Income Tax Appellate Tribunal - Hyderabad
Brigade Global Services Pvt.Ltd, ... vs Assessee on 11 October, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A, HYDERABAD
BEFORE SHRI CHANDRA POOJARI, MEMBER and
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
I.T.A. No. 1494/Hyd/2010
Assessment year 2004-05
M/s. Brigade Global vs. The Income Tax Officer
Services Pvt. Ltd., Ward-1(1)
Hyderabad Hyderabad
PAN: AAACW4748A
Appellant Respondent
I.T.A. No. 988/Hyd/2011
Assessment year 2005-06
M/s. Brigade Global vs. The Income Tax Officer
Services Pvt. Ltd., Ward-1(2)
Hyderabad Hyderabad
PAN: AAACW4748A
Appellant Respondent
Appellant by: Sri I. Rama Rao
Respondent by: Sri Narahari Biswal
Date of hearing: 11.10.2012
Date of pronouncement: 26.11.2012
ORDER
PER CHANDRA POOJARI, AM:
The above two appeals by the assessee are directed against different orders of the CIT(A)-III, Hyderabad assessment years 2004-05 and 2005-06. As certain issues involved in these two appeals are common in nature, the appeals are clubbed and heard together and are being disposed of by the common order for the sake of convenience.
2. First we will take up ITA No. 1494/Hyd/2010.
3. Brief facts of the issue are that the assessee is a company engaged in providing back office processing services. For the 2 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ A.Y. 2004-05, it has filed return of income on 27.10.2004 showing income of Rs. 1,470/- after claiming deduction of Rs. 13,30,153 u/s. 10A of the Act. During scrutiny of this return, the Assessing Officer noticed that during the previous year, the assessee has gross receipts from exports shown at Rs. 13,05,32,325, shown under BPO services, and foreign exchange gain of Rs. 11,46,821 and interest income of Rs. 1,470 shown under other sources. He further noticed that in the profit & loss account, the assessee has claimed an amount of Rs. 1,00,71,383 towards communication expenses, which was attributable to the delivery of computer software abroad, shown under BPO services. Referring to the definition of 'export turnover' as given in clause (iv) to Explanation-2 to section 10A of the Act, which says consideration in respect of export of articles or things or computer software received by an assessee in convertible foreign exchange, but does not include freight, telecommunication charges, insurance attributable to delivery of such article outside India and expenses if any, incurred in foreign exchange in providing technical services outside India, he held that such communication expenses, which was incurred by the assessee for delivery of the software under BPO services abroad, has to be excluded for computing the 'export turnover' for the purpose of computing deduction u/s. 10A. Therefore, after excluding the said amount of Rs. 1,00,71,383 towards telecommunication charges, from the figure of Rs. 13,16, 79,146 as export turnover considered by the assessee, he computed the 'eligible export turnover' at Rs. 12, 16,07,763, and accordingly, computed the allowable deduction u/s. 10A at Rs. 12,28,417. He, thus, disallowed an amount of Rs. 1,01,736 towards excess deduction claimed u/s. 10A of the Act.
3 ITA No. 1494/Hyd/2010 & Anr.M/s. Brigade Global Services Pvt. Ltd.
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4. The Assessing Officer further noticed that during the previous year the assessee has entered into international transactions with its Associated Enterprise (AE in short) M/s. Webhelp Inc, USA, value of which was shown at Rs. 13,05,32,325/-. For determining the Arm's Length Price (ALP) of such transactions, during the assessment proceedings, the Assessing Officer has made a reference to the Addl. CIT, (Transfer Pricing) (TPO in short) u/s. 92CA(1) of the Act on 5.9.2006. In response to the same, after making necessary verification and enquiries in the matter, the TPO vide his order dated 22.12.2006 passed u/s. 92CA(3) of the Act, determined the ALP of such international transactions at Rs. 17,73,86,758 thereby suggesting for adjustment of Rs. 4,68,54,433 u/s. 92CA of the Act. Later, in conformity with such order passed by the TPO the Assessing Officer made an addition of Rs. 4,68,54,433 to the income of the assessee, towards adjustment to the ALP of such international transactions u/s. 92CA of the Act. With both the above additions and taking into account the income from other sources shown separately at Rs. 1,470 the Assessing Officer computed the assessment determining total income at Rs. 4,69,57,639 vide his order dated 29.12.2006 passed u/s. 143(3) of the Act.
5. Before the CIT(A) the assessee challenged reduction of communication expenses from the export turnover. On this issue the CIT(A) observed that in view of clause (iv) to Explanation-2 to section 10A of the Income-tax Act, 1961 communication expenses are to be reduced from eligible export turnover for the purpose of deduction u/s. 10A of the Act. Accordingly, he confirmed the reduction of communication expenses from eligible export turnover. However, he has given a finding that the telecommunication expenses what are deducted 4 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ from export turnover the same to be deducted from total turnover also.
6. Regarding adjustment under ALP of the international transactions u/s. 92CA of the Act, assessee challenged selection of comparables. The assessee shown the value of the international transactions at Rs. 13,05,32,325 in addition to an amount of Rs. 19,16,518 towards Recharges. The assessee followed TNM Method for the purpose of analysing the transfer pricing as most appropriate method. For comparability analysis the assessee has used data belonging to the period April 2001 to 16th February, 2004 and has selected 17 comparables for A.Y. 2004-05. However, the TPO considering the provisions of Rule 10B(4) of the Income-tax Rules, 1962, further considering the contemporaneous data i.e., the data belonging to the financial year 2003-04, has excluded the companies from the list of comparables originally selected and furnished the comparative results in respect of 8 companies. However, out of the 8 companies in respect of which the assessee furnished the financial data, taking into account the financial results for the financial year 2003-04, the TPO selected two companies i.e., Nucleus Netsoft & GIS India Ltd. and Tricom India Ltd. and rejected the other six companies. Further he selected the following six companies for the purpose of comparable analysis for the A.Y. 2004-05:
a) Fortune Infotech Ltd.
b) Vishal Information Technologies Ltd.
c) Wipro BPO Solutions Ltd.
d) Spanco Telesystems (Segmental)
e) Mercury Outsourcing
f) Ultramarine & Pigments Ltd. (Segmental)
7. Thus, the TPO finally selected 8 comparables for determining ALP of the international transactions for A.Y. 2004- 5 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
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05. Taking into account the PLI for the financial year 2003-04 in respect of the above 8 comparables, he arrived at the average profit margin i.e., Arithmetic Mean PLI at 36.82% after allowing deduction of 2% towards working capital adjustment, he arrived at the adjusted Arithmetic Mean PLI at 34.82%. Further, though the assessee furnished the operating expenses at Rs. 11,74,52,779, the Assessing Officer considered the operating cost at Rs. 13,15,73,029. After applying the above adjusted arms-length margin of 34.82% to such operational cost the TPO computed the ALP of the international transactions entered by the assessee with its Associated Enterprises (AEs) during the A.Y. 2004-05 at Rs. 17,73,86,758. Since the assessee has shown such price at Rs. 13,05,32,325, he added Rs. 4,68,54,433 towards adjustment u/s. 92CA of the Act. However, he has accepted the value of transactions shown under Recharges at Rs. 19,16,518. Against the computation of ALP, the assessee raised the following grounds of appeal:
1.0 The orders passed by the lower authorities, insofar as issues decided against the assessee are against the law, facts, circumstances, natural justice, equity and all other known principles of law.
1.1 The order passed by the learned TPO under the provisions of section 92CA of IT Act is bad in law and the learned AO erred in relying on such order.
1.2 The order of the learned CIT(A) on the issue of 'transfer pricing' to the extent determined against the appellant, is in error and the findings are in violation of provisions of section 92C of IT Act.
