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Income Tax Appellate Tribunal, DELHI BENCH : I-2 : NEW DELHI
Before: SHRI R.K. PANDA & SMT. BEENA A. PILLAI
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER Assessment Year: 2007-08 DCIT, Vs. Transcend India Pvt. Ltd., Circle-25(2), B-4, Sagar Tower, Janak Puri, New Delhi. District Centre, New Delhi. PAN: AAGCS9759K CO No.446/Del/2015 (ITA No.2754/Del/2015) Assessment Year: 2007-08 Transcend India Pvt. Ltd., Vs. DCIT, 1/1, Arakere, Circle-25(2), Bannerghatta Road, New Delhi. Bangalore. PAN: AAGCS9759K (Appellant) (Respondent) Assessee by : Shri Vishal Kalra & Shri S.S. Tomar, Advocates Revenue by : Shri Sarabjeet Singh, Sr. DR Date of Hearing : 03.12.2018 Date of Pronouncement : 10.12.2018 ORDER
PER R.K. PANDA, AM:
This appeal by the Revenue is directed against the order dated 29th January, 2015 of the CIT(A)-44, New Delhi relating to assessment year 2007-08. The assessee
CO No.446/Del/2015 has filed a CO against the appeal filed by the Revenue. For the sake of convenience, these were heard together and are being disposed of by this common order.
The facts of the case, in brief, are that the assessee is a company engaged in the business of rendering medical transcription services. It filed its return of income on 31st October, 2007 declaring total income of Rs.2,75,91,249/-. Since the assessee during the year under consideration, had undertaken international transactions with its AE, the value of which was more than Rs.15 crore, the Assessing Officer referred the matter to the TPO u/s 92CA(3) of the IT Act, 1961 to determine the ALP of the international transaction carried out by it.
During the course of TP assessment proceedings, the TPO observed that the assessee is in the business of rendering medical transcription services and is a wholly owned subsidiary of Spryance Inc. The medical transcription work is outsourced to either independent service providers identified by Spryance Inc. or to independent Home Based Medical Transcriptionists (HMTs) identified by Spryance India as per guidelines laid down by Spryance Inc. He observed that during the impugned assessment year, the assessee company has undertaken quality check in relation to medical transcription work performed by independent suppliers and coordination and quality control activities in relation to the work outsourced to it by Spryance Inc. which Spryance India passes on to third party HMTs for execution as per guidelines laid down by Spryance Inc. He observed that the assessee during impugned assessment year has undertaken the following international transaction:-
S.No. Description of transaction Method Value (in Rs.) 1. Medical Transcription, quality TNMM 33,92,30,295/- assurance and related services 2. Reimbursement of expenses CUP 14,20,388/-
He observed that the assessee in its TP study report has considered all the international transactions as related to IT enabled activities and has benchmarked by using TNMM. Profit level indicator (PLI) used is OP/TC. In the TP report, the OP/TC of the assessee was shown at 14.64%. The assessee has selected four comparables whose average weighted margin was shown at 11.01%. Since the assessee has used multiple year data, the TPO rejected the same and applied the current year data. Further, since the assessee in the original TP study had used four comparables to benchmark the transactions, the TPO retained the two comparables, namely, R. Systems International and Firstsource Solutions and proposed five more comparables and determined the arithmetic mean at 16.15%. After considering the objections filed by the assessee, the TPO finally selected the following comparables and computed the ALP at 28.63%, the details of which are as under:-
S.No. Company Name OP/TC (%) 1. Cat Technologies Ltd. 82.88 2. Cosmic Global Ltd. 11.75 3. Cameo Corporate Services Ltd. 9.75 4. Accentia Technologies Ltd. 33.4 5. R. Systems International Ltd. 14.58 6. Firstsource Solutions Ltd. 19.41 Arithmetic Mean 28.63
CO No.446/Del/2015 5. While doing so, the TPO did not allow risk adjustment or working capital adjustment. The Assessing Officer, thereafter, passed the order making an upward adjustment of Rs.4,14,08,031/- as suggested by the TPO. Similarly, the Assessing Officer disallowed an amount of Rs.3,65,386/- u/s 14A and Rs.1,82,711/- on account of sale of assets.
6. The assessee approached the CIT(A) challenging the TP adjustment as well as the disallowance made by the Assessing Officer u/s 14A and loss on sale of assets. So far as the TP adjustment is concerned, the ld.CIT(A) directed the Assessing Officer to exclude M/s Accentia Technologies Ltd. and Cat Technologies Ltd., from the list of comparables on account of functional dissimilarity. So far as the other disallowances are concerned, he rejected the grounds raised by the assessee before him.
Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds:-
"1. The Ld. CIT(A) has erred in law and on facts in directing to exclude M/s Accentia Technologies Ltd. as a comparable ignoring the functional similarity of the comparable. The Medical transcription services forms the foremost segment and is an integral part of the entire gamut of services." "2. The Ld. CIT(A) has erred in law and on facts admitting the additional evidences in case of Accentia Technologies Ltd. regarding acquisition etc., without giving any opportunity to the TPO which is in violation of Rule 46A of the Income Tax Rule, 1962."
3. The Ld. CIT(A) has erred in law and on facts in directing to exclude M/s Cat Technologies Ltd. as a comparable ignoring the functional similarity of the comparable. The training and Medical Transcription Service was a major part of the income of Cat Technologies Ltd. in the A.Yrs. 2006-07, 2007-08 & 2008-09.
CO No.446/Del/2015 "The appellant craves, leave for reserving the right to amend, modify, alter, add or forego any ground (s) of appeal at any time before or during the hearing of appeal."
The assessee has taken the following grounds in the CO filed by it:-
1. That on the facts and circumstances of the case and in law, the CIT(A) erred in partially upholding the order of the Assessing Officer (“AO”) / Transfer Pricing Officer (“TPO”) which is arbitrary, bad in law and void ab-initio. That the CIT(A) erred on facts and in law in upholding the action of the AO 2. in invoking the provisions of Chapter X - Special Provisions relating to avoidance of tax of the Act, without appreciating that the income of the Appellant was exempt under sections10A/10B of the Act, and therefore, there could not have been any erosion of tax revenue from India. 3. That the CIT(A) erred on facts and in law in upholding the action of the AO in invoking the provisions of Chapter X - Special Provisions relating to avoidance of tax of the Act, without appreciating that there would have been no profit shifting from India. 4. That the CIT(A) erred on facts and in law in not appreciating that the order passed under section 92CA of the Act is without jurisdiction, and therefore, consequential transfer pricing adjustment made by the AO, is null and void ab- initio. 5. That the CIT(A) erred on facts and in law, in not appreciating that the reference made by the AO to the TPO was bad in law and void ab-initio as the AO failed to provide a copy of the approval granted in this regard by the Commissioner of Income-tax and affording any opportunity of being heard to the Assessee, in violation of the principles of natural justice.
Grounds relating to Transfer Pricing (‘TP’) adjustments:
That the CIT(A) erred on facts and in law in upholding the order of the AO / TPO rejecting the transfer pricing study of the Assessee.
7. That the CIT(A) erred on facts and in law in upholding the order of the AO/TPO which has not provided adjustment on account of difference in risk assumed by the Assesse vis-a-vis the comparable companies. 8. That the CIT(A) erred on facts and in law in upholding the order of the AO disallowing INR 3,65,386 under section 14A of the Act. 9. That the CIT(A) erred on facts and in law in upholding the order of the AO which made double disallowance of INR 1,82,711 being loss on sale of fixed
CO No.446/Del/2015 assets, ignoring the fact that the said loss was suo moto disallowed by the Assessee. That the CIT(A) erred on facts and in law in upholding levy of interest 10. under section 234B of the Act.
Each of the above ground is independent and without prejudice to the other grounds of cross objection preferred by the Assessee.
The assessee prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal at any time before or at the time of hearing of the appeal.”
9. The assessee has also raised the following additional ground in the Cross Objection:-
1. That on the facts and circumstances of the case and in law, the CIT(A)/AO/TPO erred in not granting working comparability adjustment to the operating margins of the comparable companies to account for difference in working capital of Assessee vis-a-vis the comparable companies.”
10. Referring to the decision of the Hon'ble Supreme Court in the case of NTPC Ltd. vs. CIT, 229 ITR 383 (SC) and CIT vs. Nelliappan (S), 66 ITR, 722 (SC), he submitted that the additional ground raised by the assessee in the CO should be admitted. After hearing both the sides, the additional ground raised by the assessee in the CO is admitted for adjudication.
11. So far as the appeal filed by the Revenue is concerned, the ld. DR strongly supported the order of the TPO. He submitted that ld.CIT(A), without properly appreciating the facts, has directed the Assessing Officer to exclude Accentia Technologies Ltd. and Cat Technologies Ltd. from the list of comparables. He
CO No.446/Del/2015 submitted that the above two comparables be included and the arithmetic mean be computed accordingly so as to determine the ALP of the international transaction.
