Income Tax Appellate Tribunal - Delhi
American Express (India) Pvt. Ltd, New ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
[ DELHI BENCH "A" DELHI ]
BEFORE THE HON'BLE VICE-PRESIDENT SHRI G. D. AGRAWAL
AND SHRI I. P. BANSAL, JUDICIAL MEMBER.
I. T. Appeal No. 1338 (Del) of 2009.
Assessment year : 2002-03.
Dy. Commissioner of Income-tax, M/s. American Express (India) P. Ltd.,
C i r c l e : 1 (1), Vs. A-37, Mohan Co-operative Inds. Estate,
N E W D E L H I. Mathura Road, N E W D E L H I.
P A N / G I R No. AAA CA 8163 F.
AND
I. T. Appeal No. 1512 (Del) of 2009.
Assessment year : 2002-03.
M/s. American Express (India) P. Ltd., Dy. Commissioner of Income-tax,
First Floor, Mercantile House, Vs. C i r c l e : 1 (1),
15, Kasturba Gandhi Marg, N E W D E L H I.
N E W D E L H I.
P A N / G I R No. AAA CA 8163 F.
( Appellants ) ( Respondents )
Assessee by : Shri Vijay Iyer, C. A.;
Shri Arijit Chakravarthy; Adv.; &
Shri Mananeet Dalal, Adv.;
Department by : Ms. Geetmala Mahanancy [CIT] - D. R.;
O R D E R.
2
Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
PER I. P. BANSAL, JM :
These are cross appeals directed against order passed by the ld. CIT (Appeals) dated 28th January, 2009 for assessment year 2002-03.
2. The grounds of appeal raised by the assessee are as follows :-
" 1. That on facts and in law the ld. CIT (Appeals) erred in upholding the orders passed by the AO / TPO which were bad in law and void ab-initio as they suffered from material illegality and irregularity;
2. That on facts and in law the ld. CIT (Appeals) erred in upholding addition to income of Rs.12,09,75,346/- under Chapter X of the Income Tax Act, 1961 (the "Act");
2.1. That the order of the ld. AO and ld. TPO was bad in law and void ab-initio since :
a) Preconditions for reference to be made tro a transfer pricing officer were not met;
b) Based on the facts and circumstances of the case, there was neither necessity nor expediency for such reference;
c) No opportunity was provided by the ld. AO to the Appellant before referring the transfer pricing issues to the ld. TPO;
2.2 That the ld. CIT (Appeals) failed to consider and appreciate the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 for determining the arm's length price of the provision of IT enabled services. Specifically, on facts and in law the ld. AO, ld. TPO and the ld. CIT (Appeals) erred in :
(a) Not accepting the primary analysis undertaken by the Appellant;
(b) Not accepting that the Appellant was justified in using data pertaining to financial years 1999-2000 and 2000-01 for the comparability analysis;
(c) Accepting that the ld. TPO was justified in using data that became available only after the specified date / due date;
(d) Accepting that the selection of comparables by the ld. TPO was correct;3
Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
(e) Accepting the ad-hoc filters applied by the ld. TPO to reject companies identified by the Appellant and select companies on his own;
(f) Not accepting the arguments of the Appellant regarding non-comparability of Genesys International Corporation Limited on account of having a different functional profile and having significant related party transactions;
(g) Not allowing adequate opportunity to the Appellant to undertake a fresh search and identity additional comparable companies based on data that became available only after the specified date / due date;
(h) Failing to make appropriate adjustments for differences in depreciation, marketing functions, product liability risks and credit risks undertaken by the Appellant vis-à-vis the comparable companies;
(i) Not giving due cognizance to the fact that the international prices charged by the Appellant have been accepted and certified by the Software Technology Park of India ("STPI"), which is the Government / RBI designated competent technical authority to deal with the appropriateness of the price charged;
(j) Not adjudicating on the argument that final assessment should be "having regard" to ALP and not based thereon;
3. That the ld. CIT (Appeals) has erred in law in not applying the Proviso to section 92-C(2) of the Act and has failed to allow the Appellant an option for the downward variation of 5 per cent in determining the arm's length price;
4. That the ld. CIT (Appeals) has erred both on facts and in law, in not adjudicating on the excessive computation of interest under section 234-B by the ld. AO;
5. That the ld. CIT (Appeals) has erred both on facts and in law, in not adjudicating that interest under section 234-B of the Act is not to be calculated on tax on the total income determined under regular assessment under section 143(3) of the Act;
6. That the ld. CIT (Appeals) has erred in not addressing the additional ground of the Appellant on allowability of pre-operative expenses and in holding that adjudication of the additional ground shall be taken care at the time of adjudication of the grounds of appeal in the appellate proceedings for assessment year 2003-04. "
3. The grounds of appeal raised by the Revenue are as follows :-4
Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
" 1. The ld. CIT (Appeals) has erred on facts and in law in reducing the transfer pricing adjustment from Rs.15.25 crore to Rs.12.09 crore by using the comparability criteria, other than the criteria used during the transfer pricing proceedings, for which no opportunity for examination was provided to the TPO resulting in violation of Rule 46-A of the I. T. Rules;
2. The ld. CIT (Appeals) has erred on facts and in law in deleting the addition on account of foreign exchange fluctuation loss by relying upon the decision of the court in CIT Vs. Woodward Governors India Pvt. Ltd. 294 ITR 451 by ignoring the fact that the foreign exchange fluctuation loss claimed by the assessee is notional in nature and the department has not accepted the decision of the Hon'ble High Court in the case of CIT Vs. Woodward Governors India Pvt. Ltd. and preferred further appeal with the Hon'ble Supreme Court of India;
