Income Tax Appellate Tribunal - Mumbai
Hinduja Ventures Ltd.(Formerly Known ... vs Addl.C.I.T. Rg. 8(2), Mumbai on 12 July, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL " K" BENCH, MUMBAI
BEFORE SRI MAHAVIR SINGH, JM AND SRI RAMIT KOCHAR, AM
ITA No. 4503/Mum/2012
(A.Y:2007-08)
Hinduja Ventures Limited Addl. Commissioner of
Formerly known as HTMT Ltd. Income-tax, Range 8(2),
In centre, 49/50, MIDC, 12th Road, Vs.
Mumbai
Andheri (East) Mumbai-400 093
PAN No. AAACH2058N
Appellant .. Respondent
ITA No. 4424/Mum/2012
(A.Y:2007 -08)
Dy. Commissioner of Hinduja Ventures Limited
Income-tax, Range 8(2), Formerly known as HTMT Ltd.
Mumbai In centre, 49/50, MIDC, 12th
Vs. Road, Andheri (East) Mumbai-
400 093
PAN No. AAACH2058N
Appellant .. Respondent
Assessee by .. Shri Kamal Sawhney, AR
Revenue by .. Mrs. Malathi Sridharan, DR
Date of hearing .. 19-05-2017
Date of pronouncement .. 14-07-2017
ORDER
PER MAHAVIR SINGH, JM:
These cross appeals are arising out of the order of CIT(A)-15, Mumbai, in appeal No. CIT(A)-15/Arr.266/11-12 dated 12-04-2012. The Assessment was framed by Addl.CIT, Range-8(2), Mumbai for the A.Y. 2007-08 vide order dated 01-02-2011 under section 144C (3) r.w.s. 143(3) of the Income Tax Act, 1961(hereinafter 'the Act').
2. The first common issue in these cross appeals relates to additions made by the AO based on the adjustment made by the Transfer Pricing ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 Officer (TPO) and confirmed by CIT(A). For this assessee has raised various grounds No. 1 to 4 as under: -
"1. On the facts and circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') and the learned Assessing Officer ('AO') erred in making the additions and Hon'ble Commissioner of Income Tax (Appeals) (CIT(A)), further erred in partly upholding/enhancing the additions made by TPO/AO to the Appellant's income based on the provisions of the Income-tax Act, 1.961 ('the Act') and the said additions being wholly unjustified are liable to be deleted.
Ground No. 2 to 4 relate to Transfer Pricing based on the provisions of Chapter X of the Act:
2. Adjustment on account of Rendering of IT enabled services On the facts and in the circumstances of the case and in law, the learned TPO/AO erred in making an addition of Rs. 1,27,80,000/- and Hon'ble CIT(A) erred in partly upholding / confirming the action of the learned TPO of making an addition on account of rendering of IT enables services to the Appellant's income.
Rejection of Contemporaneous search conducted by the Appellant 2.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding / confirming the action of the learned Page 2 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 TPO of rejecting the contemporaneous bench marking analysis carried out by the Appellant without assigning any valid reason in contravention to the provisions of section 92C(3) of the Act. Fresh search conducted by the learned TPO 2.2 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in upholding / confirming the action of the learned TPO of conducting a fresh benchmarking analysis based on his conjectures and surmises using non-contemporaneous data and applying inappropriate filters in selecting companies as comparable.
Incorrect Rejections of comparables 2.3 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in confirming the action of the learned TPO of rejecting the comparables selected by the Appellant for the purpose of calculating the Arithmetic mean of comparables margins.
Incorrect Selection of comparables 2.4 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in accepting some of the comparables selected by the learned TPO in the fresh benchmarking analysis undertaken by him for the purpose of calculating the Arithmetic mean of margins of the comparables.
Page 3 of 29ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 Incorrect computation of margin of the corn parables selected by the learned TPO 2.5 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in accepting the incorrect margin of the comparable companies as computed by the TPO in his order.
Erroneous approach of the 'I'M in selecting secret comparables 2.6 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in accepting secret comparables by considering companies for which data was not available in public domain. TPO erred in invoking the powers given under Section 133(6) of the Act and not sharing detailed detail information for the purpose of cross examination by Appellant. The exercise undertaken by the TPO under Section 133(6) of the Act is selective and arbitrary and hence should be out rightly rejected Denial of Working Capital adjustments 2.7 On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in upholding / confirming the action of the learned TPO in not allowing working capital adjustments in accordance with the provisions of Rule I OB of the Income Tax Rules, 1962 to account for differences between international transactions Page 4 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 and the alleged comparable uncontrolled transactions selected by the learned TPO.