1.3 That the authorities below failed to appreciate the entire issue in the right perspective, instead, the findings are totally against the facts on record.6 ITA No. 1494/Hyd/2010 & Anr.
M/s. Brigade Global Services Pvt. Ltd.
============================ 1.4 The reliance placed by the learned Assessing Officer on the contemporaneous data of the financial year 2003-04 was not made available/ accessible, therefore, the orders passed are one sided and are contrary to the principles of natural justice.
1.5 Both the AO and as well as CIT(A) erred in rejecting the loss making comparables in violation of OECD guidelines, instead, summarily and without any basis concluded that the comparables shall be of those companies which have shown profit.
1.6 The learned CIT(A) erred in confirming the action of the Assessing Officer who rejected certain companies relied by the assessee as comparables, on the alleged ground of functional differences, which findings are not supported by cogent reasons acceptable under law.
1.7 The learned CIT(A) is not correct in approving the comparables selected by the AO/TPO, since under the facts, circumstances, the alleged comparables selected do not fall under category of 'comparables.
1.8 The learned CIT(A) failed to read the second proviso to section 92C(2) of the IT Act in the right perspective and misled himself, insofar as the option to use ± 5%, while determining ALP.
1.9 The lower authorities ought to have allowed downward adjustment pertaining to working capital differences on a scientific basis, instead, allowed the same at 2% on a mere summary basis.
1.10 The learned CIT(A) is not correct in reducing the communication expenses from the export turnover while computing deduction u/s. 10A of the IT Act, this is especially so when these expenses were not part of export turnover.
7 ITA No. 1494/Hyd/2010 & Anr.M/s. Brigade Global Services Pvt. Ltd.
============================ 1.11 For these and other reasons that are to be urged at the time of hearing of the case, the appellant prays that the orders passed by the lower authorities are to be set aside in the interest of justice and prays for appropriate relief based on the above grounds.
8. Though the assessee raised the above grounds, confined its arguments as mentioned in its written submission. Being so, we consider the arguments in the written submissions.
9. The learned AR submitted that ground Nos. 1.0, 1.2, 1.3 and 1.11 are general in nature and do not require any adjudication. Accordingly, these grounds are not considered for adjudication and dismissed.
10. Ground Nos. 1.1 and 1.4 are pertaining to validity, legality and propriety of the procedure adopted by the TPO while determining the ALP of the international transactions entered by the assessee with its AEs. The AR submitted that the TPO in the process of determination of ALP has rejected 6 companies from the list of comparables furnished by the assessee and included another 6 companies chosen by him in the final list of comparables. In this process, the TPO had not given opportunity to furnish certain other cases which are really comparables. Instead, the TPO had proceeded to choose his own cases of companies, which is against the ratio laid down by the Special Bench of the Tribunal in the case of Aztec Software & Technology Services Ltd. vs. Asst. CIT (109 TTJ 892) (Bang.) (SB), 107 ITD 141 (Bang) (SB) and reiterated by Mumbai Bench of ITAT in the case of Bayer Material Science (P) Ltd. vs. Addl. CIT (148 TTJ 581) (Mum).
11. The learned DR relied on the order of the CIT(A).
8 ITA No. 1494/Hyd/2010 & Anr.M/s. Brigade Global Services Pvt. Ltd.
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12. We have heard both the parties and perused the material on record. For transfer pricing analysis in this case, the assessee has used data of different companies pertaining to the period from April, 2001 to February 16, 2004. Thus, the assessee has used data of the preceding two financial years and partly of the current financial year, from April 1, 2003 to February 16, 2004. However, under Indian Transfer Pricing Regulation, for the purpose of comparability analysis, an assessee is bound to use the data of relevant financial year, in which it has entered into international transaction. Under Rule 10B(4), it says the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction, shall be the data relating to the financial year in which the international transaction has been entered into. Thus, as per the above provisions, user of data of the current financial year, in which international transaction has been entered into by an assessee, is mandatory. There is no option but to use the data of only the relevant financial year, in which the international transaction has been entered into by the assessee, for comparability analysis. Though, in the proviso below the said Rule 10B(4), it says that data relating to the preceding two financial years may also be considered, if such data reveals facts which could have an influence on determination of transfer prices in relation to the transactions being compared, since in the instant case, the assessee has not been able to reveal any facts pertaining to the earlier financial years which had an influence on the determination .of transfer prices with reference to those comparable companies, the TPO justified in using the data of only the current financial year 2003-04, for determining the ALP in this case. In support of this stand, we place reliance on the decision of ITAT, Pune Bench, in 9 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ the case of Honeywell Automation India Ltd vs. DCIT (2009- TIOL-104-ITAT PUNE) and the decision of the Tribunal, Delhi Benches, in the case of Customer Services India Pvt. Ltd., vs. ACIT, (30 SOT 486). These grounds are rejected.
13. Ground Nos. 1.5, 1.6 and 1.7 are with regard to selection of comparables.
14. The AR submitted that the TPO rejected the following companies as comparables:
(a) C.S. Software Ltd.
(b) M.C.S. Ltd.
(c) Mukund Engineers Ltd.
(d) Carborundum Universal Ltd.
(e) Suprawin Technologies Ltd.
(f) Tulsyan Technologies Ltd.
(g) F.I. Sofex Ltd.
(h) Ace Software Exports Ltd. and
(i) Vans Information Ltd.
15. He drew our attention to the data of following companies and their details:
S. Company Name Status Issue Justification No. 1 Nucleus Netsoft & GIS Accepted both by the A difference of about 7% in The TPO had included India Limited Transfer Pricing Officer the Operating profit on the credit of Rs. 11.15 (TPO) and the Cost arrived by the Transfer lakhs arising on Deferred Appellant Pricing Officer and the tax for computing Appellant 'Operating Profit', which is incorrect Excluding the same, the ratio works out to 9.85% only.
2 Tricom India Limited Accepted both the A difference of about 7% in As per the TPO, the
Transfer Pricing Officer the Operating profit on Cost Operating profit/ cost
(TPO) and the arrived by the Transfer equals 45.74% for the
Appellant Pricing Officer and the financial year 2003-04,
Appellant but, factually it works out
to 38.37% only.
3 Datamatics Rejected by the Rejection accepted by the
Technologies Limited Transfer Pricing Officer Appellant.
(TPO) and rejection
accepted by the
Appellant
4 Hinduja TMT Limited Rejected by the Rejection accepted by the
Transfer Pricing Officer Appellant.
(TPO) and rejection
accepted by the
Appellant
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5 Weal Infotech Limited Rejected by the The segmental data for Rejection accepted by the
Transfer Pricing Officer 2004 was not available and Appellant.
(TPO) and rejection no annual report had been
accepted by the produced by the Appellant
Appellant
6 Carborundum Rejected by the The company is functionally Rejection accepted by the
Universal Limited Transfer Pricing Officer different and segmental Appellant.
(TPO) and rejection data for 2004 was not
accepted by the available.
Appellant.
7 Max Healthscribe Rejected by the Data for 2004 is not Rejection accepted by the
Limited Transfer Pricing Officer available Appellant.
(TPO) and rejection
accepted by the
Appellant.
8 Tata Services Limited Rejected by the The company is having a The company is into
Transfer Pricing Officer different business profile services akin to BPO,
(TPO), but, rejection and the business is being hence, it is not
disputed by the conducted on a no-profit- functionally different. It is
Appellant. no-loss basis. a commercially operating
company and not a
'Trust'; hence, 'No profit
no loss' concept does not
arise here at all.
