DCIT 10(2)(2), MUMBAI vs. MINACS LTD (FORMERLY KNWON AS ADITYA BIRLA MINACS WORLD WIDE LTD ), MUMBAI

The assessee has challenged the grounds of section 14A disallowance, amounting to Rs.56,00,524/- and also the addition, amounting to Rs.1,82,51,549/- made by the Assessing Officer (A.O. for short)/Transfer Pricing Officer (TPO for short) on account of arms length price (ALP for short) in respect of software development services provided to AE’s.

The assessee company is a subsidiary of Aditya Birla Nuvo Limited. The brief facts are that the assessee is into the business of providing software development services to its AE’s and third parties and provides end to end IT solutions in the area of financial supply chain, services oriented architecture, workflow and business process management, enterprise solutions and business assurance. The assessee company also provides professional services in the field of application development and management, product engineering, migration, independent verification and validation, ERP implementation and support. The assessee company filed its return of income for the impugned year dated 29.09.2010, declaring total loss at Rs.Nil, after claiming carry forward business loss of Rs.12,94,75,556/-. The return was processed u/s. 143(1) of the Act. The assessee’s case was selected for scrutiny and the assessment order dated 28.04.2014 was passed u/s.143(3) r.w.s. 144C(3)(a) of the Act, where the A.O. determined the total income at Rs.15,33,27,629/-, which was after giving set off of business losses of earlier years assessed at Rs.NIL and book profit was determined u/s. 115JB at Rs.9,46,61,873/- also book profit was determined at Nil.

The assessee was in appeal before the ld. CIT(A), challenging the order of the A.O., against various disallowances.

The ld. CIT(A) confirmed the additions made by the A.O. on the ground of disallowance u/s. 14A amounting to Rs.56,00,524/- and addition amounting to Rs.1,82,51,541/- on account of ALP on software development services provided to AE’s and on other consequential grounds.

The assessee is in appeal before us, challenging the order of ld. CIT(A).

Ground nos. 1 & 2 pertains to section 14A disallowance of expenditure. The A.O. has observed that the assessee has earned interest, amounting to Rs.1,88,31,977/-. It is observed that the assessee had investments in shares of its subsidiary company M/s. Birla Technologies Ltd. amounting to Rs.11.27 crores and the said investment was said to have been made in the year 2001-02 which are strategic in nature. The assessee contended that the said investment was made as strategic investment for which no expenses was to be allocated as strategic investment do no undergo any frequent changes. The assessee stated that it had not incurred any expenses for the same during the impugned year. The assessee further contended that the entire interest cost was towards operational activities and that the disallowance u/s. 14A was not warranted as the impugned investment was made years back. The assessee further contended that it had not earned any exempt income on its investments during the impugned year. The assessee has also challenged the impugned addition made u/s.14A to the book profit computed u/s. 115JB and stated of the Act in the absence of any express provision u/s. 115JB of the Act. This plea of the assessee was not considered by the A.O. and made disallowance u/s. 14A r.w.s. Rule 8D of the Act and added an amount of Rs.56,00,522/- to the total income of the assessee.

In the appeal filed by the assessee, the ld. CIT(A) confirmed the said addition made by the A.O. by rejecting the arguments of the assessee. The ld. AR for the assessee contended that the assessee had not earned any exempt income and stated that the impugned investments was strategic in nature and was made years before. The ld. AR further stated that the assessee company had not incurred any expenses for earning the interest income during the impugned year. The ld. AR relied on the decision of the Hon'ble Apex Court in the case of PCIT vs. Oil Industry Development Board (in SLP(Civil) No. 2755/2019 vide order dated 08.02.2019), wherein the Hon'ble Apex Court had upheld the decision of the Hon'ble High Court and the Tribunal which held that in absence of any exempt income, the disallowance u/s. 14A was not allowed. The ld. AR also relied on the decision of the Hon'ble Apex Court in the case of Chetna Logistics Pvt. Ltd., in which the same proposition was held by the Hon'ble Apex Court. The ld. AR relied on the proposition in Everest Kanto Cylinder Ltd. (in where the co-ordinate bench held that section 14A disallowance should not made for computing book profit u/s. 115JB of the Act.

The learned Departmental Representative (ld. DR for short) for the Revenue, on the other hand, controverted the same and contended that the A.O. was justified in invoking Rule 8D of Rules 1962. The ld. DR relied on the decision of the co-ordinate others vide order dated 13.06.2016). The ld. DR relied on the orders of the lower authorities.

