Income Tax Appellate Tribunal - Delhi
Crm Services India Pvt. Ltd., New Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'B' DELHI
BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL
ITA No. 4068(Del)/2009
Assessment Year: 2004-05
Income-tax Officer, CRM Services India (P) Ltd.,
Ward 3(4), New Delhi. Vs. S-454, Greater Kailash-II,
New Delhi.
PAN-AABCC6211B
ITA No. 4796(Del)/2010
Assessment year: 2006-07
CRM Services India (P) Ltd., Income-tax Officer,
220, Vinoba Puri, Vs. Ward 3(1), New Delhi.
Lajpat Nagar-II, New Delhi-24.
(Appellant) (Respondent)
Department by : Shri Sanjay Puri, CIT, DR
Assessee by : S/Shri Ajay Vohra/Neeraj Jain
ORDER
PER K.G. BANSAL : AM These appeals of the revenue and the assessee were argued in a consolidated manner by the ld. CIT, DR and the ld. counsel for the assessee. Therefore, a consolidated order is passed. 1.1 It may be mentioned here that the assessee had applied for the stay of demand pertaining to assessment year 2006-07. "F" Bench of Delhi Tribunal passed an order on 16.12.2010 directing the assessee to pay a 2 total sum of Rs. 20.00 lakh in two equal installments on or before 03.01.2011 and 03.02.2011 respectively. The rest of the demand was stayed. This order, being in the nature of interlocutory order gets vacated on passing this final order on the appeals of the assessee. ITA No. 4068(Del)/2009- Appeal of the department -A.Y : 2004-05
2. In this appeal, the revenue has taken two grounds as to whether on the facts and in the circumstances of the case, the ld. CIT(Appeals) was right in -(i) treating the amount of Rs. 1,42,58,751/- as operating expenditure; and (ii) rejecting six companies identified by the TPO as comparables.
2.1 The facts of the case are that the assessee filed its return on 30.10.2004 declaring loss of Rs. 29,42,543/-. The case was initially processed u/s 143(1) of the Income-tax Act, 1961, and thereafter picked up for scrutiny by issuing statutory notice u/s 143(2). The assessee is conducting the business of providing call centre services. It is a subsidiary of Teleperformance, USA (TPUSA). In the course of scrutiny, it was found that the assessee has undertaken international transactions of the total value of Rs. 19,46,40,698/-. Therefore, the matter was referred to the Transfer Pricing Officer (the TPO) for determining arm's length 3 price of the transactions u/s 92CA(3). The TPO suggested upward revision by an amount of Rs. 3,31,61,663/- to bring the value of international transactions in line with arm's length price. The adjustment was made and, thus, the total income for this year was determined at Rs. 3,02,19,100/-. After adjusting brought forward losses from assessment year 2002-03, and assessment year 2003-04 to the extent it could be absorbed, the total income was determined at nil.
3. Coming to the order of the TPO, it is seen that the assessee had adopted transactional net margin method (TNMM) as the most appropriate method for determining arm's length price of its international transactions. The transactions inter-alia included call centre service charges from the associated enterprise amounting to Rs. 19,46,40,698/-. In respect of these service charges, the assessee had worked out the ratio of operating cost to operating profit (OC/OP) at 3.24%. While doing so, expenses of Rs. 1.36 crore, termed as extraordinary expenses, were not taken into account. The computation furnished by the assessee regarding the aforesaid profit level indicator (the PLI) is as under:-
Operating Income 194,640,698
Less: Operating Expenses
Personnel Expenses 90,235,050
4
Administration Selling & Other Exp. 86,209,637
Depreciation & Amortization 25,693,731
Add: Extraordinary expenses 13,600,000
Operating profit 6,102,280
Total Operating cost 188,538,418
Operating Profit 3.24%
3.1 The TPO was of the view that the aforesaid amount of Rs. 1.36
crore, termed as extraordinary expenditure of the year, was wrongly left out. In this connection, it has been mentioned that TPUSA was awarded a contract known as IBM Sprint-Project e-Care ("IBM-Sprint project") by the IBM in January, 2004. The operations were expected to commence in February, 2004. A part of the project was planned to be performed from the assessee's site. This required capacity enhancement in terms of infrastructure and human resources. However, due to commercial reasons, IBM later on decided not to award the contract to TP USA. Accordingly, a contract change request agreement was signed between the IBM and TPUSA for winding up the operations and for payment of compensation for direct set up expenses. The result of this change was that the assessee was reimbursed all the initial set up costs. However, the rent paid in respect of new building hired for carrying out operations was not recoverable from the IBM or TP USA. This expenditure has been treated as the extraordinary expenditure by the 5 assessee, which has not been taken into account for working out the PLI. However, the TPO was of the view that the expenditure was of TP USA and not of the assessee. Therefore, he made modification to the computation of the PLI submitted by the assessee and came to the conclusion that the same was (-) 0.92%. His computation is as under:-
INCOME Income from Operations 19,46,40,698 Other Income Exchange Gain 56,47,297 Total income 20,02,87,995 EXPENDITURE Personnel costs 9,02,35,050 Admn. & Other Expenses 8,62,09,637 Depreciation 2,56,93,731 Total Expenditure 20,21,38,418 Operating Profit -18,50,423 OP/TC(%) -0.92 3.2 Coming to the comparable cases, the TPO analyzed the services rendered by the assessee. He came to the conclusion that the submission that it is primarily a voice based service provider is not correct. The assessee has undertaken a host of special services and the group is also not classified as a voice based service provider. The assessee has updated customer list after enforcement of Do Not Call regime ("DNC regime"). Consequently, it has been held that the assessee is an IT 6 enabled service BPO (ITES BPO). It has been accepted that TNMM is the most appropriate method as it irons out rough edges, if any, that may exist while deciding the issue of comparability between voice based services and other services in this line of business. 3.3 The assessee had furnished eight comparable cases with mean PLI at (-)8.79% for this year. The TPO rejected five cases on various grounds such as related party transactions, difference in the market in which service is provided, low turnover, the accounts not being available in public domain, the accounts partly pertaining to a different period or financial non-viability as a going concern. Thus, he was left with three comparable cases, being GTL Limited, Saffron Global and Spanco Telesystems with the PLI of 22.13%, (-) 8.85% and 19.59% respectively.