3. The ld. CIT (Appeals) has erred on facts and in law in allowing the netting off of interest on Income Tax refund with interest payments, ignoring the fact that there is no nexus whatsoever between interest earned on income tax refund and interest expenditure;
4. The ld. CIT (Appeals) has erred on facts and in law in directing the income tax refund be considered for computing profits of business for the purposes of deduction under section 10-B, over-looking the established principle that deduction under section 10-B is computed on income derived from the eligible undertaking and interest on income tax refund does not fall in the category;
5. The ld. CIT (Appeals) has erred in law by holding that interest tax refund is eligible for deduction under section 10-B by over-looking the decision of the Hon'ble Apex Court in case of CIT Vs. Pandian Chemicals Ltd. 276 ITR 278 wherein the Hon'ble Court has clearly held that the phrase 'derived from' has restricted meaning and only incomes which have a direct and proximate nexus with the business can be held to eligible for deduction under section 10-B. "
4. Return of income in the present case was filed at NIL on 31st October, 2002. The assessee company is engaged in the business of Global Business Processing and support and is operating as a hundred per cent export oriented unit. During the year assessee has entered into international transaction with its associate enterprises. Reference was made by the assessing officer under section 92-CA(1) in respect of international transaction entered into by the assessee. The Transfer Pricing Officer [TPO] vide order dated 18th February, 2005 has determined Arm's Length Price of the international transaction and has arrived at an adjustment 5 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
of Rs.15,25,35,626/-, which has been added by the assessing officer to the income of the assessee. Apart from the afore-mentioned sum the assessing officer has made an addition of Rs.40,74,530/- on account of foreign exchange loss and exemption has been granted to the assessee under section 10-B to the tune of Rs.5,28,51,641/-. An amount of income representing interest on Income Tax refund Rs.1,64,62,391/- stated as income from other sources and in this manner income of the assessee has been assessed at Rs.16,89,98,020/-. The details of international transaction entered into by the assessee with its associate enterprise (AE) are as under :-
" S.No. Description of transaction Value [in Rs.] Method used.
1. Provision of IT Enabled services. 1,29,31,43,177 TNMM
2. Charges for CDN / CPU and technology. 11,24,78,760 TNMM
3. Travel agency services. 7,73,77,037 CUP
4. Secondment of personnel 1,38,66,151 CUP
5. Payment of interest. 1,14,16,145 CUP "
5. Before ld. CIT (Appeals) the assessee contested the addition of Rs.15,25,35,626/- being adjustment towards arm's length price; Rs.1,64,62.391/- being interest received on Income Tax refund treated as income from other sources as the same was assessable under the head "business" and, alternatively, it was claimed that interest on Income Tax refund has wrongly been taken at Rs.1,64,62,391/- against the amount of Rs.1,52,29,404/- which is interest computed upto 31st March, 2002; it was claimed that interest received on Income Tax refund should be considered to be income derived from exempted unit accordingly exemption under section 10-B should be granted thereon; the loss arising out of foreign exchange of Rs.40,45,530/- should be allowed; levy of interest under section 234-B amounting to Rs.2,35,78,623/- and Rs.4,67,573/- under section 234-D were also challenged being too high and excessive.
6Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
6. So as it relates to T.P. issue, after considering the various submissions made by the assessee and after making the adjustment to the OP / TC of the comparables, ld. CIT (Appeals) has arrived at adjusted OP / TC of the comparables at 16.20 per cent against un-adjusted OP / TC at 16.82 per cent and such findings are recorded in para 20 of his order and for the sake of convenience, the same is reproduced below :-
" S.No. Companies Name Un-adjusted OP / TC Adjusted OP / TC.
Mar 02. Mar 02.
1. Ace Software Exports Ltd. 17.63 per cent 14.50 per cent.
2. Allsec Technologies Ltd. 12.15 per cent 13.91 per cent.
3. Genesys International Corpn. Ltd. 39.48 per cent 34.99 per cent.
4. Max Healthscribe Ltd. 6.89 per cent 8.21 per cent.
5. MCS Limited. 7.96 per cent 9.38 per cent.
Average [ OP / TC ] 16.82 per cent 16.20 per cent. "
----------------------------------------------------------------------------------------------------
7. Thereafter the ld. CIT (Appeals) has taken the cost of provisions of services of the assessee to AE at Rs.1,22,17,56,574/- applying the margin of 16.20 per cent to the said cost, a sum of Rs.19,79,24,565/- was considered to be an appropriate margin and after reducing the margin actually earned at Rs.7,69,49,219/-, the T.P. adjustment has been computed by the ld. CIT (Appeals) at Rs.12,09,75,346/-. In this manner, the part relief has been given by the ld. CIT (Appeals) on this issue.
8. Coming to the submissions of the assessee with regard to allowability or otherwise of exemption under section 10-B with regard to the interest earned on Income Tax refund, the ld. CIT (Appeals) has arrived at a finding that such interest upto 31st March, 2002 was only a sum of Rs.1,52,29,404/-. Relying upon the decision of ITAT in assessee's own case for assessment year 1996-97 he held that the said amount has to be netted off against the interest 7 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
payments made by the assessee of Rs.1,85,09,964/-. Since the interest received by the assessee was less than the interest expenditure, it has been held by the ld. CIT (Appeals) that no part of the interest on Income Tax refund should be excluded while computing profits of business eligible for deduction under section 10-B and this issue has been decided by the ld. CIT (Appeals) in favour of the assessee.
