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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI JASON P BOAZ
Per Jason P Boaz, Accountant Member:
This appeal by the assessee is directed against the final order of assessment dated 25.11.2016 for Assessment Year 2012-13, passed under section 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 (in short ‘the Act’) pursuant to the directions issued by the Dispute Resolution Panel – 2, Bangalore (DRP) under section 144C(5) of the Act on 07.10.2016.
Briefly stated, the facts of the case are as under:-
IT(TP)A No. 185/Bang/2017 Page 2 of 24 2.1 The assessee, an Indian company, is a wholly owned subsidiary of Kennametal Inc. and provides ITES to its Associated Enterprises (AEs). For Assessment Year 2012-13, the assessee filed its return of income on 30.11.2012 declaring total income of Rs.5,68,16,900/-. The case was taken up for scrutiny for this Assessment Year and subsequent thereto, the Assessing Officer (AO) made a reference under section 92CA of the Act to the Transfer Pricing Officer (TPO) for determination of the arms length price (ALP) of the international transactions reported by the assessee in the year under consideration. The TPO passed an order under section 92CA of the Act dated 14.01.2016 proposing an adjustment of Rs.3,37,89,086/- to the international transactions entered into by the assessee in the ITES segment. Thereafter, the AO passed the draft order of assessment under section 143(3) r.w.s. 144C(1) of the Act dated 14.03.2016, wherein the assessee’s income was determined at Rs.9,06,05,986/-; which included the TP adjustment of Rs.3,37,89,086/-.
2.2 Aggrieved by the draft order of assessment dated 14.03.2016 for Assessment Year 2012-13, the assessee filed its objections thereto before the DRP. The DRP issued its direction thereon under section 144C(5) of the Act vide order dated 07.10.2016, pursuant to which the AO passed the final order of assessment under section 143(3) r.w.s. 144C(1) of the Act dated 25.11.2016 wherein the assessee’s income was determined at Rs.9,93,98,783/-, in view of the following additions / disallowances:-
(i) Revised TP adjustment – Rs.4,18,48,488/- (ii) Disallowance under section 14A r.w.Rule 8D(2)(iii) – Rs.7,33,395/-
The assessee, being aggrieved by the final order of assessment dated 25.11.2016 for Assessment Year 2012-13 has preferred this appeal, wherein it has raised the following grounds:-
IT(TP)A No. 185/Bang/2017 Page 3 of 24 IT(TP)A No. 185/Bang/2017 Page 4 of 24 IT(TP)A No. 185/Bang/2017 Page 5 of 24
Before proceeding to the deal with and dispose off the grounds raised in this appeal, the brief facts related to the TP issues are summarized hereunder.
4.1 The assessee company, in the year under consideration, is engaged in the provision of ITES to its AEs. In the year under consideration, the assessee had reported the following international transactions in its 92CE Report:-
IT(TP)A No. 185/Bang/2017 Page 6 of 24 4.2 The financial results of the assessee during the year under consideration, as worked out by the TPO are as under:-
Particulars Amount in Rs. Operating Income Rs.37,46,01,384/- Operating Expenditure Rs.31,91,43,476/- Operating Profit Rs.5,54,58,358/- OP/OC 17.38% 4.3 The assessee conducted a TP study for the international transactions adopting TNMM as the most appropriate method (MAM) and selected a set of nine companies as its comparables. As the average mean of these 9 comparables worked out at 12.50% was less than the margin shown by the assessee, it was concluded that the international transactions of the assessee in the year under consideration were at arms length. The assessee’s list of 9 comparables, chosen suo moto, are as under:-
IT(TP)A No. 185/Bang/2017 Page 7 of 24 4.4 The TPO rejected the assessee’s TP Report / Study for the reasons mentioned in his order under section 92CA of the Act. The TPO then conducted his own search process adopting various criteria / filters and selected the following 10 companies as the final set of comparables:- Sl. No. Name of the Case OP/OC 1 Accentia Technologies Ltd. 11.75 2 Universal Print Systems Ltd. 52.46 (Seg)(BPO) 3 Informed Technologies India 6.08 Ltd.
4. Infosys B P O Ltd. 36.30 5 Jindal Intellicom Ltd. -0.05 6 Microgenetic Systems Ltd. 19.61 7 T C S E-Serve Ltd. 63.69 8 B N R Udyog Ltd.(Seg)(Medical 41.58 Transcription) 9 Excel Infoways 29.79 Ltd.(Seg)(IT/BVPO) 10 E4e Healthcare Services Pvt 19.85 Limited Average PLI 28.11%
IT(TP)A No. 185/Bang/2017 Page 8 of 24 4.5 The TPO computed the ALP of the international transactions in the assessee’s ITES segment as under:-
4.6 Based on the above computation, the TPO proposed a TP adjustment of Rs.3,37,89,086/- which was incorporated in the draft order of assessment dated 14.03.2016. Pursuant to the DRP’s directions issued on 25.10.2016, the TP adjustment of Rs.4,18,48,488/- was, inter alia, incorporated in the impugned final order of assessment dated 25.11.2016 for Assessment Year 2012-13.
