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Income Tax Appellate Tribunal, HYDERABAD ‘B’ BENCH, HYDERABAD.
Before: SHRI S.S. GODARA & SHRI L. P. SAHU
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD ‘B’ BENCH, HYDERABAD.
BEFORE SHRI S.S. GODARA, JUDICIAL MEMBER AND SHRI L. P. SAHU, ACCOUNTANT MEMBER (Through Virtual Hearing) ITA No.627/Hyd/2016 & C.O. No.35/Hyd/2016 (Assessment Year : 2011-12) Dy. Commissioner of Income Tax, Circle 2(2), Hyderabad. …..Appellant. Vs. M/s. TNS India Pvt. Ltd. Hyderabad. PAN AABCN 2278F …..Respondent/Cross Objector. ITA No.636/Hyd/2016 (Assessment Year : 2011-12)
M/s. TNS India Pvt. Ltd. Hyderabad. …..Appellant. Vs. Asst. Commissioner of Income Tax, Circle 2(2), Hyderabad. …..Respondent. Assessee By : Shri Deepak Chopra. Revenue By : Shri YVST Sai. (CIT-D.R.) Date of Hearing : 16.09.2021. Date of Pronouncement : 04.10.2021.
O R D E R Per Shri S.S. Godara, J.M. : This Revenue’s appeal ITA No.627/Hyd/2016 along with assessee's cross objection C.O. No.35/Hyd/2016 followed by cross appeal ITA No.636/Hyd/2016 for
2 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 Assessment Year 2011-12 arise against the ACIT, Circle 2(2), Hyderabad’s assessment dt.29.02.2016 framed in furtherance to the Dispute Resolution Panel’s (DRP-I) Bangalore’s directions dt.29.02.2016 passed in case No. involving proceedings u/s.143(3) r.w.s. 92CA(4) r.w.s. 144C(13) of the Income Tax Act, 1961 ('the Act').
Heard both the parties. Case files perused.
We advert to the Revenue’s appeal ITA 627/Hyd/2016, first of all raising the following substantive grounds :
“1. Whether on the facts and circumstances of the case the Hon’ble DRP was justified in excluding Infosys BPO Ltd. on the grounds of high turnover which is contrary to Rule 10B(2) which prescribes comparability of international transactions with uncontrolled transactions with reference to funds performed, asset employed and risk assume. 2. Whether the DRP failed to appreciate that (i) In service industry there is no linkage whatsoever between the profits and turnover. (ii) Unless and until it is brought o record that the turnover of such companies had undue influence on the margins, it is not the general rule to exclude the same, there is no economic rationale backed up with any statistical analysis to say that higher turnover companies or companies with brand have better margins than low turnover companies.
3 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 (iii) In the business model used in IT^ES sector in India, the operational size has no impact on the profit margins when TNMM is the MAM. (iv) That high or low turnover do not influence the margins of the comparables.
Whether the DRP failed to appreciate the fact in excluding Jeevan Scientific Technology Limited, when both segments BPO and ERP fall under ITES. 4. Whether the DRP is justified in excluding TCS eserve Ltd. without verifying the fact that it has not failed the revenue income filter. 5. Whether DRP is justified in excluding Mastiff Technology Pvt. Ltd. only for the reason of fluctuation in provisions for doubtful debts and holding that this is an extra ordinary situation. 6. Whether the DRP is justified in excluding E4e Healthcare Business Services Pvt. Ltd. only for the reason that there is inconsistency in accounting as in earlier year provision for bad debts was there and for current year it is not there.” 3. The Revenue’s foregoing first twin substantive grounds seek to revive the Transfer Pricing Officer’s (TPO) action including M/s. Infosys BPO Limited as a comparable entity in the assessee's IT Enabled Services (ITES) segment in his section 92CA(3) order dt.8.1.2015. Learned CIT-DR’s vehement contention before us that just because the
4 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 foregoing entity M/s. Infosys BPO Limited is having high turn over does not ipso facto render it ineligible for inclusion in the array of comparables since we are dealing with service sector segment only. He quote hon’ble Delhi high court’s decision in PCIT-2 Vs. M/s. CHRYS CAPITAL INVESMENT ADVISORS PVT LTD 376 ITR 183 (Del) and M/s. Society General Global Solution Centre Limited 69 taxman.com 336 (Bang). We find no merit in the assessee's former twin substantive grounds since the DRP herein has directed exclusion of M/s. Infosys BPO Limited not only on the basis of turnover but due to its brand value, diversified activity as other functional dissimilarity as well. This tribunal co- ordinate bench decisions in assessee's cases itself for Assessment Year 2008-09 and 2009-10 have also directed M/s. Infosys BPO Limited’s exclusion in the very segment. And that the Revenue has not been able to pin point any change in the corresponding facts in all these assessment years. We therefore uphold learned DRP’s direction
5 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 ordering exclusion of M/s. Infosys BPO Limited from the array of comparables. 4. Next comes the Revenue’s third substantive ground avers that the DRP has erred in law and on facts in excluding M/s. Jeevan Scientific Technology Limited on the ground that it had failed to satisfy the turnover filter despite the fact that the said entity had derived income both from BPO operation as well as ERP segment. We find that the Revenue’s instant arguments are against the facts on record wherein it has been found that this entity had derived income of Rs.79.21 lakhs form BPO operation only and no revenue from ERP segment as against the turnover limit of Rs.1 Crore set by the TPO in his analysis. We therefore decline the Revenue instant third substantive ground as well.
