Income Tax Appellate Tribunal - Delhi
American Express (India) Pvt. Ltd.,, ... vs Department Of Income Tax on 28 August, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'A
'A' : NEW DELHI
BEFORE SHRI G.D.AGRAWAL,
G.D.AGRAWAL, VICE PRESIDENT AND
SHRI CHANDRA MOHAN GARG,
GARG, JUDICIAL MEMBER
ITA No.4240/Del/2009
No.4240/Del/2009
Assessment Year : 2003-
2003-04
M/s American Express (India) Vs. Joint Commissioner of
Private Limited, Income Tax,
First Floor, Mercantile House, Co.Circle 1(1),
15, Kasturba Gandhi Marg, New Delhi.
New Delhi - 110 001.
PAN : AAACA8163F.
(Appellant) (Respondent)
ITA No.4295/Del/2009
Assessment Year : 2003-
2003-04
Deputy
Deputy Commissioner of Vs. M/s American Express (India)
Income Tax, Private Limited,
Circle-
Circle-1(1), First Floor, Mercantile House,
New Delhi. 15, Kasturba Gandhi Marg,
New Delhi - 110 001.
PAN : AAACA8163F.
(Appellant) (Respondent)
Assessee by : S/Shri Arijit Chakravarty, Vijay Iyer,
Manoneet Dalal & Atulan Shah, ARs.
Respondent by : Shri Piyush Jain, CIT-DR (Intl.).
ORDER
PER G.D.AGRAWAL, G.D.AGRAWAL, VP :
These are cross-appeals filed against the order of learned CIT(A)- XX, New Delhi dated 28th August, 2009 for the AY 2003-04.
2. Ground No.1 of the assessee's appeal reads as under:-
2"That on facts and in law the Commissioner of Income-tax (Appeals) ("Learned CIT(A)") erred in upholding the orders passed by the Assessing Officer ("Learned AO")/(Transfer Pricing Officer ("Learned TPO") which were bad in law and void ab-initio as they suffered from material illegality and irregularity to the extent of additions confirmed by the learned CIT(A)."
3. At the time of hearing before us, it is stated by the learned counsel that this ground is of general nature and needs no separate adjudication.
4. Ground Nos.2, 2.1 & 2.2 of the assessee's appeal read as under:-
"2. That on facts and in law the Learned CIT(A) erred in upholding addition to income of Rs.15,92,72,896 under Chapter-X of the Income Tax Act, 1961 (the "Act").
2.1 That the order of the learned AO and learned TPO was bad in law and void ab-initio since :
a) Preconditions for reference to be made to a transfer pricing officer were not met.
b) Based on the facts and circumstances of the case, there was neither necessity nor expediency for such reference.
c) No opportunity was provided by the Learned AO to the appellant before referring the transfer pricing issues to the Learned TPO.3
2.2 That the learned CIT(A) failed to consider and appreciate the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the income Tax Rules, 1962 for determining the arm's length price of the provision of IT enabled services. Specifically, on facts and in law the Learned AO, Learned TPO and the Learned CIT(A) erred in :
(a) Not accepting the analysis undertaken by the Appellant.
(b) Not accepting that the appellant was justified in using data pertaining to financial years 2000-01 and 2001-
02 for the comparability analysis.
(c) Accepting that the Learned TPO was justified in using data that became available only after the specified date/due date.
(d) Applying an ad-hoc sales turnover filter to reject companies identified by the appellant.
(e) Not computing the Net Operating Profit Margin of MCS Limited correctly and based on financial data as per its Annual Report.
(f) Not allowing adequate opportunity to the appellant to undertake a fresh search and identify additional comparable companies based on data that became available only after the specified date/due date.
4(g) Failing to make appropriate adjustments for differences in depreciation, marketing functions, product liability risks and credit risks undertaken by the appellant vis-a-vis the comparable companies.
(h) Not giving due cognizance to the fact that the international prices charged by the appellant have been accepted and certified by the Software Technology Park of India, which is the Government/Reserve Bank of India designated competent technical authority to deal with the appropriateness of the price charged.
(i) Not adjudicating on the argument that final assessment should be "having regard" to ALP and not based thereon."
5. At the time of hearing before us, the learned counsel for the assessee did not press ground No.2.1. Accordingly, the same is rejected.
6. With regard to ground No.2.2, it is stated by the learned counsel that the said ground is only arguments with reference to the addition made by the Assessing Officer and partly sustained by the learned CIT(A) by way of transfer pricing adjustment. The same is already challenged by ground No.2 and, therefore, if ground No.2 is adjudicated, no separate adjudication of ground No.2.2 is required.
7. In the Revenue's appeal also, by way of ground No.1, the Revenue has challenged the relief allowed by the learned CIT(A) in 5 respect of transfer pricing adjustment made by the AO. The said ground reads as under:-
"1. On relief of Rs.34132272/- on account of arm's length price :
(a) Whether in the facts and circumstances of the case, the ld.CIT(A) was right in rejecting the comparables on the ground of related party transaction?
(b) Whether in the facts and circumstances of the case, the ld.CIT(A) was right in rejecting the comparables by applying a rejection criteria of turnover of Rs.5 Crore.