Denial of the benefit of +/ -5% as envisaged by proviso to section 92C (2) of the Act 2.8 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred on facts and in law in arbitrarily rejecting the without prejudice contention of the Appellant to provide the benefit / reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act, while determining the arm's length price for the international transactions.
Rejection of overseas AEs (i.e. Sourcel HTMT Inc, USA and HTMT- Europe as tested party) 2.9 On the facts and in the circumstances of the case and in law, the TPO/AO erred, in arbitrarily rejecting overseas entities (being simpler entities) as tested parties without providing any cogent reasons, in disregarding benchmarking analysis and comparable companies selected by the Appellant based on the contemporaneous multiple year data in the transfer pricing study report maintained as per section 92D of the Act read with Rule 101) of the Income-tax Rules, 1962 ('the Rules').
2.10 The TPO/AO further erred in ignoring the fact that AEs which are marketing entities have incurred losses and therefore the international Page 5 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 transaction can be said to be at arm's length from an Indian Transfer Pricing perspective.
Similarly, Revenue has also challenged the order of CIT(A) for excluding Wipro Limited and Infosys BPO as comparables. For this Revenue has raised following ground No. 3: -
"3) On the facts and in the circumstances of the case and in law, the Ld. CJT(A) erred in directing to exclude Wipro Ltd and Infosys BPO as corn parables ignoring the fact that in any service industry like software industry, the price for services rendered is decided by the market rather the brand value".
3. Briefly stated facts are that the assessee is engaged in the business of providing IT enable services and it executes a BPO project of (insurance claim processing) handling various type of claims. It is also diversified into Call Center business and handles billing and marketing related calls and service calls. The assessee has declared its business results in respect of above mentioned division for six months till 30-09- 2006 and further with effect from 01-10-2006 this division got demerged and results were declared by Hinduja Global Solutions Limited as per the demerger approved by Hon'ble Bombay High Court vide order dated 23- 02-2007. The learned Counsel for the assessee before us made short submissions that the issue is covered by the order of Tribunal in the case of Hinduja Global Solutions Limited vs. DCIT, which is a demerged unit, in ITA No 4933 and 4950/Mum/2012 for part of the year wherein the Tribunal has accepted the comparables and rejected the Revenues selection of e clerx Services Ltd., Model Tech Technologies, Visual Technologies Limited, and department is in appeal in regard to exclusion of two comparables i.e. Wipro Limited and Infosys BPO Limited. The learned Counsel for the assessee gave particulars and stated that at last margin Page 6 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 will be within ± 5%. The learned Counsel for the assessee file the details in its paper book, which reads as under: -
Sl Name of the company TPO Set CIT(A) Scenario-I No. set
1. Accentia Technologies Limited 38.26 38.26 38.26
2. Aditya Birla Minacs Worldwide Ltd. (Formerly 11.98 11.98 11.98 known as Transworks Information Services Ltd.)
3. Allsec Technologies 27.31 27.31 27.31
4. Apex Knowledge Solutions Pvt. Ltd 12.83 12.83 12.83
5. Appollo Health Street Limited (13.55) (11.35) (11.35)
6. Asit C. Mehta Financial Services Ltd. 24.21 24.21 24.21
7. Bodhtree Consulting Ltd (Seg) 29.58 - -
8. Caliber Point Business Solutions Ltd. 21.26 21.26 21.26
9. Cosmic Global Ltd 12.40 12.40 12.40
10. Datamatics Financial Services Ltd. (Seg) 5.07 5.07 5.07
11. Eclerx Services Ltd 90.43 87.83 -
12. Flextronics Software Systems Ltd (Seg) 14.54 14.54 14.54
13. Genesys International Corporation Ltd 13.35 13.35 13.35
14. HCL Comnet Systems & Services Ltd. (Seg) 44.99 44.99 44.99
15. ICRA Techno Alalytics Ltd. (Seg) 12.24 12.24 12.24
16. Informed Technologies Ltd. 35.56 35.56 35.56
17. Infosys BPO Ltd 28.78 - -
18. I Services India Pvt. Ltd 50.27 50.27 50.27
19. Maple Esolutions Ltd 34.05 - -
20. Mold-Tek Technologies Ltd. 11.349 109.63 -
21. R Systems International Ltd. (Seg) 20.18 20.18 20.18
22. Spanco Ltd (Seg) 25.81 25.81 25.81
23. Triton Corp Ltd 34.93 - -
24. Vishal Information Technologies Ltd. 51.19 51.19 -
25. Wipro Ltd (Seg) 29.7 - -
Arithmetic Mean 30.75 30.27 20.98 Further, the learned Counsel for the assessee gave details of ± 5% Particulars Amount Plus 5% Income from Services rendered 8661.79 9094.88 Operating Cost (OC) 7487.26 7487.26 Operating Profit (OP) 1174.53 1607.62 Op/OC% 15.69 21.47%
