Income Tax Appellate Tribunal - Chennai
Visual Graphics Computing Services ... vs Acit Co Cle Iii (4), Chennai on 10 February, 2017
आयकर अपील य अ धकरण, 'डी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
' D' BENCH : CHENNAI
ी एन.आर.एस. गणेशन, या यक सद य एवं
ी अ ाहम पी. जॉज%, लेखा सद य के सम' ।
[BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER]
आयकर अपील सं./I.T.A. No.2340/Mds/2012
नधा रण वष /Assessment year : 2008-2009
Visual Graphics Computing Vs. The Assistant Commissioner of
Services India Private Limited, Income Tax,
1-4, 10th floor, Zenith, Company Circle III(4)
Ascendas International Park, Chennai.
CSIR Road, Taramani,
Chennai 600 113.
[PAN AAACV 3342H]
(अपीलाथ*/Appellant) (+,यथ*/Respondent)
अपीलाथ क ओर से/ Appellant by : Shri. Nishant Thakkar, Adv &
Shri. Sonia Agrawal, C.A.
यथ क ओर से /Respondent by : Shri. Pathlantha Priya, CIT.
सन
ु वाई क तार ख/Date of Hearing : 06-02-2017
घोषणा क तार ख /Date of Pronouncement : 10-02-2017
आदे श / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against an assessment order dated 30.12.2012 passed by the Assistant Commissioner of Income Tax, Company Circle III(4), Chennai pursuant :- 2 -: ITA No. 2340/Mds/2012 to directions issued by the Dispute Resolution Panel (in short the ''ld. DPR'') u/s.144C of the Income Tax Act, 1961 (herein after referred to as 'the Act'). It has altogether raised eleven grounds apart a from set of additional grounds numbered as 12 & 13.
2. Out of these grounds, ground No.1 is general in nature. Ground No.10 is on levy of interest u/s.234B of the Act which is consequential in nature. Ld. Counsel for the assessee submitted before the Bench that he was not pressing ground no.11, on levy of interest u/s.234C of the Act. This leaves us ground Nos.2 to 9, of which ground no.8 is on issues relating to Transfer Pricing. Additional ground Nos. 12 and 13 are also on Transfer Pricing. Grounds relating to Transfer Pricing will be dealt with in the later part of this order.
3. Vide its grounds 2 & 3, assessee assail exclusion of telecommunication and foreign travel expenditure from its export turnover while computing the eligible deduction under section 10A of the Act. There is also an alternative claim that sums excluded from export turnover were to be excluded from total turnover also. Claim of the assessee that telecommunication expenditure and foreign travel expenditure incurred in foreign currency could not be excluded from export turnover cannot be accepted in view of definition of ''export :- 3 -: ITA No. 2340/Mds/2012 turnover'' given in Explanation 2(iv) to Sec. 10A of the Act. However, viz-a-viz its alternative claim that these expenditure if excluded from export turnover were to be deducted from total turnover also , is acceptable by virtue of judgment of Hon'ble Karnataka High Court in the case of CIT vs. Tata Elxsi Limited 349 ITR 98. Accordingly, we direct exclusion of these expenditure from total turnover also while computing deduction available to the assessee u/s. 10A of the Act. Ground Nos. 2 & 3 are partly allowed for statistical purpose.
4. Vide its ground No.4, grievance raised by the assessee is that deduction available u/s.10A of the Act had to be given without setting off losses of its other STPI unit.
5. Ld. Counsel for the assessee submitted that assessee had a unit at Thiruvanthapuram on which deduction G2.94 Crores was claimed u/s.10A of the Act. As per ld. Authorised Representative, ld. Assessing Officer had reduced the loss of G55 lakhs incurred by it in one of its units in Chennai called GFA while completing the deduction. Ld. Authorised Representative submitted that by virtue of judgment of Hon'ble Supreme Court in the case of CIT vs. Yokagawa India Ltd 77 taxmann.com 41 loss of a STPI unit could not be set off against the profit of the unit on which deduction u/s.10A of the Act was being claimed.
