SCHL (INDIA) P. LTD,MUMBAI vs. DCIT RG 8(2)(1), MUMBAI

Ground no.1, being a general ground does not require adjudication.

In ground no.2, the assessee has raised various issues relating to the addition of ` 1,36,42,150, made on account of transfer pricing adjustment relating to international transaction of payment of cost recharge. However, the dispute between the parties is primarily with regard to selection of two comparables viz. TCS e–Serve Ltd. and e– Clerx Ltd., Therefore, at the outset, we proceed to deal with the aforesaid issue.

Brief facts relating to this issue are, the assessee is an Indian Company. As stated by the Transfer Pricing Officer, assessee is engaged in the business of providing SHL Products and Solutions to the clients in India in various industries such as banking, insurance, retail, manufacturing, etc., and also performs research and development as well as business support service. It also provides product consulting, training, one–to–one assessments and group assessments through qualified psychologists which includes science based assessment, benchmark data, technologies and consultancy services to help organization assess, select and develop right people for right roles. According to the Transfer Pricing Officer, the support services provided by the assessee to its overseas Associated AE are in 3 SHL India Pvt. Ltd.

To benchmark the aforesaid international transaction in the transfer pricing study report, the assessee selected Transactional Net Margin Method (TNMM) as the most appropriate method with net profit

Objecting to the selection of TCS e–serve Ltd., the learned Authorised Representative submitted, the company cannot be treated as comparable due to its huge turnover which is more than seventy one times of assessee’s turnover. Further, he submitted, since the 5 SHL India Pvt. Ltd.

As regards e–clerx Ltd., the learned Authorised Representative submitted, the turnover of this company is 21 times more than the turnover of the assessee. Thus, he submitted, the turnover of this 6 SHL India Pvt. Ltd.

The learned Departmental Representative strongly relying upon the observations of the Transfer Pricing Officer and learned DRP submitted, neither the assessee nor the Transfer Pricing Officer have applied turnover filter. Therefore, a company cannot be excluded due to high turnover. Further, he submitted, the turnover of a company would have no impact on the profitability. Further, he submitted, exceptional profit earned by a company cannot be a criteria for rejecting a comparable if the company is otherwise functionally similar. In support of such contention, he relied upon the decision of the Hon’ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. v/s CIT, (ITA 102/2015 dated August 10, 2015). Thus, he submitted, there is no reason to exclude these two companies as comparables.

In rejoinder, the learned Authorised Representative submitted, none of the companies in the final list of comparable selected by the Transfer Pricing Officer except TCS e–serve Ltd. and e–Clerx Ltd. have turnover exceeding ten times of the turnover of the assessee. Thus, he

We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. As far as TCS e–serve Ltd. is concerned, undisputedly, it belongs to the Tata Group and carries the brand value of the group. From the annual report of the company, it is evident that it has also contributed towards brand creation. That being the case, though, there may be some functional similarity between the assessee and this company, however, it cannot be treated as comparable to the assessee because of its high brand value which certainly must have impacted the profitability of the company. This view was expressed by the Tribunal in case of B.C. Management Services Pvt. Ltd. (supra), which was confirmed by the Hon’ble Delhi High Court in B.C. Management Services Pvt. Ltd. (supra). That apart, the turnover of this company for the impugned assessment year is ` 1578.44 crore as compared to assessee’s turnover of ` 22,07,08,981. Thus, as could be seen, the turnover of the company is substantially higher, working out to almost 71 times of the turnover of the assessee. The Hon'ble Jurisdictional High Court in Pentair Water India Pvt. Ltd. (supra) while approving the view expressed by the Tribunal that the turnover has a crucial bearing in comparability analysis has observed that profit earned by a large

As regards e–Clerx Ltd., undisputedly, the turnover of this company is ` 472 crore compared to the assessee’s turnover of `

In the course of hearing, the learned Authorised Representative had submitted before us that in the event of exclusion of the aforesaid two companies assessee’s margin would fall within ±5% of the rest of the comparables selected by the Transfer Pricing Officer, hence, other issues relating to the transfer pricing adjustment would become academic. In view of the aforesaid submissions of the learned Authorised Representative, we refrain from deciding all other issues relating to the transfer pricing adjustment which are left open for adjudication if they arise in any other assessment year in future. Grounds are partly allowed.

In ground no.3, the assessee has challenged the addition made on account of change in revenue recognition policy.