9. So as it relates to addition made on account of loss on foreign exchange, the ld. CIT (Appeals) decided the issue following the decision of Hon'ble Delhi High Court in the case of CIT Vs. Woodward Governor India P. Ltd. [2007] 294 ITR 451 (Del.) and has deleted the addition.
10. So as it relates to levy of interest under section 234-B of the Act, relying upon the decision of Hon'ble Supreme Court in the case of CIT Vs. Anjum M. H. Ghaswala & Others [2001] 252 ITR page 1 (SC) the levy is confirmed. However, with regard to levy of interest under section 234-D, following the decision of Special Bench of the Tribunal in the case of Income-tax Officer Vs. Ekta Promoters P. Ltd. [2008] 305 ITR [AT] page 1 (Del.) (SB) it has been held by him that the same could not be charged with respect to assessment years prior to 1st June, 2003.
11. An additional ground was raised by the assessee before the ld. CIT (Appeals) regarding the allowability or otherwise of expenses incurred by the assessee of Rs.1,91,72,777/- during the financial year 2001-02 for setting up AEGSC unit, which was set up on July 29, 2002 and these were pre-operative expenses incurred prior to setting up of AEGSC unit and it was pleaded that they are not claimed in the impugned assessment year and are shown in the balance sheet as pre-operative expenses. It has been held by the ld. CIT (Appeals) that the question of allowability of pre-operative expenses arise from the assessment order passed for the assessment year 2003-04 and the question of allowability, therefore, does not arise for the impugned assessment year and, therefore, the ld. CIT (Appeals) observed that the grievance of 8 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
the assessee cannot be addressed at this stage and the same shall be taken care at the time of adjudication of this ground at the appellate proceedings for assessment year 2003-04. Therefore, he declined to adjudicate the additional ground taken by the assessee. In the afore- mentioned manner, the ld. CIT (Appeals) has disposed of the appeal filed by the assessee.
12. The assessee in this appeal has agitated the additions, which have been upheld by the ld. CIT (Appeals) and the Department is in its appeal is agitating the additions which have been deleted by the ld. CIT (Appeals).
13.1 Before proceeding further to decide the issue relating to adjustment of transfer pricing, it will be relevant to mention few facts. According to the transfer pricing report the assessee compared its international transactions with Associate Enterprise with the unrelated party, namely, Tong Yang Finance Company, Korea, for a consideration based on a cost plus 5 per cent pricing model and, therefore, the international transactions entered into by the assessee with its Associate Enterprises were stated to be priced at arms length as the assessee has adopted the same method. The secondary analysis was done on the basis of TNMM using external comparables. The assessee conducted a search and find out the following four parties :-
(a) Ace Software Exports Limited;
(b) Apex Logical Data Conversion Limited;
(c) Giltedge Infotech Services Ltd.; &
(d) Nucleus Netsoft & GIS India Limited.
13.2 The net operating profit margin of the above four companies was 21.85 per cent by using financial data for financial years 1999-2000 and 2000-01 and the said margin was further adjusted to account for differences on account of various factors and after adjustment the operating margin for the comparables was computed at 9.66 per cent as against the assessee operating margin is of 5.56 per cent and difference being less than 5 per cent it was concluded 9 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
that the assessee's international transactions with its Associate Enterprises is at arm's length. A reference was made by the Assessing Officer to the Transfer Pricing Officer [TPO]. TPO held that during the year the turnover of the assessee with Tong Yang (Rs.1.09 millions) was too insignificant to qualify as a meaningful comparable in comparison to the transactions entered by the assessee with its Associate Enterprises amounting to Rs.1293.14 millions and also that the services rendered by the assessee to Tong Yang was to facilitate the transaction after the transfer of business only till the new owner could make alternate arrangements. The TPO also rejected the secondary analysis of the assessee on the ground that the financial data for 1999- 2000 and 2000-01 was applied. TPO made fresh search by applying the following filters :-
" (i) Turnover < 5 crores;
(ii) Net Fixed Assets / Sales > 150 per cent;
(iii) Depreciation / Total Cost > 15 per cent. "
13.3 Using the above filters, Ld. TPO has searched out 9 comparables out of which further
three companies were rejected on the ground that they were having significant related party transactions (RPT) and the resultant six companies were identified as under :-
1. Ace Software Exports Ltd.
2. Allsec Technologies Ltd.
3. Genesys International Corpn. Ltd.
4. Karvy Consultants Ltd.
5. Max Healthscribe Ltd.
6. MCS Limited.
13.4 The arithmetic mean of the adjusted margin OP / TC of the above comparable was 18 per cent and by applying this operative margin to assessee's cost based arms length price of the international transaction was determined by the Ld. TPO at Rs.1,44,67,69,073/- against the price 10 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
taken by the assessee at Rs.1,29,42,33,447/- and in this manner the adjustment of Rs.15,25,35,626/- was made by the TPO.