He also conducted search on popular data bases to find out more comparable cases. These were discussed with the assessee. Finally, six more cases were added to the existing three comparable cases. The mean PLI in respect of these 9 cases has been worked out at 15.49% as under:-
Sl. No. Company Name OP/TC
1 C.S. Software 11.62
2 Carborundum Univ 11.95
3 Mukand 11.03
7
4 Tata Services 0.75
5 Tricom India 47.87
6 Ultramarine Pig. 23.32
7 GTL Limited 22.13
8 Saffron Global -8.85
9 Spanco Telesystems 19.59
Mean 15.49%
3.4 Finally, it has been mentioned that the assessee has been working
solely for TP USA according to their ventures, agreements, performance and financial guarantees. The uncontrolled PLI is 15.49%, which should have been provided to the assessee by its parent company. On this basis, the arm's length price of the international transactions has been enhanced by an amount of Rs. 3,31,61,663/-. As mentioned earlier, the AO, accepting this report, reduced the loss of the assessee by the corresponding amount.
4. The matter was agitated before the ld. CIT(A). In respect of expenditure on rent for vacant premises, the facts mentioned by him are that -
(i) Sprint is a large multinational telecom company based in USA and Canada. It had engaged IBM to arrange for providing of call centre services by examining the facilities across the globe. The IBM was in 8 touch with TP USA for assessing the possibility of assigning the contract to it;
(ii) the assessee and TPUSA were in communication for securing the contract since 15.4.2002. The representatives of IBM-Sprint visited the assessee in February, 2003 to assess the facility and the capability;
(iii) the assessee wanted to expand its business and was looking for prospective clients as the present facilities were likely to be exhausted in July, 2003;
(iv) in anticipation of growth in business, the assessee took premises on lease by way of agreement dated 05.06.2003. The lease was taken for a period of five years and it provided for a lock-in-period of three years;
(v) a press release on 5.2.2004 indicated that the IBM-Sprint business was awarded to TP USA and the operations were expected to commence from 01.04.2004. This necessitated the upgradation of facilities by the assessee;9
(vi) newspaper report dated 7.4.2004 indicated that the IBM acquired Daksh, an Indian BPO;
(vii) an agreement was reached between the TP USA and the IBM-
Sprint to pay winding up cost aggregating to US$ 60265;
(viii) this resulted in non-utilization of the rented premises. However, the assessee was bound to pay the rent for 36 months due to the conditionality of lock-in-period. Accordingly, rent of Rs. 1.36 crore was paid for this year.
4.1 On the basis of aforesaid facts and by applying the principle of comparability, the ld. CIT(Appeals) came to the conclusion that the expenditure on rent and electricity etc. for the vacant premises, amounting to about Rs. 1.42 crore was abnormal expenditure, which did not relate to the normal operations of the assessee. Therefore, he came to the conclusion that this amount had to be ignored for working out the PLI. 4.2 Coming to the inclusion of six more comparable cases, it was submitted that these cases, namely, C.S. Software Enterprises Ltd., 10 Carborundum Universal Ltd., Mukand Engineers Ltd., Tricom India Ltd., Ultramarine and Pigment Ltd. and Tata Services were included as comparables as these companies were engaged in ITES activities. While doing so, the TPO did not differentiate between voice based and non- voice based BPO units on the ground, inter-alia that such a classification has not been demonstrated and in any case TNMM irons out differences in functions. It was further submitted that the functions performed were crucially different. It was also submitted that the finding to the fact that the assessee was also performing non-voice based services is not correct as it is based on the functions performed by TP USA. It was also submitted that the assessee was a start-up company with this year being the first year of full operations while the companies identified were old and established companies. They were performing different functions. The points of divergence have been tabulated by the ld. CIT(Appeals) on page nos. 40 and 41.