:- 4 -: ITA No. 2340/Mds/2012
6. Contra, ld. Departmental Representative submitted that profit should be computed after set off of all business loss while allowing deduction u/s.10A of the Act.
7. We have considered the rival contentions and perused the orders of the authorities below. Hon'ble Supreme Court in the case of Yokogawa India Ltd (supra) had held at para 17 of its judgment as under:-
''17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression "total income of the assessee" in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in Section 10A as 'total income of the undertaking'.
:- 5 -: ITA No. 2340/Mds/2012 Accordingly, we are of the opinion that loss incurred by the assessee in its Chennai GFA unit shall not be set off against the profit of its Thiruvanathapuram unit while calculating deduction available to the assessee u/s. 10A of the Act. Ground No.4 of the assessee stands allowed.
8. Vide its ground No.5, grievance raised by the assessee is that the lower authorities did not allow set off of its loss in its STPI unit against profits of non STPI unit. Lower authorities had denied the set off treating the STPI unit as a stand alone one. The issue in our opinion is covered in favour of the assessee by virtue of the judgment of Hon'ble Bombay High Court in the case of Hindustan Unilever Limited vs. DCIT 325 ITR 102. Para 24 of this judgment is reproduced hereunder:-
''There is merit in the submission which has been urged on behalf of the assessee that the Assessing Officer has while reopening the assessment ex facie proceeded on the erroneous premise that section 10B is a provision in the nature of an exemption. Plainly, section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Section 10B was substituted by the Finance Act of 2000 with effect from April 1, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent. export oriented undertaking, to which the section applies "shall not be included in the total income of the assessee". The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and :- 6 -: ITA No. 2340/Mds/2012 gains as are derived by a 100 per cent. export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce.
Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The Assessing Officer was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under section 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of section 10B''.
Their lordship clearly observed that loss sustained by an unit which was eligible for deduction u/s. 10B of the Act could be set off against normal business income. We are therefore of the opinion that assessee has to succeed in ground No.5. Ground No.5 stands allowed.
9. Vide its ground No.6, grievance of the assessee is that a portion of its provision made for expenditure was disallowed by the ld. Assessing Officer.
10. Ld. Authorised Representative submitted that ld. Assessing Officer in the draft assessment order had disallowed provisions totaling G2,00,24,664/- for a reason that there was no charge of the said :- 7 -: ITA No. 2340/Mds/2012 amount in the profit and loss account. As per ld. Authorised Representative assessee had objected this before the ld. DRP and ld. DRP had allowed this ground vide paragraph 16(vi) of its order. However, as per ld. Authorised Representative, ld. Assessing Officer in the final assessment order did not allow a portion of such provisions made for Chennai VA unit, Thiruvanathapuram unit and Chennai GFA unit based on a wrong presumption that assessee could not produce any supporting documents. As per ld. Authorised Representative assessee had produced break-up of such expenditure before ld. Assessing Officer. Reliance was placed on paper book page Nos.179 to 184 which gave the break-up of the provision.
11. Per contra, ld. Departmental Representative submitted that ld. DRP was obliged to arrive at a specific conclusion. According to him, ld.DRP did not have power to issue directions for further enquiry. Reliance was placed on sub section (8) to Sec. 144C of the Act.
12. We have considered the rival contentions and perused the orders of the authorities below. Directions of the ld. DRP as it appear at paragraph 16(vi) of its order is reproduced hereunder:-
Disallowance of provisions of leave encashment, bonus and other expenses by the Assessing Officer - The DRP finds itself in agreement with the contention of the assessee company in principle and directs the Assessing Officer to verify the relevant facts and to :- 8 -: ITA No. 2340/Mds/2012 modify the draft assessment order to the extent required.
Section 144C(8) of the Act on which reliance is placed by ld.
