JCIT, NOIDA vs. M/S. COLWELL & SALMON COMMUNICATION (INDIA) LTD., GAUTAM BUDH NAGAR

Both these appeals by the Revenueare preferred against the order of the ld. CIT(A), Ghaziabad dated 15.03.2011 pertaining to A.Y 2004-05 and 2005-06. Since common issues are involved in both the appeals, these are being disposed of together for the sake of convenience and brevity.

Grievances of the Revenue read as under:

The underlying facts in issue are that the appellant company is a 100% subsidiary company of Gujrat Heavy Chemicals Limited (GHCL) and is engaged in the business of Information Technology Services [ITES] and provides call centre services to GHCL’s subsidiary in the US, i.e. Collwell and Salmon Communications Inc., USA.

It has entered into sub-contracting arrangement with USA for providing back office tele-calling services for lead generation, market research, and tele- sales. The appellant company was incorporated in December, 2002, but commenced operations from July 2003 and this is the first year of operation. The appellant has established a STP 100% EOU at Noida for providing ITES and eligible for deduction u/s 10A of the Act.

During the course of scrutiny assessment proceedings, the assessee was asked to justify its claim of deduction u/s 10A of the Act.

The Assessing Officer observed that the assessee has bifurcated the expenditure against the domestic income as well as export income.

When the matter was agitated before the CIT(A), the assessee justified its claim of deduction and it was strongly contended that Section 10A of the Act is not an exemption, but it is a deduction section, and there is a well-defined formula given in Section 10A(4) of the Act for calculating deduction u/s 10A of the Act in respect of the undertaking registered with STPI. It was further explained that there is no provision in Section 10A of the Act for separately calculating profit in respect of domestic sales and export sales even if segmental accounts are available.

After considering the facts and submissions, the CIT(A) found that u/s 10A(4) of the Act, a formula has been given, wherein the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.

After analysing the formula given the CIT(A) observed that :

The CIT(A) accordingly allowed the appeal of the assessee and directed the Assessing Officer to allow the deduction u/s 10A of the Act.

Before us the ld. DR strongly supported the findings of the Assessing Officer.

Per contra, the ld. counsel for the assessee reiterated what has been stated before the lower authorities.

We have carefully perused the orders of the authorities below.

While scrutinising the return of income and on perusal of the details of travelling and conveyance expenses of Rs. 70.45 lakhs, the Assessing Officer noticed that the assessee has incurred staff travel foreign expenses at Rs.46.81 lakhs besides foreign travelling other expenses of Rs. 88.35 lakhs. The assessee was required to give nexus between travelling expenses incurred and business receipts as a whole and the designation of the employees who made the travelling.

The assessee furnished the requisite details and on perusal of the same, the Assessing Officer was of the opinion that the assessee has incurred expenses on behalf of other persons who come to India and went outside, though there was no business nexus for the same.

The assessee strongly agitated the matter before the CIT(A). It was explained that the expenses were incurred by the employees of the appellant company and were incurred towards business objectives of the assessee. It was explained that the expenditure was incurred for training to remain in competitive business.

After considering the facts and submissions, the CIT(A) observed that the Assessing Officer did not question the genuineness of these transactions and as the expenses were incurred by the assessee for business development and training of employees for call centre business, expenses were allowable and accordingly, directed the Assessing Officer to delete the disallowance.

Per contra, the learned counsel for the assessee reiterated what has been stated before the lower authorities.

We have carefully perused the orders of the authorities below.

In our considered opinion, as the company is in export of call centre services, setting up a successful international call centre requires up-to-date technology, quality assurance, data analysis and continuous training of employees, international level of communication, skills, continuous business development and for this purpose, the top management and the other related employees went abroad to gain knowledge of the call centres to have international standards. As mentioned elsewhere, this is the first year of the business. Therefore, it is more important for the appellant company to update its key employees with advanced technology.

As the genuineness of the expenses have not been questioned and the Assessing Officer has merely questioned the legitimacy of the expenses which, in our opinion, is not correct. It is for the business- man to decide which expenses are necessary to further its business.

While scrutinising the return, the Assessing Officer found that under the head “Legal and Professional Expenses” the assessee has claimed expenses of Rs. 1.36 crores. On perusal of the details, the Assessing Officer formed a belief that the assessee has claimed expenditure under this head, which does not have any business nexus, and purpose for payment of legal and professional expenses are not justified and accordingly, made disallowance of Rs.1.11 crore.

The assessee carried the matter before the CIT(A) and filed details of expenses incurred under the ‘Legal and Professional Expenses’ head. The CIT(A) accordingly examined each and every payment and finally came to the conclusion that disallowance is not justified and directed the Assessing Officer to delete the addition.

Before us, the ld. DR strongly supported the findings of the Assessing Officer and the learned counsel for the assessee reiterated what has been stated before the CIT(A).

We have carefully perused the orders of the authorities below.

We have also gone through the details which are as under:

G 4H Please refer to the agreement at Page 174 in Limited, UK Paper Book-I. The services of G4H was taken to carry out a Value Chain Analysis for the 11,42,687 Colwell's Product offerings in UK and for test marketing of the Colwell's existing business propositions in five sectors of the UK market place. It is clear from it that the expenditure is purely marketing in nature and incurred for the development of assessee's business in UK. The assessee would able to capture 6-7 clients in next years because of these initial marketing efforts. So as the said expenditure is allowable as a business expense.