4.3 The ld. CIT(A) considered the submissions. He referred to the finding of the TPO in respect of IKF Technology Ltd. that this company is engaged in software services which are not non-voice based services. Applying the same logic, he rejected the inclusion of six companies in 11 comparable cases. Finally, he came to the conclusion that there were four comparable cases with mean PLI of 4.29%, the details of which are as under:-
S. No. Name of the company OP/TC
1 GTL Limited 22.13%
2 Saffron Global (-) 12.19%
3 Spanco Telesystems 19.59%
4 Transworks Information Services Ltd. (-) 12.37%
MEAN 4.29%
Thereafter, he worked out the PLI in case of assessee, after non-
consideration of extraordinary expenditure, at 6.60%. The mean of the
comparable cases, as mentioned earlier, was worked out at 4.29%. Accordingly, it has been held that no adjustment was required to be made on account of transfer pricing.
5. Before us, the ld. CIT, DR furnished a brief background of the case that the assessee-company is a telemarketing company and it is wholly owned subsidiary of TP USA. It had provided services only to the parent company. The modes operandi is that the parent company enters into agreements with clients and thereafter engages the assessee to provide services to the clients of the parent company to the extent assigned to it. 12 The TPO worked out the PLI at (-) 0.92% after including what has been termed by the assessee as extraordinary expenditure, not relating to operations of the assessee. The major expenditure is in respect of rent of vacant premises, which was to be used for providing services to IBM Sprint with which the parent company had entered into agreement for providing services. On the other hand, the ld. CIT(Appeals) has worked out the PLI in case of the assessee at 6.60% as against the PLI of only 3.24% worked out by the assessee.
5.1 It is further submitted that the other issue is in regard to choosing the comparable cases. The assessee had furnished a list of eight comparable cases, out of which five were rejected by the TPO. These cases included the case of Transworks Information Services Ltd., which was rejected on the ground that there are substantial related party transactions. However, this case was included by the ld. CIT(Appeals). Further, the TPO added six more cases, taking the total number of comparable case to nine, with the mean PLI of 15.49%. This PLI was applied to the case of the assessee. It is also submitted that the ld. CIT(A) wrongly included the case of Tansworks Information Services Ltd. and rejected all six new comparable cases selected by the TPO. We 13 may mention here that inclusion of Transworks Information Services Ltd. has not been challenged in appeal by the revenue. While reliance is placed on the decision in the case of DCIT Vs.. Sony India Pvt. Ltd., 114 ITD 448 for rejection of Transworks Information Services Ltd., the order of the TPO has been relied upon for inclusion of six new cases as comparables.
6. In reply, the ld. counsel submitted that the assessee had 350 seat call centre. The parent company was expecting to receive IBM-Sprint order, a part of which was to be executed by the assessee. Therefore, it was thought fit to enhance the capacity. For this purpose, new premises were taken on lease from Medha Fashions P. Ltd. The agreement had lock-in-period of three years. Thereafter, permission was obtained from Software Technological Parks of India on 20.6.2003 for expanding the operational area to the new premises. This can be seen from page no. 225 of the paper book. Our attention has also been drawn to the sequence of events placed in the paper book on page no. 226 starting from initial communication received on 15.4.2002 regarding prospective business from IBM-Sprint and ending with debit note raised on TP USA for reimbursement of expenses incurred in connection with this contract. Our 14 attention has also been drawn towards page no. 284 of the paper book, which furnishes the details of efforts made by the assessee for developing new clients after taking up the new building on lease, which furnishes date-wise details of visits by various clients. However, it appears that no new client could be engaged for business. On the basis of the aforesaid evidence, the case of the ld. counsel is that the assessee had been making efforts independently to develop its customer base. However, the business could be received only if the customer was satisfied with the infrastructure and human resources available with the assessee. Therefore, the expenditure incurred on business development, including the rent, was the expenditure of the assessee and not that of its parent company. In this very connection, our attention has also been drawn towards the TP report obtained by the assessee, which shows that there was no restriction on the marketing functions of the assessee. In these circumstances, it is argued that the expenditure on rent was incurred in respect of expansion of the business but which could not be carried through. This expenditure had no nexus with any of the international transaction. No revenue had been received which could be related to this expenditure. Therefore, it is an abnormal expenditure which should be ignored for the purpose of working out the PLI. 15 6.1 Our attention has been drawn towards the findings of the ld. CIT(Appeals), in which it has been inter-alia mentioned that the crux of comparability test is to compare like with the like and to eliminate differences, if any, by suitable adjustment. It is argued that this finding is in consonance with Rule 10B(3).
6.2 Coming to the rejection of six comparables chosen by the TPO, our attention has been drawn towards the findings of the ld. CIT(A) that for the purpose of comparability between the tested party and the uncontrolled party, the nature and line of business, product or service market, the size and scope of operation and the stage of business are required to be seen. From the submissions made by the assessee and the perusal of annual report, it is found that the comparables taken by the TPO are engaged in totally different businesses. The details have been mentioned in a tabular form on page nos. 47 and 48 of the impugned order. The table is reproduced below:-
Sl. No. Name Nature of Business
Remarks
1 C.S.Software Software Not engaged in voice
Enterprises Ltd. Development based call centre
service, hence rejected
2 Carborundum Manufacturer of -do-
Universal Ltd. coated and bonded
abrasive
3 Mukand Engineers Mainly into steel -do-
16
Ltd. products
4 Tricom India Ltd. Non-voice based -do-
BPO as part of the
business
5 Ultramarine & Non-voice based -do-
Pigments Ltd. BPO as part of the
business
6 Tata Services Tata Management -do-
Training Center and
other services to Tata
group companies
6.3 In the alternative, it is submitted that if the expenditure is found to be the normal expenditure, then suitable adjustment may be made in respect of capacity under-utilization.