9 Ace Software Exports Rejected by the The company is catering Though Apex Data
Limited Transfer Pricing Officer only to a single customer Services Inc., USA is an
(TPO), but, rejection Apex Data Services Inc. Associated company of
disputed by the and bot the companies Ace Software, it acted as
Appellant. being ' Associated an intermediary through
Enterprises' u/s 92A(2), its whom different clients transactions with customers were introduced to Ace cannot be treated as Software and thus uncontrolled transactions. generated business for the company. However, the Appellant did not have any sale or purchase from and/or to Apex Data Services Inc. which is confirmed by its financial statements.
10 C S Software Rejected by the There was not forex The financials of the Enterprises Limited Transfer Pricing Officer revenue and hence not company for the financial (TPO), but, rejection catering to Overseas year 2003-04 discloses disputed by the market and also due to loss on account of foreign Appellant. business functions, risks currency transactions and and assets being not similar 'Notes on accounts' talks to that of the appellant. about accounting policy adopted with respect to foreign exchange transactions. Also, the company is into similar business.
11 F I Sofex Limited Rejected by the Segmental total cost not The detailed revenue, Transfer Pricing Officer available and that the PBIT and common costs (TPO), but, rejection subsidiary in India incurred of each segment is disputed by the a loss due to which the available in the database. Appellant. entire investment as well as Also, 'Provision for recoverable advance had doubtful debts' is an been fully provided for in operating expense for any the books of accounts. company. Moreover, like profit, loss is also a part and parcel of the business and to arrive at an industry average, loss 11 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ suffering units cannot be ignored which is in line with the OECD guidelines clause 3.45 on application of TNMM.
12 M C S Limited Rejected by the The reasons being there The company is engaged
Transfer Pricing Officer was no forex revenue and in share registry services
(TPO), but, rejection that it is functionally which is very much similar
disputed by the different from a BPO. to BPO services and the
Appellant. financials of the company
for the financial year
2003-04 discloses income
on account of foreign
currency and Point no. :
1(x) of 'Notes on
accounts' talks about
accounting policy adopted
with respect to foreign
exchange transactions.
13 Vans Information Rejected by the The company has incurred The provisions related to
Limited Transfer Pricing Officer losses continuously for Transfer Pricing do not
(TPO), but, rejection three years. provide for rejection
disputed by the based on losses.
Appellant.
14 Suprawin Technologies Rejected by the The company have incurred The provisions relating to
Limited Transfer Pricing Officer losses continuously for Transfer Pricing do not
(TPO), but, rejection three years; no segmental provide for rejection
disputed by the results are available and based on losses. Also,
Appellant. that the company is the official website of
continuously engaged in department of IT and
Research & Development of Biotechnology has given
products like ERP & CRM. details of participants in
the IT.Com Show
conducted in the FY
2003-04, where Suprawin
had put up its stall and
the website has clearly
characterized Suprawin
as a BPO.
15 Tulsyan Technologies Rejected by the The service income does The average turnover for
Limited (Presently Transfer Pricing Officer not clear quantitative filter of financial years 2002-03
Known As - Cosmic (TPO), but, rejection Sales is more than Rs. 1 and 2003-04 is more than
Global Limited) disputed by the crore, no segmental results 1 crore and also, since
Appellant. available and that the the company is mainly
business constituted into ITES, it qualifies as a
Software Development and comparable.
ITES.
16 Mukand Engineers Rejected by the The reasons being there The financials of the
Limited Transfer Pricing Officer was no forex revenue and company for the financial
(TPO), but, rejection that ist is functionally year 2003-04 discloses
disputed by the different. income from "Foreign
Appellant. exchange gain" and Point
no. : A (7) of 'Notes to
Accounts' talks about
foreign exchange
accounting policy adopted
by the company. Also, the
segment information
discloses information
relating to the 'Infotech'
division of the company.
17 Ultramarine & Accepted by the The comparable had been The Directors' Report for
Pigments Limited Transfer Pricing Officer originally furnished by the the financial year 2003-04
(TPO), but, rejected by Appellant and accepted by states that "The IT
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the Appellant. the Transfer Pricing Officer, enabled Services
but, subsequently / later, Divisions has more than
rejected by the Appellant. doubled its' revenue and
the Operating Profit of the
division was Rs. 43 lakhs
(Previous year loss of Rs.
63 lakhs)". Hence, it
appears that there has
been an extraordinary
movement during the year
and the profit earned
does not seem to be
ordinary profit earned in
the normal course of
business. As such, the
comparable is rejected.
18 Fortune Infotech Introduced by the There is a difference of Factually, the financials of
Limited Transfer Pricing Officer about 4% in the Operating the company for the
(TPO) and accepted by profit on Cost arrived by the financial year 2003-04
the Appellant. Transfer Pricing Officer and indicate that the
the Appellant. Operating profit / cost
equals 35.34% only as
against 39.35% adopted
by the TPO.
19 Mercury Outsourcing Introduced by the The comparable had been Subsequently, on
Management Limited. Transfer Pricing Officer introduced by the Transfer obtaining all relevant
(TPO) and accepted by Pricing Officer but, initially information and data, the
the Appellant. rejected by the Appellant appellant accepted the
since the data regarding the comparable.
functions were not available
in the public domain and
the Director's Report and
Notes to Accounts did not
elaborate much on the
functions of the Company.
20 Vishal Information Introduced by the The comparable had been The company's employee
Technologies Limited Transfer Pricing Officer introduced by the Transfer cost to total cost ratio is
(TPO) but rejected by Pricing Officer. 2% as per its annual
the Appellant. report whereas the
industry average is 30-
50%. The appellant
company's Employee cost
to Total cost ratio is 47%.
The Company is rejected
as a comparable as the
business model is totally
different.
21 Wipro BPO Limited Introduced by the The comparable had been The company is
Transfer Pricing Officer introduced by the Transfer exceptionally large
(TPO) but rejected by Pricing Officer. segmental information
the Appellant. pertaining to their ITES
activities is not available.
20 Spanco Telesystems Introduced by the The comparable had been The financials of the
and Solutions Limited Transfer Pricing Officer introduced by the Transfer company indicate that the
(TPO) but rejected by Pricing Officer. turnover of the company
the Appellant. during the financial year
2003-04 was Rs. 61
crores while that of the
appellant company was
only around Rs. 13
crores. Owing to the wide
variation in size, the two
does not seem to be
Comparable companies.
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16. According to the learned AR the data of following companies has to be considered as comparables:
Sl. OP/TC
Name of the company
No. %
1. Nucleus Netsoft & Gis India Ltd. 9.85
2. Tricom India Ltd. 38.37
3. Tata Services Ltd. 0.29
4. Ace Software Exports Ltd. 16.59
5. CS Software Enterprises Ltd. (for F.Y. 2002-03) -12.00
6. FI Sofex Ltd. (Segmental) -72.76
7. MCS Ltd. 1.65
8. Vans Information Ltd. -59.11
9. Suprawin Technologies Ltd. -14.37
10. Tulsyan Technologies Ltd. (presently - Cosmic Global Ltd.) -21.31
11. Mukund Engineers Ltd. (Segmental) -28.12
12. Fortune Infotech Ltd. 35.34
13. Mercury Outsourcing Management Ltd. 5.88
Arithmetic Mean -7.31
Arithmetic Mean as per final submission as above, works out to -7.31 % only.
17. Further he submitted that in respect of C.S Software Enterprises Ltd., MCS Ltd. and Mukund Engineers Ltd. (Nos. 10, 12 and 16 in the chart), the TPO as well as the Commissioner of Income Tax (Appeals) had upheld the rejection as comparables on the sole ground that there was no foreign exchange earnings. The AR submitted that the "notes on accounts" of respective companies, reveal that there are gains or losses on account of foreign exchange, which implies that there are foreign exchange transactions. In any event, it is possible that the export proceeds would not have been received physically; but, they would have been shown as "receivables" on account of which there may be gains or losses on account of foreign exchange rate fluctuations. Even assuming for a moment that there are no exports sales from those companies, it cannot be rejected as comparables for the simple reason that it is not a pre-condition even domestic sales can be considered for the purpose of comparability. Thus, the Commissioner of 14 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ Income Tax (Appeals) as well as TPO are not justified in rejecting those companies as comparables.
