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Income Tax Appellate Tribunal, DELHI BENCH “I-1” NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
PER AMIT SHUKLA, JM:
The aforesaid Cross Appeals have been filed by the Revenue as well as by the assessee against impugned order dated 18.11.2016 passed by ld. CIT(A)-XLIV, New Delhi for
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the quantum of assessment passed u/s.143(3) r.w.s. 144C(3) for the Assessment Year 2009-10. The effective ground raised by the assessee reads as under: “2. On the facts and in the circumstances of the case, the CIT(A) has erred both on facts and in law, in not appreciating the correct factual and legal position in regard to the issue of tax deducted at source for both parties relating to rent in Appellant’s ground no.6 before him and had issued directions to the Assessing Officer which are confusing and instead, he ought to have appreciated the facts and records fairly and objectively to arrive at the decision for allowing deduction thereof and failure to do so had vitiated the impugned order.”
The ground no.1 has not been pressed and ground no.3 as per the synopsis submitted by the assessee has also not been pressed, therefore, the same is dismissed as not pressed.
The grounds raised by the Revenue are as under:
“1. The Ld.CIT(A) erred in directing the AO/TPO to exclude Acropetal & Infosys BPO Ltd. from the final set of comparables as these comparables have the similar FAR as that of assessee for the year under consideration.” The Ld.CIT(A) also erred in directing the AO/TPO to recomputed average PLI of the final set of comparables and make the adjustment in arm’s length price accordingly after excluding eClerx Services Ltd. from the final set of comparables as on similar issue, the Revenue’s appeal is pending in Hon’ble Supreme Court in the case of against the decision of Hon’ble High Court of Delhi in
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the case of M/s Rampgreen Solution Pvt. Ltd. Vs. CIT(ITA No.102/2015). 2. The Ld. CIT(Appeal) erred in law and on facts in deleting disallowance u/s 40a(ia) as assessee paid rent in excess of amount allowed in certificate of lower deduction u/s 197(1). 3. The Ld.CIT(A) erred in deleting the addition of Rs.1,03,53,150/- made by the AO u/s 40A(2)(b) in spite of the fact that assessee, during the course of assessment proceedings, failed to justify the services being rendered by the director Shri Sunil Baijal to the company for which he was earning such a huge amount of remuneration.”
We will first take up the Revenue’s appeal wherein the main issue involved as raised in ground no.1 are; exclusion of three comparables, i.e., i) M/s. Acropetal Technologies Ltd.; ii) eClerx Services Ltd.; and iii) Infosys BPO Ltd. The facts in brief qua the issue are that assessee is a subsidiary of GHF Holdings Ltd., Mauritius. It provides IT enabled services to its AE through the use of IT infrastructure which includes use of online software, live information services, research on international data base. During the year, assessee has entered into following two international transactions:-
Sl. No. Types of Method Total Value of International Transactions Transaction 1. Provision of IT TNMM 501,167,785 Enabled Services 2. Recovery of NA 1,263,825 Expenses
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The assessee’s margin was worked out at 14.87%, whereas in the TP Study report after adopting TNMM as MAM with the PLI base of OP/TC, the assessee had short listed set of 12 comparables with an average margin of 9.82%. Accordingly, it was reported that international transactions were at arm’s length. Since assessee had used multiple data, the TPO asked the assessee to do a fresh search using filter proposed by TPO and in response, the assessee arrived at a set of four comparables having average mean margin of 4.76%. In the TP Study Report, the functions performed for the provision of IT enabled services was reported as under: “Provisions of IT Enabled Services Futures First was incorporated to utilize the large talent base available in India at relatively lower cost. Futures First provides IT enabled services to its AFs through the use of IT infrastructure. It effectively utilizes IT infrastructure which include use of online software, live information services, research on international databases such as Bloomberg and Reuters and high speed international networks to perform its functions. Futures First provides these services to a group entity Linus which in turn provides services to Indus Derivatives. Futures First activities are detailed below for the Trading Support Function. • Research to facilitate trading support activities: Futures First has a support team involved in provision of financial and economic research. These research services facilitate employees to enter buy-sell details. These analysts perform company and industry analysis, secondary data analysis, capital market analysis, commodity demand and supply research etc. The functions of this team are similar to research services provided by Knowledge Process