7. In the rejoinder, the ld. DR submitted that even as per assessee's submissions before the lower authorities, it was undertaking activities of business promotion. The renting of the premises subsequent to the IBM- Sprint order was in the course of business of the assessee. Therefore, this expenditure could not be ignored as it was abnormal expenditure. This kind of infructuous expenditure gets incurred in all businesses. The difference can be sorted out by granting suitable adjustment. Further, TNMM sorts out some differences which may exist in the business of the tested party and the business of comparable cases. However, he fairly 17 agreed with the alternative argument of the ld. counsel that adjustment may be given for capacity under-utilization.
8. We have considered the facts of the case and submissions made before us. In so far as payment of lease rent is concerned, briefly the facts are that TP USA, the parent company was to get a new business from IBM Sprint. It was decided that a part of this business will be allocated to the assessee. In order to carry out this work, the assessee was required to increase its capacity. Therefore, new premises were hired and prepared for the work. Necessary approval was obtained from STPI. The representatives of IBM Sprint also visited the new facility. However, due to change in business strategy of IBM, the order was cancelled. Therefore, the winding up agreement came into existence. Under the agreement, initial costs were reimbursed but the rent and electricity charges for the premises were not reimbursed. The lease agreement had a lock-in-period of three years due to which the assessee had to perforce pay rent for three years whether the agreement was terminated or not. Further facts are that the transfer pricing report submitted by the assessee states in paragraph no. 7.4 that the TP USA is responsible for marketing the call centre capacity of its various call 18 centres. The assessee has no responsibility to market for the business of the group. However, the assessee has independently marketed its capability to customers in the U.K, although the same has not resulted into any contract. The case of the ld. DR is that the assessee does not bear the market risks, which is borne by its parent company in the USA. This is true even as per the TP report submitted by the assessee, which shows that it has tried to do the marketing work in U.K only. However, the increase in the capacity was on account of IBM-Sprint work originating from the USA. The assessee had no marketing responsibility in this region. Further, on perusal of the profit and loss account for this year, it is seen that the same has been debited by personnel cost, administrative and other expenses, interest, and depreciation. The details of administrative and other expenses are furnished in Schedule 11, which do not show any separate head of expenses relating to advertisement, sales promotion etc. This account has been debited by a sum of about Rs. 27.76 lakh, being miscellaneous expenses, the details of which are not available. In view of these facts, it will be difficult to come to a conclusion that the assessee has been marketing its business independently. Thus, the conclusion to be drawn on the basis of facts on record is that the expenditure has been incurred by the assessee at the 19 behest TP USA so as to part perform IBM Sprint work. No doubt, the facility was visited by parties other than IBM also but there is nothing on record to show that any worthwhile negotiation took place with any one of them for providing services. Accordingly, we tend to agree with the ld. DR that additional capacity was created at the behest of the parent company. Therefore, it follows that the expenditure, in case of frustration of IBM Sprint contract, should have been borne by the parent company. In this very connection, the ld. DR has also drawn our attention towards the report of the TPO. This report does not allocate any contract risk to the assessee, although the risk of idle capacity has been shown to be quite high (page 3 of the report). Further, our attention has been drawn towards page nos. 9 and 10 of the report, which show that PLI of the parent company has been positive in the calendar years 2001 to 2005. On the other hand, the PLI of the assessee is meager and is, in fact, negative in the financial year 2002-03. Therefore, the conclusion which can be drawn on the basis of this analysis is that the expenditure of the parent company has been shifted to the assessee. Thus, on the facts it is held that marketing risk in North America was being borne by the parent company and, therefore, the expenditure on rent should have been reimbursed by it to the assessee in the same manner as other costs were reimbursed as a 20 consequence of winding up agreement. Therefore, it is held that the expenditure did not pertain to the assessee. In other words, the PLI of the assessee was low inter-alia because it was bearing the cost of the parent company. In other words, the transactions were so arranged as to decrease the profits of the assessee. In such a situation, the revenue could have disallowed the expenditure. However, the AO has not done so but proceed with aligning the PLI of the assessee with arm's length PLI.