Having heard the rival submissions and perused the materials on record. It is evident that the said issue is no longer res integra as various Hon'ble High Court’s and Hon'ble Apex Court have reiterated the proposition that when there is no exempt income earned by the assessee during the impugned year in issue, disallowance in terms of section 14A read with Rule 8D cannot be made. From the catena of judgments relied upon by the assessee and also the decision of Everest Kanto Cylinder Ltd. (supra), it can be seen that section 14A disallowance cannot be made at the time of computing book profits u/s. 115JB of the Act. By respectfully following the above said decisions, we are of the considered view that the disallowance made u/s. 14A read with Rule 8D, amounting to Rs.56,00,524/- is not warranted and, therefore, we delete the impugned addition made by the A.O. and confirmed by the ld. CIT(A). Hence, ground nos. 1 & 2 raised by the assessee are allowed.

Ground no. 3 pertains to the addition amounting to Rs.1,82,51,549/- made on account of ALP with respect to the software development services provided to the AE’s challenged by the assessee on the ground that the AO/TPO has adopted filters other than the filters used by the assessee, comparables are functionally different and the rejection of the comparables adopted by the assessee without stating any plausible reason by using in current year data and no previous years data of comparables. It is observed that the assessee had entered into international transaction with AE exceeding Rs.15 crores and 6 & 4789/M/2015 (A.Y.2010-11) Minacs Private Limited the assessee’s case was referred to TPO u/s. 92CA(1) of the Act, wherein the TPO vide order dated 20.01.2014 passed u/s. 92CA(3) of the Act made an upward adjustment to the ALP by Rs.1,82,51,549/- pertaining to the international transactions entered into by the assessee company with its AE during the impugned year. It is observed that the assessee company has provided software development services such as: • Quality Assurance Service • Global Delivery Centers • BI Projects • Maintenance and Migration of ‘THINK’ applications • MS NET Offshore Resources

The assessee has bench marked the transaction by TNMM method. It is observed that the assessee had earned a margin of 15.32 % in providing the above mentioned services to its AE’s, for which the assessee had adopted three years weighted average of operating profit/operating cost of the comparable company which was at 4.93% and was further revised to 4.2% during the assessment proceedings based on TPO’s direction for the single year ended 31.03.2010. The assessee company had applied quantitative and qualitative filters of 12 comparable companies and worked out three year weighted average comparable companies to 4.93% and submitted single year updated margin for the impugned year at 2.80% in respect of 12 comparable companies. The assessee stated that since the margins of the assessee company are against +15.32%, the transaction falls within +/- 5% and stated that the impugned transaction was at arms length. It is observed that the assessee’s submission was not accepted by the TPO and the TPO made upward adjustment of Rs.1,82,52,549/- by taking into consideration the arithmetical mean at 22.28% for the reasons that :

7 & 4789/M/2015 (A.Y.2010-11) Minacs Private Limited 1. Export sales/total sales was < 75% 2. RPT > 25% 3. Companies incurring persistent losses for last three years 4. Diminishing Revenues 5. Turnover filters < 250 crores.

The TPO processed his own comparables to that extent. The comparables selected by the TPO are as follows:

The TPO after rejecting one of his comparable namely FCS Software Solution Ltd, the TPO finalized 15 comparables out of which 5 comparables were already selected by the assessee in its TP study report. It is observed that the TPO had rejected the following comparables of the assessee on the ground that specified:

The TPO then made the adjustment of Rs.1,82,51,549/- after arriving at the margin of software development services to its AE at 22.28%.

It is observed that the TPO had rejected one of the comparables namely FCS Software Solutions Ltd. which was added by the TPO himself and had finally arrived at 15 comparables out which 5 comparables was that of the assessee in its TP study report. software development services to its AEs and made an adjustment of RS.1,82,51,579/-.

The assessee was in appeal before the ld. CIT(A), challenging the order of the ld.TPO/Assessing Officer.