(c) Whether in the facts and circumstances of the case, the ld.CIT(A) was right in rejecting the comparable viz.
Genesys International Corporation Limited on the ground of function comparability?"
8. Since ground No.1 of the Revenue's appeal and ground No.2 of the assessee's appeal are interrelated, they are being taken up for hearing and adjudication together.
9. The facts of the case are that the assessee is a private limited company. It is a wholly owned subsidiary of American Express International Inc. (AEII), USA. It is engaged in providing IT-enabled services to its group companies, i.e., transaction processing, data management, information analysis and control. During the year under consideration, the assessee received a sum of `213,25,80,456/- from Associated Enterprise (AE) for providing IT-enabled services to them. On reference by the Assessing Officer, the TPO determined the arm's 6 length price to be charged from the AE and, accordingly, worked out the addition of `19,34,05,168/- as under :-
"10. In the manner discussed above, the arithmetic mean of adjusted operating profit over the total cost margins of the comparables for the financial year works out to 16.70%. The arm's length price of the international transactions entered into by the assessee with its various associated enterprises is worked out as under.
Total cost of provision of services by the assessee : Rs.1,99,31,32,497/- (as per Page 8 of TP Report) Margin @ 16.70% of the above : Rs.33,28,53,127/-
Arms length price to be charged from the AE : Rs.2,32,59,85,624/-
11. In the manner discussed above the arm's length price of the international transactions entered into by the assessee regarding provision of IT enabled services to its AEs is determined at Rs.2,32,59,85,624/- in place of Rs.2,13,25,80,456/-. Since the price charged by the assessee varies by more than 5% from the Arm's Length Price, an adjustment of Rs.19,34,05,168/- is to be made to the income of the assessee, being the difference between the arm's length price and the price charged by the assessee from its AEs for rendering services to them, i.e., the Assessing Officer shall enhance the income of the assessee by an amount of Rs.19,34,05,168/- while computing its total income. No exemption u/s 10B shall be 7 admissible on such adjustment in accordance with proviso of Sub-section (4) of Section 92C."
10. The above adjustment was worked out by the TPO by applying the TNMM. The TPO made the comparison by taking the operating margins of comparable companies, details of which are given in paragraph 8 of his order which is reproduced below for ready reference:-
8.0 Accordingly, operating profit over the total cost margin of the comparable companies was adjusted to take into account the difference in the working capital. The detailed computation of effect of working capital adjustment on operating profit/total cost margin is given in Annexure 1. The adjusted operating margins of comparable companies as a result of above adjustment are given in the table below:
Mar-03 Mar-03
Company Name (OP/TC)% Adjusted
(OP/TC)%
Ace Software Exports Ltd. 9.23 10.13
Allsec Technologies Ltd. 14.68 16.19
Genesys International Corpn. Ltd. 29.63 26.47
(Consolidated accounts)
Karvy Consultants Ltd. 17.06 15.46
MCS Ltd. 15.67 15.17
Hinduja TMT Ltd. 132.77 129.90
AM I Computers (I) Ltd. -55.59 -63.66
Nucleus Netsoft & GIS India Ltd. -16.67 -13.39
Max Healthscribe Ltd. 12.95 14.79
Arithmetic Mean 16.70
8
11. On appeal, the learned CIT(A) worked out the addition at `15,92,72,896/- as under:-
"16.7 On the above criteria the average net margin of the comparable companies is arrived at as under:-
S.No. Companies Name Unadjusted Adjusted
OP/TC (Mar 03) OP/TC (Mar 03)
1 Allsec Technologies Limited 15.06% 16.08%
2 Max Healthscribe Limited 12.98% 14.42%
3 MCS Limited 6.90% 15.17%
Average (OP/TC) 16.32% 15.22%
As the average adjusted OP/TC is 15.22%, accordingly adjustment on account of difference in the ALP of the international transaction has been computed as under:
(A) Total Cost of provision of services to AEs Rs.1,99,31,32,497
(B) Margin @ 15.22% to be earned by appellant Rs.30,34,29,036
(C) Margin actually earned by appellant Rs.14,41,56,140
Adjustment (B-C) Rs.15,92,72,896
Thus the TP adjustment of Rs.15,92,72,896 is confirmed."
12. The Revenue, aggrieved with the relief allowed, is in appeal vide ground Nos.1(a), (b) & (c). The assessee, aggrieved with the addition sustained, is in appeal vide ground No.2 of its appeal.
13. With regard to ground No.1(a) of the Revenue's appeal, it is stated by the learned DR that learned CIT(A) rejected the comparable Hinduja TMT on the ground that the transactions with the related 9 parties are more than 70%. He pointed out that learned CIT(A) clubbed the receipt and payment with the related parties together and compared the same with the total expenses of Hinduja TMT. That the expenses can be compared with the expenses and receipt can be compared with the receipt but there cannot be any justification for adding the receipt and expenses of related parties and comparing the same with the total expenses. Thus, the working of the learned CIT(A) is incorrect. He, therefore, submitted that the order of learned CIT(A) for excluding Hinduja TMT is to be reversed and a direction may be given that Hinduja TMT should be considered as a comparable.