8.1 This bring us to the alternative argument that the assessee is entitled to get adjustment in respect of capacity under-utilization. No objection has been raised by the ld. CIT, DR in this matter. As a matter of fact, he has fairly accepted the proposition that adjustment in this regard is required to be made. It is also clear from the report of the TPO that the assessee runs substantial risk of idle capacity. In view of the aforesaid admitted position, we may deal with the matter rather in a summery manner. Rule 10B(3) specifies that an uncontrolled transaction shall be comparable to an international transaction if -(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transaction is likely to materially 21 affect the price or cost charged or paid in, or the profit arising from such transactions in the open market; or (ii) reasonably accurate adjustment can be made to eliminate the material effect of such differences. As is our experience, it is nearly impossible to get comparable cases with no difference at all. Therefore, the question of reasonable accurate adjustment arises in almost all cases. Both the parties agree that requisite adjustment may be made in the case of the assessee on this issue. This is in consonance with Rule 10B(3), as the agreed position pre-supposes that reasonably accurate adjustment can be made in respect of this matter. It may also be clarified that no such argument was taken before lower authorities. However, since the assessee is a defendant in this case, such a plea can be raised and the same will have to be dealt with while disposing off the appeal. Accordingly, it is held that transfer pricing adjustment is required to be made in respect of the rent, while working out the arm's length PLI. At the same time, it is also held that suitable adjustment has to be made to such PLI in respect of idle capacity. For this purpose, the matter is restored to the file of the AO. Thus, ground no. 1 is treated as partly allowed for statistical purposes. 22
9. Ground no. 2 is against the finding of the ld. CIT(Appeals) that six companies identified by the TPO are not valid comparables. The details of these companies have already been mentioned in paragraph no. 6.2 (supra). The ld. CIT(A) mentioned that Rule 10B(2) as well as various rulings of the Tribunal clearly lead to a conclusion that for the purpose of comparability various factors, namely, nature and line of business, product or service market, the size and scope of operation and stage of business are required to be seen. The ld. CIT (A) considered the financial report in the case of comparable cases for this purpose. It was found that they were carrying on totally different lines of business against the business of the assessee of voice based BPO. The AO had rejected the case of IKF Technology Ltd. precisely on the ground that it was engaged in software services and those too were in the field of non-voice based industry. Following this very logic, the ld. CIT(A) rejected six cases selected by the TPO.
9.1 Before us, the ld. DR relied on the order of the TPO. It was strongly submitted that the case of Tata Services Ltd. was wrongly excluded. From the details of this company, it is seen that it is an in- 23 house company providing services to other companies of Tata Group. For the sake of ready reference, the details submitted by the assessee to the ld. CIT(A) and mentioned on page no. 46 are reproduced below:-
"....The company is an in-house group resource company providing certain centralized service to the Tata Group of Companies. The operations of the company are run on no- profit and no-loss basis. The company provides services to Tata Group companies against their requirements with the operations of various departments consists of Tata Management Training Centre, Corporate Affairs Department, Department of Economics & Statistics, Legal Department, Public Affairs Department, Labour Relation Bureau, Network Communication Department etc......"
It will be seen that these details do not contain the nature of services provided but it is run on no-profit no-loss basis.
9.2 In the case of E-Gain Communications (P) Ltd., it has been held in paragraph no. 34 that while comparing transactions or enterprises under TNMM, the differences which are likely to materially affect the price, cost charged or paid or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect. However, if the differences are such that they cannot be subject to evaluation, then the 24 transaction of the enterprise may have to be rejected. Further, in the case of Sony India (P) Ltd., (2009) 315 ITR (AT)....... it has been mentioned in paragraph no. 132 that it is by no stretch of imagination an easy job to evaluate differences for each of the factor and, therefore, allowing 20% reduction in the PLI of the comparable cases was fair and reasonable. In the case of Sakoda India P. Ltd. Vs. ACIT [122 TTJ 699 (Pune)], it has been mentioned in paragraph no. 19 that it has to be seen whether the high import content was necessitated by extraordinary circumstances beyond the control of the assessee. Referring to the finding in the case of E-Gain Communications P. Ltd. that "the differences which are likely to materially affect the price, cost charged or cost paid in, or the profit in the open market are to be taken into consideration with an idea to make reasonable and accurate adjustment to eliminate the differences having material effect", it was mentioned that the assumption that every time higher import duty was paid it must have been passed to the customers cannot be accepted. One way of looking at the issue would be to make adjustment for functional differences or to accept the plea that unusually high costs are paid looking to the fact that the business is in the initial stages. Thus, if there are substantial differences in comparable cases on one hand and the tested party on the other, one way at looking at the 25 situation is to reject the comparables. The other is to make reasonable adjustment arising on account of differences. Nonetheless, the second option involves many uncertainties and, therefore, if there are substantial differences it would be proper to reject the comparables. 9.3 When we examine the facts of the case in the light of aforesaid conclusion, it is seen that none of the comparables selected by the TPO is shown to have the same business of voice based BPO as in the case of the assessee. C.S. Software Enterprises Ltd., is conducting the business of software. Carborundum Universal Ltd., is mainly in the line of manufacture of coated and bonded abrasive. The main business of Mukand Engineers Ltd. is production of steel. Tricom India, apart from other businesses is also carrying on the business of non-voice based BPO. Such is also the case of Ultramarine & Pigments Ltd. We have already mentioned about the business of Tata Services Ltd. All these companies have been carrying on their main businesses for a long period. The business models are not comparable. Therefore, we do not find any reason to disturb the order of the ld. CIT(Appeals) in this matter.
26ITA No. 4796(Del)/2010-Appeal of the assessee-A.Y. 2006-07.
10. In this appeal, the assessee has taken up 15 grounds. However in the course of hearing before us, only some matters were argued by both the parties. Therefore, the appeal is decided on the basis of the arguments made before us.