The assessee has challenged the rejection of the two comparables namely Quintegra Solutions Limited and CG vak Sotfware and Exports Limited because of diminishing revenues. The same was challenged by the assessee on the ground that diminishing revenue was not taken as a filter test during the assessment proceedings and further stated that merely because the comparable company have been incurring losses, persistently for last three years, is a not a ground for rejection. The assessee further contended that Quintegra Solutions Limited has an operating margin of 0.75% during the impugned year and that the ld. TPO has rejected the said comparable without any justification. The ld. CIT(A) has stated that the assessee company has applied filter test of export sales/total sales <75%, RPT > 25% and companies incurring persistent losses for last three years. The ld. CIT(A) rebutted the contention of the assessee that the assessee was not given sufficient opportunity before rejection of the said comparables. The ld. CIT(A) also held that the filter test of diminishing revenues can be considered for the said comparables to analysis if there was any abnormal circumstances existing due to which the revenues or profits of the company are in accordance to the international trends or not. The ld. CIT(A) also held that the diminishing revenues can be considered for the purpose of eliminating the material differences arising out of such abnormal circumstances and relied on the decision of the Special Bench of ITAT, Delhi in the case CIT(A) considered the submissions of the assessee in the case of Quintegra Solutions Limited having a margin of 0.75% during the impugned year, thereby directing the Assessing Officer/TPO to consider the said comparable if it is found to have a positive margin during the impugned year.

The assessee has also challenged the rejection of the other comparables namely SIP Technology and Exports Ltd., TVS Infotech Ltd. on the ground that these companies have been incurring persistent losses for the last three years. The assessee has challenged the rejection of these comparables on the ground that the lower authorities have adopted filters other than the filters used by the assessee and have also rejected the said comparables of the assessee without stating any cognizable reasons. The assessee has also challenged the rejection on the ground that only the current year data was used and the lower authorities have failed to verify the earlier year’s data of the comparables.

Having heard the rival submissions and perused the material on record. It is observed that the A.O./TPO has not considered the functionality of the comparables selected by the assessee and has also not considered the filters adopted by the assessee. It is also observed that the TPO/A.O. has applied the filter of diminishing revenues for CG vak Sotfware and Exports Limited and also Quintegra Solutions Ltd., wherein it is observed that the assessee in its TP study has not considered the said filters. The A.O./TPO has also not justified as to why the filters adopted by the assessee was rejected.

From the above facts and circumstances of the case, we are of the considered opinion that the exclusion of the comparables selected by the assessee was rejected without sufficient reasoning and, therefore, we direct the TPO/A.O. to consider the said comparables by applying the filters adopted by the assessee to determine the ALP of the software development services rendered by the assessee to the AE’s. Therefore, ground no. 3 raised by the assessee is allowed.

Ground nos. 4 being a consequential ground, requires no adjudication and ground no. 5 is general in nature.

In the result, this appeal filed by the assessee in is partly allowed.

This appeal has been filed by the Revenue, challenging the grounds of rejecting some of the comparables proposed by the TPO on various grounds.

Ground nos. 1 & 2 challenging the rejection of the comparables viz. Larsen & Toubro Infotech Ltd., Infosys Technologies Ltd., and Wipro Ltd. on the ground that these comparables are distinguishable from that of the assessee on the basis of the scale of the operations, brand name and functionality, inspite of the fact that the TPO had carried out The assessee submits that the above three mentioned comparables, operating incomes are substantially higher than that of the assessee company which has earned Rs.31.12 crores as ‘operating income’. The assessee also stated that due to the reason that these comparable companies comprising of the products and services are based on goodwill, reputation and brand value and the said comparable companies are benefited by lower cost of infrastructure facilities and employees and owned intangibles and assume susbstantial risks thereby earning higher profits.

The assessee also contended that the comparable companies owned a significant brand value in the market incurring substantial expenses towards brand building exercise which is not so in the case of the assessee company. The assessee further submitted that the assessee company does not create or own or exploit any brand or intellectual property and that it is owned only by the AE and risks are also borne by the AE and not the assessee company, thereby contending that the said comparables does not suit the profile of the assessee company.

The assessee also contended that these comparables are functionally different from that of the assessee company and are dominant ones in providing IT services including business process outsourcing (BPO) across the world. The assessee also contended that the said comparables also have other businesses related to IT products, which is not so in the case of assessee company. The assessee submitted that the said comparables are distinguishable in the above mentioned aspects and are not to be considered as comparables of the assessee, as considered by the A.O. The ld. CIT(A) held that the operations, brand name and on functionality which are enormous than that of the assessee company. The ld. CIT(A) also held that due to diversified activities and owning of intangibles, the comparable companies are not at a par with that of the assessee company.