4. The learned Counsel for the assessee stated that it is carrying on the same business as carried on by Hinduja Global Solutions Limited after Page 7 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 01-10-2006 on account of demerger and same AO, TPO and CIT(A) were same for both the entities and identical comparables were chosen for both the entities. According to him, in case the Tribunals order in the case of Hinduja Solutions Limited, a demerged entity, is followed, wherein exclusion of e-clerx services Limited, Mold-Tek Technologies Limited, Vishal Information Technologies Limited is confirmed and rest of the five companies have been excluded by the CIT(A) including challenged by Revenue i.e. Wipro Limited and Infosys BPO Limited, in that eventuality the assessee's comparable fitted into the ± 5% range as provided by section 92C(2) of the Act. The learned counsel for the assessee drew our attention to the order of Tribunal in the case of Hinduja Global Solutions Limited, wherein it is held as under: -
"Ground no.2, which relates to transfer pricing adjustment on provisions of ITES is being dealt with herein after.
7. The major issue which arises for consideration in these grounds relate to selection / rejection of comparables which we propose to deal with at the outset. The assessee has objected to rejection of NIIT Smart Serv Ltd. as a comparable.
8. Learned Authorised Representative submitted, the Transfer Pricing Officer has rejected the company as a comparable on the ground that related party transactions (RTP) of the company at 25.26% exceeds the permissible RPT limit of 25%. The learned Authorised Representative submitted, as per the financials of the comparables, the RPT is 11.72% which is less than 25% RPT filter applied by the Transfer Pricing Officer. She submitted, as per the annual report of the comparable, it has total RPT of ` 155,378,842 and its revenue is ` 560,648,554, which works out to 27% on revenue / sales. She Page 8 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 submitted, Transfer Pricing Officer has worked out this percentage at 25.26% and has applied related party filter of 25% on sales. She submitted, learned Commissioner (Appeals) has taken total RPT (expenditure plus income) and divided it to total income. Therefore, numerator and denominator are not consistent. She submitted, RPT calculation can be done either on the basis of RPT income divided by total income or RPT expenses divided by total expenditure or RPT income plus expenditure divided by total income plus expenses. She submitted, if the RPT is worked out applying the aforesaid principle, it will work out to 11.72% which is less than the 25% RPT filter applied by Transfer Pricing Officer. In support of her contention, she relied upon the following decisions:-
i) CIT v/s P.T.C. Software India Pvt. Ltd., ITA no.732 of 2014, dated 26.9.2016;
ii) PTC Software India Pvt. Ltd. v/s ACIT, ITA no.1605/Pn./2011; and
iii) Sunguard Solutions Net Pvt. Ltd. v/s DDIT, ITA no.1670/Pn./ 2011.
9. Learned Departmental Representative agreeing in principle with the submissions of the learned Authorised Representative contended that the RPT computation has to be aligned to any one of the criteria proposed by the learned Authorised Representative. He, therefore, submitted, it may be restored back to the file of the Assessing Officer for doing the necessary exercise. 10. We have considered the submissions of the parties and perused the material available on record. Basic Page 9 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 difference between the assessee and the Departmental Authorities as far as selection of this comparable is RPT. While the Transfer Pricing Officer / learned Commissioner (Appeals) have excluded the company on the reasoning that RPT has exceeded the threshold limit of 25%. Learned Authorised Representative pointed out flaws in computation of RPT and has submitted that as per actual computation, RPT of the comparable is 11.72% which is well within the threshold limit applied by Transfer Pricing Officer. Having considered the submissions of the parties, we find that the Tribunal, Pune Bench, in PTC Software India Pvt. Ltd. (supra), observed the ratio of RPT to total transactions have to be worked out by dividing RPT sales and RPT expenses with total sales and total costs. The aforesaid view expressed by the Tribunal, Pune Bench, was approved by the Hon'ble Jurisdictional High Court in CIT v/s PTC (I) Pvt. Ltd. (supra) while holding that RPT has to be considered in the context of total transactions. In view of the aforesaid, we restore the issue relating to comparability of the aforesaid company to the Assessing Officer / Transfer Pricing Officer for deciding afresh after working out the RPT keeping in view the decisions referred to above.
eClerx Services Ltd.