14. The learned counsel for the assessee, on the other hand, fairly admitted that learned CIT(A) has clubbed the receipt and payment of the related parties and compared the same with the total outgoing of Hinduja TMT. He, however, submitted that even if the receipt of the related parties is compared with the total receipt and the outgoing of the related parties is compared with the total outgoing, there would be substantial payment to and from related parties. Therefore, Hinduja TMT was rightly rejected by learned CIT(A) as a comparable. He also alternatively submitted that this specific point can be restored back to the file of the Assessing Officer/TPO for verification of correct facts and then re-adjudication accordingly.
15. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that CIT(A) has recorded the following finding in this regard:-
"13.10 As regards to appellant's submissions regarding rejection of Hinduja TMT Limited, I have gone through financials accounts and it is found that Hinduja 10 TMT Limited has the following related party transactions on the expense side :
Hinduja TMT - FY 2002-03 Particulars Rs. In Lacs Rendering of services 2,579.82 Professional fee paid 30.00 Discounts and commission paid 483.15 Rent charges paid 97.40 Business promotion expense 4.29 Purchase/Miscellaneous expenses 6.26 Communication charges 22.31 Total 3223.23 I have also examined the total operating expense of Hinduja TMT. These are :
Hinduja TMT - FY 2002-03
Particulars Rs. In Lacs
Direct Cost, Product Cost and 366.16
Connectivity Cost
Employee Cost 2294.50
Administration and Other Expenses 1788.05
Total 4448.71
Based on the above calculations, it is clear that the company has significant percentage of related party transactions (total value of related party transactions/total operating expense are more than 70%) hence, I hold that Hinduja TMT is not to be used as a comparable company on account of significant related party transactions."11
16. From the above, it is evident that learned CIT(A) has totaled up the amount received from the related parties for rendering of services together with the payments made to related parties which became `3223.23 lakhs. He compared the same with the total operating expenses which were `4448.71 lakhs. If the total operating expenses are being compared, then they can be compared only with the total operating expenses paid to the related parties. The amount received from related parties for rendering services can be compared only with the total receipt of Hinduja TMT from rendering of services. Therefore, apparently, the working of learned CIT(A) is incorrect. At the same time, it cannot be denied that there are substantial payments and receipt from the related parties but all the particulars in this regard are not available with us and, moreover, we find that the TPO has not applied his mind on this aspect. We, therefore, deem it proper to restore the issue related to Hinduja TMT to the file of the AO. He shall readjudicate whether the case of Hinduja TMT can be considered as a comparable for determining arm's length price as per TNMM. Needless to mention that he will allow adequate opportunity of being heard to the assessee.
17. Ground No.1(b) of the Revenue's appeal is that learned CIT(A) rejected some comparables by applying the filter of turnover of `5 crores. We find that while considering the comparable, the TPO has applied the filter of `1 crore but learned CIT(A) had applied the filter of `5 crores. The relevant finding of learned CIT(A) in this regard reads as under:-
"Holding the same view which was taken while deciding the appeal of last year and as held in the last years appellate order that, after doing FAR analysis TPO applied 12 a turnover filter of Rs.5 crores and selected the comparables (but it is quite peculiar that in this year, the turnover filter was not applied when there is no change in the facts and circumstances in the appellants business, scale, functions and risks analysis). I apply the filter turnover of Rs.5 crores as held by me to be correct in last year and accordingly the comparables are used for the further comparability analysis. It may be mentioned here that on this issue remand report was sought from the TPO, but he has not given any comments on this issue.
Therefore, by applying the turnover filter of 5 crores considering the fact during the year the appellants sales volume is Rs.213 crores, I hold that companies with less than Rs.5 crores as turnover should not be taken as comparable, accordingly, following companies get eliminated :"
18. From the above, it is evident that learned CIT(A) has noted that in the earlier year, TPO himself has applied the turnover filter of `5 crores and selected the comparables exceeding the turnover of `5 crores. Moreover, the receipt of the assessee from the Associated Enterprise is `213 crores. Considering the receipt from the AE by the assessee, the turnover filter of `1 crore applied by the TPO is very less and, in our opinion, the turnover filter of `5 crores applied by the CIT(A) is quite fair and justified. Moreover, the TPO himself has applied the turnover filter of `5 crores in the earlier year. Therefore, there was no justification for applying the turnover filter of `1 crore only in the year under consideration. We, therefore, uphold the order of learned CIT(A) in this respect and reject ground No.1(b) of the Revenue's appeal.
1319. By way of ground No.1(c), the Revenue has challenged the rejection of Genesys International Corporation Limited as comparable on the ground that it is functionally not comparable with the assessee.
20. We have heard both the parties and perused the material placed before us. We find that the TPO himself stated that the case of Genesys International Corporation Limited cannot be considered because there are substantial related party transactions. However, to nullify the effect of related party transactions, he considered the consolidated accounts of Genesys International Corporation Limited. The relevant finding of the TPO reads as under:-
"6.8 The next objection against Genesys International is that this company has a related party transaction. The contention that Genesys International has related party transactions is based on facts given in the annual audited accounts of Genesys for the year ended March 31, 2003. As per note no.6 of Schedule O forming part of the annual audited accounts for the year ended March 31, 2003 sales to subsidiary amounted to Rs.10.73 crores which is about 46% of the total sales of Genesys International. The contention is that because of the presence of related party transactions, Genesys International can not be used as a comparable.