18. The DR submitted as follows over the above comparables:.
(1) C.S. Software Limited: It was submitted by the assessee that the TPO rejected the above company on the ground that there are no foreign exchange transactions. It was stated that operations are determined by prevailing market conditions and not merely by currency in which they transact. Stating that lack of foreign transactions will not be detrimental to the results, the AR contended that the TPO was unjustified in rejecting the above company as a comparable. As noted by the TPO, there was no foreign exchange revenue in the case of the above company during financial year 2003-04, and hence it was not catering to overseas market. It was submitted that normally the profit margin/return from export sales is higher when compared with the same from domestic turn over. The DR stated that for the same reason i.e. in absence of export sales during financial year 2003- 04, in the case of Deloitte Consulting India Pvt. Ltd., for the Asst. Year 2003-04, vide order in ITA No. 0062/CIT(A)-III/08-09, dt. 31.05.2010, it was held that the above company i.e. C.S. Software Ltd., cannot be considered as a comparable for the purpose of determining ALP of the International Transactions.
(2) MCS Ltd. : It is functionally different from a BPO and it has no forex earnings, the TPO has rejected this company as a comparable. However, stating that business operations are determined by prevailing 15 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ market conditions and lack of foreign transactions will not be detrimental to the financial results, the assessee has contended that the TPO was not justified in rejecting this company as a comparable. From the observations made by the TPO in para-7.2,4 of his order, apart from being functionally different, the sales revenue during financial year 2003-04 in the case of MCS Ltd., were entirely from domestic operations. Since there was no export sale during financial year 2003-04, for the reasons stated in the case of C.S. Software Enterprises Ltd., the above company cannot be considered as a comparable in this case.
(3) Mukand Engineers Ltd. : This company apart from being functionally different, for the reason of absence of foreign exchange revenue, the TPO has not considered this company as a comparable. However, stating that lack of foreign transactions will not be detrimental to the results, the assessee has contended that the TPO was not justified in rejecting this company as a comparable. However, the DR not agreed with such contention of the assessee. In absence of any export turn over during financial year 2003-04, further for the same reasons as stated in case of C.S. Software Enterprises Ltd. above, the TPO was justified in not considering the above company as a comparable.
19. We have heard on this issue of rejection of comparables. With regard to exclusion of gain on account of foreign exchange fluctuation, while computing the net margin, as claimed by the assessee, we find that the exchange fluctuation gains arise out 16 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ of several factors, for instance, realisation of export proceeds at higher rate, import dues payable at lower rate. Since the gain or loss is on account of exchange fluctuation arising in the normal course of business transaction, the same should be considered while computing the net margin for the international transactions with the AEs of the assessee. Our view in this behalf is fortified by the order of the Tribunal Bangalore Bench in the case of Sap Labs India Ltd. vs. ACIT (44 SOT 156) (Bang.) and also order of the Tribunal Mumbai Bench in the case of Deutsche Bank A.G. vs. DCIT (86 ITD 431). If the gain on account of foreign exchange rate fluctuation is to be taken as operating gain in nature, the net margin declared by the assessee for the international transaction with the AEs, goes up still further. However, if the loss of the comparable is abnormal and there is no trading activity of whatsoever, data of such company cannot be considered. Accordingly, we direct the Assessing Officer to consider the data of MCS Ltd. as comparable while computing the ALP and to exclude other two companies from comparables.
20. The AR submitted, in respect of F.I. Sofex Ltd., Vans Informations Ltd. and Suprawin Technologies Ltd. (items Nos. 11, 13 and 14 in the chart), that these companies were introduced as comparables by the assessee, but were rejected by both Learned TPO as well as Commissioner of Income Tax (Appeals) on the sole ground that they were loss making companies. He submitted that the Special Bench of Chandigarh Tribunal in the case of DCIT v. Quark Systems (P.) Ltd. (38 SOT 307/4 ITR (Trib.) 606/132 TTJ 1 (Chd.) (SB) held that merely because a comparable is making loss, it cannot be excluded from the list of comparable for the purposes of computation of ALP. The Mumbai Tribunal in the cases of Asst. CIT v.
17 ITA No. 1494/Hyd/2010 & Anr.M/s. Brigade Global Services Pvt. Ltd.
============================ Wockhardt Ltd. 6 taxmann.com 78 (Mum. - ITAT) and UCB India (P) Ltd. v. Asst. CIT [2009] 121 ITD 131 (Mum.) reiterated the same position. Therefore, in the light of the decision of the Special Bench, the rejection of these companies as comparable is not justified and unsustainable in the eye of law.
21. The DR submitted that these companies are rejected on the following reasons:
22. Regarding F.I. Sofex Limited the DR submitted that it was rejected on the ground that, it had extraordinary items as part of its operating expenses.
23. In this context, further the DR submitted that the TPO in his remand report, has submitted that PBIT in the case of the above company is not clear as per the public data base. He has further mentioned that there was no segmental un-allocable expenditure in the public data base. Further, he submitted that bad debts written off can be allowed as deduction as per accounting standards and as per provisions of Income Tax Act. The bad debts, cannot be considered as a routine/regular business expenditure for arriving at the total operational cost. Claim for bad debts arises, only when an assessee is not able to recover its sale proceeds from any party. However, the same cannot be considered as a normal operational expenditure for earning income during any year. Hence, the same cannot be allowed deduction for arriving at the total operational cost in the context of determining the PLI (OP/TC%). Further, while furnishing the segmental information in respect of the above company before the TPO, the PLI is shown at -73%. The details in this regard furnished by the assessee, are referred to at page- 21 of the TP order. Since as per such segmental data 18 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ furnished/worked out by the appellant in the case of the above company, there was no operational profit/positive income, but only loss, for the reasons discussed in the case of Suprawin Technologies Ltd, the said company, should not be considered as a comparable. Therefore, and for the reasons stated by the TPO in para 7.2.3 of his order, he was justified in rejecting the above company i.e., FI Sofex Limited, as a comparable for the purpose of determining ALP in this case.
24. Regarding Vans Information Limited, it was submitted by the DR that as stated by the TPO in para 7.2.13(i) of his order, this company has been incurring losses continuously for three years. However, it was wrongly stated by the AR that the provisions relating to transfer pricing do not provide for rejection based on losses, the appellant contended that the TPO was not justified in rejecting the company. In the face of such continuous losses over the years and since there was no profit/positive income during the current financial year, for the reasons discussed in the case of Suprawin Technologies Ltd., the TPO was justified in not considering the above company as comparable.
25. Regarding Suprawin Technologies Ltd., it was submitted by the DR that this company was having losses continuously for three years. It is functionally different from that of the assessee and more over no segmental results are available in the case of this company. The assessee has submitted that provisions relating to transfer pricing do not provide for rejection based on losses. From the submission of the assessee, it may be seen that such finding of the TPO regarding incurring of continuous losses including during the current year, has not been disputed. As already discussed above, in the case of the assessee, it was 19 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ earning profit from the price charged by it for the services rendered to its AE. Since for the purpose of determining ALP, the operating profit margin (%) on the total cost in case of comparable company has to be taken into account, the TPO was right in not considering the above company where there was no profit/ positive income from operations during the financial year 2003-04. Hence, the TPO was justified in rejecting the above comparable.