14. Before the TPO the assessee in working out OP / TC of comparables sought the following adjustments.
" 1. Working capital adjustment;
2. Depreciation adjustment;
3. Marketing function adjustment;
4. Product liability risk adjustment;
5. Credit risk adjustments. "
14.1. However, TPO gave benefit of working capital adjustment only and after giving detailed reasons, he did not approve other adjustments :-
15. Before the ld. CIT (Appeals) various issues were raised by the assessee against adjustments made on account of arm's length price which, inter alia, include the exclusion of Karvy Consultants Ltd. and Genesys International Corporation Ltd. from the comparables selected by the TPO. From the financial data of Karvy Consultant Ltd., it was found that the turnover of its activities comparable to the assessee was less than Rs.5 Crore, therefore, the said comparable entity was not meeting the criteria of filters considered by the TPO and the same was excluded. As regards Genesys International Corporation Ltd., it was the case of the assessee that since that party has large related party transactions, therefore, it should not be used as comparable. The ld. CIT (Appeals) found that TPO in para 8 of his order has stated that during financial year 2001-02 in fact the turnover of that comparable of related party transaction was less than 1 per cent of the total turnover which cannot influence the profit margin and he also found that the related party transaction in the financial data related to some advances / deposits and those receipts and payments did not form part of the sale / expenditure of the company. Therefore, the ld. CIT (Appeals) declined to exclude that party. The request of the assessee for 11 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
inclusion of one independent party, namely, Transworks Information Services Ltd. was also rejected. The ld. CIT (Appeals) also agreed with the contention of the assessee that an adjustment on account of risk was also to be given. So as it relates to benefit of plus minus 5 per cent range Ld. CIT (A) has held that difference of plus minus 5 per cent is not in the nature of standard deduction. After making discussion, the ld. CIT (Appeals) has held that : (i) current year data was to be used for comparable analysis; (ii) the filters used by the TPO are correct; &
(iii) Karvy Consultants Ltd. was to be rejected as comparable as the turnover of the medical transaction significant was less than Rs.5 crores and thus does not meet the criteria laid down by the TPO and in this manner un-adjusted OP / TC and adjusted OP / TC of remaining 5 comparables was computed by the ld. CIT (Appeals) as has been reproduced in para 6 of this order.
16. After narrating the facts it is the case of the ld. AR that according to the three filters adopted by TPO the case of Genesys International Corporation Ltd. will not fall and Genesys International Corporation Ltd. has to be excluded on the basis of criteria adopted by the TPO. In this regard he referred to para Nos. 7.1 and 7.3 of the TPO's order. In para No. 7.1 the TPO has described the three filters and in para No. 7.3 the acceptable comparables have been defined with the relevant figures. It will be relevant to reproduce the relevant portion of para Nos. 7.1 and 7.3 of the order of the TPO as follows :-
" 7.1 To narrow down the list of the comparables further, following filters were applied to eliminate the companies which are not comparable to the assessee company in terms of functions, assets employed or scale of operations.
i) Turnover < 5 crores : the turnover of the assessee is 129 crores therefore companies with turnover less than 5 crores were eliminated because of huge difference in the scale of economies;12
Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
ii) Net profit Assets / Sales > 150 per cent : the disproportionately high assets to sales ratio indicates either under utilization of capacity or a start-up company or presence of idle / non-productive assets;
iii) Depreciation / Total Cost > 15 per cent : it indicates either under utilization of capacity or start-up Unit or Idle / non-productive assets."
" 7.3 After rejecting the above companies, for the reasons mentioned above, the following comparables were left :
Mar.02 Mar.02 Mar-02 Mar-02 Mar-02 Mar-02
Company sales Total (OP/TC) (gta/sales) (nfa/sales) (Dep/TC)
Name cost % % % %
Ace 5.31 4.58 16.59 90.02 58.57 9.17
Software
Exports Ltd.
Allsec 8.43 8.22 8.64 74.26 64.41 11.07
Technolo-
-gies Ltd.,
Datamatics 40.66 29.71 42.21 66.8 56.22 4.48
Technolo-
-gies Ltd.,
E-Serve 203.68 188.58 13.6 37.84 21.11 9.77
International
Ltd.,
Genesys 14.36 10.72 37.69 119.5 95.75 18.56
International
Corpn. Ltd.,
Infotech 97.43 74.82 39.01 66.65 42.32 15.33
Enterprises
13
Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
Ltd.,
Karvy 53.94 52.29 12.87 87.62 59.03 4.53
Consultants
Ltd.,
M C S Ltd., 26.7 26 7.38 87.83 52.04 4.54
Max Health- 37.49 35.93 4.98 39.8 23.9 6.85
-scribe Ltd.,
17. Referring to the above table it is the case of the learned AR that Genesys International Corporation Ltd. should be excluded from the comparables as its Dep/TC is 18.56% which exceeds the limit set out in the filters applied by TPO. He submitted that if Genesys International Corporation Ltd. is excluded from comparables, then, the difference in the ALP will be within the tolerance limit of + 5%. He submitted that if Genesys is excluded the mean margin of remaining four comparables will be 8.91% against margin of the assessee of 5.56% as computed by the TPO. The difference will be less than 5%. He has submitted the chart which is as follows:-
" American Express (India) Private Limited [AEIPL] Appeals Nos. 1338 Del/2009 & 1512/Del 2009 for AY 2002-03 Comparable Companies Margins as per TPO Margins computed by selected by TPO after CIT (A) applying three filters.
Ace Software Export Ltd. 19.15 14.50
Allsec Technologies Ltd. 10.04 13.91
Genesys International Corpn. ---- ----
Ltd.
Karvy Consultants Ltd. 9.39 ----
MCS Ltd. 2.38 8.21
14
Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
Max Healthscribe Ltd. 3.58 9.38
Average Margins of 8.91 11.50
Comparables.
Assessee Margin 5.56 6.30
Range after benefit of 92C 3.47 5.95
(2) (considering operating
margin of 5.56 per cent of
AEIPL.
Range after benefit of 92-C 3.49 5.93
(2) (considering operating
margin of 6.30 per cent of
AEIPL.