11. The first issue taken up is regarding extraordinary expenditure of Rs. 2,13,99,841/- incurred by the assessee by way of rent and maintenance expenses of the leased premises, which have been termed as extraordinary expenditure. The same has been deducted while computing the PLI. It is submitted by both the parties that the facts in this regard are identical with the facts for assessment year 2004-05. This issue has been decided by holding that the expenditure ought to have been borne by the parent company and, therefore, showing this expenditure in the accounts of the assessee has led to reporting of lower profits by it. Accordingly, adjustment is required to be made on account of transfer pricing. At the same time the assessee is entitled to capacity sub- utilization deduction arising on account of excess capacity. Following this order, the matter is restored to the file of the AO to re-work the 27 adjustment to be made to the value of international transactions undertaken by the assessee.
12. Ground no. 4.1 is against rejection of five comparables by the TPO, viz., (i) Axis IT &T Ltd., (ii) Godrej Upstream Ltd., (iii) NIIT Smart Serve Ltd, (iv) Nupima Services Ltd. and (v) First Source Solutions Ltd. From the order of the TPO, it is seen that the assessee initially selected five comparables and thereafter added six more comparables, thus, citing 11 comparable cases. The PLI was worked out at (-) 1.45% against 21.80% computed in the case of the assessee. The TPO found that four comparables had substantial related party transactions. These are NIIT Smart Source Ltd., Nupima Services Ltd, Axis IT&T Ltd. and Godrej Upstream Ltd. The fact of existence of related party transactions in these four comparables were accepted by the assessee, therefore, relying on the decision in the case of Sony India (P) Ltd. Vs. Dy. CIT, (2008) 114 ITD 444, these comparables were rejected. In the aforesaid decision, it was mentioned that an entity can be taken as uncontrolled if its related party transactions do not exceed 10% to 15% of the total revenue. Within the aforesaid limits, the transactions cannot be said to be having significant influence on the PLI. The TPO 28 has also cited the case of Phillips Software Centre Vs. ACIT, (2008) 26 SOT 226, in which a view has been taken that even if there is a single rupee transaction with the associated enterprise, such a case should not be considered as a comparable case.
12.1 Before us, the ld. counsel furnished synopsis termed as "broad proposition", which show that NIIT Smart Serve Ltd. had 32% related party transactions, Nupima Services Ltd. - 28%, Axis IT&T Ltd.- 48% and Godrej Upstream Ltd. dealt only with associated enterprises i.e., all its transactions were related party transactions. No further argument was made in this behalf. On the other hand, the ld. DR relied on the decision in the case of Sony India P. Ltd. (supra). 12.2 Having considered the facts of the case and the arguments made before us, it is clear that the four comparables mentioned above had related party transactions exceeding 15% of the revenue. Therefore, these cases could not have been taken as comparables in view of the decision in the case of Sony India P. Ltd. The cases could have also not been considered at all in view of the decision in the case of Phillips 29 Software Centre P. Ltd.(supra). Therefore, it is held that the TPO rightly rejected these four cases.
12.3 The TPO had considered the case of First Source Solutions Ltd. separately in paragraph no. 8.8. He wanted to reject this comparable on grounds of functional dissimilarity and substantial related party transactions. Upon hearing the assessee, the ground of functional dissimilarity was dropped, but the comparable was rejected as related party transactions formed 51.9% of the revenue. Thus, this case was also rejected on the same line as other four cases. The matter regarding effect of substantial related party transactions has already been discussed by us. Since the related party transactions exceed 15%, it is held that the TPO rightly rejected these comparables.
13. Ground no. 4.2 is against rejection of Optimus Global Services Ltd. as a valid comparable case. In this connection, it has been mentioned in the TPO's report that this company had been persistently incurring losses. The submission of the assessee was that a comparable case cannot be rejected merely because it incurred losses as losses are normal feature of any industry. In this connection, the TPO mentioned that the share 30 capital including reserves of the company amounted to Rs. 17.00 crore. As against this, the assessee had shown accumulated losses at about Rs. 17.09 crore. Thus, the net worth of the company had been completely eroded. While it was accepted that profit and loss are normal feature of any business, but persistent losses is not the normal feature of any business. If a company has been incurring losses consistently, it can be inferred that it is not operating in normal circumstances. The situation becomes abnormal when the capital base is completely eroded. 13.1 The only submission made by the ld. counsel is that the company had positive net worth in earlier years, it is functionally comparable, it had shown higher revenue year after year and it had shown profit in financial year 2007-08. Therefore, if this comparable had to be ignored on account of higher loss, then companies having abnormally high PLI should also be rejected. On the other hand, the ld. DR relied on the order of the TPO and the DRP.
13.2 We have considered the facts of the case and submissions made before us. We are of the view that this case is not a valid comparable for the reason that it has been incurring losses year after year and the 31 capital base has completely eroded. The erosion of capital base stands separate and apart from normal incidence of profit and loss. While looking the situation from this angle, accounts of the company for financial year 2007-08 cannot be considered because as per the rule, the accounts of financial year 2005-06 only have to be considered. Therefore, we are of the view that this comparable was also rightly rejected by the TPO.