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Outsourcing (“KPO') companies in India. • Trading support functions: AFs have provided Futures First with adequate online trading tools and knowledge of trading strategies so that these support activities and buy- sell details can be entered by employees without prior experience of trading or financial markets. This can be judged from the fact that over 90% of Futures first employees are either fresh graduates or have no trading experience. The employees analyze data on various online tools and use their knowledge skills to enter buy-sell details. The employees are trained with rules which help them to enter these details. Futures First employs over 370 employees who support execution of main activities of AEs which are performing derivative trades in equities futures (primarily in U.S. and European Stock Indices), commodities futures (e.g. oil. gold, cocoa, coffee, sugar and corn commodity futures) and interest rate futures (e.g. Euro, Sterling and Canadian currency derivatives). Futures First enters buy-sell details for tick trading which essentially means buying and selling on very low margins. These details are primarily system and software driven and the role of employee in India is limited to entering the buy— sell details based on broad guidelines provided by AEs. In addition each employee is allocated only one or two products for which he enters buy-sell details within specified limits. • IT support tools: Futures First has a small support team involved in provision of technical support. These tools help employees in provision of stated support function. • Other related functions: Finance, Accounting, Treasury and Legal Function: The management of Futures First is responsible for managing the finance, treasury, legal and accounting functions relating to Futures First operations. In certain areas,
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wherever necessary. Futures First is guided by the AEs. Futures First is also responsible for all local statutory compliance. Human Resource Management Function: The HR function at Futures First is coordinated by its local management, which has primary responsibility for recruitment, development and training of the personnel including the emolument structure. In this respect, where appropriate, it is guided by AE policies. Marketing of Trading Services: Futures First does not perform any marketing activity as its role is limited to providing services to its AE. As trading support function is the primary function of Futures First and research and IT support activities arc performed primarily to facilitate the support activities, we believe other activities subsumes into support function.”
However, the TPO carried out his own search and finally came out with following nine comparables:- SI. No. Comparable OP/OC 1 AcroPetal Tech. (Segment) 21.30% Coral Hub 36.93% 2 3 Cosmic Global 48.20% 4 eClerx Services 47.00% 5 Informed Technologies Limited 23.13% 6 Infosys BP0 Ltd. 24.42% 7 Jeevan Softech 44.32% 8 Microqenetic Systems Ltd .: 23.25% 9 Microland Ltd. (Segment) -21.63% 27.72% AVERAGE
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Accordingly, TPO proposed adjustment of Rs.3,42,98,762/-. Since, the only dispute is with regard to the aforesaid three comparables, viz., M/s. Acropetal Technologies Ltd., eClerx Services Ltd. and Infosys BPO Ltd., therefore, the other comparables are not the subject matter of dispute either which has been rejected by the TPO or which has been finally selected by him.
The relevant finding of the ld. CIT (A) for excluding three comparables are as under: “M/s Acropetal Technologies Ltd. Ld. AR has argued that this company is engaged in the development of software and has given the extracts from the annual report reproduced as under:- "The Company is engaged in the development of computer software. The production and sale of such items cannot be expressed on any generic term. Hence it is not possible to give the quantitative details of sales and information as required under paragraph 3, 4 C & 4 D of Part II of the Schedule VI to the Companies Act."
Ld. AR has further argued that Acropetal has huge on site development expenses whereas the appellant is only engaged in offshore activities. I agree with the arguments of the Ld. AR that the possibilities of software development activity and on site development activity of this company makes it unfit to be call a good comparable for ITES segment. Accordingly, I direct, the AO/TPO to exclude Acropetal from the Final set of comparables.”