Note 1 : Genesys International Corporation Ltd. did not meet the filter of Depreciation / Total Cost > 15 per cent proposed by TPO in his order and hence should be rejected. [ Page 9 and 12 of TPO's order or Page 112 & 116 of Paper - book C ] Note 2 : Karvy Consultants Ltd. : Only Medical transcription segment is a comparable segment whose revenue is less than Rs.5 crores and does not meet comparability criteria as per TPO. [Page 38 of CIT (A) o56rder of Paper - book A ]. "
18. As against that it is the case of the learned DR that the argument of the learned AR for exclusion of Genesys is a new argument. Assessee did not object the inclusion of Genesys before TPO or CIT (A) on the ground that Dep/TC of the said comparable was more than 15% despite the fact that its exclusion from comparable was sought by the assessee on other grounds. Thus, it is the case of the learned DR that Genesys should not be excluded from the comparable. She pleaded that assessee at this stage cannot be allowed to take entirely a new ground for exclusion of Genesys International Corporation Ltd., which was not taken at all before the TPO or CIT (A). Without prejudice, she submitted that turnover of the Genesys International Corporation Ltd. is almost equal to the turnover of the assessee. She submitted that calculation of depreciation / total cost at 18.56 per cent is as per Companies Act and it is not as per Income Tax Act. After 15 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
analyzing various factors TPO had arrived at a list of comparables and complete information / details in this regard were given to the assessee. The assessee had never raised this issue of depreciation / total cost before the TPO or the ld. CIT (Appeals). According to the ld. Sr. DR analyzing from various angles, M/s. Genesys International Corporation Ltd. is one of the most appropriate comparables and the same should be retained in the list of comparables. Thus, the ld. Sr. DR vehemently objected to the submissions of the ld. AR. She has also submitted following chart and calculation to show as to how the difference of mean margin of the assessee with the comparable will be exceeding 5 per cent and the said calculation is reproduced below :-
Financials of American Express India Private Limited :
Margins used by CIT (A). Margins used
By TPO.
Summary of Associated Unrelated Total Reference
American Enterprises Entities
Express
Margins for
AY 2002-03
[Amount in
Rs.]
Income from 1,293,143,177 1,090,270 1,294,233,447 P 2 of CIT's 1,294,233,447
Exports O r d e r.
Provision for 158,131 158,131
Doubtful
Advances
Written Back.
Excess 5,169,736 5,169,736
provision
written back
16
Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
Miscellaneous 234,749 234,749
Income
Operating 1,298,705,793 1,090,270 1,299,796,063 1,294,233,447
Income
Total Cost 1,225,037,134 1,038,352 1,226,075,486 P 17 of 1,226,075,486
TPO's Order.
Less: 3,280,560 3,280,560
Financial
charges.
Operating 1,221,756,574 1,038,352 1,222,794,926 P 43 of CIT's
Cost O r d e r.
Profit 76,949,219 51,918 77,001,137 P 43 of CIT's 68,157,961
O r d e r.
AEIPL 6.30 per cent. 5.00 per cent. 6.30 per cent. 5.56 per cent.
Margin.
" M/s. American Express (I) Pvt. Ltd. A.Y. 2002-03
Calculation of adjustment
Total cost of provision of services by the assessee Rs.1,226,075,486
(as per Annexure -6 of TP Report}
Margin @ 11.5 per cent of the above {as per CIT(A)'s order : Rs.140,998,681
Arm's length price to be charged from the AE : (A) Rs.1,367,074,167
5 Per cent of the AI.P : Rs.68,353,708
Minimum to be charged by the assessee (lower end of the +/- 5 per cent range) Rs.1,298,720,459 Price charged by the assessee @ 5.56 per cent (B) Rs.1,294,233,447 Adjustment : (A+B) Rs.72,840,720 "17
Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
19. Thus, it was pleaded by the learned DR that firstly Genesys should not be excluded from comparable and secondly even if Genesys is excluded still the difference in the margin of the assessee and comparables will exceed + 5% as per calculation arrived at by CIT (A). Therefore, she submitted that assessee's ground on this issue should be dismissed.
20. We have carefully considered the rival submissions in the light of material placed before us. In our opinion, the claim of the ld. AR for exclusion of Genesys International Corporation Ltd. is a right claim. The TPO had applied three filters which have already been reproduced above. The figures relating to depreciation / total cost are also mentioned in the order of the TPO. When a filter is imposed by the TPO himself, no deviation can be made to that filter. We find no force in the argument of the ld. Sr. DR that at this stage the assessee cannot raise this objection particularly in a situation when all the facts are clearly stated in the order of the TPO itself and for raising this plea the assessee does not need to refer any other document except the order of the TPO. The calculations in the order of TPO are obvious. Therefore, we are of the opinion that this contention of the assessee has to be accepted. Therefore, we exclude Genesys International Corporation Ltd. from the list of comparables.
21. Similarly, Karvy Consultants Ltd. has been excluded by the ld. CIT (Appeals) after examination of the details according to which the separate figures of medical prescription segment (comparable activity) is available according to which the Revenue from that segment is less than Rs.5crores. Therefore, we hold that the ld. CIT (Appeals) has rightly held that Karvy Consultants Ltd. should be excluded as per filters applied by the TPO.