14. Ground nos. 4.3 and 4.4 are against rejection of Surevin Internet Services Ltd. as a comparable company. In this connection, it is mentioned that the selection criteria applied by the assessee is to accept companies with sales of more than Rs. 1.00 crore. Thereafter, the second filter is applied by which cases having major income from trading and manufacturing operation are rejected. However, the assessee has not taken into account the criteria of percentage of revenue from the relevant activity to the total revenue. On the basis of filters applied by the assessee, a case having turnover of more than Rs. 100 crore may get selected if revenue from the relevant activity is less than Rs. 1.00 crore. Therefore, a case may get selected where turnover from the relevant activity is less than the threshold limit of Rs. 1.00 crore. This company 32 has a turnover of Rs. 91.24 lakh from call centre activities, Rs. 7.46 lakh from software and Rs. 2.45 lakh from cable connection. There are no segmental accounts available. This company has share capital of Rs. 28.80 lakh and accumulated losses amount to Rs. 39.20 lakh. Accordingly, the comparable case has been rejected on these two grounds.
14.1 The case of the ld. counsel is that the total turnover of this company is Rs. 1.00 crore, out of which Rs. 91.24 lakh is from BPO activities. Therefore, the case is functionally comparable. Further, although the company has accumulated losses, its net worth is positive if reserves and surplus are taken into account. Thus, the case cannot be rejected merely on account of accumulated losses. On the other hand, the case of the ld. DR is that this company is working in a totally different economic environment.
14.2 We have considered this matter also. The turnover of the assessee in this year amounted to about Rs. 31.64 crore. The turnover of the comparable case from similar business is only Rs. 91.24 lakh. Thus, there is huge difference of the multiple of about 33 times in the 33 turnover from the same business. Such a case cannot be said to be comparable case on this ground alone. Therefore, it is held that this case has been rightly rejected by the TPO.
15. Ground no. 4.5 is against rejection of Shreejal Info Hubs Ltd. as a comparable case. In this connection, it has been mentioned in the TPO's order that the assessee raised objection and it was submitted that this company is carrying out business of vending information, i.e., customer support or a contract centre. This business is similar to the BPO business. The TPO rejected the submission by mentioning that vending of information and rendering services to call centre are activities different from running a call centre. Therefore, the functional profile of the two companies were different.
15.1 Before us, the ld. counsel mentioned that the information vending is nothing but customer support or a contract centre. Thus, Shreejal Info Hubs Ltd. is imparting information of supplier of goods and services to prospective customers. As per director's report, it is carrying out the business of information vending by employing calling agents under the brand name "Ask Me", which is essentially a call centre/contract service 34 centre. Therefore, functional profile is same i.e., to furnish information about the client-company. On the other hand, the case of the ld. DR is that Shreejal Info Hubs Ltd. is working for the clients in India while the assessee is providing services in USA, thus, business territories are totally different.
15.2 We have considered the facts and the submissions made in this behalf. We are of the view that territory of the business is a material factor in deciding comparability of the cases. The assessee renders services in USA while Shreejal Info Hubs Ltd. renders services in India. This fact alone is sufficient to exclude this comparable. Thus, it is held that the AO/TPO rightly rejected this case as a comparable case.
16. Lastly, ground no. 4.6 is against rejection of Optimus Outsourcing Co. Ltd. as a valid comparable case on the ground that it has been incurring losses consistently and its net worth had eroded. No argument is made in respect of this ground by any party and the ground appears to have been wrongly taken up. Therefore, no decision is required on this ground. 35
17. Ground nos. 5 to 9 are against inclusion of Galaxy Commercial, Maple E Solutions, Triton Corporation, and Nucleus Netsoft and GIS (India) Ltd. as comparable cases by the TPO. In regard to Galaxy Commercial, the objection of the assessee before the TPO has been that it has diversified activities while the assessee is carrying on the business of voice based call centre only. The TPO mentioned that the company is carrying on BPO operation and transport operation. The results of only BPO operation are being considered for the purpose of determining arm's length price. In this regard, the functions are more or less similar. 17.1 Before us, it is submitted that the aforesaid company is engaged in customized BPO services and not in call centre activities. It is carrying on three distinct businesses, namely, -(i) BPO operations, (ii) transport operations and (iii) purchase and sale of shares and units. Although it is mentioned by the TPO that only BPO operations have been considered, but he applied entity-wise profit. Segment-wise profitability is not available in the audited accounts. Therefore, this case has been wrongly considered as a comparable.
3617.2 In regard to Maple E Solutions & Triton Corporation, it is mentioned in the report of the TPO that the first named company is carrying on the business of rendering data process services and BPO services. Objection has been raised that the directors of the company were involved in a fraud. This company is a wholly owned subsidiary of Haryana Fibres Ltd., whose promoters were involved in fraud as per newspaper report and the CBI report. The TPO mentioned that according to CBI bulletin of December, 2008, it was reported that the Rastogi family cheated Government of India to the tune of Rs. 54.00 crore in late 1980s and mid 1990s. Rastogi brothers had floated 14 firms for the purpose of export of bicycle parts to Russia and Hong Kong. They were arrested by the FBI and U.K. authorities and sentenced to imprisonment for more than 9 years. However, the report nowhere contains the name of this company. According to the data available at Prowess Data Base, it is engaged in the business of call centre activities; it had set up 100% EOU and it holds registration under section 10B. In regard to the second mentioned company, it was submitted that it is engaged in two activities i.e., telecom sector and BPO sector. It is also a company of Rastogi group and, therefore, other objections are the same as in the case of first mentioned company. The TPO mentioned that the 37 company is deriving revenue from ITES activities which are comparable to the business of the assessee. Thus, both the companies were included as comparables.