Departmental Representative is reproduced hereunder:-
''The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order''. We are of the opinion that ld. DRP was obliged to give specific findings with regard to the claim of the assessee after going through the records. We are of the opinion that the matter requires a fresh look by the ld. DRP. We therefore set aside the orders of the ld. Assessing Officer and ld. DRP on the issue regarding provision for expenditure and remit it back to the ld. DRP for consideration afresh in accordance with law. Ground No.6 allowed for statistical purpose.
13. Vide its ground No.7, assessee is aggrieved that ld. DRP had failed to give directions on its claim for enhanced deduction u/s.10A of the Act, if the provision for expenditure was disallowed.
14. We find that above ground is related to ground No.6 of the assessee relating to disallowance of provision. Since we have set aside the matter regarding disallowance of provision back to ld. DRP for :- 9 -: ITA No. 2340/Mds/2012 consideration afresh, we are of the opinion that this issue can also to be dealt by ld. DRP, in case they find that disallowance of any part or whole of the provisions were justified. Ground No.7 is therefore treated as allowed for statistical purpose.
15. Vide ground No.9, assessee is aggrieved on short credit of TDS of G2,220/-.
16. As per the assessee, TDS was correctly claimed by it in its return of income but still credit is not given. We are of the opinion that ld. Assessing Officer has to verify the fact whether tax has been deducted and claimed by the assessee in its return and decide accordingly. Ground No.9 is allowed for statistical purpose.
17. This leaves us with ground No.8 of the original grounds and ground nos.12 & 13 of additional grounds which are on transfer pricing related matters.
18. Ld. Counsel for the assessee submitted that he was seeking exclusion of M/s. Infosys BPO Ltd and Cosmic Global Limited from the list of comparables considered by ld. Transfer Pricing Officer for bench marking the international transactions of the assessee with its Associated Enterprise abroad. According to him, in case, M/s. Cosmic :- 10 -: ITA No. 2340/Mds/2012 Global Limited was considered to be a good comparable, then one another comparable suggested by the assessee namely M/s. MCS Ltd also needed to be included in the list of comparables. In support of the above pleadings, ld. Authorised Representative relied on the profile of the assessee which has been extracted by the ld. TPO at para 2 of its order at 12.09.2011 in which he has classified the assessee as an IT enabled service provider.
19. Continuing his submission, ld. Authorised Representative stated that assessee was providing services to its Associated Enterprise in the form of power point presentations which included preparation of various visual aid communication materials such as graphics, charts, exhibits, overhead transparencies and on-screen animated presentations. As per ld. Authorised Representative its Associated Enterprise, namely M/s. Mckinsey & Company was situated in USA. Again as per ld. Authorised Representative the final set of ten comparables considered by the ld. TPO included M/s. Infosys BPO Ltd and M/s. Cosmic Global Ltd. As per ld. Authorised Representative though M/s. Cosmic Global Ltd was assessee's own comparable it had objected before ld. DRP and sought exclusion of the said company from the list of comparables, due to its very low employee cost to :- 11 -: ITA No. 2340/Mds/2012 total cost ratio. As per ld. Authorised Representative such low rate of employee cost to total cost proved that it was outsourcing its work and thus its functional profile was different from that of the assessee, which was not doing any outsourcing. Contention of the ld. Authorised Representative was that M/s. Cosmic Global Ltd had employee cost which was 25.2% of the total cost and was noted by ld. TPO himself. If its outsourcing translation work was also considered, as per ld. Authorised Representative such ratio would be still lower. According to him, M/s. Cosmic Global Limited could not be taken as a good comparable to that of the assessee. Reliance was placed on the decision of Pune Bench of the Tribunal in the case of Maximize Learning Private Limited vs. ACIT ( ITA No.2235/PN/2012, dated 02.02.2015 for assessment year 2007-08) and also the judgment of Hon'ble Andhra Pradesh High Court in the case of CIT vs. M/s. Market Tools Research (P) Ltd ( I.T.T.A. No.471 of 2014, dated 25.07.2014).
