Income Tax Appellate Tribunal - Bangalore
M/S.State Street Global Advisors India ... vs Deputy Commissioner Of Income Tax, ... on 31 August, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI N V VASUDEVAN, VICE PRESIDENT
AND SHRI G MANJUNATHA, ACCOUNTANT MEMBER
IT(TP)A No.2193/Bang/2019
Assessment year: 2010-11
The Deputy Commissioner Vs. M/s. State Street Services (India)
Income Tax, Pvt. Ltd.,
Circle 6(1)(2), RMZ Infinity, 7th Floor,
Bengaluru. Tower D, Old Madras Road,
Bengaluru - 560 016.
PAN: AALCS 1213K
APPELLANT RESPONDENT
CO No.1/Bang/2020
[in IT(TP)A No.2193/Bang/2019]
Assessment year: 2010-11
State Street Global Advisors (India) Vs. The Deputy Commissioner
Pvt. Ltd. Income Tax,
[Formerly M/s. State Street Services Circle 6(1)(2),
(India) Pvt. Ltd.], Bengaluru.
4th Floor, Campus 8A,
RMZ Ecoworld,
Bengaluru - 560 103.
PAN: AALCS 1213K
CROSS OBJECTOR APPELLANT IN APPEAL
/ RESPONDENT
Appellant by : Shri Priyadarshi Misra, Jt.CIT(DR)(ITAT), Bengaluru.
Respondent by : Shri Darpan Kirpalani, Advocate.
Date of hearing : 19.08.2020
Date of Pronouncement : 31.08.2020
IT(TP)A No.2193/Bang/2019
& CO 1/Bang/2020
Page 2 of 12
ORDER
Per N.V. Vasudevan, Vice President The appeal is by the revenue against the order dated 12.6.2019 of the CIT(Appeals)-6, Bengaluru relating to assessment year 2010-11. The assessee has filed Cross Objection against the very same order of CIT(Appeals).
2. The Assessee in engaged in the business of provision of Information Technology Enabled Services (ITES) to its wholly owned holding company. In terms of the provisions of Sec.92-A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec.92B(1) of the Act, the transaction of providing ITeS was an "international transaction" i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, any income arising from an international transaction shall be computed having regard to the arm's length price.
3. In this appeal by the Assessee, the dispute is with regard to determination of Arms' Length Price (ALP) in respect of the aforesaid international transaction of rendering ITeS to the AE.
IT(TP)A No.2193/Bang/2019 & CO 1/Bang/2020 Page 3 of 12
4. The Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the Assessee was arrived at 19% by the Assessee in its TP study. The operating income was Rs 27,68,44,765 and the Operating Cost was Rs234,26,42,660. The Operating profit (Operating income - Operating cost was Rs4,42,02,105. Thus the OP/TC was arrived at 19%. The Assessee chose companies who are engaged in providing similar services such as the Assessee. The Assessee identified some companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm's Length.
5. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected some comparable companies from database. The TPO accepted some companies chosen by the Assessee as comparable companies. The TPO on his own identified some other companies as comparable with the Assessee company and worked out the average arithmetic mean of their profit margins as follows:-
Sl.No. NAME PLI
1 Accentia Technologies Ltd. 43.06%
2 Acropetal Technologies Ltd. (Seg) 22.27%
3 E-Clerx Services Ltd. 55.97%
4 Fortune Infotech Ltd. 22.80%
5 ICRA Online Ltd. (Seg) 43.39%
6 Informed Technologies India Ltd. 26.15%
IT(TP)A No.2193/Bang/2019
& CO 1/Bang/2020
Page 4 of 12
7 Infosys BPO 31.23%
8 Cosmic Global Ltd. 14.97%
9 Sundaram Business Services Ltd. - 12.31%
10 Jeevan Scientific Technology Ltd. (seg) 21.05%
AVERAGE 26.86%
6. The TPO computed the Addition to total income on account of adjustment to ALP as follows:-
Arm's Length Mean Mark-up 26.86%
Less: Working Capital Adjustment (As per Annex. C) 0.23%
Adjusted margin 26.79%
Operating Cost 23,26,42,650
Arm's Length Price (ALP) (126.79% of Operating Cost) 29,49,67,628
Price Received 27,68,44,765
Shortfall being adjustment u/s. 92CA 1,81,22,863
Thus a sum of Rs.1,81,22,863/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE.
7. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to the total income of the Assessee by the AO. The Assessee filed objections before the DRP and the DRP gave certain directions. Based on the directions of the DRP, the AO passed the final order of assessment. To the extent the Assessee got relief from the DRP, the revenue has preferred appeal before the Tribunal on the following grounds:-
IT(TP)A No.2193/Bang/2019 & CO 1/Bang/2020 Page 5 of 12
1. The order of the CIT (Appeals) is opposed to law and the facts and circumstances of the case.
2. On the facts and circumstances of the case, whether the Ld CIT(A) is justified in directing the TPO to exclude the company M/s. Acropetal Technologies Limited, without appreciating that the definition of ITeS service in the CBDT Notification doesn't differentiate between BPO and KPO services and that there is no basis for the contention that the companies providing KPO services do not fall in the category of ITeS providers.
3. On the facts and circumstances of the case, whether the Ld CIT(A) is justified in directing the TPO to exclude the company M/s. E-Clerx Services Limited, without appreciating that the definition of ITeS service in the CBDT Notification doesn't differentiate between BPO and KPO services and that there is no basis for the contention that the companies providing KPO services do not fall in the category of ITeS providers.
4. On the facts and circumstances of the case, whether the Ld CIT(A) is justified in directing the TPO to include the company M/s.
Microgenetics Systems Limited, in the list of comparables even though it wasn't considered by the taxpayer or the TPO during the TP audit proceedings as its inclusion at this stage would amount of cherry picking of comparables.
5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A), in so far as it relates to the above grounds may be reversed and that of the Assessing Officer be restored.
6. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.
8. As far as CO of assessee is concerned, though grounds No.7 to 15 raised are with regard to the Transfer Pricing determination issue, however, at the time of hearing the ld. counsel for the assessee submitted that he does not wish to press those grounds of Cross Objection as the decision in grounds raised by the revenue in its appeal in the light of judicial precedents would be sufficient.
9. As far as appeal of revenue is concerned, by ground No.2 the revenue seeks exclusion of Acropetal Technologies Ltd. as a comparable company. The CIT(Appeals) excluded it from the list of comparables for IT(TP)A No.2193/Bang/2019 & CO 1/Bang/2020 Page 6 of 12 the reason that it was into engineering design services which was a major component of revenue and those services fell within the ambit of Knowledge Process Outsourcing [KPO] requiring high skill sets than the Business Process Outsourcing [BPO] functions that the assessee performs. The crux of the argument of the ld. DR is that there cannot be any difference between the BPO & KPO services and in this regard sought to place reliance on the CBDT Circular wherein the Board in the definition of Information Technology enabled Services [ITeS] does not make any difference between BPO & KPO.
10. We have considered the submission of the ld. DR and are of the view that the same is not of any use to the plea raised by the assessee revenue, as the distinction between the KPO & BPO has been considered by the Special Bench in the case of Maersk Global Centres (India) P. Ltd. [ITA No.7466/Mum/2012] and it was held that the companies providing high end services cannot be compared to companies providing back office support services. Relevant extract is reproduced below:-
"78. To sum up, we hold that the potential comparables of ITES sector level can be selected by applying broad functional test at first stage and although the comparables so selected can be put to further test, depending on facts of each case, by comparing the specific functions performed in the international transactions with that of uncontrolled transactions to attain the relatively equal degree of comparability as discussed above, the classification of ITES into low-end BPO services and high-end KPO services for comparability analysis would not be fair and proper. The first question referred to this Special Bench is whether for the purpose of determining the arm's length price of international transactions of the assessee company providing back office support services to their overseas associated enterprises, companies performing KPO functions should be considered as comparable ?. In our opinion, the answer to this question will depend on the facts and circumstances of each case inasmuch as if the assessee company, on the basis of its own functional profile, is found IT(TP)A No.2193/Bang/2019 & CO 1/Bang/2020 Page 7 of 12 to have provided to its AE the low-end back office support services like voice or data processing services as a whole or substantially the whole, the companies providing mainly high-end services by using their specialized knowledge and domain expertise cannot be considered as comparables."