The ld. counsel for the assessee, on the other hand, strongly supported the order of the CIT(A). So far as Accentia Technologies Ltd. is concerned, he drew the attention of the Bench to the copy of the annual report of the said company, copy of which is placed at pages 269 to 314 of the paper book. Referring to page 311 of the paper book (internal page 51 of the annual report), he drew the attention of the Bench to the income from operations which is from three sources, i.e., (a) medical transcription, (b) coding, and (c) software development. Referring to clause (19) of the Notes to Accounts, he submitted that the auditors have stated that the company has only one segment of activity, namely, “healthcare receivables management” and, therefore, segment reporting as defined in AS-17 does not apply. He accordingly submitted that it is not known as to how much margin is affected by trading in software. The financials of the company cannot be representative of the medical transcription business. Therefore, on account of non-availability of segmental information, the company cannot be compared with that of the assessee. Referring to clause (2) of the Notes to Accounts, he submitted that during the year under consideration, Accentia Technologies Ltd. has undertaken significant acquisitions, i.e., it acquired 51% stake in Geo-Soft Technologies (Trivandrum) Ltd. and 51% stake in Iridium Technologies India Pvt. Ltd.. Due to this the revenue of this company has gone up significantly. Referring to the following decisions, he submitted that Accentia
CO No.446/Del/2015 Technologies Ltd. have been directed to be excluded on account of unavailability of separate segment in financials and extraordinary events impacting profitability:-
(i) American Express India Private Limited vs. DCIT, (Delhi- Trib.) for A.Y. 2007-08 at para 40 of the order. (ii) Samsung Heavy Industries India Private Ltd. vs. DCIT, ITA No.576/Del/2015 (Delhi- Trib.) for A.Y. 2010-11 at paras 29 to 31 of the order. (iii) Vodafone India Services (P) Ltd. vs. DCIT (2014) 146 ITD 78 (Mumbai) for A.Y.2007-08 at para 21.1 of the order. (iv) DCIT vs. Monster.Com India Pvt. Ltd. (2017) 56 ITR(T) 1 (Hyderabad-trib.) for A.Y. 2007-08 at para 36 & 36.1 of the order. (v) Orange Business Services India Solutions Pvt. Ltd. vs. DCIT, ITA No. 869/Del/2016 (Delhi-Trib.) for A.Y. 2011-12 at paras 4.1 & 4.3 of the order. (vi) NTT Data Global Delivery Services vs. ITO, ITA No.5339/Del/2011 (Delhi-Trib.)
So far as the Cat Technologies Ltd. is concerned, the ld. counsel for the assessee drew the attention of the Bench to the copy of the audited accounts, copy of which is placed at page 220-244 of the paper book. Referring to page 235 of the paper book, the ld. counsel for the assessee drew the attention of the Bench to Schedule-9 i.e., ‘Income from operations’ and submitted that the assessee has derived income from three sources, namely, training income Rs.12.14 lakhs, software development and consulting services Rs.339.90 lakhs and medical transcription receipts Rs.53.58 lakhs. Referring to clause (7) of the notes forming part of accounts placed at page 239 of the CO No.446/Del/2015 paper book, ld. counsel of the assessee drew the attention of the Bench to the following:- “7. SEGMENT REPORTING The Company’s exclusive business is Medical Transcription, Training Software Development and Consulting Services as such this is the only reportable segment as per Accounting Standard -17 on Segment Reporting issued by the Institute of Chartered Accountants of India. As the Company consider whole of India as a- single geographical segment, the disclosures related to secondary segments are not relevant for the Company.”
He accordingly submitted that Cat Technologies Ltd., has not disclosed any segments. Further, this company is having majority of its revenue from software development and, therefore, this company is primarily a software development company. Therefore, in absence of segmental information, the same cannot be considered as a good comparable. Referring to the following decisions, he submitted that Cat Technologies Ltd. have been directed to be excluded on account of unavailability of separate segments in financials:- i) Nokia Siemens Networks India vs. ACIT, (Del-Trib); ii) Opera Solutions Management Consulting Services Pvt. Ltd. vs. ITO, ITA No.5761/Del/2014 (Delhi-Trib.); iii) Virage Logic International India Branch Office vs. JDIT, ITA No.6919/Del/2014 (Delhi-Trib.)
We have considered the rival arguments made by both the sides and perused the relevant material on record. The only dispute to be considered in the appeal filed by the Revenue is regarding the exclusion of the two comparables namely, Accentia
CO No.446/Del/2015 Technologies Ltd. and Cat Technologies Ltd. So far as Accentia Technologies Ltd., is concerned, we find this company is having its revenue from three sources, namely, medical transcription, coding and software development. However, no segmental details are given and it has been classified under a single segment namely “healthcare receivables management.” We, therefore, find merit in the argument of the ld. counsel for the assessee that it is not known as to how much margin is affected by trading in software and the financials of the company cannot be representative of the medical transcription business. Further, we find this company during the impugned assessment year has undertaken significant acquisitions. Clause 2 of the Notes to Accounts reads as under:- “2. Pursuant to the Order passed by the Hon'ble High Court of the Judicature at Bombay and Ernakulam the erstwhile Subsidiaries of the Company namely Geosoft Technologies (Trivandrum) Limited (GTTL) and Iridium Technologies (India) Private Limited (ITIPL) have merged with the company with effect from April 1, 2006.