We have heard the rival submissions and perused the materials available on record. In our view, the comparables proposed by the TPO are considered to be giants in the field of IT services. The Revenue’s contention that the assessee’s turnover was approximately Rs.92 crores was in line with the turnover filters applied to the proposed comparable companies are not convincing in our opinion. The contention of the Revenue that the ld. TPO had carried out FAR analysis in which case the turnover or brand has already been considered while selecting the comparables is also not justifiable. we are of the considered view that there is no infirmity in the order of the ld. CIT(A) in rejecting the comparables namely Larsen & Toubro Infotech Ltd., Infosys Technologies Ltd., and Wipro Ltd. Hence, we hereby dismiss ground nos. 1 & 2 raised by the Revenue.

Ground Nos. 3 & 4 pertains to the rejection of the comparable viz. M/s. KALS Information Systems Ltd. on the ground that it deals with software product development which is functionally different from that of the assessee company and also by placing reliance on the decision of Toluna India Pvt. Ltd. vs. ACIT (TS-247-ITAT-2014)(Del) and M/s. Yahoo Software Development India P. Ltd. (TS-467-ITAT-2014)(Bang.).

Briefly stated, the assessee submits that the said comparable is functionally different from that of the assessee as it is the software product company and related services. The assessee further stated that the said comparable also provides implementation and maintenance of software products and has developed a wide range of such product such as Shine ERP software, Docuflo, Dac4Cast, CMSS (Consultant Management Sales System), La Vision, Virtual Insure and Aldon. The ld. CIT(A) considered the submission of the assessee by stating that the assessee company provides end to end IT solutions, focusing mainly on financial services industries, whereas KALS Information System Ltd. as per its annual report is into software product development.

We have heard the rival submissions and perused the materials on record. It is evident that the comparable proposed by the TPO, i.e., KALS Information System Ltd. are into software product development and its alleged activities such as implementation and maintenance of software product as per the annual reports of the KALS Information System Ltd. scheduled 14 – notes to the financial statements. The assessee company, on the other hand, provides IT Solutions in the areas of financial supply chain, service oriented, architecture workflow and business processed management, enterprises solutions and business assurance. The assessee also provides professional services in application management and development, product engineering, migration, independent verification and validation, ERP implementation and support. companies activities is distinguishable from that of the comparable company namely KALS Information System Ltd. relied upon by the TPO. We find no infirmity in the order of the ld. CIT(A) in rejecting the said comparable for the reasons specified above.

Ground no. 5 pertains to the ground of allowing deduction amounting to Rs.1,99,98,158/- being loss on account of foreign exchange fluctuation during A.Y. 2009-10 which was offered by the assessee in the impugned year, which was held to be notional by the A.O. in A.Y. 2009-10 and was challenged by the assessee before the ld. CIT(A), Bangalore. The assessee submits that the impugned losses on account of foreign exchange fluctuation were incurred by the assessee during A.Y. 2009-10 which arised out of the normal business operation carried out by the assessee due to forward contract reinstatements and premium. The same was disallowed by the A.O. during the assessment proceeding of A.Y. 2009-10 on the ground that the same was notional, unascertained and provisional in nature. It is also observed that the assessee company has reversed the said losses which was provisional debited in profit and loss account for A.Y. 2009-10 and had offered the same as ‘income’ while filing the return of income. The assessee further contended that the same should be reduced from the income failing which it would amount to double taxation. This contention of the assessee was not accepted by the A.O. and the A.O. has failed to decide this issue during the assessment proceedings. The ld. CIT(A), on the other hand, had considered the submissions of the assessee and remanded this issue back to the file of the A.O. to consider if the claim of the assessee was made on 06.03.2014, prior to the completion of the assessment. The ld. pertaining to loss on account of foreign exchange fluctuation during the impugned year as the same would amount to double taxation, if not, done. The ld. CIT(A) directed the A.O. to verify the relevant documents that was produced before him. The Revenue has challenged the said order of the ld. CIT(A) before us.

We have heard the rival submissions and perused the materials on record. It is observed that the assessment order dated 28.04.2014 has not dealt with this issue and having noted that the assessee has filed the relevant documents to substantiate its claim before the ld. CIT(A), we find justification in the action of the ld. CIT(A) in remanding this issue back to the A.O. for verification of the claim. We also do not find any infirmity in the order of the ld. CIT(A) in directing the A.O. to allow the impugned deduction on account of foreign exchange fluctuation. We hereby hold that the A.O. is directed to verify the documentary evidence and to allow the said claim on merits.

In the result, the appeal filed by the Revenue in is dismissed.