5.0 Ground Nos.1 to 11 and 15 and 16 5.1 At the outset of proceedings before us, the learned AR of the assessee filed a chart of comparables that the assessee wanted either to be excluded from or included in the final set of comparables and Notes on Arguments. It was submitted by the learned AR that out of the 16 grounds raised on transfer pricing issues, only grounds 12, 13 and 14 related to the plea for exclusion and inclusion of companies from final set of comparables are being pressed; and all other ground Nos. 1 to 11, 15 and 16. (supra) are not being pressed. It is submitted that even in ground No.13, relating to inclusion of companies in the list of comparables, only one company, namely, Crystal Voxx Ltd., is being urged /
IT(TP)A No. 185/Bang/2017 Page 9 of 24 pressed. In these circumstances, ground Nos. 1 to 11, 15 and 16 raised in this appeal, being not pressed by the assessee, the same are rendered infructuous and are accordingly dismissed as not pressed.
Ground No.12 – Companies sought to be excluded by the assessee from final set of comparables 6.1 In this ground (supra), the assessee has sought for exclusion of the following five companies from the final set of comparables:-
(1) Universal Print System Ltd., (2) Infosys BPO Ltd., (3) BNR Udyog Ltd., (4) TCS E-serve Ltd., (5) Excel Infoways Ltd.,
In support of the assessee’s contentions for exclusion of the above 5 companies from the final set of comparables, the learned AR placed reliance on the decision of the Co-ordinate Bench of this Tribunal in the case of Mobility Infotech India Pvt. Ltd., in IT(TP)A No.2055/Bang/2016 dated 08.08.2018 which is also rendered for Assessment Year 2012-13.
6.2 Per contra, the learned DR for Revenue put forth submissions supporting the orders of the authorities below.
6.3.1 We have considered the rival contentions and carefully perused the material on record; including the judicial decisions cited. It is seen that the Co-ordinate Bench of this Tribunal in the case of Mobility Infotech India (P) Ltd., (supra) has considered and adjudicated on the comparability of the above list of 5 companies [i.e., in para 6.1 (supra)] with companies rendering ITES. We find
IT(TP)A No. 185/Bang/2017 Page 10 of 24 that the functional profile of that company; i.e., Mobility Infotech India (P) Ltd., is similar to that of the assessee and the assessment year is also the same, viz., Assessment Year 2012-13. It is seen that the TPO has selected the same set of comparables in both; Mobility Infotech India (P) Ltd., as well as in the case on hand. Since the facts and circumstances are similar, we are of the view that the decision rendered by the Co-ordinate Bench of this Tribunal in the case of Mobility Infotech India (P) Ltd., for Assessment Year 2012-13 is applicable to the facts of the case on hand also. The relevant portion of the aforesaid decision of the Co-ordinate Bench (supra) at para 6 to 10.3.2 thereof are extracted hereunder:-
IT(TP)A No. 185/Bang/2017 Page 11 of 24 IT(TP)A No. 185/Bang/2017 Page 12 of 24 IT(TP)A No. 185/Bang/2017 Page 13 of 24 IT(TP)A No. 185/Bang/2017 Page 14 of 24 IT(TP)A No. 185/Bang/2017 Page 15 of 24 IT(TP)A No. 185/Bang/2017 Page 16 of 24
IT(TP)A No. 185/Bang/2017 Page 17 of 24 6.3.2 Respectfully following the decision of the Co-ordinate Bench of this Tribunal in the case of Mobility Infotech India (P) Ltd., (2018) 97 taxmann.com 2 (Bangalore – Trib), we direct (1) the exclusion of Infosys BPO
IT(TP)A No. 185/Bang/2017 Page 18 of 24 Ltd., from the final set of comparables and (2) remand the issue of comparability of the other four companies, namely (i) Universal Print Systems Ltd., (ii) BNR Udyo Ltd., (iii) TCS E-serve Ltd., and (iv) Excel Infoways Ltd., back to the file of the TPO with the same directions rendered by the Co-ordinate Bench in the case of Mobility Infotech India (P) Ltd. We hold and direct accordingly. Consequently, ground No.12 is disposed off as indicated above.