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eClerx Services Ltd.
Ld. AR argued that this company is engaged in Knowledge Process Outsourcing company and has quoted annual report for the FY 2008- 09 as under: -
"Founded in the year 2000, eClerx is a leading Knowledge Process Outsourcing (KPO) company providing data analytics and data process solutions to some of the largest brands in the world. Over the years, eClerx has consistently achieved profitable growth and has now reached employee strength of about 2000."
Source: "Business Overview" at pg 17 of Annual Report for FY 2008-09 (enclosed at page no. 127)
"What is really interesting about eClerx, though, is the way we have made an ’ inherently niche, high-end, KPO data analgtics business scalable - by combining people, process re engineering and automation in a potent mix to build proprietary, platform based services".
Source: "Chairman's Message" at pg 5 of Annual Report for FY 2008-09 (enclosed at page no. 128)
"We also focus on automation and process re-engineering to eliminate wasteful steps, and to automate repetitive ones, so we minimize the need for human intervention and present our clients costs savings which exceed those from simple wage arbitrage. This also reduces the need for costly, high skilled resources and gives us the ability to scale solutions quickly, both for existing clients and also for new ones."
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"So this is the company that you support. A leading, third party data analytic KPO service provider, based in India, but supporting global clients on a real-time basis across their complex businesses.
Source: "Chairman's Message" at pg 5 of Annual Report for FY 2008-09 (already enclosed at page no. 128)”
I have considered the arguments of the Ld. AR. As this company is engaged in different types of business model that is knowledge outsourcing and hence, high end IT enabled services. Therefore, I direct, the AO/TPO to exclude this company from the final set of comparables.
(vii) Infosys BPO Ltd.
Ld. AR has quoted that the Infosys BPO Ltd. is a giant having turnover of Rs. 1081.53 crs which is 12.71 of turnover of the appellant. Similarly net worth of Infosys BPO Ltd. is Rs. 661.94 crs which is 99.39 times of the appellant. Ld. AR relied on the decision of Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. which held this company as a lager and bigger company in the area of development of software etc. hence non comparable. Considering the scale of operations and substantial intangible assets of this company amounting to Rs 19.03 crs as goodwill, 1 direct, the AO/TPO to exclude this company from the final set of comparables.
On the basis of my above findings, the AO/TPO has to recompute average PLI of the final set of comparables and make the adjustment in arm’s length price accordingly. As a result, these grounds of appeal are partly allowed.
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Before us, ld. counsel for the assessee submitted that in so far as exclusion of Infosys BPO Ltd. is concerned, the Tribunal in assessee’s own case for the subsequent assessment year, i.e., Assessment Year 2010-11 in ITA No.3382/Del/2016 have excluded this comparables, on the grounds that, firstly, Infosys BPO is a giant company having revenue of more than 12 times of the assessee company; secondly, it has fixed assets which are more than 18 times of the assessee company including the employees strength which are also 44 times more than of the assessee; and lastly, relying upon the judgment of Hon’ble Delhi High Court in the case of CIT vs. Sanvih Info Group Pvt. Ltd. in ITA No.420/2019 observed that on similar ground the Hon’ble High Court has also excluded Infosys BPO Ltd. The relevant finding of the Tribunal reads as under:- (v) In Ground No.5, the assessee is praying for exclusion of Infosys BPO as a comparable. Undisputedly, this comparable was selected by the assessee in its original set of comparables but now the assessee is seeking its exclusion on the ground that this company is a giant as compared to the assessee. The Ld. Departmental Representative (DR) has argued that the comparable which has initially been selected by the assessee cannot be excluded subsequently by the assessee. However, we note that the Mumbai Bench of the ITAT in the case of Stream International Services (P.) Ltd. vs. ADIT (International Taxation), 7(2), Mumbai ITA NO.8997/ Mum/2010 held that