It may be appreciated that Genesys is parent company and is having a subsidiary Genesys Enterprises Inc., USA which is related party as per notes to account. In this case since Indian company is parent company therefore there is no doubt that this related party transaction is with a related 14 party under the accounting standard 18 issued by Institute of Chartered Accountants of India. Since there is a holding company subsidiary relationship clearly coming out therefore from facts, not only as per Accounting standards but also under section 92A of Income Tax Act, this would qualify to be an Associated enterprises. However, difficulty of related party transactions can be overcome by using consolidated accounts of the Genesys International since it is an established fact that in order to nullify the effect of related party transactions one may use consolidated accounts. This office had financial results of Genesys International both on standalone basis and consolidated. It is a fact that standalone financials of Genesys International are showing better operating margins as compared to consolidated but to meet the objection of related party transaction it is decided that consolidated accounts of Genesys International would be used."
21. However, the learned CIT(A) examined the consolidated accounts of Genesys International Corporation Limited and found that in the case of Global Information Services (GIS) segment in the consolidated revenue, 60% is the revenue earned by the subsidiary. While in the case of IT enabled services, 95% of the revenue is earned by the subsidiaries. He, therefore, held that even the consolidated accounts of Genesys International Corporation Limited are not comparable. The relevant finding of learned CIT(A) reads as under:-
"
Particulars GIS IT Consultancy
Consolidated revenue A 310,451,836 161,668,467
Revenue earned by Genesys B 231,640,102 7,567,864
during FY 2002-03
15
Sale made to the subsidiary C (107,292,625) --
Revenue earned by Genesys from D=B-C 124,347,477 7,567,864
uncontrolled transactions
Revenue earned by the subsidiary E=A-D 186,104,359 154,100,603
% of revenue earned by Genesys D/A 40% 5%
in consolidated revenues
% of revenue earned by the E/A 60% 95%
subsidiary in consolidated
revenues
As you would appreciate the operations of the US subsidiary of Genesys cannot be considered comparable to the ITES services rendered by the appellant since the economic and geographical conditions in which these two companies operate cannot be considered comparable.
Hence, the consolidated financial statements of Genesys Corporation cannot be used for the purpose of computing arm's length price of the appellant's IT enabled services. Further, we would like to re-iterate that standalone financials of the company would not be considered since the financial results on a standalone basis may be influenced by the significant related party transactions undertaken by the company with its group companies.
Hence, on these grounds, Genesys cannot be considered as a comparable company for the purpose of determining arm's length price of the IT enabled services rendered by the appellant."
22. After considering the arguments of both the sides and the facts of the case, we do not find any infirmity in the above finding of the CIT(A). The TPO himself has noted that Genesys International 16 Corporation Limited cannot be considered as a comparable because of substantial related party transactions. To nullify the effect of related party transactions, he considered the consolidated accounts of Genesys International Corporation Limited. However, in the case of IT enabled services which is the main business of the assessee, 95% of the Genesys International Corporation Limited's consolidated account is received from subsidiaries and only 5% from Genesys International India operations. The subsidiary of Genesys International Corporation Limited is in United States. Similarly, even in respect of Global Information Services (GIS) segment, 60% of the consolidated revenue is from subsidiaries and only 40% from Genesys International Corporation Limited. In view of the above, in our opinion, the CIT(A) rightly held that Genesys International Corporation Limited cannot be considered as a comparable company for the purpose of determining arm's length price of IT enabled services rendered by the assessee. We, therefore, reject ground No.1(c) of the Revenue's appeal.
23. Now, we come to ground No.2 of the assessee's appeal. The limited argument of the learned counsel for the assessee was with regard to operating margin of MCS Ltd. It was stated by the learned counsel for the assessee that the CIT(A) has wrongly taken the operating margin of MCS Ltd. at 15.17%. The correct margin of MCS Ltd. is 7.64%. In this regard, he referred to page 262 and 263 of the assessee's paper book Part C wherein the working of operating profit is given. He also stated that this working was given to the CIT(A) but he has not given any reason for not accepting the same.
24. The learned DR, on the other hand, relied upon the orders of the authorities below on this point and stated that the working given by the assessee cannot be accepted without verification. Therefore, if at all Bench is inclined to consider the same, the matter should be set 17 aside either to the Assessing Officer or to the TPO for verification of the correct operating profit of MCS Ltd.