(Emphasis supplied)
11. As far as ground 3 raised by the revenue is concerned, the challenge to the exclusion of E-Clerk Services Ltd. and the argument in this regard are identical to the arguments advanced in the case of Acropetal Technologies Ltd. The exclusion of E-Clerk Services Ltd. was considered by the Special Bench in the case of Maersk Global Centres (India) P. Ltd. (supra) and for the same reason for which Acropetal Technologies Ltd. was excluded, this company was also excluded from the list of comparable companies. Following the judicial precedent on exclusion of this company, we uphold the order of CIT(Appeals) and dismiss ground No.3 raised by the revenue.
12. Ground 4 raised by the revenue seems on the assumption that M/s. Microgenetics Systems Ltd., has been directed to be included by the CIT(Appeals), however, for a reading of para 5.10 of CIT(Appeals) order, we find that there is a contradiction in the conclusion on inclusion of this company. The relevant observation of the CIT(Appeals) on this issue is as follows:-
"5.10 Vide ground of appeal no. 11, the appellant has sought for inclusion of certain companies like Cepha Imaging Pvt. Ltd. and Microgenetics Systems Ltd. as comparables. The companies had been rejected by the TPO on the grounds that the data was not available in the public domain. During the TP proceedings, the appellant had submitted copies of the Annual Report to the TPO hence the same are being considered. On examination of the same, it is seen that Cepha Imaging Pvt. Ltd. is engaged in e- publishing services which include type-setting, composition, proof-reading, project management and multimedia with the IT(TP)A No.2193/Bang/2019 & CO 1/Bang/2020 Page 8 of 12 appellant and hence its exclusion from the set of comparables by the TPO is upheld. On the other hand, Microgenetics Systems Ltd. is into medical transcription services which falls under ITeS and hence functional comparability exists with the appellant. The TPO is directed to include this company after verification that it satisfies all the filters. It is observed here that the appellant has sought inclusion of Microgenetics Systems Ltd. on the grounds that since it is into medical transcription services which falls under ITeS, it is comparable with the appellant. At the same time, the appellant has sought exclusion of Accentia Technologies even though the company is also into medical transcription services, though for this particular year, it has been excluded on account of extraordinary events. The appellant's approach to the TP study is therefore not uniform. The appellant has also sought for inclusion of 3 companies viz. R-Systems International Ltd., Caliber Point Business Solutions Ltd. and Jindal Intellicom Private Ltd.; however the same have been rejected by the TPO because of the different financial year ending. As the adoption of this filter has been upheld in pares 5.7 supra, the exclusion of these three companies by the TPO is upheld. This ground of appeal is therefore partly allowed."
(emphasis supplied)
13. We are of the view that it would be just and appropriate to set aside the issue of comparability of this company to the TPO/AO for consideration afresh. We hold and direct accordingly.
14. The other grounds of appeal by the revenue are general in nature and calls for no specific adjudication.
15. As far as CO of the assessee is concerned, the grounds of CO which survive for consideration are grounds 1 to 6 which are as follows:-
"Corporate Tax matters
1. The learned AO has erred, in law and on facts, by disallowing depreciation on capital assets on the basis that no tax has been deducted at source while making payment for such IT(TP)A No.2193/Bang/2019 & CO 1/Bang/2020 Page 9 of 12 assets. Further, the learned AO has erred in law, by not giving the Assessee an opportunity of being heard in this respect.
2. The learned CIT(A) has erred, in law and on facts, by directing disallowance of the entire amount incurred towards purchase of software on which tax has not been deducted at source. In doing so, the learned CIT(A) failed to appreciate that the software purchased was capitalised and what was claimed as a deduction was merely the depreciation on such software and not the entire amount paid towards purchase of software which was capitalised.
3. The learned CIT(A)/ AO have failed to appreciate that no disallowance can be made under Section 40(a) of the Income-Tax Act, 1961 ("the Act") in relation to depreciation on capital assets.
4. The learned CIT(A)/ AO have failed to apply the jurisdictional tribunal rulings which have clearly held that Section 40(a) does not apply to depreciation on capital assets.