Ground No.13 – Plea of assessee for inclusion of Company M/s. Crystal Voxx Ltd., (Crystal) in the set of comparables 7.1 In this regard (supra), the assessee has sought inclusion of the following 4 companies in the final set of comparables:-
(i) ICRA Online Ltd., (ii) Techprocess Solutions Ltd., (iii) Crystal Voxx Ltd., (iv) Cameo Corporate Services Ltd.,
At the outset, the learned AR for the assessee submitted that the assessee is only pressing for the inclusion of Crystal Voxx Ltd., in the final set of comparables and is not pressing for inclusion of of the other three companies listed at (i), (ii) and (iv) in the final set of comparables. So, we need to deal only with the comparability or otherwise of Crystal Voxx Ltd., (‘Crystal’).
7.2 The learned AR submitted that this company, ‘Crystal’ was suggested as an additional comparable by the assessee in proceedings before the TPO as it qualifies all the filters applied and is functionally comparable to the assessee in the case on hand. According to the learned AR, this company, ‘Crystal’, was rejected only on the ground that the data of this company was not available in the IT(TP)A No. 185/Bang/2017 Page 19 of 24 prowess and capitaline database used by the TPO. The learned AR contends that this company is rendering BPO / ITES services and is therefore functionally comparable to the assessee in the case on hand and ought to be included in the final list of comparables. In this regard, reliance was placed on the decision of the Co-ordinate Bench of this Tribunal in the case of FNF India Pvt. Ltd., Vs. ACIT in IT(TP)A No.459/Bang/2017 dated 03.07.2019 for Assessment Year 2012-13.
7.3 Per contra, the learned DR for Revenue supported the orders of the authorities below.
7.4.1 We have considered the rival contentions / submissions and carefully perused the material on record including the judicial pronouncements cited. We find that a Co-ordinate Bench of this Tribunal in the case of FNF India Pvt. Ltd., in its order in IT(TP)A No.459/Bang/2017 dated 03.07.2019 for Assessment Year 2012-13 dated 03.07.2019 for Assessment Year 2012-13 have held that this company i.e., ‘Crystal’, is a predominantly BPO company and should be included as a comparable to a company providing ITES services. We observe that the Assessment Year involved is the same i.e., Assessment Year 2012-13, as in the case on hand, the set of comparables chosen by the TPO in the cited case (supra) as well as in the case on hand are also the same and as such we find that the facts of both these cases are similar i.e., provision of BPO / ITES services. Therefore, in our view, the decision rendered by the Co-ordinate Bench in the case of FNF India Pvt. Ltd., for Assessment Year 2012-13 (supra) is applicable to the assessee in the case on hand also. At paras 24 and 25 of its order in the case of FNF India Pvt. Ltd., (supra), the Co-ordinate Bench has dealt with the comparability of ‘Crystal’ with ITES companies and has held as under:-
IT(TP)A No. 185/Bang/2017 Page 20 of 24 “24. In ground No.13, the Assessee has prayed for inclusion of Crystal Voxx Ltd. as a comparable company. This company was not regarded as comparable company with the Assessee by the DRP for the reasons given in Para 2.15 of its order i.e., for the reason that in the financial results, the Auditors have mentioned that this company was predominantly a Business Process Outsourcing (BPO) company and therefore this company cannot be said to be an ITES company. The learned counsel for the Assessee brought to our notice that in the very same note, the auditors have also mentioned that the only reportable segment was BPO. Therefore this company was a BPO company and the results of the BPO which is the only segment ought to have weighed in the mind of the TPO to include this company as a comparable company.
We have considered the submission of the learned counsel for the Assessee and are of the view that the plea raised by the Assessee is correct and the TPO ought to have regarded this company as comparable company because the only reportable segment of this company was BP We direct the TPO to include this company as a comparable company.”
7.4.2 Respectfully following the decision of the Co-ordinate Bench of this Tribunal in the case of FNF India P. Ltd., (supra), we hold and direct that this company, Crystal Voxx Ltd., is to be included in the final set of comparables.
Ground No.14 – Assessee’s plea for inclusion of M/s. Informed Technologies Ltd., in the final set of comparables 8.1 In this ground (supra), the assessee prays for inclusion of Informed Technologies Ltd., (‘Informed’) in the final set of comparables. According to the learned AR, this company, ‘Informed’, was selected as a comparable by the assessee in its TP study, and was accepted by the TPO and formed a part of his final set of comparables. It is submitted that this company was excluded, suo moto, by the DRP on the ground that the correct margin of the company for the ITES segment cannot be determined as “Other Income” is 48% of the total
IT(TP)A No. 185/Bang/2017 Page 21 of 24 income. The learned AR contends that the percentage of “Other Income” cannot be a ground for excluding a company, which is otherwise functionally comparable, from the set of comparables and therefore prays that the company ‘Informed’ ought to have been included in the set of comparables.