26. We have heard both the parties on these comparables. The contention of the assessee is that the loss making companies were not to be taken out from the comparables while determining the ALP. We find merit in the argument of the assessee's counsel. Determining of ALP is depend upon the comparables of identical or similar in controlled transactions in similar or comparable circumstances and thereafter suitable adjustment has to be made to set off the difference to make the transaction commercially comparable. Upon careful consideration of the assessee's counsel plea, we find ourselves in agreement with the assessee's contention that only abnormal loss making companies are to be taken out from the comparables. The judgement relied on by the assessee's counsel in Quark Systems Pvt. Ltd. (32 TTJ 1) (Chd.)(SB) supports the assessee's counsel arguments. Being so, for proper comparables these three companies viz., items at 11, 13 and 14 are to be included in the comparables if their loss is on account of normal business reasons and segmental turnover is above Rs. 1 crore. This view of ours is also supported by the order of the Tribunal Delhi Bench in the case of Sapient Corporation Pvt. Ltd. (15 ITR (Trib) 285), Genisys Integrating Systems India Pvt. Ltd. (15 ITR (Trib) 475) (Bangalore Bench) wherein held that when companies which are loss making are 20 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ excluded from comparables, then super profit making companies are also to be excluded from the comparables for determining the ALP. Being so, in our opinion, the Assessing Officer has to recalculate the ALP after excluding only the data of the companies which have losses due to extraordinary reasons. In other words, if there is loss in ordinary course of business which is normal/nominal cannot be excluded from the comparables. However, we make it clear that if there is any abnormal loss or if there is continuous loss year by year, in such situation that company data cannot be considered as comparable with the assessee company. For example, F.I. Sofex Ltd., Vans Information Ltd. and Mukund Engineers Ltd. and these companies are to be excluded from the comparables.
27. The AR submitted that Wipro BPO Ltd. and Spanco Telesystems & Solutions Ltd. (items Nos. 21 and 22) introduced by the TPO as comparables and not accepted by the assessee, the scale of operation of those companies are exceptionally large and therefore, cannot be accepted as comparable. The Mumbai Tribunal in the case of DHL Express (India) (P.) Ltd. v. Asst. CIT [2011] 11 taxmann.com 40 (Mum. - ITAT) held that where there is a large difference in the scale of operations, though operating in the same field, cannot be taken as comparable. Same position was reiterated again in the case of Symantec Solutions (P.) Ltd. v. Asst. CIT, (11 Taxmann.com 264) (Mum.) 15 ITR (Tribunal) 323.
28. The DR submitted that financial data of Spanco Telesystems & Solutions Limited indicate that the turnover of the company during the F.Y 2003-04 was Rs. 61 crores. The turnover in the case of the assessee was only around Rs. 13 crores. The assessee contended that owing to wide variation in 21 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ size, the above company should not be considered as a comparable. The DR stated that the TPO has taken into account the financial results of only one segment in the case of the above company for comparability analysis in this case and the TPO is justified.
29. Regarding exclusion of big companies, in our opinion, the size of the comparables matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these advantages and, therefore, the turnover also would come down which results in reducing the profit margin. This is as held by various Bench of the Tribunal, the companies having huge turnover are to be excluded from comparables. For this purpose we place reliance on the judgement of Genisys Integrating Systems India Pvt. Ltd. (15 ITR (Trib) 475) (Bang.). Accordingly, we direct the Assessing Officer to exclude these two companies (item No. 21 and 22 in the chart) from the list of comparables.
30. The AR submitted in respect of Ace Software Exports Ltd. (item No. 9 in the chart) that this company introduced by the assessee but rejected by the TPO as well as the Learned Commissioner of Income Tax (Appeals) on the ground that it had related party transactions. Whereas the factual matrix is that the company had no related party transactions.
31. Regarding Ace Software Exports Ltd. the DR submitted that according to the assessee, the TPO erred in excluding this company for comparison on the ground that Director's Report of the company mentions that it has catered service exclusively to 22 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ Apex Data Services Inc, a group company, that makes both Ace Exports and Apex Data as Associated Enterprises u/s. 92A(2)(i) of the Act. It was stated that the TPO has ignored the fact that, the financial statements nowhere mention that any sale/ purchase transactions have taken place with Apex Inc. during the relevant financial year. It was further submitted that the AO erred in treating the above company as functionally different from that of the assessee company. It was submitted that as seen from the annual report of Ace Software Ltd., for the year ended 31.03.2004, the sale transaction made by Ace Software Exports during the F.Y 2003-04 were controlled transactions and this company, should not be considered as a comparable. Therefore, the TPO was justified in rejecting the above company as comparable in this case.
32. We have heard both the parties on this issue. In our opinion, controlled transaction with related parties which makes it un-comparable with the assessee. In the present case, related party disclosure in Ace Annual Report shows no services are provided to Apex Data Services. Relationship has to be examined as per definition of Associated Enterprises (AEs) as per section 92A of the Act. It was stated before us that Apex Data Services is having 7% share capital in Ace Software Exports Ltd. Even otherwise provisions of section 92A(2)(i) deems two companies as AEs only, if 100% goods are purchased and sold. Though the transactions with related parties cannot be considered for the purpose of comparison, in the present case considering the facts, rejection is not justified.
33. The AR submitted that, in respect of F.I. Sofex (item No. 11 in the chart) introduced by the assessee but rejected by Learned CIT (Appeals) as well as TPO on the ground that no 23 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ segmental details were available. Whereas the fact remains that the assessee had furnished the segmental data. The Mumbai Tribunal in the case of Addl. CIT v. Technimont ICB India (P) Ltd. 148 TTJ (Mumbai) (TM) 547 had held that where the segmental data was furnished rejection of such cases as comparable is not justified. It was further held by both the lower authorities that bad debts written off cannot be allowed as operating cost. The Assessee respectfully submits that bad debts written off forms part of operating cost. In this connection, reliance is placed on the decision of Tribunal in the cases of CA Computer Associates (P.) Ltd. v. Dy. CIT [2010] 37 SOT 306 (Mum. Tribunal) and Dy. CIT v. Vertex Customer Services India (P.) Ltd. [2009] 34 SOT 532 (Delhi).
34. The DR submitted that segmental total cost not available and that the subsidiary in India incurred a loss due to which the entire investment as well as recoverable advance had been fully provided for in the books of account. Being so it is not comparable with the assessee company.
35. We have considered the arguments of both the parties. In our considered view for computing the net margin of the assessee for the purpose of transfer pricing only the cost related to the transaction with the AEs has to be considered and accordingly, we agree with the argument that segmental financial data is to be considered for the purpose of arriving at the net margin on an international transaction with the assessee's enterprises in respect of transactions carried on by the assessee. This view of ours is also supported by the order of the Hyderabad Bench of the Tribunal in the case of Foursoft Ltd. vs. DCIT (62 DTR 308) (Hyd). Same view has been taken by the Tribunal in various cases stated by the assessee in its 24 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ arguments. Being so, segmental data of the company F.I. Sofex Ltd., ought to be considered as comparable if there is normal loss. In this case, there is abnormal loss on account of extraordinary reasons, then it is not comparable and to be excluded from comparables. Thus, F.I. Sofex Ltd., has to be excluded by the Assessing Officer.
36. The AR further submitted, in respect of Tulsyan Technologies Ltd. (item No. 15 in chart) introduced by the assessee but rejected by both the lower authorities on the ground of functional differences but as per the clarification given by the CBDT the business of the company constitutes ITES and therefore, cannot be rejected as comparable.
