consider the nature of services provided by Genesys International Corporation Ltd., it comes to the forefront that they are providing full range of geospatial services to its customers. In simple terms, geospatial services means the services relating to the relative position of things on the earth’s surface. These basically include 3D mapping, Navigation maps, Image processing, Cadastral mapping, etc. If we take into account the nature of services provided by the assessee, being financial and retirement security, health, productivity of employees and employment relationships and then try to compare them with those rendered by Genesys, it is manifested that both are totally incomparable.

14.3. The TPO on page 48 of his order has examined CBDT Circular SO 890 (E) dated 26.9.2000 which provides a detailed list of products or services that can be covered under the ITES for the purposes of Section 10A and 10B of the Act. In this Circular, Information Technology Enabled Products/Services have been divided into fifteen categories, starting with Bank Office operations, Call centres etc. and ending with Website services. From the very description of such services, it is palpable that even though these fall under the overall ITES category, but some of them are quite different from each other. To cite, service at Sl.No. (vi) of this Circular is ‘Geographic Information System services and at Sl. No. (vii) is ‘Human Resources Services.’ No doubt, all these fifteen categories of products/services have been included under the major head of ‘Information Technology Enabled Services’ (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading ‘Geographical Information Systems Services’, whereas those rendered by the assessee fall partly under clause (vii) with the heading ‘Human Resources Services’ and partly under clause (xi) with the heading ‘Payroll’. On juxtaposition examination of these two sets of services, we find that there is a vast difference which make one quite distinct from the other. In view of such functional incomparability between assessee and Genesys, we hold that this company cannot be treated as comparable. We, therefore, direct to exclude this case from the list of comparables.”

17.1. On careful consideration of the matter, respectfully following the above decision of the coordinate Bench, we are also of the opinion that there is vast difference between the functions of the above company and that of assessee. This company as such, cannot be treated as comparable on FAR analysis. We therefore, direct the Assessing Officer/TPO to exclude this company.

(3) Eclerx Services Ltd.

18. The objection of assessee to this comparable is that this company is functionally dissimilar. It is in the business of consultancy and advisory service and provides only analytical data. It is also involved in quality monitoring. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. Therefore, the functions of the above company are dissimilar to assessee, which is a captive service provider. On the principles laid down by the Hon’ble Special Bench of the ITAT (Mumbai) in the case of Maersk Global Centres (India) Pvt. Ltd. V/s. ACIT (ITA No.7466/Mum/2012 for assessment year 2008-09 dated 7.3.2014) and the principles laid down by the coordinate bench of the Tribunal(Delhi) in the case of M/s. Mercer Consulting (India) Pvt. Ltd., (supra), assessee submits that this company cannot be selected as a comparable.

18.1 The Learned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded.

18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee’s services. We therefore, direct the Assessing Officer/TPO to exclude this company.

(4) Cosmic Global Ltd.

19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee’s TP study, it has raised objection before the TPO that this company’s employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under-

“13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at Rs. 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at Rs. 9.90 lacs, Translation charges at Rs. 6.99 crore and Accounts BPO at Rs. 27.76 lac. The ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs. 3.00 crore, which is strictly inthe realm of the Translation segment, revenues from which are to the tune of Rs. 6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment.

13.3. However, we find this case to incomparable on the alternative argument advanced by the ld. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs. 27.76 lacs. We have discussed this aspect above in the context of CG-VAK’s case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs. 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs. 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables.” In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons.

(5) Acropetal Technologies Ltd. (Seg.)

20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper.

20.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company.

(6) Accentia Technologies Limited.

21. This company was objected to by assessee on the reason of super profits as well as extra-ordinary events. It was submitted that acquisition of Oak Technologies & Trans Services has impact on the profits of the company and has taken inorganic growth as strategy to increase the profits because of the peculiar economic circumstances and brand value. The same in these circumstances cannot be selected. It was submitted that assessee was in medical transcription services.

21.1. The Departmental Representative however, objected to the pleas of assessee stating that the extraordinary events occurred in earlier year and therefore, the same cannot be considered as having any impact in the year under consideration.

21.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected.

Same view has also been expressed in the other decisions also. Ld. DR has not brought any new facts or materials to show that the view expressed in aforesaid decisions will not apply to the facts of assessee’s case.