17.3 In regard to Nucleus Netsoft & GIS (India) Ltd., it was submitted that its business is functionally different and there are related party transactions to the extent of 21.60%. Its PLI works out to 32.47% against 44% computed by the TPO. In the order, it is mentioned that this company is rendering ITES. The software part is handling of CAD/CAM services, which does not amount to software development. The related party transactions worked out to only 6.07% which is within the permissible range. The working of PLI at 44% is also correct. 17.4 In regard to inclusion of all these companies, the ld. CIT, DR relied on the order of the AO.
17.5 We have considered the facts of the case and submissions made before us. The admitted facts in respect of Galaxy Commercial are that it is carrying on three lines of businesses and segment profitability is not available. Obviously, overall profitability of the company cannot be 38 applied in the case of the assessee as it will amount to comparing incomparable cases. Further, the business reputation of Rastogi group, owning Maple E Solutions and Triton Corporation, is under serious indictment. They are also carrying on the businesses of data processing services and ITES services apart from BPO services. In view of a question mark on the reputation of the owner, albeit for earlier years, it would be unsafe to take their results for comparison of the profitability of the assessee. Similarly, it has not been contested by the ld. CIT-DR before us that related party transaction in case of Nucleus Netsoft & GIS (India) Ltd. amounted to 22.28% against the working of 6.07%. The high figure of 22.28% renders the case incomparable as the tolerable limit of related party transactions would be in the vicinity of 10% to 15%. Accordingly, it is held that none of these cases can be taken to be comparable case.
17.6 Ground nos. 10 to 12 deal with final working of arm's length price. As the same will undergo change in view of our findings given above, the matter is restored to the file of the AO for working out arm's length price again, after hearing the assessee and taking aforesaid directions into account.
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18. Ground no. 13 is in respect of setting off of brought forward losses and unabsorbed depreciation. From the assessment order, it is seen that while computing the profits of Gurgaon unit, which is the eligible unit, brought forward losses from assessment years 2002-03 and 2003-04, aggregating to Rs. 11,65,418/- and unabsorbed depreciation for assessment years 2002-03 to 2004-05 and depreciation for this year i.e., assessment year 2006-07, aggregating to Rs. 4,28,45,777/- have been deducted. The case of the assessee is that section 10A grants deduction of profit of the undertaking for the relevant previous year without taking into account brought forward losses and unabsorbed depreciation. In this connection, reliance has inter-alia been placed on the order of Special Bench of Chennai Tribunal in the case of Scientific Atlanta India Technology (P) Ltd. Vs. ACIT, (2010) 129 TTJ 273. In this case, it has been held that profits of the eligible unit are deductible u/s 10A, which means that the income computed under the head "profits and gains of business or profession" will be so deductible. This deduction is required to be made at the stage of computing the income under the aforesaid head. Even though it is a deduction admissible to the assessee, it has to be deducted while arriving at profits of the business and not from the gross 40 total income. That is why the provision is separately enacted and does not form part of Chapter VI-A. This means that provision contained in section 80AB cannot be applied.
18.1 When looked into from the aforesaid angle, it is clear that unabsorbed depreciation has been rightly considered by the AO because as per scheme of section 32, unabsorbed depreciation of an earlier year become the depreciation of the current year. The deduction is also given under section 32, which is part of chapter IV-D. However, provisions regarding set off of brought forward losses are included in chapter VI, which cannot be taken into account for computing profits and gains of business. Therefore, it is held that the AO was not right in deducting brought forward losses. Thus, this ground is partly allowed.
19. Ground no. 14 is against not allowing the setting off of the interest income of Rs. 2,24,338/- against brought forward loss or depreciation. As mentioned earlier, brought forward depreciation become the current year's depreciation. Therefore, the income chargeable to tax under the head "other sources" can be set off against brought forward depreciation, as it becomes the business loss of the current year. However, it cannot be set 41 off against brought forward business losses. The determination of the question will depend upon the availability of unabsorbed depreciation or depreciation computed for this year. The AO is directed to decide this ground again while giving effect to this order by following aforesaid directions. Needless to say that the assessee will be granted an opportunity of being heard.
20. Ground no. 15 is against taxation of an amount of Rs. 1,95,860/-, being excess liability written back as income from other sources. As in the case of depreciation, section 41(1) falls in chapter IV-D, dealing with computation of business income. Therefore, the income is assessable as business income. Thus, this ground is allowed.
21. In the result, both the appeals are treated as partly allowed, as discussed above.
The order was pronounced in the open court on 30 June, 2011.
Sd/- sd/-
(C.L. Sethi) (K.G.Bansal)
Judicial Member Accountant Member
Date of order: 30th June, 2011.
SP Satia
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Copy of the order forwarded to:-
CRM Services India(P) Ltd., New Delhi.
ITO, Ward 3(1), New Delhi.
CIT(A)
CIT
The DR, ITAT, New Delhi. Assistant Registrar.