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there can be no escape from the proposition that the assessee is entitled to argue at least before the Appellate Authorities that a wrong stand taken at the time of filing of the return should be allowed to be modified. Similarly, the Special Bench of the Tribunal in the case of DCIT vs. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (Chd.) also allowed the assessee to claim exclusion of certain companies from the list of comparables which were inadvertently included by it in its transfer pricing study. Therefore, we agree with the contention of the Ld. Authorized Representative that assessee has a right to argue for the exclusion of comparable even if originally it was included by the assessee in the transfer pricing study. Coming to the arguments for exclusion of this company, it is the assessee’s contention that this company is a giant as compared to the assessee company having its revenue more than 12 times of the revenue of the assessee company. Apart from this it had also been argued that this company has fixed assets which are 18 times more than assets of the assessee company. The employees strength is also 44 times more than that of the assessee company. We note that now there are numerous case laws to support the view that Infosys BPO Ltd. is not to be taken as a comparable on the ground of being a giant company. The Hon’ble Delhi High Court in the case of CIT vs. Sanvih Info Group Pvt. Ltd. in ITA 420/2019, for the same assessment year as the captioned assessment year, upheld the order of the ITAT in rejecting Infosys BPO Ltd. as a comparable on the ground of being a ‘giant’ company. In this case, the Tribunal, while ordering exclusion of this company, had relied on decision of the Hon’ble Delhi High Court in Agnity India Technologies Pvt.
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Ltd. The Hon’ble Delhi High Court noted that Infosys BPO Ltd. was a giant corporation. Similar observations were made by the Hon’ble Delhi High Court in the case of Avaya India Pvt. Ltd. (ITA No.532/2019 for Asst. Year 2010-11) wherein M/s TCS E- Serve Limited and M/s TCS E-Serve International Limited were held to be having high brand value and operating on a huge economic upscale and were, therefore, able to command and generate better profits making them functionally dissimilar to the assesee. The Hon’ble Delhi High Court noted that Infosys BPO Ltd. had been excluded by the ITAT for the very same reason. Similarly, ITAT Delhi Bench in the case of Cengage Learing India Pvt. Ltd. vs. DCIT (ITA No.6484/Del/2012) held that Infosys BPO Ltd. had huge turnovers, owns IPR and brand value on products and provides services to vast clientele. Under such circumstances this company cannot be accepted to be a fit comparable in case of assessee who is a captive service provider providing services only to its group concerns. The Judicial precedents where Infosys BPO Ltd. has been excluded for the reason of being a giant company, having huge turnover, brand value, ownership of IPRs etc. can be multiplied. Therefore, in overall view of the matter, considering the size and service being rendered by the assessee company as compared to Infosys BPO Ltd., we hold that this company is not a good comparable. Accordingly, we direct the exclusion of this company from the final set of comparables. Thus Ground No.5 stands allowed.”
After considering the aforesaid finding of the Tribunal we find that, even the ld. CIT (A) has quoted the same reasons for
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excluding the Infosys BPO Ltd. Since the exclusion of the said comparable is based on various judicial principles laid by Hon’ble Jurisdictional High Court, therefore, we do not find any reason to deviate from the finding of the ld. CIT (A) and the same is confirmed.
Similarly, in the case of M/s. Acropetal Technologies Ltd., the TPO has taken segmental information for income from engineering design services was taken as IT enabled services. Ld. CIT (A) has excluded the said comparable in the ground that firstly his company is entered in the business of computer software and there is no quantitative detail of sales and information in the annual accounts. Further, the M/s. Acropetal Technologies Ltd. has huge on-site development expenses whereas the assessee is only engaged in offshore activities, therefore, software activities and offshore activities of these comparables cannot be compared to the assessee and accordingly on functional level it was directed to be excluded. On the bare perusal of the TPO’s order, it is seen that nowhere the TPO has analyzed how the engineering design services has been compared with low and IT enabled services carried out by the assessee company. From the perusal of the annual report as referred to by Ld. Counsel at page 619 of the paper book that it is functionally not comparable since it is engaged in software products and engineering services. Further from perusal of page 639 of the paper book, it is seen that company has a segment by the name of engineering design and inventories show that there are product
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development. Even the segmental detail of the said company has not been discussed by the TPO, to buttress his claim. Accordingly, we do not find any reason to infer with the finding of the ld. CIT (A) and the same is confirmed.