22. It can be seen from the table reproduced in para 17 that learned CIT (A) has re-computed the margins of comparables as the margin of Ace Software Export Ltd. has been reduced to 14.50 from 19.15 computed by TPO and in other cases i.e., in the case of Allsec Technologies Ltd., the margin re-computed by CIT (A) is 13.91% against the margin computed by TPO at 18 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
10.04. However, in the case of MCS Ltd. the margin computed by CIT (A) is 8.21% against 2.38% computed by the TPO and in the case of Max Healthscribe Ltd., the margin computed by CIT (A) is 9.38% against 3.58% computed by TPO. It is in this manner the average mean margin of comparables has been enhanced from the average mean margin taken in respect of these parties at 11.50% against mean margin computed as per calculations of TPO of 8.78%. Similarly, learned CIT (A) also has enhanced the margin of the assessee to 6.30% against margin of the assessee computed by TPO at 5.56%. Not going into the question that whether or not CIT (A) could do so, but one thing is clear that wherever the issue goes against the assessee, the CIT (A) was required to give notice to the assessee of his intention to do so as the same will result in the enhancement of the addition. The enhanced margin computed by the CIT (A) in respect of comparables will result into enhancement of income of the assessee. Therefore, we are of the opinion that the margin computed by the TPO and figures adopted by him will be relevant to consider the issue and if two comparables, namely, Genesys International Corpn. Ltd. and Karvy Consultants Ltd. are excluded, then, the average mean margin of these comparables, as per calculations of TPO, would come to 8.78% and the average mean margin of the assessee as computed by the TPO will be 5.56%. The net result would be that the difference will be within tolerance limit 5% and the assessee will be entitled to have the benefit of proviso to 90C(2). However, these figures are required to be verified by the Assessing Officer. We, therefore, direct that the Assessing Officer should examine the mean margin of left out comparables and of the assessee with reference to the figures adopted by the TPO. If the remaining difference as computed as per our directions, between these two remains less than 5%, then, the benefit of proviso to Section 92C(2) will be given to the assessee and no addition will be called for. We direct accordingly. With these observations the ground relating to TP issue in respect of both the appeals is decided and is considered to be allowed for statistical purposes. The assessing officer will adjudicate the issue in accordance with the directions given to him. This will dispose of ground No. 1 of the Revenue's appeal and ground Nos. 1, 2 and 3 of the assessee's appeal.
23. Apropos ground No. 2 of the appeal filed by the Revenue, the issue has been discussed by the assessing officer at page No. 4 of the assessment order. The ground of rejection of claim of 19 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
the assessee is that the claim has been made on notional basis as the liability has not been paid as on 31st March, 2002 and liability has also not become payable by 31st March, 2002. The assessee will be liable for making the payment on the basis of exchange rate on the date of the payment; the claim of the assessee that it is following accrual method of accounting is mis-conceived and the liability is contingent and is unascertained liability. It is on these basis the claim of the assessee for Rs.40,74,530/- is disallowed. It has been deleted by the ld. CIT (Appeals) following the decision of Hon'ble Delhi High Court in the case of CIT Vs. Woodward Governors India Pvt. Ltd. (supra). This ground raised by the Revenue suggest that the deletion has been only on the ground that Department has not accepted the order of Hon'ble Delhi High Court and has filed appeal with Hon'ble Supreme Court. Now Hon'ble Supreme Court has upheld the order of the Hon'ble Delhi High Court in the decision cited as CIT Vs. Woodward Governors India Pvt. Ltd. 312 ITR 254 (SC). Therefore, we find no force in this ground of the Revenue and the same is dismissed.
23.1 In ground Nos. 3 to 5 the Revenue has agitated the decision of the ld. CIT (Appeals) vide which it has been held that interest upto 31st March, 2002 i.e. a sum of Rs.1,52,29,404/- received on Income tax refund should be netted off against interest payment of Rs.1,85,09,964/-. This has so been held by the ld. CIT (Appeals) according to para 21.1 of his order. It was the claim of the assessee before the assessing officer that interest earned on Income tax refund of Rs.1,52,29,404/- should be netted against interest paid. The assessee was required to show cause as to why such claim of the assessee should not be rejected. In response it was submitted that the netting should be allowed as per the decisions of the Tribunal. The demand was created by the Income Tax Department and assessee had to discharge the same by availing over-draft facility, therefore, interest earned on Income tax refund is linked to the business of the assessee. Section 10-B does not require that profit is to be derived from the business. Section 80-HHC and 10-B are pari materia and are distinguishable from 80-HH / 80-I. Therefore, it was claimed that the netting should be provided. The assessing officer did not accept such claim of the assessee and held that whole of the interest received by the assessee on Income tax refund amounting to 20 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
Rs.1,64,62,391/- is assessable as income of the assessee under the head 'Income from other sources'.
23.2 Before the ld. CIT (Appeals) it was the submission of the assessee that assessee was assessed to Income tax from assessment year 1996-97 onwards and had claimed deduction under section 80-HHC / 10-B of the Act which was denied by the Department, therefore, resulted in Income tax demand of Rs.5,59,39,098/- which was paid during the pendency of the appeals. During financial year 2001-02 the assessee's appeal for assessment year 1996-97 was allowed vide order dated 7th January, 2002. Consequently in financial year 2002-03 refund of Rs.8,07,92,340/- was received including the interest of Rs.1,64,62,391/- vide appeal effect order dated 22nd July, 2002. It was submitted that the interest on income tax refund is worked out as under :-
Financial Year Amount of interest
[in Rs.]
2001-02 15,229,404
(Interest upto March 31, 2002)
2002-03 1,232,987
(Interest for the period April to July, 2002)
Total 16,462,391
23.3 The demand for assessment year 1996-97 was paid out of bank over-draft facility. If the
interest paid by the assessee on over-draft is considered then the interest paid by the assessee is higher than the interest received on Income tax refund. Reliance was placed on various decisions to claim that netting is justified:-
" (i) Pink Star Vs. DCIT [2006] 72 I.T.D. 137 (Bom.); (ii) Honda Siel Power Products Ltd. Vs. DCIT [2001] 21 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009. 77 I.T.D. 123 (Del.); & (iii) Lalsons Enterprises Vs. DCIT [2004] 89 I.T.D. 25 (Del.) (SB).