11. Objecting to selection of this company, learned Authorised Representative submitted, it is functionally different since it is providing data analytics services, operations management service and audits and reconciliation services. She Page 10 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 submitted, these activities are not even remotely comparable to the activities carried on by the assessee. She submitted, the functions performed by the comparable is in the higher end of the BPO service which is known as Knowledge Process Outsourcing (KPO), hence, cannot be compared to low end BPO service provider. In support of such contention, learned Authorised Representative relied upon the following decisions:-
i) Rampgreen Solutions Pvt. Ltd. v/s CIT, [2015] 377 ITR 533 (Del.);
ii) ITO v/s Knoah Solutions P. Ltd., ITA no.1407/Hyd./2013, order dated 25th April 2014;
iii) C3i Support Services Pvt. Ltd., v/s ACIT, [2014] 151 ITD 348 (Hyd.); and iv) iQor India Services Pvt. Ltd. v/s ITO, [2015] 57 taxmann.com 416 (Del. Trib.)
12. Learned Departmental Representative relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals). 13. We have considered the submissions of the parties and perused the material available on record. From the material on record, it is evident that this company is engaged in activities which are totally different from the assessee. It is also relevant to note that comparability of this particular company with BPO service providers has come up for consideration in case of number of other assessees and consistent view of different benches of the Tribunal is, this company since is engaged in providing KPO services is not a comparable to BPO service Page 11 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 providers. In fact, the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. (supra), approving the aforesaid view has observed that company being involved in providing KPO services is not comparable. The relevant observations of the Hon'ble Delhi High Court is reproduced below:-
"37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different Page 12 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s Capital Iq Information Systems (India) (P.) Ltd. v. Additional Commissioner of Income-tax (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits.
14. In the aforesaid view of the matter, we are of the opinion that this company cannot be treated as comparable to the assessee.
Moldteck Technologies Ltd.
15. Objecting to inclusion of this company as a comparable, the learned Authorised Representative submitted, this company is engaged in the business of engineering service to high rise buildings in U.S. and Canada. She submitted, during the relevant previous year, it has acquired cross road detailing Inc. an engineering service KPO. She submitted, as against this, the assessee is providing services relating to insurance claim processing and call centre service which are routine ITES. Therefore, company should not be treated as a comparable. In support of such contention, assessee relied upon the following decisions:-Page 13 of 29
ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8
i) Rampgreen Solutions Pvt. Ltd. v/s CIT, [2015] 377 ITR 533 (Del.);
ii) ITO v/s Knoah Solutions P. Ltd., ITA no.1407/Hyd./2013, order dated 25th April 2014; and
iii) C3i Support Services Pvt. Ltd., v/s ACIT, [2014] 151 ITD 348 (Hyd.).
16. Learned Departmental Representative relied upon the order of the Assessing Officer and the learned Commissioner (Appeals). 17. We have considered the submissions of the parties and perused the material available on record. As could be seen from the material on record, this company is providing highly technical and speciliased engineering service which comes in the category of KPO. That being the case, it cannot be treated as comparable to the assessee. This view was taken by the Tribunal, Hyderabad Bench, in Capital IQ Information Systems India Pvt. Ltd. v/s DCIT, [2013] 25 ITR (Trib.) 185 (Hyd.) and subsequently followed in a number of other decisions of the Tribunal including the decisions relied upon by the learned Authorised Representative. In fact, in case of Ramp Green Solutions Pvt. Ltd. (supra), the Hon'ble Delhi High Court approving the view expressed in the case of Capital IQ Information Systems India Pvt. Ltd. (supra), held that KPO service provider cannot be compared with a normal BPO service provider. Respectfully following the consistent view expressed in the judicial precedents referred to above, we exclude this company from the list of comparable.
Vishal Information Technologies Ltd.