25. We have carefully considered the submissions of both the sides and perused the material placed before us. We find that at page 263 of the assessee's paper book, the assessee has furnished the following details of the operating profit of MCS Ltd. :-
Particulars MCS Ltd. 2003 Operating Income 237,357,200 Operating Profit 15,322,867 Operating Expenses 222,034,333 Working capital Accounts receivable 30,269,413 Inventories Accounts Payable 7,987,937 CAPITAL ADJUSTMENTS ACCOUNTS RECEIVABLE ADJUSTMENTS AEIPL's accounts receivable/operating cost 31.13% Comparable's accounts receivable/operating 13.63% cost % difference 17.50% Multiplied by comparable's operating cost 222,034,333 Difference (INR) 38,857,672 Multiplied by Prime Rate/(1+ Prime Rate) 10.01% Receivable adjustment (INR) 3,890,138 INVENTORY AEIPL'S Inventory/operating cost 0.00% Comparable's accounts Inventory/operating cost 0.00% % difference 0.00% Multiplied by comparable's operating cost 222,034,333 Difference (INR) -- Multiplied by Prime Rate 11.13% Inventory adjustment (INR) -- 18 ACCOUNTS PAYABLE ADJUSTMENTS AEIPL's accounts payable/operating cost 12.96% Comparable's accounts payable/operating cost 3.60% % difference -9.36% Multiplied by comparable's operating cost 222,034,333 Difference (INR) (20,789,413) Multiplied by Prime Rate/(1+Prime Rate) 10.01% Payables adjustment (INR) (2,081,280) Adjusted Operating Revenue 241,247,338 Adjusted Operating Expenses 224,115,613 Adjusted Operating Profit 17,131,725 % age 7.64% Average (%age)
26. We do not find any comment on this working of operating profit of MCS Ltd. by the CIT(A). However, we also agree with the submission of the learned DR that the figures given by the assessee cannot be accepted without verification. We, therefore, deem it proper to set aside the orders of authorities below in this regard and restore the matter back to the file of the AO. We direct the assessee to furnish this working before the AO and also furnish the source from where these figures of the operating profit of MCS Ltd. were obtained. Needless to mention that AO will allow adequate opportunity to the assessee. It was also contended by the learned counsel that if the above adjustments are made, then even as per the order of the CIT(A), the variation in the margin would be within the permissible range under Section 92C(2). However, as we have already set aside the issue of working of the margin of the comparable cases, therefore, the question whether the variation between the margin of comparable cases and the assessee's case is within the permissible range under Section 92C(2) or not can be verified only after the redetermination of the margin of the comparable cases. We, therefore, direct the AO to 19 examine this contention of the assessee after redetermination of the margin of the comparable cases.
27. Ground No.2 of the Revenue's appeal reads as under:-
"Whether in the facts and circumstances of the case, the ld.CIT(A) was right in allowing relief of Rs.1,91,72,777/- on account of pre-operative expenses incurred in the F.Y. 2001-02."
28. It was explained by the learned counsel that the assessee never claimed any deduction for pre-operative expenses. The entire pre- operative expenditure was disclosed in the balance sheet because it was to be reimbursed by American Express Travel Related Services Co., USA ('AETRSCO'). Thus, when the expenditure was incurred, the amount was debited to pre-operative expenses account and when the expenditure was reimbursed by 'AETRSCO', the same was credited to pre-operative expenses account. When no expenditure was claimed by the assessee, the question of disallowing the same did not arise.
29. The learned DR, on the other hand, relied upon the order of the Assessing Officer.
30. We have heard the submissions of both the sides and have perused the relevant material placed before us. We find that learned CIT(A) has recorded the following finding in this regard:-
"19.2 I have considered the submissions made by the appellant and during the appellate proceeding it has been explained by the appellant that on incurring the pre- operative expenses, these expenses were not routed 20 through profit & loss account and they have been shown as a balance sheet item by showing the holding company as a debtor and when reimbursement is received the Debtors are reduced to that extent, hence there is no impact on the profit and loss account as a result of the transaction as whatever the appellant has incurred has been reimbursed to it. At the time of incurring expenditure, the appellant passed the entry debiting pre-operative expense account and crediting bank account. When the expenditure is reimbursed to the appellant, the appellant reversed the pre-operative expenditure by debiting AETRSCo's account who agreed to reimburse all the expenditure incurred on setting up of an undertaking.
In view of the above, I agree that as the said expenditure is fully reimbursable from AETRSCo and which has been reimbursed, the same should not be added in the taxable income as the transaction had no impact on profit and loss item. Hence, grounds 3.1 & 3.2 are decided in favour of the appellant."
31. Thus, the CIT(A) has clearly recorded a finding that the above expenditure was not routed through the profit & loss account but the same has been shown in the balance sheet. When the expenditure was incurred, the amount is shown as receivable from the holding company i.e. 'AETRSCO' and when the amount is reimbursed, the same is credited to their account. In our opinion, if the assessee has not claimed any deduction for the expenditure in the year under consideration, the question of disallowing the same cannot arise. During the year under consideration, the only incident was of reimbursement of the expenditure by 'AETRSCO' which is credited to 21 the pre-operative expenses account. Therefore, since no expenditure was claimed during the year under consideration, the Assessing Officer was not justified in disallowing the same. We, therefore, uphold the order of learned CIT(A) on this point and reject ground No.2 of the Revenue's appeal.
32. Ground No.3 of the Revenue's appeal reads as under:-
"Whether in the facts and circumstances of the case, the ld.CIT(A) was right in holding that AEGSC(STP) unit was eligible for deduction u/s 10-A of the Act which in the opinion of was formed by splitting up/expansion of existing business of FCE(EOU) which was already enjoying the benefit u/s 10-B of the I.T.Act."