20. In so far as M/s. Infosys BPO limited was concerned, ld. Authorised Representative submitted that it had a turnover which was more than G850 crores whereas that of assessee was only G64.27 crores. Contention of the ld. Authorised Representative was that M/s.
:- 12 -: ITA No. 2340/Mds/2012 Infosys BPO was working at a much higher scale than the assessee. As per the ld. Authorised Representative by virtue of Hon'ble Bombay High Court judgment in the case of CIT vs. M/s. Pentair Water India Pvt. Ltd, (2016) 381 ITR 216 M/s. Infosys BPO Limited could not be considered as a good comparable. Reliance was also placed on the judgment of Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd (2013) 93 DTR 375.
21. Contra, ld. Departmental Representative submitted that M/s. Cosmic Global Limited was assessee's own comparable and therefore assessee could not now seek exclusion. Viz-a-viz M/s. Infosys BPO Limited, submission of the ld. Authorised Representative was that volume of activity was not relevant when functional profiles were similar. Thus, he supported the orders of the lower authorities.
22. We have considered the rival contentions and perused the orders of the authorities below. No doubt M/s. Cosmic Global Limited was one of the comparables considered by the assessee in its own TP study. However, assessee had before the ld. TPO itself pointed out that M/s. Cosmic Global Limited had very low employee cost to total cost ratio, proving that it was getting its work done through outsourcing. Assessee had raised this issue before ld. DRP as well. By virtue of decision of Special Bench in the case of Dy. CIT vs. Quark :- 13 -: ITA No. 2340/Mds/2012 Systems P. Ltd (2010) 42 DTR 414 which was upheld by Hon'ble Punjab and Haryana High Court (62 DTR 182) , an assessee cannot be estopped from seeking exclusion of a comparable which was on its own list. Assessee had specifically pointed out that M/s. Cosmic Global Limited had employee cost which was 25.2% of the total cost. However, ld. TPO as well as ld. DRP has held that if the outsourcing translation work of G2.86 crores incurred by the said company was considered as a part of its employees cost, then the employees cost would swell to 85%. In our opinion expenditure incurred on by M/s. Cosmic Global Ltd for outsourcing translation cannot be considered as part of its employee cost. We also find that Pune Bench of the Tribunal in the case of Maximize Learning Private Limited (supra) where also the concerned assessee was into ITES service, had with regard to comparability of M/s. Cosmic Global Ltd held as under in para 24 of its order:-
''We have carefully considered the rival submissions. The pertinent point made out by the Ld. Representative for the assessee is that the said concern is operating in a different business model wherein much of it's activities are outsourced whereas the business model of the assessee is different. In an outsourcing business model obviously the expenditure incurred on employee costs would be low in comparison to the expenditure incurred on outsourcing. Ostensibly, where IT enabled services are outsourced to a third party vendor then the margin derived by the said concern would be attributable to services rendered by the outsourced vendor. Per contra, where IT enabled services are being rendered by a concern through its own employees, the margins from rendering of services by the said concern would be attributable to its own employees. Obviously, the level of margins in the two business models would not be comparable. The :- 14 -: ITA No. 2340/Mds/2012 Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) has held that concerns who act as intermediateries having outsourced it activity cannot be said to be comparable with a concern who is rendering services through its own employees. The said proposition has also been upheld by the Hyderabad Bench of the Tribunal in the case of Brigade Global Services Private Limited (supra). Having regard to the aforesaid discussion, in our view, the said concern is not a good comparable to be included for the purposes of comparability analysis as it operates under a different business model which impacts operating margins. As a consequence, we direct the Assessing Officer to exclude the said concern from the final set of comparables''.
We are therefore of the opinion that M/s. Cosmic Global Limited has to be excluded from the list of comparables. Ordered accordingly.