Page 14 of 29ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8
18. Objecting to the inclusion of this company, learned Authorised Representative submitted the company under no circumstances can be comparable to the assessee as a major portion of its work is out sourced to third parties. Learned Authorised Representative referring to the financials of the company for the year under consideration submitted, the assessee had paid an amount of ` 13.31 crore towards data entry charges and vendor payments which works out to almost 65% of the total expenditure. She submitted, the personnel cost of the company is merely 3.47% of the total cost as against assessee's personnel cost of 66.52%. She, therefore, submitted, the business model of the company being totally different from the assessee, it cannot be treated as comparable. In support of this contention, learned Authorised Representative relied upon the following decisions:-
i) Rampgreen Solutions Pvt. Ltd. v/s CIT, [2015] 377 ITR 533 (Del.);
ii) Capital IQ Information Systems (I) Pvt.
Ltd., v/s DCIT, [2013] 25 ITR (T) 185 (Hyd.);
iii) Techbooks International Pvt. Ltd. v/s ACIT, ITA no.4990/Del./2011, order dated 2.4.2014, and iv) C3i Support Services Pvt. Ltd., v/s ACIT, [2014] 151 ITD 348 (Hyd.).
19. Learned Departmental Representative supported the findings of the learned Commissioner (Appeals) and the Assessing Officer.
20. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On Page 15 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 examining the financials of the company, we have noted, major part of expenditure incurred by the company is towards data entry charges and vendor payment which works out to almost 65% of the total expenditure. It is further seen, the salary cost of the company works out to 3.47% of the total cost which signifies that the company is itself not engaged in providing ITE services but gets it done through others. In other words, it out-sources the work to third party vendors. Therefore, this company cannot be a comparable to the assessee on the basis of function performed and assets employed. Considering the aforesaid aspects, the Tribunal, Hyderabad Bench, in Capital IQ Information Systems India Pvt. Ltd. (supra) has held that this company cannot be considered as comparable as it out sources its activities. The aforesaid view of the Tribunal has been approved by the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra). For better appreciation, we consider it appropriate to reproduce the observations of the Hon'ble High Court in this regard.
"38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same Page 16 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity."
21. In view of the aforesaid, we are of the opinion, this company cannot be treated as comparable to the assessee.
22. At this stage, it is necessary to deal with the Department's appeal in ITA no.4950/Mum./2012, since, the only issue involved therein is in relation to exclusion of two comparables by the learned Commissioner (Appeals) viz. Wipro Ltd. and Infosys BPO Ltd. As could be seen from the materials on record, these two companies were not in the list of comparables selected by the assessee. The Transfer Pricing Officer had included these two companies as comparables in the course of proceedings before him.
23. The learned Commissioner (Appeals) had excluded the aforesaid companies on the reasoning that they have brand value, incurring heavy marketing and selling expenses and cost of software package for own use.
24. Learned Departmental Representative objecting to the exclusion of these two companies submitted, only on the basis of high turnover companies cannot Page 17 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 be excluded from the list of comparable. He submitted, if high turnover filter was not applied earlier, it cannot be applied at a later stage.
25. Learned Authorised Representative on the other hand relied upon the observations of the learned Commissioner (Appeals).
26. Having considered the submissions of the parties and perused the material on record, we are of the considered opinion that under no circumstances, these two companies can be considered as comparable to the assessee as they will not qualify on FAR analysis owing to various factors including their brand value, size, owning of intangibles, etc. In various decisions, different benches of the Tribunal have held that these companies cannot be considered as comparable to a captive service provider. The same view has also been expressed by the Hon'ble Jurisdictional High Court in CIT v/s Pentair Water India Pvt. Ltd., [2016] 381 ITR 216. Keeping in view the aforesaid facts, we agree with the learned Commissioner (Appeals) that these two companies cannot be treated as comparable to the assessee.
27. At the time of hearing, learned Authorised Representative has submitted before us a chart showing computation of margin after exclusion of the following companies:-
i) Bodhtree Consulting Ltd.
ii) eClerx Services Ltd.
iii) Infosys BPO Ltd.
iv) Mapel-e Solutions Ltd.Page 18 of 29
ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8
v) Molteck Technologies Ltd.
vi) Triton Corp. Ltd.
vii) Vishal Information Technologies Ltd.
viii) Wipro Ltd.
28. As per the said chart, after exclusion of the aforesaid companies, the weighted average margin of the rest of the comparables works out to 20.89%. Since we have excluded E-clerx Services Ltd., Moldteck Technologies Ltd. and Vishal Technologies Ltd. and rest of the five companies have been excluded by the learned Commissioner (Appeals) which is also upheld by us while dismissing Revenue's appeal, the weighted average margin of the rest of the comparables at 20.98% is within ±5% of margin shown by the assessee on 16.50% requiring at further adjustment to the arm's length price as far as ITES segment is concerned. That being the case, other grounds raised by the assessee on determination of arm's length price in ITES segment having been reduced to mere academic interest do not require adjudication."