Brief facts are, the assessee follows mercantile system of accounting. Under the said accounting system, the assessee used to recognize revenue on the basis of invoices raised towards services rendered/goods sold. However, during the previous year relevant to the assessment year 2010–11, the assessee changed its revenue recognition policy by recognising revenue on the basis of actual usage of web units by its customers and not on the basis of invoices raised. After examining the material on record, the Transfer Pricing Officer observed, as a result of change in revenue recognition policy, the revenue shown by the assessee in the assessment year 2010–11 was lesser by ` 77,63,974. He observed, while completing the assessment for the assessment year 2010–11, the Assessing Officer added back the said amount to the income of the assessee. Similar addition was also made in assessment year 2011–12. He observed, due to change in revenue recognition policy, the profit has been reduced by ` 95,11,929. Accordingly, he added back the same amount to the income of the assessee. While considering the objections of the assessee on the said issue, learned DRP upheld the decision of the Assessing Officer.

The learned Authorised Representative submitted, the issue relating to the identical addition made by the Assessing Officer in the assessment year 2010–11, is now in appeal before learned Commissioner (Appeals). Thus, he submitted, the issue may be restored back to the Assessing Officer for re–adjudication on the basis of the decision to be taken by learned Commissioner (Appeals) in assessment year 2010–11.

The learned Departmental Representative also agreed that the issue should be restored back to the Assessing Officer for re– adjudication.

We have considered rival submissions and perused the material on record. Undisputedly, the Assessing Officer has made the disputed addition relying upon the assessment order passed on identical issue in the assessment year 2010–11 and 2011–12. It is submitted by the learned Authorised Representative that the initial year wherein the issue arose for the first time i.e., 2010–11, is still pending for adjudication before learned Commissioner (Appeals). Considering the above, we are inclined to restore the issue to the Assessing Officer for fresh adjudication keeping in view the decision to be taken by learned Commissioner (Appeals) while deciding the issue in the assessment year 2010–11. Of course, the assessee must be given a reasonable

In ground no.4, the assessee has challenged disallowance of professional fee amounting to ` 2,58,81,235.

Brief facts are, in the course of assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction on account of professional fee paid of ` 2,58,81,235, called upon the assessee to furnish party wise details of payments made with supporting evidences such as bills, agreements, basis of allocation, TDS deducted, etc. As alleged by the Assessing Officer, though the assessee made submissions regarding the payment made, however, necessary details were not furnished. The Assessing Officer observed, similar claim made by the assessee in the assessment year 2008–09 was disallowed while completing the assessment under section 143(3) of the Act. The disallowance was also confirmed by the learned Commissioner (Appeals). He also observed that similar claim made by the assessee was disallowed in assessment year 2010–11 and 2011– 12. Accordingly, he proceeded to disallow the expenditure claimed by the assessee.

Learned DRP also sustained the disallowance made by the Assessing Officer.

The learned Authorised Representative submitted, while deciding identical issue in assessment year 2008–09, learned Commissioner (Appeals) had allowed assessee’s claim. However, the Revenue challenged the decision of the learned Commissioner (Appeals) before the Tribunal. He submitted, while disposing off the appeal filed by the Revenue the Tribunal restored the issue to the Assessing Officer for adjudication after considering the evidences furnished by the assessee. He submitted, while complying to the directions of the Tribunal in assessment order dated 28th December 2018, the Assessing Officer has allowed assessee’s claim. The learned Authorised Representative submitted, the payments made are not to the AEs but to the professionals working in India. Therefore, assessee’s claim has to be allowed. Without prejudice, he submitted, in view of the decision of the Tribunal in assessment year 2008–09, the issue may be restored back to the Assessing Officer for verifying assessee’s claim.

The learned Departmental Representative submitted, the issue may be restored to the Assessing Officer for fresh adjudication.

We have considered rival submissions and perused the material on record. As could be seen from the facts on record, assessee’s claim was disallowed by the Assessing Officer primarily due to the non– furnishing of evidences called for. Learned DRP, though, has observed

In ground no.5, the assessee has challenged the addition of ` 1,22,45,850, due to un reconciled difference in annual information report (AIR).

Brief facts are, as per the AIR information available on record, the Assessing Officer found difference in income shown by the assessee. Therefore, he called upon the assessee to reconcile the difference. In response, it was submitted by the assessee that the difference in income between 26AS and the books of account is on account of service tax. However, the Assessing Officer was not 15 SHL India Pvt. Ltd.

After considering the submissions of the assessee, learned DRP directed the Assessing Officer to verify the reconciliation statement prepared by the assessee along with the AIR data and make addition only in respect of entries which remains unexplained. While implementing the direction of learned DRP, the Assessing Officer, however, made the same addition by stating that the difference remains un-reconciled.

Reiterating the stand taken before the Departmental Authorities, the learned Authorised Representative submitted, the difference in receipt as per the books of account and the AIR information is on account of service tax. Drawing our attention to the reconciliation statement placed in the paper book, the learned Authorised Representative submitted, the receipt shown by the assessee is more than the receipt shown in AIR. Therefore, the Assessing Officer was not justified in making the addition without properly verifying the claim of the assessee.

The learned Departmental Representative submitted, since the assessee failed to reconcile the difference properly, the addition was made.