23.4 The assessee also placed reliance upon the decision of ITAT in assessee's own case for assessment year 2001-02 in I. T. Appeal Nos. 117, 118, 119 (Del) of 2004 vide order dated 29th September, 2006 in which it was held as under :-
" We have considered the rival submissions. The Special Bench of the Tribunal observed that where the expenditure which has direct nexus for earning interest income, it should be deducted from gross interest received. Similar view has been adopted by ITAT, Mumbai in the case of Renaissance Jewellery (supra) relied dupon by the ld. counsel for the assessee. The deposits were made out of business finds of the assessee which were temporarily available. Thus the interest receipt has direct nexus with interest payment. Hence, in view of the aforesaid decisions, since interest income is less than interest expenses no part of the same is to be excluded while computing profits of business eligible for deduction under section 10-B of the Act. "
23.5 Alternatively, it was claimed that interest earned by the assessee during the year on Income tax refund amounting to Rs.1,52,29,404/- is inextricably linked to the hundred per cent EOU of the assessee, therefore, eligible for deduction under section 10-B of the Act. Therefore, it is assessable as business income and reliance was placed on following decisions :-
(i) Snamprogetti SPA Vs. ACIT [1981] 132 ITR 70 (Del.); (ii) Infotech Enterprises Ltd. Vs. JCIT [2003] 85 I.T.D. 325 (Hyd.); (iii) Honda Siel Power Products Ltd. Vs. DCIT [2001] 22 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009. 77 I.T.D. 123 (Del.); (iv) CIT Vs. N. S. C. Shoes [2002] 258 ITR 749 (Mad.); (v) CIT Vs. Paramount Premises (P.) Ltd. [1991] 190 ITR 259 (Bom.); (vi) CIT Vs. Tirupati Wollen Mills Ltd. [1992] 193 ITR 252 (Cal.);
(vii) CIT Vs. Tamil Nadu Dairy Development Corpn. Ltd. [1995] 216 ITR 535 (Mad.);
(viii) CIT Vs. Madras Refineries Ltd. [1997] 228 ITR 354 (Mad.);
(ix) CIT Vs. Punit Commercial Ltd. [2000] 245 ITR 550 (Bom.);
(x) Letherage Vs. ITO [2003]
86 I.T.D. 482 (Lucknow);
(xi) ACIT Vs. Khambhata Family Trust [1998]
67 I. T. D. 411 (Mad.); &
(xii) Wolkmen India Ltd. Vs. DCIT [1998]
65 TTJ 68 (Jai).
23.6 It was claimed that section 80-HHC and 10-B are pari materia and they are different from 80-HH and 80-I. Reference was made to the decision of Tribunal in the case of ACIT Vs. Motorola India Electronics (P) Ltd. [2007] 112 TTJ 562 to contend that interest income has to be taken into consideration while computing deduction under section 10-A / 10-B of the Act. On these submissions the ld. CIT (Appeals) has granted relief to the assessee as follows :-
23Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
" I have carefully considered the submissions made by the appellant, and the decision of the Hon'ble ITAT in Appellant's own case for A.Y. 1996-97. Respectfully following the above order of the ITAT the ground of appeal is allowed. Accordingly, the interest on Income Tax refund of Rs.15,229,404 is to be netted off against the interest payment of Rs.18,509,964 and since the interest received by the appellant is less than the interest expense for the year under appeal, no part of the interest on Income Tax refund of Rs.15,229,404 is to be excluded while computing profits of business eligible for deduction under section 10-B of the Act. Hence Ground No. 3.1 and 4 is decided in favour of the appellant. "
23.7 The Revenue is aggrieved by such findings recorded by the ld. CIT (Appeals).
24. As it can be seen from the above that the case of the assessee before the ld. CIT (Appeals) was that the demand was raised in respect of income assessed for assessment year 1996-97 on which subsequently relief was granted and refund was received in 2002-03. Therefore, in assessment year 1996-97 there was no issue regarding the netting of interest. The netting of interest is only related to assessment year 2000-01. The relevant observations of the Tribunal have already been reproduced. The order of the Tribunal in assessee's case for assessment year 2000-01 does not relate to issue regarding interest earned by the assessee on Income Tax refund. Copy of the said decision has been filed in the assessee's paper-book at pages No. 101 to 120 (Paper Book Part "A"). This issue has been dealt with by the Tribunal in para Nos. 25 to 29. It will be relevant to reproduce below :-
" 25. The next ground of appeal for assessment year 2000-01 is against denying deduction under section 10-B in relation to interest received of Rs.5,13,288/-.
26. The AO noted that the assessee had borrowing from banks for the purpose of business and paid a sum of Rs.55,60,348/- as interest during the year.
24Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
In the profit and loss account the interest received and interest paid is shown separately. In the net analysis the interest expenses is much more than the interest received. The assessee is borrowing for the purpose of its EOU business. Only for certain short duration when funds are available it is placed in short term deposit on which interest is earned. The AO held that interest is not income derived by the assessee from business of data processing and export thereof. In view of the decision of Hon'ble Supreme Court in Sterling Foods Vs. CIT 237 ITR 579, since there is no direct nexus between the business and the interest receipt, such interest income is not incidental to business and hence to be taxed under the head 'Income from other sources' and deduction under section 10-B cannot be allowed in respect of such interest receipt. The ld. CIT (Appeals) confirmed the same.