37. The DR submitted that Tulsyan Technologies Ltd : As stated by the TPO, in para-7.2.6.1 of his order, the business in the case of this company comprises both software development and ITES. Further stating that the service income was only Rs. 95,00,000 i.e. less than Rs. 1 crore, and no segmental results are available, the TPO rejected this company as a comparable. However, stating that the average turnover during financial year 2002-03 and 2003-04 was more than Rs. 1 crore and further stating the company was mainly into ITES, the assessee has contended that the above company qualifies as a comparable. However, it cannot agreed with such contention of the appellant. As may be seen, the assessee admitted that revenue from services in the case of the above company during financial year 2,003-04 was less than Rs. 1 crore. In view of this fact, and since segmental results in case of Tulsyan Technologies Ltd., was not available during the proceedings before him, the TPO, was justified in not considering the above company as a comparable in this case.
25 ITA No. 1494/Hyd/2010 & Anr.M/s. Brigade Global Services Pvt. Ltd.
============================
38. We have heard the parties. The ALP is to be computed on the basis of comparables wherein they should be functional comparables. The assessee company in the present case is engaged in providing back office processing services. M/s. Tulsyan Technologies Ltd., is engaged in information technology enabled services (ITES). The Assessing Officer is directed to consider the segmental data relating to ITES and software and consider the same for the purpose of comparison if the service income is more than Rs. 1 crore after making suitable adjustment.
39. AR submitted in respect of Ultramarine & Pigment Ltd. (item No. 17 in the chart) introduced by the Assessee and accepted by lower authorities but later on rejected by the Assessee on the ground that during the current financial year, the company had made abnormal profits. The AR submitted that the company showing abnormal profits, which is beyond the norms or the standards of industry cannot be taken as comparables. Reliance for this proposition is placed on the decision of Mumbai Bench in the cases of Adobe Systems India Pvt. Ltd. v. Addl. CIT (44 SOT 49) (Delhi-URO), ITO v. Saunay Jewels Pvt. Ltd. (42 SOT 4) (Mum. - URO), Mentor Graphics, 2007-(112)-TTJ-0408-TDEL and the case of ITAT, Pune Bench in the case of E-Gain Communications vs. ITO 118 TTJ 354 and SAPIENT Corporation Pvt. Ltd. vs. DCIT (2012) 15 ITR (Trib.) 285 Delhi.
40. The DR submitted that M/s. Ultramarine Pigments Limited cannot be excluded from comparables. According to the assessee counsel, the AO was not correct in accepting this company which has 123% increase in revenue in one year, as a 26 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ comparable in this case. However, the assessee itself has proposed this company as a comparable in their TP documentation. Further, it is seen that the TPO has considered only the segmental results, pertaining to F.Y 2003-04 in the case of the above company for comparability analysis in this case. As per the financial data pertaining to such segmental results, the amount of income is shown at Rs. 10.9 crores, which is comparable, keeping in view the turnover of Rs. 13.05 crores shown by the assessee for the Asst. Year 2004-05. It is also relevant to mention here that, the TPO has noted that the extraordinary profits earned in subsequent Financial Year 2004- 05, is not relevant as the matter here pertains to F.Y. 2003-04. Having regard to such facts, the TPO was justified in considering the segmental results in respect of the above company, for comparability analysis in this case. Accordingly, the AO was also justified in accepting such segmental results in respect of the above company for comparability analysis in this case.
41. We have heard both the parties on this issue. It is an admitted fact that the cases which were showing abnormal trading results, as discussed in earlier paras, by relying on the order of the Bangalore Bench in the case of Genisys Integration Systems India Pvt. Ltd. (supra), companies showing abnormal results cannot be considered as comparables. It is an admitted view that the companies making abnormal profits as compared to the assessee cannot be considered as comparables while determining the ALP. For this purpose we place reliance on the decision of Special Bench in the case of Dy. CIT vs. Quark Systems Ltd. (132 TTJ 1) (Chd.) (SB). Accordingly, in our opinion, super profit companies per se are liable to be excluded from the comparables.
27 ITA No. 1494/Hyd/2010 & Anr.M/s. Brigade Global Services Pvt. Ltd.
============================
42. The AR submitted that in respect of Vishal Information Technologies (item No. 20 in chart) introduced by the Learned TPO and disputed by the assessee, submitted that from the financial statements of the company, it is crystal clear that major portion of the work was outsourced and this cannot be taken as comparable case. Reliance in this regard is placed in the case of M/s. Maersk Global Service Centres vs. ACIT in ITA No. 858/Mum/2011.
43. Regarding Tata Services Ltd. (item No. 8 in the chart) the AR submitted that the company is in into services akin to BPO, hence it is not functionally different. It is a commercially operating company and 'no profit no loss" does not mean that the assessee is 'trust'. "No profit no loss" concept does not arise here at all.
44. The DR submitted that Vishal Information Technologies Ltd., as per the annual report in the case of this company, the employee cost to total cost ratio is 2%. Stating that their employee cost to total cost ratio is 47%, the assessee contended that the above company should not be considered as a comparable. However, the CIT(A) agreed with the submission of the TPO made in his remand report, copy of which has been furnished to the assessee for comments, that allocation of salaries of employees under particular head, depends on the method followed by the company. In the said report, he has further mentioned that some assesses may categorize such expenditure as operating cost. Having regard to his such submission, which has not been controverted by the assessee and since under 'trading and operating expenses' in this case, there is claim of expenditure of Rs. 7,69,28,836 and moreover, it is functionally similar to the assessee, accordingly, the TPO was 28 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ justified in considering the above company i.e., Vishal Information Technology Limited, as a comparable for the purpose of determining ALP in this case.
45. The DR submitted with regard to Tata services Limited that the assessee has objected to rejection of this company by the TPO, in its grounds of appeal before the CIT(A). However, the assessee has accepted the rejection of the above company before the CIT(A) in its written submission filed on 23.7.2010. Accordingly, rejection of the above comparable by the TPO/AO was justified.
46. We have heard both the parties on the above two comparables. Regarding Vishal Information Technologies Ltd., the employee's cost to total cost ratio is worked out at 2% as compared to the industry average of 30 to 40%. The assessee's employee's cost to total cost ratio is worked out at 47%. Since the employee's cost form major cost base in ITES service industries, the low ratio of comparables implies that it would not be providing services by employing its own sources. Being so, the assessee is not alike to M/s. Vishal Information Technologies Ltd. Accordingly, M/s. Vishal Information Technologies Ltd., cannot be considered as comparables and it is to be excluded from comparables.
47. As held in earlier paras elsewhere in this order, functionally different companies cannot be considered as comparables with the assessee company. Being so, Tata Services Ltd., which is operating on no profit no loss basis cannot be considered as a comparable case and the rejection is justified.
29 ITA No. 1494/Hyd/2010 & Anr.M/s. Brigade Global Services Pvt. Ltd.
============================
48. With regard to Nucleus Netsoft and GIS India and M/s. Tricom India (items Nos. 1 and 2 in the chart), the AR submitted that there is a difference of 7% in working out the percentage of operating profit and cost. In other words, only operating income should be considered. Reliance in this regard is placed on the decision of Delhi Tribunal in the case of Mentor Graphics (Noida) P. Ltd. vs. DCIT (109 ITD 101) and Sony India P. Ltd. vs. DCIT (315 ITR (AT) 150) (Delhi). We are in agreement with the assessee's counsel that only operating profit is to be considered while selecting the comparables.
49. The AR submitted that the other ground of appeal relates to the working out the percentage of operating profit on the cost in the case of the assessee itself. During the current year, the assessee had incurred excessive rent of Rs. 1,41,20,250 on account of keeping the premises idle in view of proposed shifting of the office premises. This adjustment is held to be permissible in the case of Transwitch India Pvt. Ltd. v. DCIT in ITA No. 6083/Del/2010 and also in the case of DCIT v. Vertex Customer Services India (P.) Ltd. (34 SOT 532) (Delhi). These are additional grounds raised by the assessee. After considering the reasons offered by the assessee, we are inclined to admit the same for adjudication.