33. The facts of the case are that the assessee is having a EOU unit at A-37, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi which commenced its business on 1st June, 1995. This unit is being allowed exemption under Section 10B from AY 1996-97. The assessee applied for setting up a unit under STPI Scheme on 10th January, 2002 and approval was granted on 15th January, 2002. This unit called AEGSC unit was set up for being engaged in call centre, back-office and support centre services. The assessee claimed exemption under Section 10A in respect of the new unit called as AEGSC unit. The Assessing Officer rejected the assessee's claim on the ground that the business of newly set up AEGSC unit has been created by splitting up of the existing unit which is already being allowed the benefit of Section 10B of the IT Act.
2234. On appeal, the learned CIT(A) examined the facts of the case in detail and thereafter accepted the assessee's contention. For ready reference, we reproduce herein below the finding of the CIT(A):-
"17.3 I have carefully considered the submissions made by the appellant and the observations of the Assessing Officer as well as that of the Additional Commissioner of Income Tax. I have also gone through the following case laws in which the issue of splitting up and reconstruction has been considered :
• Chenab information Technologies (P) Ltd. vs. ITO [2008] (25 SOT 432)(Mumbai ITAT).
• JCIT vs. Associated Capsules (P) Ltd. (304 ITR 85) (Mumbai ITAT).
• ITO vs. DSM Soft (P) Ltd. [ ITA No.2345/Mds/05](Chennai ITAT). • PRP Granites vs. ACIT (17 DTR 234) (Madras High Court). • CIT vs. Mahaan Foods Ltd. (177 Taxman 274)(Delhi ITAT). • ITO vs. Servion Global Solutions Ltd. (308 ITR 375)(Chennai ITAT).
Based on the above, my observations and comments are as follows :
a) It is seen from the records made available, that the FCE unit (EOU) applied to NEPZ for broad branding of its scope of activities vide application dated September 12, 2002 and the approval was granted by NEPZ vide letter dated September 16, 2002. The new AEGSC unit (STP) commenced its call centre prior to the FCE unit (EOU) applying for the broad branding before NEPZ.23
b) The appellant started its business with the FCE unit (EOU) only and the funds were received from the shareholders as Share Capital. The investment in AEGSC unit (STP) was made from specifically borrowed funds.
c) The appellant submitted the following points of distinction between the existing FCE unit and the new AEGSC unit to demonstrate that AEGSC unit was not formed by splitting up or expansion of existing business of FCE unit, tabulated as under:
S.No. Points of FCE Unit (Old Unit) AEGSC Unit (New Distinction Unit) 1 Physical location A-37, Mohan Co-operative Plot no.A-26, Sector-
Industrial Estate, Mathura 34, Infocity, Gurgaon, Road, New Delhi - 110044 Haryana 2 Nature of activities Carries out processes by Provides call centre utilizing telecommunication services to Group equipment & machines companies and back (including computers) and office support in other technology relation to resolving equipments, on raw data card member matters received in electronic form related to billing and exports the output to customers located overseas 3 Call Centre license FCE Unit (EOU) does not Obtained license from undertake any call centre the Department of activities and hence does Telecommunications, not require any such license Ministry of Communications, Government of India ['DoT'] to set-up an international Call Centre 24 4 Infrastructure & Has own separate physical a) Has high speed Technology infrastructure in terms of reliable multiple (E1 office, space, plant & link) capacity machinery, furniture & telecommunications fixtures etc. and does not bandwidth to the US have similar infrastructure for running voice and as that of AEGSC Unit data network
b) Has high-end voice related equipment like CMS for ensuring analysis of call traffic and work force management.
Further, the unit
supports multiple
voice links from
outside India, each
having varying
technology solutions,
which require
complex terminating
equipment.
5 Separate Approved under the EOU Registered with
Registration scheme issued by Software Technology
Department of Industrial Park of India (STPI)
Development, Ministry of under STP Scheme
Industry, Government of
India
6 Source of Funds AEIPL started its business Investment made
with the FCE unit (EOU) from specifically
only and the funds were borrowed funds (i.e.
received from the fresh funds)
shareholders as Share
Capital
7 Customers Various American Express American Express
overseas entities. Travel Related
25
Services Company
Inc., USA
('AETRSCO').
8 Customer The FCE unit (EOU) and AEGSC unit (STP) have their
Agreements and own separate agreements with their respective
Invoices customers, and issue separate invoices to them
9 Books of Accounts The FCE unit (EOU) and AEGSC unit (STP) maintain
their separate books of accounts
10 Customs Bonding The premises of FCE unit (EOU) and AEGSC unit
(STP) are separately bonded by the Customs authorities. As per the then prevailing regulations, STP Units and EOU Units were not permitted to share their equipment with each other or with any other Unit/entity.
11 Export obligations The FCE unit (EOU) and AEGSC unit (STP) have their separate export obligations, which are periodically monitored separately by the respective regulatory authorities.
d) It was also seen that the turnover of both the units have increased over the years even after expiry of tax holiday under section 10B to demonstrate that two units are separate and function independently of each other and the same were as under:
TURNOVER (in INR) Assessment Year FCE Unit (EOU) AEGSC Unit (STP) 2002-03 1,29,42,33,447 --
2003-04 1,29,59,50,379 83,66,30,080
2004-05 1,51,54,52,033 1,62,89,94,061
2005-06 1,64,49,97,430 1,77,15,60,454
2006-07 1,79,68,75,159 1,99,29,79,700
2007-08 1,89,11,17,724 2,26,24,73,452
2008-09 2,94,59,02,448 2,77,85,45,928
26
e) It was also submitted before me that the turnover of
both the units have increased over the years after expiry of tax holiday under section 10B to demonstrate that two units are separate and function independently of each other and the same were as under:
17.4 In view of above findings, it is clear that the new AEGSC unit (STP) was not formed by splitting up or reconstruction of existing business of FCE unit (EOU) and hence, I hold that the AEGSC unit is eligible for deduction under section 10A. Accordingly, ground nos.2.1 is decided in favour of the appellant."