5. Without prejudice to the grounds 3 and 4 above, the learned CIT(A)/ AO have erred in law by not considering that even if the said adjustment u/s 40(a) is made, the Assessee's profit from business would stand enhanced as per the provisions of the Act and therefore, the Assessee would be entitled to higher or enhanced deduction under Section 10A of the Act.
6. Without prejudice to the above, the learned CIT(A)/ AO have grossly erred in not granting the enhanced deduction of Section 10A on the said adjustments, when the Respondent has only Section 10A undertakings."
16. The AO in the course of assessment proceedings found that the assessee company purchased following software during the previous year and capitalized the expenditure for purchase of software and claimed the following amount of depreciation:-
IT(TP)A No.2193/Bang/2019 & CO 1/Bang/2020 Page 10 of 12 Type of software No.of days to use put >180 days <180 days depreciation SQL Server Enterprise Edition 2008 380170 ........ 228102 Enterprise Security Reporter V3, 202591 60777 File system Auditor Folklore Attendance module & 328728 98618 Attendance reader TOTAL DEPRECIATION 387497
17. Admittedly the assessee did not deduct tax at source on the payment made to non-resident for purchase of software. The AO was of the view that the payment in question was in the nature of royalty and since the assessee did not deduct tax at source as required u/s.195 of the Act, the sum claimed as depreciation should be disallowed by invoking the provisions of section 40a(i)/(ia) of the Act. Accordingly, the aforesaid sum of Rs.3,87,497 claimed as depreciation on software was disallowed by the AO.
18. On appeal by the assessee, the CIT(Appeals) confirmed the order of AO.
19. The crux of the argument of the ld. counsel for the assessee was that depreciation is a statutory allowance and it cannot be disallowed by invoking the provisions of section 40a(i)/(ia) of the Act and in this connection placed reliance on the decision of Mumbai Tribunal in the case of SKOL Breweries Ltd. v. DCIT [2013] 29 taxmann.com 111 [Mum Trib].
20. The ld. DR relied on the order of CIT(Appeals).
21. We have considered the rival submissions and we find that admittedly the expenditure in question incurred in respect of purchase of software has been capitalized in the books of account and has not been debited to the P&L account. The question whether in such circumstances, provisions of section 40a(i)/(ia) can be invoked has already been decided IT(TP)A No.2193/Bang/2019 & CO 1/Bang/2020 Page 11 of 12 by the Mumbai Tribunal in the case of SKOL Breweries Ltd. (supra) wherein it was held as follows:-
"Depreciation is a statutory deduction and after the insertion of Explanation 5 to Section 32. it is obligatory on the part of the Assessing officer to allow the deduction of depreciation on the eligible asset irrespective of any claim made by the assessee. Therefore, the depreciation is a mandatory deduction on the asset which is wholly or partly owned by the assessee and used for the business or profession which means the depreciation is a deduction for an asset owned by the assessee and used for the purpose of business and not for incurring of any expenditure. The deduction under Section 32 is not in respect of the amount paid or payable which is subjected to TDS; but it is a statutory deduction on an asset which is otherwise eligible for deduction of deprecation. Depreciation is not an outgoing expenditure and therefore, the provisions of Section 40(a)(i) are not attracted on such deduction."
22. The aforesaid view has also been taken by the Hon'ble Punjab & Haryana High Court in the case of Mark Auto Industries Ltd., 358 ITR 43 (P&H). In view of the aforesaid decisions, we are of the view that the disallowance of depreciation in the present case cannot be sustained. Accordingly, the relevant grounds of appeal 1 to 4 of CO are allowed and grounds 5 & 6 become infructuous.
23. In the result, the appeal by the revenue is partly allowed for statistical purposes, while the CO by the assessee is partly allowed.
Pronounced in the open court on this 31st day of August, 2020.
Sd/- Sd/-
( G MANJUNATHA ) ( N V VASUDEVAN )
ACCOUNTANT MEMBER VICE PRESIDENT
Bangalore,
Dated, the 31st August, 2020.
/Desai S Murthy /
IT(TP)A No.2193/Bang/2019
& CO 1/Bang/2020
Page 12 of 12
Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore.
By order
Assistant Registrar
ITAT, Bangalore.