5. However, the learned CIT DR agreed that the issue is covered for part of the year i.e. in the demerged companies case but she stated that in view of large number of services falling under IT enabled services and difficulty in classifying these services either as low end BPO services or high end KPO services, it is not always possible to bifurcate IT enabled services as BPO and KPO services for the purposes of comparability analysis. She relied on the decision of Mumbai Bench 'K' (SB) (2014) 43 taxman.com 100 (Mum-Trib.) (SB) wherein it is held as under: -
"78. To sum up, we hold that the potential comparables of ITES sector level can be selected Page 19 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 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 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."
In view of the above, the learned CIT DR also relied on the judgment of Hon'ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. vs. CIT (2015) 60 taxmann.com 355 (Del), Hon'ble Punjab and Haryana High Court in the case of CIT vs. Mercer Consulting (India) (P.) Ltd. (2016) 76 taxmann.com 153 (P&H) and Bombay High Court in the case of CIT vs. PTC Software (I)(P.) Ltd. (2016) 75 taxmann.com 31 (Bom).
Page 20 of 29ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8
6. We have heard both the sides and gone through the Tribunals order in the case of demerged company Hinduja Solutions Limited (supra) and notice that the issue is squarely covered in favour of assessee. Respectfully, following the demerged company of the assessee where by the Tribunal has allowed the claim of the assessee, taking a consistent view, and that the operating profit and operating cost margin comes to 15.69% and + 5% makes it to 21.47% and assessee's margin comes to 20.98% which is within ± 5% of the margin shown by the assessee. We order AO accordingly. Accordingly, this issue of assessee's appeal is allowed as per the above direction and the issue of Revenue's appeal is dismissed.
7. The next issue in this appeal of assessee is as regards to the order of the AO/TPO confirmed by CIT(A) in making adjustment of notional interest without considering economic and commercial benefits accruing to the assessee. For this assessee has raised following ground No.3:-
3. Adjustment of Rs. 41,32,000 on account of Notional Interest 3.1 On the facts and in the circumstances of the case and in law, the TPO/AO erred in making and Hon'ble CIT(A) further erred in confirming an adjustment of Rs. 41,32,000 on account of notional interest on the interest free loan given to AE without considering economic and commercial benefits accruing to the Indian entity.
3.2 Without prejudice, the TPO/AO erred in making and Hon'ble CIT (A) further erred in confirming the benchmarking of interest free loan at Libor plus 300 basis points without any cogent reasons.Page 21 of 29
ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8
8. We have heard the rival contentions and gone through the facts and circumstances of the case. At the outset, the learned Counsel for the assessee as well as learned CIT DR fairly conceded that the loan was given for earning of interest or not or to acquire the business of the AE i.e. to acquire C-Cubed N.V. an associate enterprise is not in dispute but learned counsel for the assessee made only alternatively that addition is to be made only based on the LIBOR rate to held the ALP rate as applicable. The assessee has claimed that this issue has been decided by the Tribunal in assessee's own case on this very same loan in AY 2008-09 and AY 2010-11. We direct the AO to decide the issue in term of decision taken in AYs 2008-09 and 2010-11 on the very same issue. Accordingly, this issue remitted back to the file of the AO. This issue of assessee's appeal is allowed for statistical purposes.
9. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in making disallowance of expense relatable to exempted income u/s 14A of the Act. For this assessee has raised following ground No. 5:-
"5. Disallowance under section 14A of the Act 5.1 On the facts and in the circumstances of the case and in law, the learned AO erred in making a disallowance under section 14A of Rs. 63,08,190 and the learned CIT(A) further erred in upholding such disallowance.
5.2 The learned CIT (A) further erred in enhancing the disallowance under section 14A computed by the learned AO from Rs.63, 08,190 to Rs.2,48,16,000.
5.3 Without prejudice to the above grounds, even assuming (without admitting) that Page 22 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 disallowance under section 14A of the Act is to be made, the learned CIT (A) erred in rejecting the computation of disallowance submitted by the Appellant without providing any cogent reasons."