On a bare perusal of the aforestated details, it can be found that these are self-explanatory. No error or infirmity has been brought on record by the revenue. We, therefore, decline to interfere with the findings of the CIT(A). Ground No. 3 is dismissed.

The underlying facts show that during the year under consideration, the assessee has undertaken international transactions of provision of voice based call centre services amounting to Rs. 461.92 lakhs with C&S, USA. For benchmarking the international transactions of provision of voice-based call centre services, the assessee applied TNMM and considered the Associated Enterprises, that is, C & S, USA as tested party. As the AE was less complex entity in the transaction, results of benchmarking analysis was as under:

During the TP assessment proceedings, the Assessing Officer questioned the selection of the tested party and was of the firm belief that the assessee should be tested party for the purpose of benchmarking analysis and accordingly, undertook fresh search of comparable companies and arrived at a set of 12 companies with operating profit to cost ratio of 9.52% and accordingly, an adjustment of Rs. 3.64, crores towards the difference in ALP was made.

Before the CIT(A), the assessee justified the ALP of the international transaction with multiple possibilities. Firstly, the assessee justified its AE as tested party. Secondly, the assessee justified its international transaction to be at ALP on the basis of under-utilisation of the capacity and further justified with internal comparables. Though the CIT(A) considered the submissions made by the assessee, but finally adjudicated upon under-utilisation of capacity.

While coming to his conclusion, the CIT(A) forwarded the reply of the assessee to the Assessing Officer and the Assessing Officer was asked to file his reply on the submissions made by the assessee in the paper book.

We find that multiple opportunities were given by the CIT(A) but in spite of more than sufficient time, no response was received from the Assessing Officer. As mentioned elsewhere, the CITA finally adjudicated on the alternative TP study relating to adjustment of unutilised capacity and allowed the appeal of the assessee.

Before us, in addition to supporting the findings of the TPO/Assessing Officer, the DR has also filed written submissions which have been duly considered by us.

In the written submissions, the ld. DR mainly addressed to the selection of the tested party. It has been contended by the revenue that the FAR analysis mentioned in the TP documentation has been altered to suit the requirement of the assessee so the AE can be selected as tested party and therefore, the AE of assessee should not be selected as tested party and instead the assessee should be selected as tested party as rightly done by the TPO.

On capacity utilisation, the ld. DR submitted that the TPO did not discuss the impact of considering the capacity utilisation in alternative TP study. It has been contended that the assessee has undertaken capacity utilisation on its own financial results rather than those of comparable financial results. Reliance has been made in the decision of the Tribunal in the case of Claas India Ltd ITA 1783/DL/2011.

On internal CUP, the revenue contends that comparability criteria laid down under CUP is very strict and there has to be exact comparability in terms of the nature etc. any variation in nature of services should render such analysis useless.

Per contra, the ld. counsel for the assessee reiterated what has been stated before the CIT(A). It is the say of the ld. counsel for the assessee that in terms of Rule 27A the assessee is entitled to defend the order of the CIT(A) on all grounds including the grounds which have either not been decided by the CIT(A) or have been decided against the assessee. For this proposition, reliance was placed on the decision of the Hon'ble Delhi High Court in the case of Sanjay Sawhney 273 Taxman 332 the Hon'ble Bombay High Court in the case of B.R. Bhamasi 83 ITR 233.

We have given thoughtful consideration to the rival submissions and have carefully perused the orders of the authorities below. It is true that the assessee has justified its international transaction to be at ALP from multiple angles before the CIT(A). It is equally true that though the CITA has considered all the alternative submissions made by the assessee, but has finally adjudicated upon the under-utilisation of the capacity. As mentioned elsewhere, this being the first year of business and the business was run only for 9 months in the F.Y. under consideration, obviously the assessee has not achieved optimum level of capacity utilisation.

Moreover, the assessee has to absorb certain start up costs and fixed operating costs. In the absence of optimum utilisation of its capacity it has suffered average loss during the year. On the other hand, the net profit margin of the comparable cases who are already into business from past many years unutilised capacity can be understood from the following chart:

From the above chart, it can be seen that total available man hours for calling during the year was 1,93,440 and total billed hours were 1,01,851/-. Thus, the idle hours of calls 91,589 which makes unutilised capacity at 47.35%. In the subsequent years, capacity utilisation has been increased from 50% to 100%. We, therefore, do not find any infirmity in deciding this issue on unutilised capacity by the CIT(A).

We are of the opinion that the alternative TP study done by the assessee fulfils the requirements of TP regulations and is found to be correct. OP/TC with C&S USA is 11.20% which is more than the average OP/TP of the comparable companies at minus 6.89%. Assuming that the OP/TC of the comparable companies as per the TPO is correct, which is at 9.52%, the assessee’s OP/TC being 11.20%, we are of the considered view that the international transaction is at ALP and needs no further adjustment and accordingly, no interference is called for in the findings of the CIT(A). Ground No. 4 is dismissed.

In the result appeal filed by the revenue is dismissed.

In the result, the appeals of the Revenue in 1117/DEL/2012 are dismissed.