23. Coming to the comparability of M/s.Infosys BPO Limited, Hon'ble Bombay High Court in the case of M/s. Pentair Water India Pvt. Ltd, (supra) had upheld the order of the Tribunal in the case, wherein it was observed as under:-
''Infosys BPO Ltd. :- In this case also we noted the turnover in respect of this Company is Rs.649.56 crores while the turnover of the Asseessee company is around Rs. 11 crores which is much more than 65 times of the Assessee's turnover. We, therefore, do not find any illegality or infirmity in the order of CIT(A) in excluding this Company out of the comparables. Accordingly, we confirm the order of the CIT(A)''.
No doubt here turnover of the assessee was G64.27 crores. However the turnover of M/s.Infosys BPO Ltd for the impugned assessment year was G850 Crores which was more than ten times that of assessee.
:- 15 -: ITA No. 2340/Mds/2012 Therefore we are of the opinion that M/s. Infosys BPO Ltd was operating at a different level and could not have been compared with assessee. We, therefore direct the ld. Assessing Officer to exclude M/s. Infosys BPO Ltd from the list of comparables. Ordered accordingly.
24. Submitting his arguments on assessee's grievances regarding working capital adjustment, ld. Authorised Representative stated that ld. DRP had given a specific direction to verify the working capital position between the assessee and the comparables. However, according to ld. Authorised Representative working capital adjustment for advances from customers recoverable in cash or kind from four companies were not considered. As per ld. Authorised Representative observation of the ld. Assessing Officer was that break up was not available from the downloaded financials of the four companies namely Sparsh BPO Service Ltd, Aditya Birla Minacs Worldwide Ltd, Professional Management Consultants Pvt Ltd and Sundaram Business Services Ltd. Relying on paper book II, page nos. 14 to 23, ld. Authorised Representative submitted that these details were readily available but still not considered.
25. Per contra, ld. Departmental Representative strongly supported the orders of the authorities below.
:- 16 -: ITA No. 2340/Mds/2012
26. We have considered the rival contentions and perused the orders of the authorities below. Grievance of the assessee is that advance recoverable in cash or kind of the four companies mentioned above were part of the Audited account and annual report of these companies but still not considered. We find that schedule 8 of balance sheet of Sparsh BPO Services Ltd does give the breakup of loans and advances and other current asset which interalia include advances of G61,69,150/- recoverable in cash or kind or the value to be received. Such details are available at schedule 9 of the audited accounts of the Aditya Brila Minacs Worldwide Limited, Schedule 6 of Sundaram Business Services Limited and Schedule 7 of Professional Management Consultants Private Limited. Accordingly, we are of the opinion that ld. Assessing Officer /TPO has to rework the working capital adjustment, necessary after considering the value of advance and deposits recoverable in cash or kind or for the value to be receivable from the above four companies also. Ordered accordingly.
27. Thus, out of the various grounds raised by the assessee in relation to Transfer Pricing issue, we allow the grounds seeking exclusion of Infosys BPO Ltd and M/s. Cosmic Global Ltd from the list of comparables and also direct the ld. Assessing Officer to rework the working capital adjustments considering the advances/deposits :- 17 -: ITA No. 2340/Mds/2012 recoverable in cash or kind or value to be received from the four companies listed at para 26 above. Ld. Counsel for the assessee did not advance arguments on any other grounds relating to the Transfer Pricing issue. Accordingly, ground No.8 of the original ground and the grounds No.12 & 13 in the additional ground are treated as partly allowed.
28. In the result, the appeal of the assessee is partly allowed for statistical purpose.
Order pronounced on Friday, the 10th day of February, 2017, at Chennai.
Sd/- Sd/-
(एन.आर.एस. गणेशन)) (अ ाहम पी. जॉज%)
(N.R.S. GANESAN) (ABRAHAM P. GEORGE)
या यक सद य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER
चे$नई/Chennai
%दनांक/Dated: 10th February, 2017.
KV
आदे श क त(ल)प अ*े)षत/Copy to:
1. अपीलाथ /Appellant 3. आयकर आयु+त (अपील)/CIT(A) 5. )वभागीय त न/ध/DR
2. यथ /Respondent 4. आयकर आयु+त/CIT 6. गाड फाईल/GF