Lastly, with regard to the Eclerx Service Ltd., the Revenue in its ground has not disputed with the exclusion of the said company because the same being a KPO company and is covered by the decision of Hon’ble Delhi High Court in the case of Rampgreen (supra), albeit it has raised the issue on the ground that against the judgment of Hon’ble Delhi High Court appeal has been filed before the Hon’ble Supreme Court. The ld. TPO also in his order has noted that the only segment of Eclerx is data analytics and process outsourcing services which is nothing but ITe services. From the bare perusal of the functions carried out by the assessee company and the nature of services rendered by the Eclerx Service, as incorporated in the appellate order and also noted by us above, it is an undisputed fact that Eclerx service is a leading KPO services provider wherein it carried out high end KPO data analytic base services. Further, from perusal of page 708, which is part of its annual accounts, it is seen that there is no segmental data for its streams of revenue. Another glaring fact is that it carries out its substantial business on outsourcing model which is absent in the case of the assessee. This factor itself cannot be held to be comparable. The Hon’ble Delhi High Court has held that in principle that e-Clerx is high end KPO services provider which cannot be
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compared with ITE services which are in the category of BPO services provider. Accordingly, the aforesaid finding of the ld. CIT (A) is confirmed.
In so far as ground no.2 is concerned, the disallowance u/s. 40a(ia), the ld. Counsel pointed out that the ld. CIT(A) has given direction to the Assessing Officer to verify whether the copies of non deduction of tax/deduction tax at lower rate was filed before the Assessing Officer before passing of the assessment order and if that be so then no disallowance can be made. It has been informed by the ld. counsel that ld. Assessing Officer will give effect to the order of the ld. CIT(A) vide order dated 27.09.2018 has accepted this fact that in case of payment of Rs 33,39,348/- to M/s Annapurna Builders, assessee has produced TDS exemption certificate and himself has deleted the disallowance. Accordingly, this ground is treated as infructuous. In so far as short deduction of TDS, rather TDS deducted at lower rate in the case of M/s Hind Hosiery Mills Pvt. Ltd, again no disallowance can be made in view of the judgment of Hon’ble Calcutta High Court in the case of CIT vs. S.K. Tekriwal reported in (2013) 260 CTR 73. Accordingly, this issue is decided against the revenue.
In so far as issue of 40A(2)(b) the relevant observation of the ld. Assessing Officer reads as under: “During the assessment proceedings, the assessee was asked to furnish the details 1 of payments made to person specified
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u/s 40A(2)(b) of the Act during the year. The assessee simply furnish the details of the same. On perusal of the same, it has been found that the assessee company has paid Rs. 2,07,06,300/- as salary to its Director Mr. Sunil Baijal. However, no justification has been given by the assessee as what kind of services are rendered to earn such a huge amount of remuneration. Since, the assessee failed to bring on record to show that the remuneration so paid is not in excess of the limits. The assessee has also failed to justify the nature of services rendered by the directors so as to command such a huge remuneration. Therefore, an amount of Rs. 1,03,53,150/- being 50% of the total remunerations paid to Mr. Sunil Baijal, Director of the assessee company is hereby disallowed and added back to the income of the assessee. Since. 1 am satisfied that assessee has concealed the income by furnishing inaccurate particulars of its income, penalty proceedings u/s 271(1 )(c) is initiated separately.”