35. The Revenue, aggrieved with the above finding of learned CIT(A), is in appeal before us.
36. We have heard both the parties and perused the material placed before us. We find that the CIT(A) has considered all the parameters which may be necessary for adjudicating whether the set up of the new unit is by way of splitting up of the existing business or it is a new set up over and above the existing set up. He has recorded the finding that the physical location of both the units is different. The nature of activities is different, separate license is obtained for the new unit, separate infrastructure is created in the new unit, fresh funds have been invested in the new unit and even after the setting up of the new unit, the turnover of the old unit has not reduced but, on the other hand, increased. During AY 2002-03, when no new unit was in existence, the turnover of old unit was `129 crores which, after the setting up of the new unit, has increased to `294 crores in AY 2008-09.
In view of the above facts, we do not find any infirmity in the order of 27 learned CIT(A). The same is sustained and ground No.3 of the Revenue's appeal is rejected.
37. Ground No.4 of the Revenue's appeal reads as under:-
"Whether in the facts and circumstances of the case, the ld.CIT(A) was right in allowing deduction u/s 10-B on interest earned from I.T. refund (Rs.24,84,307/-) and housing loan (Rs.1,27,741/-) given to employee being Non- business income."
38. We have heard both the parties and perused the relevant material placed before us. We find that the issue relating to deduction under Section 10B on the income tax refund has been decided by the ITAT in assessee's own case for AY 2002-03, wherein the ITAT, vide its order dated 13.1.2012 in ITA No.1338/Del/2009 & 1512/Del/2009, held as under:-
"25. As it can be seen from the afore-mentioned observations of the Tribunal, the issue did not relate to interest earned by the assessee on Income tax refund, but it related to the interest earned on short term deposits and while recording the facts Tribunal has observed that the deposits were made from the business funds of the assessee which were temporary available. Therefore, it was held that interest received had direct nexus with the interest payments. Therefore, in our considered opinion, the said decision cannot be relied upon to consider the issue regarding set off of interest received by the assessee on Income tax refund with the interest paid by the assessee on its over-draft facilities. The interest received 28 from Department on Income Tax refund will stand entirely on a different footing as the payment of tax, if any, is not made by the assessee with an intention to earn interest but to discharge tax liability. It cannot have any connection with the business of the assessee as earning of interest on income tax payment has nothing to do with the business of the assessee. Therefore, the character of interest received by the assessee on Income tax refund cannot be linked with the business of the assessee and it will retain its character of income from other sources. Therefore, the ld.CIT(Appeals) is wrong in holding that the interest earned by the assessee on income tax refund has a colour of income from business. If the same cannot be related to the business of the assessee then netting off cannot be granted as there is no inextricable link between the earning of the interest and payment of interest. We also do not find force in the contention of the assessee that since the payment of tax was made out of overdraft facility, therefore, interest receipt on income tax refund should be adjusted against interest paid on overdraft facility as according section 57(iii) only such expenditure (not being in the nature of capital expenditure) can be allowed if it is laid down or expanded wholly and exclusively for the purpose of making or earning of such income. Payment of income tax cannot be said to be made for earning of interest, hence the case of the assessee will also be out of the purview of section 57(iii).
26. In view of the above discussion, we are of the opinion that the relief has wrongly been granted by the ld.CIT(Appeals) as he did not properly appreciate the facts 29 of the case. The earlier decision of the Tribunal in assessee's own case has no bearing on the facts of the present case. These grounds are decided against the assessee and in favour of the Revenue and these grounds of the Revenue are allowed."
39. In view of the above, respectfully following the decision of ITAT in assessee's own case for AY 2002-03, we hold that interest from income tax refund does not qualify for deduction under Section 10B.
40. So far as housing loan to the employees is concerned, we agree with the finding of the learned CIT(A) that it was for the purpose of business. The loan was given to the employees during the course of carrying on of the assessee's business. He has also recorded a finding that there is a direct nexus between interest paid and interest received by the appellant. Such finding recorded by the CIT(A) with regard to housing loan to the employees has not been controverted before us. Therefore, we uphold the same.
41. Ground No.5 of the Revenue's appeal reads as under:-
"Whether in the facts and circumstances of the case, the ld.CIT(A) was right in allowing the depreciation @ 60% on computer peripherals and accessories amounting to Rs.2,56,50,351/- though the IT Rules allows 60% depreciation only on computer software."