11. Moreover, in assessee’s own case for AY 2008-09, the coordinate bench of this Tribunal while considering the issue of comparability of the aforesaid companies to assessee in ITA No. 1647/Hyd/2012 dated 24/10/2014 has also held that these companies are not comparable to assessee for the reasons stated therein. The ld. DR was not able to bring to our notice any material difference between facts as involved in AY 2008-09 and the impugned AY. Therefore, following the decisions of ITAT as well as rule of consistency, these companies have to be excluded from the list of comparables. In view of the above, we direct AO/TPO to exclude the aforesaid companies from the list of comparables.

12. The next issue as raised in Ground No. 9 is with regard to inclusion of reimbursement transactions as part of operational cost.

13. Ld. AR submitted that during the year, assessee had paid certain amounts towards travel air fare and stay expenses relating to employees of all AEs for travelling to India for business purposes. Similarly, AE has also paid certain expenses of assessee and the same has been reimbursed to AE on cost to cost basis. Ld. AR submitted that the payments/receipts were made at cost without markup for the reason that assessee/AE has for administrative convenience paid for the amounts on behalf of client/AE, no significant additional function being performed or risks assumed for the transaction either by assessee or by AE. It was submitted, the payments are in the nature of out of pocket expenses paid to third party vendor, which are normal industry practice wherein incidental payments are reimbursed at cost. It was submitted, without bringing any instances wherein out of pocket expenses are marked-up in an uncontrolled transactions included payments in the operating cost for determining ALP of the provision of services. It was submitted, TPO failed to appreciate under no circumstances third party customer would agree to reimburse such costs at a mark-up. Ld. AR submitted, in assessee’s own case for AY 2008-09, Hyderabad Bench of Tribunal has held that reimbursement of cost should be excluded from the operational cost while computing margin. A copy of the order passed by the Tribunal in ITA No. 1647/Hyd/12 (supra) was placed on record. Ld. DR, on the other hand, relied upon the order of TPO/DRP.

14. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. As can be seen, in assessee’s own case for AY 2008-09, similar issue came up for consideration before the coordinate bench in ITA No. 1647/Hyd/12 (supra), the coordinate bench held as under:

“16.1 After considering the rival submissions and following the principles laid down in the decisions of the Tribunal cited above, we are of the opinion that reimbursement costs should be excluded as they do not involve any functions to be performed so as to consider it for profitability purposes. In the case of Four Soft Ltd., supra, Hyderabad bench of the Tribunal considered this issue and held as under:

“15. We have considered the rival submissions and perused the material on record. First, we will take up the issue relating to the adjustments made by the assessing officer in respect of the international transactions with Four Soft Limited, Hyderabad vs Assessee on 9 September, 2011its associated enterprises in the software development services. It is the contention of the assessee that bad debts incurred by the assessee company are in respect of transactions, which are not related to associated enterprises. This contention of the assessee has not been controverted by the Revenue by bringing any material on record before us. It is the contention of the learned counsel for the assessee that such bad debts cannot be taken into account for computing the margin of the assessee from the transactions with the associated enterprises in respect of software development services. The learned counsel for the assessee has also filed before us a comparative chart explaining the computation of Net Margin, excluding the bad debts and clearly demonstrated before us that if the bad debts/reimbursements are excluded for the purpose of computing the margins on the transactions relating to the associated enterprises, the net margin comes to 19.07%, which is well comparable with the Arms Length Margin of 19% determined by the Transfer Pricing Officer. In our considered view, for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingly, we approve that segmental financials is to be considered for the purpose of arriving at the net margin on the international transaction with the assessee's enterprise in respect of software development services. In that process, bad debts/reimbursements has to be excluded and segmental profitability has to be adopted. We find support in this behalf from various decisions of the Tribunal relied upon by the learned counsel for the assessee duly filing copies thereof in the paper-book, which have been noted hereinabove. That being so, the TPO should have determined the Arms Length Price for the international transactions with associated enterprises considering only the operating cost allocable to the Associated Enterprises segment. Since the assessing officer had no occasion to verify the veracity of the segmental financials prepared by the assessee company, for limited purpose, we direct the assessing officer to verify the segmental financials prepared by the assessee company and adopt the same for arriving at the net margin on the international transaction with AEs in respect of software development services. We direct accordingly.”

Similar view was also taken in assessee’s own case in AY 2006-07. Respectfully following the same, we direct the AO/TPO to exclude the reimbursement costs while working out the operating costs. This ground is considered allowed.”