10. At the outset, the learned Counsel for the assessee stated that the AO as well as CIT(A) has relied on rule 8D for working out of the disallowance and Tribunal in identical circumstances in assessee's own case for the AY 2004-05, in ITA No. 400/Mum/2010 dated 30-11-2010 and for AY 2005-06 in ITA No. 6770/Mum/2014 dated 01-06-2016 has remanded the matter back to the file of the AO to consider the disallowance u/s 14A of the Act in accordance with law. The Tribunal observed as under: -
"5. At the time of hearing, learned AR submitted that the appeal filed by the assessee was disposed of by the Tribunal on 21.1.2015 in ITA No. 6394/Mum/2014, wherein the Tribunal directed the Assessing Officer to consider the matter relating to the disallowance u/s. 14A afresh with the following observations :-
12. After considering the rival contentions, we direct the Assessing Officer to compute the disallowance u/s. 14A, in terms of directions issued by the Tribunal in assessee's own case vide order dated 31.1.2012, wherein the Tribunal has directed the Assessing Officer to consider all the materials placed by the assessee before it while computing disallowance u/s. 14A of the Act. We direct accordingly.Page 23 of 29
ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8
6. Accordingly learned AR submitted that the issue, having been restored back to the file of the Assessing Officer to consider the same afresh, the appeal of the revenue would also stand covered by the said direction.
7. We have heard learned Departmental Representative and perused the record. Since the Tribunal has restored the issue relating to disallowance u/s. 14A to the file of the Assessing Officer with the direction to examine the same afresh, said order would cover the grounds urged by the Revenue.
8. Accordingly the appeal filed by the Revenue is treated as allowed for statistical purposes."
11. Respectfully following the Tribunal's decision in earlier year in assessee's own case, we restore the matter back to the file of the AO to decide the disallowance in accordance with law and provisions of section 14A of the Act. The Rule 8D of the Rules will not apply to the relevant year in view of the decision of Hon'ble Bombay High Court tin the case of Godrej & Boyce Mfg. Ltd vs. DCIT (2010) 328 ITR 81 (Bom). Accordingly, this issue of assessee's appeal is allowed for statistical purposes.
12. The next issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expenditure being payment made to group concern incurred for the purpose of transactions in ITNL shares being legal and professional fees. For this Revenue has raised following ground No. 1 & 2: -
1) "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of expenditure of Rs.
4,00,00,000/- being payment made to group concern MIs Hinduja Group India Ltd ignoring Page 24 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 the fact that assessee had failed to explain the nature of the said payment and to substantiate its allowability as an expenditure incurred, wholly and exclusively, for the purposes of its business.
2) "Further on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to treat the payment of Rs. 4,00,00,000/- made to group concern MIs Hinduja Group India ltd as cost of sales of shares of ITNL ignoring the fact that the assessee has failed to substantiate the allowability of the impugned payment of Rs.4 cr, to its associate concern as an expenditure incurred for the purpose of its transactions in ITNL shares, in addition to and over and above the various, specific expenses separately claimed by the assessee under the head "Capital Gain".
13. Briefly stated facts are that the assessee claimed to have incurred expenses amounting to Rs. 33.78 crores towards legal and professional fees paid to various persons during the year. According to AO, an amount of Rs. 4,22,47,500/- incurred on account of legal and professional fee is expenditure as capital expenditure for certain expense such as commitment fee, legal fee pertaining to disinvestment of ITNL shares, which had been capitalized either with cost of shares or reduced from sale consideration by treating the same as cost of sale of shares but assessee claimed the same as Revenue expenditure. Aggrieved, assessee preferred the appeal before CIT(A), who deleted the disallowance by observing in Para 7.4 as under: -
Page 25 of 29ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 "7.4 I have considered the facts of the case, submission of the appellant as against the findings / observations of the AO in his assessment order under section 143(3) of the I.T. Act. The contentions and submissions of the appellant are being discussed and decided here in under:
i. The assessee company is engaged broadly in the business of providing I.T. and ITeS, media & telecommunication, treasury and realty business.