Before ld. CIT(A) the assessee had submitted as under:
“(i) The Managing Director Shri Sunil Baijal is associated with the assessee company right from the beginning. Due to its association turnover and profit before tax has increased many times. He is involved in financial market since 1994 in trading in Forex, Interest Rates and Credit Markets in Delhi, Mumbai. and Singapore. He holds a degree in (Mechanical) Engineering from Delhi Collage of Engineering and MBA from university of Delhi. Therefore his remuneration commensurate to his qualification and working of the company. (ii) Subsequently the Assessment Year 2010-11 Mr. Sunil
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Baijal was paid an increase remuneration of Rs. 2,66,37,300/-. The same was accepted by the AO during the Scrutiny Proceedings of the assessee. (iii) Mr. Sunli Baijal has declared the this sum in his return of income. (iv) Ld. AR has relied on the following judicial pronouncements where such adhoc disallowance was not approved. (a) “The Hon’ble Supreme Court held in Commissioner of Income Tax vs. Edward Keventer {private) Ltd.(1978) 115 ITR 149 (SC) (b) The Hon’bie ITAT, Delhi held, in Deputy Commissioner of Income Tax vs. Spark Hotels (P) Ltd. 2012 52 SOT 305 (Delhi)”
Ld. CIT(A) has deleted the said disallowance on the ground that Assessing Officer has not brought any evidence/ any material for making the disallowance u/s.401A(2). In subsequent Assessment Year, i.e., Assessment Year 2010-11 wherein higher salary paid to the Managing Director, Mr. Sunil Baijwal was allowed in the order passed u/s.143(3).
After hearing both the parties and on perusal of the relevant finding given in the impugned order, we find that first of all Assessing Officer without any reason or material facts on record had simply disallowed 50% on the ground that there is no justification for giving such huge amount of remuneration. Such an ad hoc reasoning cannot be accepted as Assessing Officer has to justify that such a remuneration
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paid is not commensurate with the services rendered by the Managing Director having regard to the services rendered and market value of its services. The profile of Managing Director and the services rendered by him as incorporated in the impugned appellate order and also looking to the fact that the subsequent assessment year the increase remuneration has been accepted, and therefore, the disallowance made u/s.40A(2)(b) cannot be sustained. Thus, the Revenue’s appeal is dismissed.
In the assessee’s appeal, wherein the only ground no.2 has been argued, we find that, this ground is similar to ground no.2 of the Department’s Appeal wherein the disallowance was made by the Assessing Officer on the ground that no TDS exemption certificate was submitted in respect of rental payments made to Annapurna Builders. Secondly, there was lower deduction certificate submitted in respect of Hind Hosiery Mills Ltd. The Ld. CIT(A) has directed the Assessing Officer to verify whether the copies of non deduction of tax at lower rate were filed before the Assessing Officer or not and if that is so, then to delete the disallowance. Ld. Counsel submitted that before the Assessing Officer both the certificate were duly submitted during the course of assessment proceedings vide submissions dated 1st March, 2013 and 10th April, 2013. The ld. Assessing Officer after verifying the said certificate had deleted the disallowance in order giving effect order. Apart from that, the ld. counsel has also relied upon the judgment of Hon’ble Calcutta High Court
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in the case of CIT vs. S.K. Tekriwal as reported in (2014) 361 ITR 432 that no disallowance u/s.40(a)(ia) can be made where there is a short deduction of TDS. We have already held that no disallowance can be made in case of deduction of TDS at lower rate. The assessee has produced the certificate before the Assessing Officer as per the direction given by ld. CIT (A), and therefore, there is no question of any disallowance. Accordingly, the ground no.2 raised by the assessee is allowed.
In the result, the appeal of the Revenue is dismissed and appeal of the assessee is partly allowed. Order pronounced in the open Court on 10th May, 2021.
Sd/- Sd/- [PRASHANT MAHIRSHI] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 10th May, 2021 pkk