50. We have heard both the parties on this issue. We are in agreement with the plea of the assessee that assessee had incurred excessive rent on account of keeping the premises idle. Accordingly, we direct the Assessing Officer to make necessary adjustments towards rent.
51. The AR submitted that, as against the arithmetic mean of 10.05%, after adjusting for working capital @ 2%, it comes to 30 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ 8.5% and whereas the assessee had benchmarked his transaction with Associate Enterprise at 11% (after adjusting operational cost to the abnormal rent incurred as submitted vide para 16 supra. In any event, it will be within the range of (+) or (-) 5% and therefore, no adjustment is required.
52. The AR further submitted with regard to Ground No. 1.8 that, notwithstanding the above, the assessee is entitled to the benefit of proviso to Sec. 92C(2) of 5% adjustment irrespective of range of actual variation between the margin disclosed by Assessee and the average mean margin so calculated as held by ITAT in the cases of :-
(1) Emersons Process Management India Pvt. Ltd. vs. ACIT, 2011- TII-102-ITAT-MUM- TP;
(2) M/s. Diageo India Pvt. Ltd. vs. DCIT 2011-TII-94-ITAT-Mum-TP; (3) Capgemini India (P) Ltd. vs. ACIT (2011) 141 TTJ 33 (Mum) (URO);
(4) Phoenix Mecano India Ltd. vs. DCIT in ITA No. 7647/M/2011; (5) ACIT vs. UE Trade Corpn (I) Pvt. Ltd. (2011) 136 TTJ 297 (Del.); (6) TNT INDIA P. Ltd., vs. ACIT (2012) 15 ITR (Trib.) 263 (Bang); (7) Schefenacker Mother Son Ltd. vs. ITO (2010) 2 ITR (Trib.) 1961 Delhi;
(8) Cummins India Ltd. v. DCIT [2012] 15 ITR (Trib) 252 (Pune).
53. The AR submitted that the Mumbai Bench in the case of Emersons Process Management India Pvt. Ltd. vs. ACIT (supra) wherein it was held that prior to amendment in second proviso to Sec. 92C w.e.f. 01.10.2009, issues is no longer res integra and the benefit of 5% is to be allowed even in the cases where difference in value of international transactions at its ALP is more than 5%.
54. Regarding granting of deduction as per proviso to section 92C(2) of the Act, the DR submitted that if the difference between the ALP determined by the TPO does not exceed 5% of the price of the international transactions shown by the 31 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ assessee, then such price shown by the assessee shall be deemed to be the ALP. According to the DR, in the present case, the difference exceeds 5% between the ALP determined by the TPO and the price of the international transactions shown by the assessee. Being so, no such deduction could be granted. The DR relied on the orders of the lower authorities.
55. We have heard both the parties and perused the material on record. In our opinion, the assessee is entitled for deduction 5% if the difference between the ALP determined by the TPO and the assessee is within the range of ± 5%, then, as prescribed in section 92C(2) of the Act, as held by various decisions relied on by the assessee's counsel, the deduction at 5% should be given on ALP computed by the Assessing Officer.
56. Coming to ground No. 1.9 with regard to adjustment towards working capital at 2%, we are of the opinion that the plea of the assessee should be allowed in the light of order of the Tribunal in the case of Logix Micro Systems Ltd. vs. ACIT (8 ITR (Trib) 159) (Bang.) and also Tally Solutions Pvt. Ltd. vs. DCIT (13 ITR (Trib) 245) (Bang.).
57. With regard ground No. 1.10 with regard to reduction of communication expenses from the export turnover while computing deduction u/s. 10A of the IT Act, we are of the opinion that, as held by the Special Bench in the case of Income tax Officer vs. Sak Soft Ltd. [121 TTJ (Chennai) (SB) 865], for the purpose of applying the formula under subsection (4) of section 10B, the freight, telecom charges and insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside 32 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ India are to be excluded both from the export turnover and from the total turnover, which are numerator and denominator, respectively in the formula. Accordingly, we confirm the order of the CIT(A) on this issue.
58. Coming to the assessment year 2005-06 in ITA No. 988/Hyd/ 2011. The assessee raised the following grounds of appeal:
1.0 The orders passed by the lower authorities, insofar as issues decided against the assessee are against the law, facts, circumstances, natural justice, equity and all other known principles of law.
1.1 The learned CIT(A) as well as the learned AO/TPO have erred in law as well as facts of the case in not accepting the arm's length price (ALP) determined by the appellant.
1.2 The learned CIT(A), as well as learned AO/TPO have erred in selecting and using certain companies as comparables to determine the ALP by not appreciating the fact that the comparable companies selected are not comparables to the appellant and hence, cannot be used in the instant case.
1.3 Both the learned CIT(A) and as well as AO/TPO erred in rejecting the loss making comparables, in violation of OECD guidelines, instead, summarily without any basis concluded that the comparables shall be of those companies which have shown profit.
1.4 The learned CIT(A) erred in confirming the disallowance of expenditure pertaining to internet services utilised from VSNL on the ground that the payment falls under the category of fees for technical services and assessee failed to deduct tax at source.
1.5 The learned CIT(A) is not correct in upholding the ad-hoc disallowance of 15% of the expenditure excluding rent, electricity charges, 33 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ communication charges, insurance and foreign exchange loss.
1.6 The learned CIT(A) failed to dispose of the contest of the assessee in so far as AO finding to exclude communication charges from the export turnover for computation of deduction u/s. 10A of the IT Act.
1.7 The learned CIT(A) is not correct in reducing the communication expenses from the export turnover while computing deduction u/s. 10A of the IT Act, this is especially so when these expenses were not part of export turnover.
1.8 For these and other reasons that are to be urged at the time of hearing of the case, the appellant prays that the orders passed by the lower authorities are to be set aside in the interest of justice and prays for appropriate relief based on the above grounds.
59. Ground Nos. 1.0, 1.8 and 1.11 are general in nature and do not require any adjudication. Accordingly, these grounds are dismissed.
60. Ground No. 1.2 and 1.3 are with regard to selection of comparables. Similar issue is disposed of in the earlier paras of this order for assessment year 2004-05. Applying the same ratio, these grounds are decided accordingly and the Assessing Officer is directed to consider the comparables on the similar lines.
61. Ground No. 1.6 and 1.7 are with regard to exclusion of communication charges from export turnover as well as from total turnover. This issue is also decided in earlier para No. 57 of this order. These grounds are dismissed accordingly.
62. Ground No. 1.4 reads as under:
34 ITA No. 1494/Hyd/2010 & Anr.M/s. Brigade Global Services Pvt. Ltd. ============================ 1.4 The learned CIT(A) erred in confirming the disallowance of expenditure pertaining to internet services utilised from VSNL on the ground that the payment falls under the category of fees for technical services and assessee failed to deduct tax at source.
63. Brief facts of the issue are that the assessee has objected to the disallowance of Rs. 13,09,362 made in the assessment. In the written submissions filed by the AR, it was submitted that during the previous year the assessee company has utilized internet services from VSNL and made payment towards the same. Objecting to such disallowance made by the AO, it was stated that mere purchase of Internet bandwidth does not lead to availing technical service. Though sophisticated equipments are used and the connection of the internet is through a satellite link, it cannot be said that the assessee is availing technical services. Stating that the company has availed general internet service like any other user, from VSNL, the AR contended that the payment made for the same cannot treated as fees for technical services. Further stating that such payment made by the assessee was not liable for deduction of tax at source, he contended that such disallowance made by the Assessing Officer in the assessment is not justified. In this regard, the AR relied on the decision of Madras High Court in the case of Skycell Communications Ltd., & Anr. vs. DCIT [251 ITR 53] and the decision of the ITAT, Delhi Bench, in DCIT vs. M/s. Estel Communications Pvt. Ltd., in ITA No. 3375/Del./2007 dated 10.03.2008.