We next proceed to deal with Revenue’s forth substantive ground that M/s. TCS E-Serve Limited also deserves to be included in the array of comparables. We note from a perusal of the DRP’s directions in para 9 that
6 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 although the learned panel had invoked in “CHRYS CAPITAL” (supra) whilst rejecting the assessee's turnover argument but it has thereafter recorded a finding of the fact that M/s. TCS E-serve Limited was engaged in the business of providing IT Enabled Services, BPO services primarily to the Citi Group Co. introduced globally and the transaction includes a broad spectrum of activity involving processing, collection, customer care and payment in relation to the services rendered by the said group to its corporate and retail clients. The said company was further found to have been provided technical services involving software testing, verification and validation of software at the time of implementation and data centre management activity rendering it functional dissimilarities than the assessee's segment of IT Enabled Services (supra). We thus decline the Revenue’s pleadings which in fact do not even challenge the correctness of the said entity functional dissimilarity as held by the learned panel.
7 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 6. The Revenue’s next substantive ground is that the DRP has erred in law and on facts in directing exclusion of M/s. Mastive Technology Pvt. Ltd. for the reason of fluctuation in provision for doubtful debts thereby holding it as an extraordinary situation. Learned CIT-DR fails to dispute that because of the said extraordinary situation of provision for doubtful debts only, the said entity’s margin has come down from 21.78% to 2.28%. The factual position is no different regarding last entity M/s. E4e Healthcare Business Services Pvt. Ltd. wherein not only the learned panel but also this tribunal's order in A.Y. 2010-11 pages 788 to 796 of paper book has also decided the issue in assessee's favour. And that the assessee has also filed financials of this foregoing latter entity showing variation as per Schedule-I of the significant accounting policy. Leaned authorized representative lastly sought to highlight the fact that both the instant latter twin entities have been rejected in the learned panel detailed discussion because of the fact that they bear business risk(s) in the IT Enabled Services
8 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 segment whereas this assessee is a capital service provider only. We therefore reject learned CIT-DR’s arguments quoting 33 taxman.com 107 (Mum) that bad debts are an operational item in light of the fact that the TPO’s computation’s annexure with his order; had erroneously included the bad debts in issue and uphold learned DRP’s directions exclusion thereof as per the foregoing inconsistency in accounting practice. The Revenue fails in all of substantive grounds. So is the outcome of its main appeal ITA No.627/Hyd/2016.
Learned counsel’s next stated at bar that the assessee's C.O. No.35/Hyd/2016 in Revenue’s foregoing appeal is only supportive of the DRP’s directions under challenge. We therefore reject this C.O. No.35/Hyd/2016 as rendered infructuous.
We now take up the assessee's cross appeal ITA No.636/Hyd/2016. Its second substantive ground challenges the Assessing Officer’s action disallowing the overhead and trademark licence fees of Rs.3,26,80,824/-
9 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 and Rs.15,40,225/-; respectively on the ground that it had not filed any objection corresponding details despite the DRP’s remand directions to this effect. The assessee has placed before us the corresponding invoices in paper book pages 70-71 and 198 along with the Assessing Officer’s consequential order for Assessment Year 2003-04 and 2009-10 not making any such disallowance in light of the corresponding agreement and invoices. Faced with this situation, we deem it appropriate to restore the instant issue back to the Assessing Officer for his afresh factual verification as per law within three effective opportunities of hearing subject to the condition that the assessee itself shall file all the documentary evidence by electronic mode as well as registered post. Ordered accordingly. This second substantive ground is allowed for statistical purposes.
Next comes the assessee's third substantive ground regarding capital expenditure on software license fees disallowance of Rs.2,05,96,523 made by the Assessing
10 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 Officer on the ground that it the assessee had not filed any objections to this effect before the DRP. Learned CIT-DR fails to dispute that the DRP’s detailed discussion regarding assessee's objection No.10 in para 2.10 page 14 had clearly directed the Assessing Officer to grant depreciation @ 60% in view of the tribunal's findings in preceding assessment years. We therefore allow the assessee's instant substantive ground in principle and leave it open for the Assessing Officer to frame consequential computation as per law.
Next comes the assessee's additional ground that “without prejudice to ground No.3, the learned Assessing Officer erred in law and on facts in not allowing deduction u/s. 10A of the Act on expenditure towards software lincence fee disallowed in the assessment order of Rs.1,81,14,801/- relating to STPI unit of the company.” The same is admitted being an alternate plea; without prejudice to the foregoing third substantive ground, and restored back to the Assessing Officer as per law in light of
11 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 the relevant facts and the corresponding factual position in preceding and succeeding assessment years. Ordered accordingly. The assessee's instant cross appeal ITA No.636/Hyd/2016 is partly allowed for statistical purposes in above terms.
To sum up, Revenue’s appeal 637/Hyd/2016 is dismissed; the assessee's Cross Objection No.35/Hyd/2016 is dismissed as rendered infructuous and its cross appeal 636/Hyd/2016 is partly allowed for statistical purposes in foregoing terms. A copy of this common order be placed in the respective case files.
Order pronounced in the open court on 4th Oct., 2021.
Sd/- Sd/- (L.P. SAHU) (S.S. GODARA) Accountant Member Judicial Member
Hyderabad, Dt. 04.10.2021. * Reddy gp
12 ITA Nos.627 & 636/Hyd/2016 & C.O. No.35/Hyd/2016 Copy to : 1. M/s. TNS India Pvt. Ltd., Shri Prashanthi Sai Towers, Plot No.68, Nagarjuna Hills, Panjagutta, Hyderabad-500 082 2. DCIT / ACIT, Circle 2(2), Hyderabad. 3. Pr. C I T-5, Hyderabad. 4. CIT(Appeals)- Hyderabad. 5. DR, ITAT, Hyderabad. 6. Guard File.
By Order Sr. Pvt. Secretary, ITAT, Hyderabad.