ii. As far as the payment of Rs. 4,00,00,000/- is concerned. The AO in his order at Para 8.3 page 10 has mentioned that such amount has been paid to M/s Hinduja Group India Ltd. and its nexus with the disinvestment of ITNL share has not been substantiated. The appellant in its details submission to the AO has mentioned that this payment is for advisory fees for disinvestment of stake of ITNL & Legal compliance. In this regard it is mentioned that there is no doubt raised by the AO on the factum of payment. The only question therefore would be whether such payment is capital or revenue in nature. As the very fact that such payment has been made in connection with disinvestment of stake of ITNL & legal compliance, the nature of expenses have to be treated as one towards costs of sales of the share of ITNL. The argument of the AO that this additional payment to M/s Hinduja Group India Ltd. is an additional in-house payment to the group company and it nexus with the disinvestment of ITNL shares has not been substantiated Page 26 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 and therefore such payment is not under dispute. Once that be so and the payment towards disinvestment of ITNL Shares, may be to Group Company, does not make such payment to be not allowable. Under such facts of the case, the expenditure is held to be for the purposes of disinvestment of shares of ITNL and legal compliances and accordingly the same is directed to be treated as cost of sales shares of ITNL in the hands of the appellant. Accordingly, the sub-ground 4.2 of the appeal is allowed.
iii. In view of the above, the Ground No.4 is partly allowed."
Aggrieved against the order of CIT(A) deleting the disallowance, Revenue came in second appeal before Tribunal.
14. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the AO observed from the narration and the nature of the expenditure, that these expenses have been incurred for purposes which have no immediate nexus with the actual business operation conducted during the year and these are incurred in relation to acquisition/disposal of shares or in connection with implementation of certain projects, which are in the pipeline or for the purposes which have direct nexus with the capital base of the assessee. According to AO the assessee has already capitalized expenditure which actually is attributable to the purchase and sale of ITNL shares and the same has been certified by tax auditors. The amount of Rs.4 crores paid to M/s. Hinduja Group India Ltd., is an additional in-house payment to the group company and its nexus with the disinvestment of ITNL shares has not been substantiated. Hence, according to AO, all the items of expenditure has to be disallowed as non-revenue expenditure Accordingly, the afore- stated expenses aggregating to Rs. 4,22,47,500/-
Page 27 of 29ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 is treated as capital. We find that the CIT(A) allowed the claim of assessee only for the reason that the payment has been made in connection with disinvestment of stake of ITNL and legal compliance and hence, the expenses are to be treated as cost of sale of shares of ITNL. But the findings are without any basis. In such circumstances, we restore this issue back to the file of the AO to find out the nexus of this expenditure with that of the disinvestment of ITNL shares after taking evidences from the assessee. The assessee is also directed the necessary evidences to substantiate its claim. Accordingly, this issue is set aside and allowed for statistical purposes.
15. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO /TPO in making adjustment of commitment fee. For this assessee has raised following ground No.4: -
4. Adjustment of us., 1,56,00,000 on account of 'commitment fee' on sale of shares of lndusind Telecom Network Ltd On the facts and in the circumstances of the case and in law, the TPO/AO erred in making and Hon'ble CIT (A) erred, in confirming adjustment of 'commitment fee' of Rs.
1,56,00,000 on sale of shares of Indusind Telecom Network Ltd."
16. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee during the year under consideration sold shares of Indusind Telecom Network Ltd. numbering 2,58,75,545/-. The assessee claimed the shares of the same company were also sold to a third party by Innetwork Entertainment Ltd. The assessee claimed third party charged commitment fee in the shape of interest at Rs. 1,56,00,000/- at the rate of 10% of sale consideration from the date of agreement till the completion date between 30-06-2006 Page 28 of 29 ITA No s . 4 42 4 & 4 50 3 / Mu m/ 2 01 2 Hinduja Ventures Limited; A. Y: 07- 0 8 to 17-08-2006. The AO required the assessee to explain this transaction by filing evidence and date of fulfillment of conditions, copies of board resolutions, details of dematerialization of shares with date but the assessee could not file these details and accordingly, the TPO proposed the addition and AO added the same. The CIT(A) affirmed the decision of the AO. Now, before us the learned Counsel for the assessee made only one submission, at last, that the disallowance if all is to be made that is to be calculated only for the delay of four days. Since, the factual aspects are not examined by the AO, we restore this issue back to the file of the AO, who after examining all the evidences as to be filed by the assessee, will decide the issue according to law. This issue of assessee's appeal is allowed for statistical purposes.
17. In the result, the appeals of assessee and Revenue both are partly allowed for statistical purposes.
Order pronounced in the open court on 14-07-2017 .
Sd/- Sd/-
(RAMIT KOCHAR) (MAHAVIR SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 14-07-2017
Sudip Sarkar /Sr.PS
Copy of the Order forwarded to:
1. The Appellant
2. The Respondent.
3. The CIT (A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai
6. Guard file. //True Copy//
BY ORDER,
Assistant Registrar
ITAT, MUMBAI
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