64. We have carefully considered the submissions of the AR and the facts of the case. First of all, it may be stated here that the Assessing Officer has made such disallowance after referring to the decision of Hon'ble ITAT, Kolkata, in the case of Hutchison Telecom East Ltd., vs. CIT [16 SOT 404]. The 35 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ assessee has submitted that in their case there was only purchase of internet bandwidth from VSNL. It is further stated that though there was user of sophisticated equipments and the connection of the internet is through a satellite link, it cannot be said that the assessee was availing technical services. However, as may be seen, the assessee has not stated that there was no involvement human skill in such services availed from the said internet service provider. The assessee has remained silent with reference to that aspect. In our considered view, in availing such service facility from VSNL, there is involvement of human skill. In other words, efforts of technical personnel were involved in availing the said internet connection and the incidental services availed from VSNL. Under the circumstance, in our view, such payment made by the assessee to that service provider has to be treated as fees for technical services and hence the assessee was under obligation to deduct tax at source from the same.
65. In support of his contention, the assessee has referred to the decision in Skycell Communications Ltd., (supra). In that case payment was made by the assessee for cellular mobile service and it was held by Hon'ble Madras High Court that when a person subscribes to a cellular telephone service, he does not contract to receive a technical service. It was further held that the fact that telephone service provider has installed sophisticated equipments in the exchange, does not on that score, make it a provision of a technical service to the subscriber for the purpose of section 194J. In our view, the facts in that case are different from that of assessee. Further, in the other decision in the case of Estel Communication Pvt. Ltd. (supra), ITAT, Delhi Bench, following their earlier order, held that the payment made for internet bandwidth is not towards 36 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ rendering of any managerial, technical or consultancy services and the same cannot be disallowed u/s. 40(a)(i). However, having regard to the said decision of the Hon'ble ITAT, Kolkata Bench, relied on by the Assessing Officer and since there was human skill involved in the said internet bandwidth and other facilities availed by the assessee from VSNL, the said payment was in the nature of fee for technical services. Under the circumstance, for non deduction of tax at source on the same, the Assessing Officer was justified in disallowing the said amount u/s. 40(a)(ia) of the Act. We do not find any infirmity in the order of the CIT(A) and the same is upheld. This ground is rejected
66. Ground No. 1.5 reads as under:
The learned CIT(A) is not correct in upholding the ad- hoc disallowance of 15% of the expenditure excluding rent, electricity charges, communication charges, insurance and foreign exchange loss.
67. Facts of the case are that the assessee has objected to the disallowance of expenditure of Rs. 2,15,33,810 made in the assessment. It is stated that books of accounts have been produced by the assessee before the Assessing Officer for his verification. It is further stated that the assessee being a registered STPI unit, eligible to claim exemption for its profits u/s. 10B, there is no need for the assessee to inflate its profits. As such, the ITO's claim that excessive expenditure had been recorded by the assessee is totally incorrect. It is further stated, accordingly, the disallowance of 15% of total expenditure to the tune of Rs. 2,15,33,810 is unwarranted and wrong.
68. We have heard both the parties and perused the material on record and gone through the submissions of the AR and the facts of the case. Though the assessee has clarified about the 37 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ nature of various expenditure claimed by it, it has not been explained as to why and under which circumstances it could not produce the books of accounts and those bills and vouchers for verification before the Assessing Officer during the assessment proceedings. As seen from the assessment record, at the time of hearing on 12.12.2008, Assessing Officer has requested the AR of the assessee to produce books of accounts and vouchers of expenses for verification before him. The case was adjourned on that date to 22.12.2008. It appears on 22.12.2008 there was no hearing. However, on 30.12.2008, when the next hearing was made, the AR of the assessee has made submissions partly. As noted by the Assessing Officer, the AR has expressed inability to furnish the balance information called for by him. From the findings of the CIT(A), it is seen that the assessee has not produced the books of accounts and bills and vouchers for verification on that date. Under the circumstances, i.e., when the assessee has not been able to produce the books of accounts and bills and vouchers for verification before the Assessing Officer, disallowance is called for from such claim of expenses made by the assessee in its return. Thus, we uphold action of the CIT(A) in disallowing a part of such expenses claimed by the assessee for this assessment year.
69. Further, even though the AR has now submitted that the assessee is having bills and vouchers in respect of the other expenses, since the same have not been produced for verification before the Assessing Officer, during the assessment and no justification has been given for not producing the same during the assessment proceedings, such request of the assessee at this stage, cannot be acceded to. Further, it is difficult to comment on the sanctity of such vouchers in respect 38 ITA No. 1494/Hyd/2010 & Anr. M/s. Brigade Global Services Pvt. Ltd.
============================ of those remaining expenses. Under the circumstance, we uphold the disallowance of 15% expenditure in respect of those expenses. We do not find any infirmity in the order of the CIT(A) and the same is upheld. This ground of the assessee is dismissed.
70. With regard to ground Nos. 1.6 and 1.7 in this appeal, this issue is already discussed by us in ITA No. 1494/Hyd/2010 elsewhere in earlier paras by placing reliance on the order of the Special Bench of Chennai in the case of ITO vs. Sak Soft Ltd. (121 TTJ 865). Accordingly, these grounds are dismissed.
71. The assessee filed additional ground that the CIT(A) ought to have appreciated that when the additions are made under 'business head', the same would only go to inflate the business income which qualifies for exemption u/s. 10A of the IT Act, 1961 as held by the Bombay High Court in the case of CIT vs. Gem Plus Jewellery Ltd. (330 ITR 175).
72. The assessee filed petition for admission of additional ground stating that the issue raised in additional ground is purely on question of law does not involve any investigation into the facts of the case. For the purpose of admission of additional ground, he relied on the judgement in the case of National Thermal Power Co. Ltd., vs. CIT (229 ITR 383) (SC) wherein held that the power of the Tribunal in dealing with the appeals is expressed in the widest possible terms and this Tribunal has jurisdiction to examine the question of law which arises from the facts before the authorities below and having bearing on the liability on the assessee even if such question was not raised before the authorities below.
39 ITA No. 1494/Hyd/2010 & Anr.M/s. Brigade Global Services Pvt. Ltd.
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73. We have heard both the parties on the issue relating to admission of additional ground and also on merit. We find reasonable causes for not raising this issue before the lower authorities as the issue relating to treatment of disallowance made by the Assessing Officer while computing the income to be considered for exemption u/s. 10A of the IT Act and these additions made by the Assessing Officer would form part of the assessed income. Being so, we are inclined to decide the issue in favour of the assessee by placing reliance on the judgement of CIT vs. Gem Plus Jewellery India Ltd. (330 ITR 175) (Bom) wherein held that the inflated business income on account of disallowance of expenditure qualifies for deduction u/s. 10A of the IT Act. Accordingly, this ground is allowed.
74. In the result, both the appeals of the assessee are partly allowed.
Order pronounced in the open court on 26th November, 2012.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated 26th November, 2012
tprao
Copy forwarded to:
1. M/s. Brigade Global Services Pvt. Ltd., Plot No. 30 & 31, Brigade Towers, Financial District, Nanakramguda, Hyderabad-500 032.
2. Income Tax Officer, Ward-1(1), Hyderabad.
3. Income Tax Officer, Ward-1(2), Hyderabad.
4. The CIT(A)-III, Hyderabad.
5. The CIT-I, Hyderabad
6. The DR - A Bench, ITAT, Hyderabad