8.2 Per contra, the learned DR for Revenue supported the orders of the DRP in excluding Informed Technologies Ltd., from the final set of comparables. It was submitted that “Other Income’ constitutes 48% of the total income and unless the expenses related to earning of the income are identified and excluded, the profit margin from ITES activity cannot be ascertained.
8.3.1 We have considered the rival contentions and perused the material on record. We have perused the excerpts of the Annual Report of the company ‘Informed’ placed before us and find that at page 8 thereof under the head ‘Segmental Reporting’ the company has only one reportable segment, namely ‘BPO Segment’ which is functionally comparable to the assessee. Further, it is seen that total sales / turnover reported on page 24 thereof is also entirely from BPO activities and as such the filter applied by the TPO of ITES is satisfied, as the “Other Income” is clearly non-operating revenue. We, however, notice that the effect of “Other Income” on the margin of the company has not been examined. It is also seen that while suo moto excluding this company ‘Informed’, from the set of comparables, the DRP has not put either of the parties on notice.
8.3.2 In this factual matrix of the matter, as discussed above, we are of the view that it would be appropriate to restore the matter to the TPO for examination of the point raised by the assessee before the DRP and decide on the comparability of this company, Informed Technologies Ltd., afresh. Needless to add, the AO / TPO shall afford the assessee adequate opportunity of being heard and to put forth details / submissions required in the matter, which shall be IT(TP)A No. 185/Bang/2017 Page 22 of 24 duly considered by the AO / TPO before deciding the matter. We hold and direct accordingly. Consequently, ground No.14 of assessee’s appeal is allowed for statistical purposes.
CORPORATE TAX ISSUES
Ground No.17 – Disallowance under section 14A r.w. Rule 8D 9.1 In this ground, the assessee contends that no disallowance under section 14A of the Act r.w. Rule 8D(2)(iii) of the Rules was called for as no expenditure has actually been incurred and debited in the profit and loss account by the assessee.
9.2 We have considered the rival contentions in the matter. On a perusal of the record before us, it is seen that in the course of assessment proceedings, the AO observed that the assessee had made investments in shares yielding exempt dividend income amounting to Rs.91,96,047/- which are claimed exempt from tax under section 10(34) of the Act. The AO did not accept the assessee’s claim that no expenditure had been incurred to earn the exempt income and invoking the provisions of section 14A r.w. Rule 8D(2)(iii) to compute the indirect expenses attributable to the earning of such exempt income of Rs.91,96,047/-, as per the formula given in Rule 8D. Except for repeatedly raising the plea that no disallowance is called for, nothing was brought on record by the assessee to controvert the finding of the authorities below that disallowance of Rs.7,33,395/- computed as per the provisions of section 14A r.w. Rule 8D(2)(iii) was called for in the facts and circumstances of the case. We, therefore, find no infirmity in the order of the AO / DRP and uphold the disallowance made under section 14A r.w. Rule 8D. Consequently, ground No.17 of the assessee’s appeal is dismissed.
IT(TP)A No. 185/Bang/2017 Page 23 of 24
Ground Nos.18 and 19 – Charing of interest under section 234B and 234C of the Act 10.1 In this ground (supra), the assessee denies itself liable to be charged interest u/s 234B and 234C of the Act. The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon’ble Apex Court in the case of Anjum H. Ghaswala (252 ITR 1) (SC) and we, therefore, uphold the action of the AO in charging the assessee the aforesaid interest u/s 234B and 234C of the Act. The AO is, however, directed to re-compute the interest chargeable u/s 234B and 234C of the Act, if any, while giving effect of this order.
Ground No.20 – Short credit for Tax paid 11.1 In this ground (supra), the assessee contends that the AO has granted credit for TDS / Advance tax paid only to the extent of Rs.1,21,46,000/- as against the actual payment of Rs.1,24,50,000/-. It was also submitted that though a specific objection in this regard was raised before the DRP, the DRP at para 22.1 of its order declined to issue directions on this issue stating that since this issue does not relate to variation in income, it cannot be adjudicated by the panel as it is beyond their scope and powers.
11.2 We have considered the issue raised before us in this regard (supra). It is trite law that the assessee is entitled to be allowed full credit for taxes paid by it to the Government exchequer. We, therefore, direct the AO to examine and verify the assessee’s claim and allow credit for taxes paid by it as per law. Consequently, ground No.20 of the assessee’s appeal is allowed for statistical purposes.
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In the result, the assessee’s appeal for Assessment Year 2012-13 is partly allowed.
Order pronounced in the open court on this 14th day of August, 2019.