We have considered rival submissions and perused the material on record. It is the contention of the assessee before the Departmental Authorities as well as before us that the difference in receipt is on account of service tax. It is observed, before learned DRP the assessee has furnished a reconciliation statement. From the aforesaid statement it appears that the receipt shown by the assessee is more than the AIR figure. From the aforesaid facts, it appears that the Assessing Officer without properly examining the reconciliation statement and other evidences furnished by the assessee has proceeded to make the addition, which in our view is improper. Accordingly, we restore the issue to the Assessing Officer with a direction to properly verify the reconciliation statement and all other evidences furnished by the assessee to substantiate its claim. The Assessing Officer also must allow reasonable opportunity to the assessee to explain the difference. This ground is allowed for statistical purposes.

In ground no.6, the assessee has challenged disallowance of excess TDS written–off amounting to ` 12,94,058.

Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the amount of ` 15,85,201, was claimed by the assessee towards bad debt written–off. After verifying the details furnished, he found that the deduction claimed included the amount of ` 12,94,058, being excess TDS written–off. When called upon to explain, it was submitted by the assessee that the difference between the TDS accounted in the books of account and appearing in Form no.26AS, has been written–off. It was submitted, such difference pertains to various years. It was submitted, as the corresponding invoices relating to the TDS written–off have been considered as part of revenue in respective years, the TDS written–off is in the nature of bad debt, hence, should be allowed. The Assessing Officer, however, did not accept the claim as according to him it is not in terms of section 36(1)(vii) r/w section 36(2) of the Act. Accordingly, he disallowed assessee’s claim.

Learned DRP also sustained the disallowance made by the Assessing Officer.

The learned Authorised Representative submitted, the amount receivable by the assessee is as per invoices raised. Whereas, the payments made by the customers are after deduction of tax at source. Thus, he submitted, the TDS amount not reflected in Form no.26AS

The learned Departmental Representative submitted, the TDS not being in the nature of bad debt cannot be written–off.

We have considered rival submissions and perused the material on record. It is the contention of the assessee that the TDS written–off represent the amount of TDS deducted by the customer but not reflected either in Form no.26AS or claimed by the assessee. Undisputedly, the assessee recognizes revenue on the basis of invoices raised. Whereas, the payment made by the customers are after deduction of tax at source. Therefore, the TDS amount forms part of the revenue shown by the assessee. To that extent, we accept assessee’s contention that the TDS amount not claimed by the assessee is an unrealized debt. In view of the aforesaid, we direct the Assessing Officer to verify assessee’s claim factually and thereafter decide the issue in accordance with law. This ground is allowed for statistical purpose.

In ground no.7, the assessee has challenged disallowance of ` 9,67,343 under section 37(1) of the Act.

Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has claimed TDS of ` 9,67,343, on provision made. The Assessing Officer observed, similar claim by the assessee in assessment year 2008–09 and 2009–10 were disallowed under section 37(1) of the Act. He further observed, assessee’s claim that the expenditure is allowable since the assessee has deducted tax at source in the impugned assessment year was rejected by the Assessing Officer on the ground that the disallowance has been made under section 37(1) of the Act. The assessee challenged the disallowance before learned DRP.

After considering the submissions of the assessee, learned DRP observed that it is the claim of the assessee that the disallowance was made in the assessment year 2010–11 under section 40(a)(ia) of the Act due to non–deduction of tax at source. Thus, learned DRP observed, since assessee’s claim requires verification of record of relevant assessment years, he directed the Assessing Officer to verify assessee’s claim and if it is found that disallowance under section 40(a)(ia) of the Act was made in the assessment year 2010–11, consequential relief should be granted in the impugned assessment year. However, in the final assessment order the Assessing Officer again made the disallowance.

The learned Authorised Representative submitted, the expenditure was incurred in the assessment year 2010–11. However, since the assessee did not deduct tax at source, it was disallowed in the said assessment year. He submitted, the dispute relating to the disallowance made in the assessment year 2010–11 is still pending in appeal before learned Commissioner (Appeals). Therefore, he submitted, if assessee’s claim is disallowed in assessment year 2010– 11, then it should be allowed in the impugned assessment year since the assessee has deducted and paid tax on the said amount in the impugned assessment year. Thus, he submitted, the issue may be restored back to the Assessing Officer for re–adjudication on the basis of decision to be taken in the assessment year 2010–11.

The learned Departmental Representative also agreed for restoration of the issue to the Assessing Officer.

Having considered rival submissions and perused the material on record, we are of the view that assessee’s claim of deduction in the impugned assessment year depends on the decision to be taken by the learned Commissioner (Appeals) in respect of similar disallowance made in the assessment year 2010–11. If assessee’s claim is accepted in assessment year 2010–11, the disallowance made in the impugned assessment year has to be sustained. Otherwise, if assessee’s claim is 21 SHL India Pvt. Ltd.