We, therefore, find merit in the submission of the ld. counsel for the assessee that due to non-availability of segmental information and extraordinary events occurred during the year, this company cannot be considered as comparable. The various decisions relied on by the ld. counsel for the assessee also supports his case.
Under these circumstances, we do not find any infirmity in the order of the CIT(A) in directing to exclude this company from the list of comparables. Accordingly, the same is upheld.
CO No.446/Del/2015 17. So far as Cat Technologies Ltd. is concerned, here also we find from the annual report of this company that it has revenue from three sources, namely, medical transcription; software development and consultancy services; and training income. However, we find no segmental details are available. A perusal of the audited accounts shows that this company is having majority of its revenue from software development since, as against the total income from operations at Rs.4,05,61,280/-, the revenue from software development and consulting services is Rs.3,39,89,551/-, training income is only Rs.12,14,225/- and medical transcription receipts is Rs.53,57,504/-. We, therefore, find merit in the argument of the ld. counsel for the assessee that this company is primarily a software development company and, therefore, in absence of segmental information, this cannot be compared with the assessee company as a comparable. The various decisions relied on by the ld. counsel also supports his case. Under these circumstances, we do not find any infirmity in the order of the CIT(A) in excluding this company from the list of comparables. So far as the ground raised by the Revenue that ld.CIT(A) has not given any opportunity to the TPO before admitting the additional evidence in case of Accentia Technologies Ltd., regarding acquisition, etc., we find the same is without any merit. All these details are very much available in the audited accounts in the form of Notes to Accounts, therefore, there was no necessity of giving any opportunity to the Assessing Officer. Therefore, the ground No.2 raised by the Revenue is also dismissed.
In the result, the appeal filed by the Revenue is dismissed.
CO No.446/Del/2015 19. Now, coming to the CO filed by the assessee, ld. counsel for the assessee did not press ground Nos.1, 4 and 5 for which the ld. DR has no objection. Accordingly, these grounds are dismissed.
So far as ground of appeal Nos.2 and 3 of the CO are concerned, the ld. counsel for the assessee fairly submitted that these grounds have been decided against the assessee by various decisions of the coordinate Benches of the Tribunal as well as the High Court. Accordingly, ground of appeal Nos.2 and 3 are dismissed.
Ground of appeal No.6 being academic in nature is dismissed. So far as ground of appeal No. 8 is concerned, the same relates to disallowance of Rs.3,65,386/- u/s 14A of the IT Act.
22. After hearing both the sides, we find the Assessing Officer disallowed an amount of Rs.3,65,386/- since the assessee has earned dividend income of Rs.2,52,976/- and has invested an amount of Rs.87,69,780/- towards shares in various companies and has not made any disallowance for earning such exempt income. While doing so, he applied the provisions of section 14A read with Rule 8D. In appeal, the ld. CIT(A) confirmed the action of the Assessing Officer for which the assessee is in appeal before the Tribunal. It is an admitted fact that the assessment year involved in A.Y. 2007-08. Therefore, in view of various decisions, the provisions of Rule 8D are not applicable for assessment year 2007-08. Therefore, the action of the Assessing Officer in applying the provisions of Rule 8D is incorrect. However, since the assessee has earned dividend income of Rs.2,52,976/- and has substantial 12
CO No.446/Del/2015 investment in shares of various companies, therefore, it cannot be said that no expenditure has been incurred by the assessee for making the investment and earning the exempt dividend income. Considering the totality of the facts, we are of the considered opinion that disallowance of Rs.30,000/- on estimate for this year under the facts and circumstances of the case will meet the ends of justice. We, therefore, modify the order of the CIT(A) and direct the Assessing Officer to disallow an amount of Rs.30,000/- u/s 14A of the IT Act. Ground No.8 is accordingly partly allowed.
So far as ground No.9 is concerned, it is the case of the ld. counsel for the assessee that there is double disallowance of Rs.1,82,711/- being loss on sale of fixed assets since the said loss was suo moto disallowed by the assessee. We, therefore, restore this matter to the file of Assessing Officer with a direction to verify the claim of the assessee and adjudicate the issue afresh. Needless to say, the Assessing Officer shall give due opportunity of being heard to the assessee and decide the issue as per the fact and law. Ground of appeal No.9 is accordingly allowed for statistical purposes.
Ground of appeal No.10 relates to levy of interest u/s 234B which is mandatory and consequential in nature. Therefore, this ground is dismissed.
25. The additional ground raised by the assessee becomes academic in nature in view of the dismissal of the appeal filed by the Revenue. Therefore, this ground is dismissed.