Respectfully following the view taken by the coordinate bench in assessee’s own case, we direct AO/TPO to exclude reimbursement cost while working out the operating cost. In view of above, we direct AO/TPO to recompute ALP afresh and if warranted, make necessary adjustment to the price charged by assessee for the international transaction.

15. As far as corporate tax issues are concerned, Ground No. 12 is on the issue of interest charged u/s 234B of the Act. Since chargeability of interest u/s 234B of the Act, will ultimately depend upon the outcome of the adjustment to be made to the ALP, it is premature to decide this issue at this stage. Accordingly, this ground being infructuous is dismissed.

16. Ground No. 13 is not pressed, hence, dismissed as not pressed.
17. In ground no. 14, assessee has raised the issue of set off of losses from the income assessed.

18. Briefly, facts relating to the issue are, in the relevant AY, assessee has incurred loss in relation to its Gurgaon Unit. Assessee while computing deduction u/s 10A, claimed 10A exemption in respect of other STPI units. In so far as loss pertaining to Gurgaon unit and UK Branch is concerned, the same was set off against other income while computing total income. AO while computing deduction u/s 10A of the Act set off losses relating to Gurgaon Unit against profits of other 10A units and thereafter computed deduction u/s 10A. Assessee objected to the aforesaid action of AO before the DRP. The DRP after considering the submissions of assessee and examining the decisions relied upon by assessee, directed AO to set off of losses against other income. AO, however, while completing assessment as per the directions of DRP held that set off of losses relating to 10A unit against other income cannot be allowed in view of CBDT Circular dated 16/07/13.

19. Ld. AR submitted before us that AO was totally wrong in not allowing set off of losses as income of section 10A unit has to be excluded at source itself before arriving at the gross total income. Therefore, question of setting off of loss of the current year as well as brought forward business losses against the profits of 10A units will not arise. Further, ld. AR submitted that as per section 144C(10), AO has to pass assessment order in compliance to the directions of DRP. Therefore, AO cannot override the directions of DRP in the matter of set off of losses.

20. The ld. DR, on the other hand, submitted that DRP while issuing the aforesaid directions has not followed CBDT Circular , which is binding on the departmental authorities, therefore, AO was justified in not allowing set off of losses against other income. Ld. DR submitted that in fact AO has also filed an application for rectification of the direction before the DRP, which is still pending. 21. We have considered the submissions of the parties and perused the materials on record. After examining various decisions relied upon by ld. AR, we find merit in the contention advanced on behalf of assessee that income of section 10A unit has to be excluded at source itself before arriving at the gross total income, hence, question of setting off of loss against such profits of 10A units will not arise. In fact, ITAT, Bangalore Bench in case of Clear Water Technology Services in ITA No. 1146/Bang/13 dated 12/09/2014 after taking into consideration of CBDT Circular No. 7, dated 16/07/13 decided the issue in favour of assessee. In that view of the matter, we hold that assessee’s claim of set off of losses of the STPI Unit against other income has to be allowed. The direction of the DRP in the particular circumstances of the case is correct. One more aspect we need to observe that while implementing directions of the DRP, AO has to act strictly in accordance with the provisions contained u/s 144C. As per sub-section (10) of section 144C, every direction of DRP is binding on AO. Therefore, AO cannot and should not deviate from the directions of DRP. In the aforesaid view of the matter, we uphold the direction of DRP and allow assessee’s claim. This ground is considered to be allowed.

ITA No. 295/Hyd/14 by revenue

22. The effective grounds raised by Department are 2, 3 & 4. Ground No. 2 is on the direction of DRP to exclude communication charges both from the export and total turnover. This issue is no more res-integra in view of a number of decisions not only of different High Courts but also different benches of the Tribunal including ITAT, Chennai Special Bench in case of ITO Vs. Saksoft, 30 SOT 55. Therefore, respectfully following the decision of ITAT Chennai Special Bench and the decision of Hon’ble Mumbai High Court in case of CIT Vs. Gemplus Jewellery India Ltd., 330 ITR 175, we uphold the direction of DRP by dismissing the ground.

23. Ground Nos. 3 & 4 are in relation to the direction of DRP with regard to assessee’s claim of set off of loss. In view of our finding while deciding ground No. 14 in assesee’s appeal, these grounds have become infructuous, hence, dismissed.

24. In the result, assessee’s appeal in ITA No. 247/Hyd/14 is partly allowed and the department’s appeal in ITA No. 295/Hyd/14 is dismissed.

The order pronounced in the open court on 18/02/2015.