27. The learned counsel for the assessee Shri Pawan Kumar submitted that the fact remains that the interest was earned out of business funds. At times the assessee was borrowing huge sum from the bank and paid interest thereon. Thus the interest income is to be taxed under the head 'profits and gains of business'. Though the income may not be directly treated as derived from business of data processing since the interest payment is much more than the interest received, no part thereof can be excluded while computing deduction admissible under section 10-B of the Act. For this purpose he relied upon the decision of Special Bench of the Tribunal in the case of Lalsons Enterprises 89 ITD 25. The learned DR, on the other hand, strongly relied upon the appellate order. He submitted that since interest income cannot be considered as "derived from" export of computer software the same is not eligible for deduction under section 10-B.
29. We have considered the rival submissions. The Special Bench of the Tribunal observed that where the expenditure which has direct nexus for earning interest income, it should be deducted from gross interest received. Similar view has been adopted by ITAT, Mumbai in the case of Renaissance Jewellery (supra) relied upon by the learned counsel for the assessee. The deposits were made out 25 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
of business funds of the assessee which were temporarily available. Thus the interest receipt has direct nexus with interest payment. Hence, in view of the aforesaid decisions, since interest income is less than interest expenses no part of the same is to be excluded while computing profits of business eligible for deduction under section 10-B of the Act. "
25. As it can be seen from the afore-mentioned observations of the Tribunal, the issue did not relate to interest earned by the assessee on Income tax refund, but it related to the interest earned on short term deposits and while recording the facts Tribunal has observed that the deposits were made from the business funds of the assessee which were temporary available. Therefore, it was held that interest received had direct nexus with the interest payments. Therefore, in our considered opinion, the said decision cannot be relied upon to consider the issue regarding set off of interest received by the assessee on Income tax refund with the interest paid by the assessee on its over-draft facilities. The interest received from Department on Income Tax refund will stand entirely on a different footing as the payment of tax, if any, is not made by the assessee with an intention to earn interest but to discharge tax liability. It cannot have any connection with the business of the assessee as earning of interest on income tax payment has nothing to do with the business of the assessee. Therefore, the character of interest received by the assessee on Income tax refund cannot be linked with the business of the assessee and it will retain its character of income from other sources. Therefore, the ld. CIT (Appeals) is wrong in holding that the interest earned by the assessee on Income tax refund has a colour of income from business. If the same cannot be related to the business of the assessee then netting off cannot be granted as there is no inextricable link between the earning of the interest and payment of interest. We also do not find force in the contention of the assessee that since the payment of tax was made out of overdraft facility, therefore, interest receipt on income tax refund should be adjusted against interest paid on overdraft facility as according section 57(iii) only such expenditure (not being in the nature of capital expenditure) can be allowed if it is laid down or expanded wholly and exclusively for the purpose of making or earning of such income. Payment of Income tax cannot be said to be made for earning of interest, hence the case of the assessee will also be out of the purview of section 57(iii).26
Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
26. In view of the above discussion, we are of the opinion that the relief has wrongly been granted by the ld. CIT (Appeals) as he did not properly appreciate the facts of the case. The earlier decision of the Tribunal in assessee's own case has no bearing on the facts of the present case. These grounds are decided against the assessee and in favour of the Revenue and these grounds of the Revenue are allowed.
27. In ground No. 4 the assessee has challenged interest under section 234B of the Act on the ground that it is excessive. In ground No. 5 the assessee is contesting the decision of the ld. CIT (Appeals) on levy of interest under section 234B on the ground that the same has not been adjudicated by the ld. CIT (Appeals).
28. After hearing both the parties, we restore this issue to the file of the assessing officer to re-compute interest under section 234-B as per law after giving a reasonable opportunity of being heard to the assessee. It may be mentioned here that assessee is not contesting the leviability of interest under section 234B itself, but contesting only the quantum which will be re-adjudicated by the assessing officer after giving the assessee a reasonable opportunity of being heard as per provisions of law. These grounds are allowed, for statistical purposes.
29. Apropos ground No. 6 raised by the assessee, it is the grievance of the assessee that additional ground related to pre-operative expenses was not adjudicated by the ld. CIT (Appeals).
30. It is the case of the assessee that the ld. CIT (Appeals) has erred in not addressing additional ground of allowability of pre-operative expenses and it has been held that it shall be taken care of at the time of adjudication of appeal for assessment year 2003-04. In 2003-04 the ld. CIT (Appeals) has allowed this claim of the assessee and it was submitted by the ld. AR that 27 Cross I. T. A. Nos. 1338 & 1512 (Del) of 2009.
just to keep alive this issue, this ground has been raised. As the claim of the assessee has been allowed for assessment year 2003-04, we decline to interfere in this ground. Therefore, this ground is dismissed.
31. In the result, both the appeals filed by the assessee and Revenue are considered to be partly allowed, for statistical purposes, in the manner aforesaid.
The order pronounced in the open court on: 13.01.2012..
Sd/- Sd/-
[G. D. AGRAWAL] [I. P. BANSAL]
VICE - PRESIDENT. JUDICIAL MEMBER
Dated : 13.01.2012.
dk
Copy of the order forwarded to : -
1. Appellants.
2. Respondents.
3. CIT,
4. CIT (Appeals),
5. DR, ITAT, NEW DELHI.
True Copy. By Order.
Assistant Registrar, ITAT.