42. We have heard the contentions of both the sides and perused the material placed before us. It is observed that the issue relating to depreciation on computer peripherals and accessories is covered in favour of the assessee by the decision of Hon'ble Jurisdictional High 30 Court dated 31st August, 2010 in ITA No.1266/2010 in the case of CIT Vs. BSES Rajdhani Powers Ltd. A copy of the said judgment is placed on record by the learned counsel for the assessee. In the said judgment, the Hon'ble Jurisdictional High Court held as under:-
"4. We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60%."
43. Respectfully following the aforesaid judgment, we hold that the learned CIT(A) was right in allowing the depreciation at the rate of 60% on computer peripherals and accessories. We uphold his finding on this point and reject ground No.5 of the Revenue's appeal.
44. Now, we take up the remaining grounds of assessee's appeal.
45. Ground No.3 of the assessee's appeal reads as under:-
"That the learned CIT(A) has erred in law in not applying the Proviso to section 92C(2) of the Act and has failed to allow the Appellant an option for the downward variation of 5 percent in determining the arm's length price."
46. At the time of hearing before us, at the outset, it was pointed out by the learned DR that in the Finance Bill, 2012, there is a proposed amendment in Section 92C(2) which will settle the issue raised by the 31 assessee vide ground No.3. He, therefore, suggested that the issue raised by the assessee vide ground No.3 should be set aside to the file of the AO/TPO to be readjudicated after the Finance Bill, 2012 comes into operation. The learned counsel for the assessee did not object to his suggestion of the learned DR.
47. In view of the above, we set aside the issue raised by the assessee vide ground No.3 of its appeal to the file of the AO to be readjudicated in accordance with law after coming into force of the Finance Bill, 2012.
48. Ground No.4 of the assessee's appeal reads as under:-
"4.1 That on facts and in law the learned CIT(A) erred in treating the compensation of Rs.16,260,000 received from landlord for delay in actual delivery of leased premises and related work facilities in respect of AEGSC (STP) unit as revenue receipt taxable under the Act though it relates to pre-operative period.
4.2 That on facts and in law the learned CIT(A) erred in treating the said compensation received from landlord taxable under the head "Income from other sources". In this regard, the learned CIT(A) failed to appreciate that the said compensation is in relation to AEGSC (STP) unit and thus is "profits of the business of the undertaking" as mentioned in section 10A(4) of the Act."
49. At the time of hearing before us, it is stated by the learned counsel that during the year under consideration, the assessee has taken on hire a premises for starting STP unit. That there was delay in 32 handing over the possession of the property by the landlord to the assessee. Therefore, he gave the compensation of `1,69,71,000/- which was in effect refund of rent paid for the period for which property was not ready for start of STP unit. The sum of `1,62,60,000/- was the rent paid for the period prior to commencement of the STP unit and, therefore, the same was credited to prior period expenses and balance sum was reduced from the rent which was debited to profit & loss account. However, the Assessing Officer added the entire sum of `1,69,71,000/- as the income of the assessee from other sources.
50. On appeal, the learned CIT(A) allowed the relief to the exntet of `7,11,000/- i.e. the amount reduced from the rent which was claimed as deduction during the year under consideration. The Revenue has accepted the deletion of `7,11,000/- as there is no ground in the Revenue's appeal against such deletion. That the nature of receipt of `1,62,60,000/- is also similar to the receipt of `7,11,000/-. That the entire compensation received from the landlord was by way of refund of the rent which was paid to him due to delay in handing over the possession of the said premises. That the rent paid by the assessee for the pre-commencement period was shown as pre-operative expenses. Therefore, refund of such rent was rightly credited to pre- operative expenses account.
51. The learned DR, on the other hand, relied upon the orders of authorities below on this point and he stated that the learned CIT(A) has considered the entire issue and has already allowed the relief which was due to the assessee.
52. We have carefully considered the submissions of both the sides and perused the material placed before us. We find force in the 33 contention of the learned counsel. When the rent was paid by the assessee, it was debited to rent account. Part of it was for the period prior to commencement of STP unit which was transferred to pre- operative expenses and the part of the rent which was for the period after the commencement of STP unit was debited to profit & loss account. If any part of the rent was received back by way of compensation, naturally the same is to be credited against the rent paid by the assessee. Therefore, the refund of the rent of pre- operative period was rightly credited in the pre-operative expenses account and the rent of post-operative period was credited to rent account (which was transferred to profit & loss account). The CIT(A) accepted the assessee's claim with regard to sum of `7,11,000/- which was reduced from the rent debited to profit & loss account. In our opinion, the nature of entire compensation of `1,69,71,000/- is the same. Merely because the assessee bifurcated it into two portions and reduced one portion from the expenses (rent) debited to profit & loss account and another portion from the expenses (rent) debited to pre- operative expenses, different treatment cannot be given to them. In our opinion, the assessee rightly reduced the entire sum of `1,69,71,000/- from the rent expenses, whether pertaining to pre- operative period or post-operative period. We, therefore, delete the addition of `1,62,60,000/- sustained by the CIT(A). Accordingly, ground No.4 of the assessee's appeal is allowed.
53. In the result, both the appeals are partly allowed.
Decision pronounced in the open Court on 18th May, 2012.
Sd/- Sd/-
(CHANDRA MOHAN GARG)
GARG) (G.D.AGRAWAL)
JUDICIAL MEMBER VICE PRESIDENT
Dated : 18.05.2012
VK.
34
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Assistant Registrar