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Income Tax Appellate Tribunal, DELHI ‘I-2’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI SUDHANSHU SRIVASTAVA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER, With this appeal, the assessee has challenged the correctness of the order dated 28.09.2012 framed u/s 143(3) r.w.s 144C of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'].
2 2. Substantive grounds of the assessee read as under:
“1. That on the facts and circumstances of the case, and in law; the Assessment Order passed in pursuance to the directions issued by the Learned Dispute Resolution Panel (‘Ld. DRP’) is a vitiated order as the Ld. DRP erred in confirming the addition made by the Ld. Assessing Officer (‘AO’) to the appellant’s income.
The Ld. AO/TPO erred both on facts and in law in confirming the addition of Rs.313,76,541 by holding that the appellant’s international related party transactions pertaining to the provision information technology enabled and financial support services do not satisfy the arm’s length principle as envisaged under the Income Tax Act, 1961 (‘The Act’) and in doing so the Ld. AO/TPO has grossly erred in: 2.1 disregarding the arm’s length price (‘ALP’) and the methodical benchmarking process carried out by the appellant in the Transfer Pricing (‘TP’) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’); and
3 in particular modifying/ rejecting the filters applied by the appellant; 2.2 rejecting comparability analysis in the TP documentation and in conducting a fresh comparability analysis based on application of additional filters in an arbitrary manner while determining the arm’s length price; 2.3 including companies in the comparability analysis which do not satisfy the test of comparability, rejecting companies similar to the appellant while performing the comparability analysis and thereby resorting to cherry picking of comparables; 2.4 selecting high-profit making companies in the final comparables’ set (including a company directed by Hon’ble DRP Panel to be rejected) for benchmarking a low risk captive unit such as the appellant, with the single-minded intention of making an addition to the returned income of the appellant; 2.5 not allowing the appropriate economic adjustments to the appellant by ignoring the differences in the functional profile of the appellant and the comparables, holding that the appellant bears the single customer risk;
4 2.6 committing a number of factual errors in the computation of the operating profit margins of the comparables/appellant; 2.7 relying on information of the companies collected by exercising power granted to him under section 133(6) of the Act that was not available to the appellant in the public domain and not sharing with the appellant in case of number of comparables the information/ reply received by the Ld. TPO/ AO u/s 133(6); 2.8 using data as at the time of assessment proceedings, instead of using the latest data that was available as on the date of preparing the TP documentation for comparable companies while determining arm’s length price; thereby ignoring the principle of ‘impossibility of performance”; 2.9 disregarding judicial pronouncements in India while udertaking the TP adjustment.
3 That the Ld. AO grossly erred on facts and in law in disallowing an amount of Rs. 63,207 on account of being 0.5% of the average value of investment under section 14A of the Income tax Act, 1961 (“Act”) read with Rule 8D of Income tax Rules, 1962 (“Rules”).
5 4. That the Ld. AO grossly erred on facts and in law in making an addition under section 14A of the Act without recording satisfaction in accordance with sub section (2) of section 14A of the Act, that expenditure has been incurred by the appellant for earning exempt income.
That the Ld. AO grossly erred on facts in making an addition under section 14A of the Act even where own funds have been used by the appellant for making investments.
That the Ld. AO grossly erred on facts and in law in disallowing an amount of Rs. 1,168,238 towards lease rental payments, under section 40A(2)(b) of the Act as being excessive and unreasonable, without bringing any evidence on record to prove its unreasonableness or excessiveness.
That the Ld. AO grossly erred on facts and in law in ignoring the established principle of law that no disallowance can be made under section 4oA(2)(b) of the Act where there is no intention to evade taxes as per
Circular No. 6-P issued by the Central Board of Direct taxes, dated July 06,1968.
That the Ld. DRP grossly erred on facts and in law in directing to restrict the allowance of lease rental payments to 15% of the cost of the vehicles as justified and reasonable, without giving any basis for arriving at the aforesaid restriction at 15%.
That the Ld. AO grossly erred on facts and in law in directing to restrict the allowance to Rs. 1,95,725/- under section 4o(a)(ia) in the subsequent years, out of total disallowance of Rs. 13,63,963 made in the financial year 2007-08, under section 4o(a)(ia) of the Act.”
The representatives of both the sides were heard at length. The case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused.
Briefly stated, the facts of the case are that the appellant company was incorporated on 16.11.1999. The entire share capital is held by I Process Mauritius Limited, Mauritius alongwith its nominees, being GE Capital International (Mauritius) Limited, Mauritius. The appellant company is a Business Process Outsourcing company, set up as a captive service provider to provide offshore outsourcing services primarily to various GE entities/ businesses worldwide. The primary activity of the appellant company comprises of rendering IT Enabled Services ("ITES") and financial support services to various overseas GE Group companies. In return for rendering these services, the appellant was remunerated on an arm's length cost plus basis i.e. it was compensated for all its operating costs, plus a pre-agreed mark-up thereon.
In operating as an ITES and financial support service provider for other GE Companies, and in being compensated on a cost plus revenue model basis, the assessee is completely shielded from risks. Since the appellant company’s only customers are other GE Companies, and other GE Companies takes on all the marketing and business development functions overseas, with no involvement from the assessee, it is also shielded from other critical risks such as credit
risk/debt collection risk and market risk.
The financial results of the appellant company for F.Y. 2007-08 are as under:
Description Amount Operating Revenues Rs. 252,082,457 Operating Expenses Rs. 219,573,164 Operating Profit Rs. 3,25,09,293 NCP(%) 14.81% Method used TNMM PLI TNMM (%) No of Comparables 6
As mentioned elsewhere, the assessee is engaged in providing ITES and financial support services to its AEs as under:
S. No. Name of the Company Industry Vertical 1 Applabs Technologies Pvt. Ltd. Computer software Caliber Point Business Solutions 2 BPO operations Ltd. 3 Datamatics Technologies Ltd. Provision of ITES Database management solution, 4 Mercury Outsourcing Mngt. Ltd. BPO operation Consumer finance, Hospitality & 5 R Systems International Ltd.* Telecom
Manufacturing & retail; High Tech; Telecom Media & Entertainment; Banking & Financial services; Transworks Information Insurance; Healthcare & public 6 Services Ltd. sector
International transactions as reported in the 92CE report read as under: a. Provision for ITES Rs. 24,65,72,039/- b. Reimbursement of expenses Rs. 2,50,95,970/-
In the TP Study Report, the assessee has selected TNMM as the most appropriate method, which, according to the assessee, is the most appropriate method in the facts and circumstances of the case.
During the course of scrutiny assessment proceedings, the TPO found that the assessee has selected TNMM, its operating margin and has compared it with operating margins of comparable cases. However, the TPO found that the assessee has used multiple year data to determine the margins of the comparables in the TP study. The TPO, in his show cause notice, proposed to use only current year’s data u/r 10B(4) of the Rules.
In its submissions, the assessee supported the use of multiple year data stating that using single year data of comparable companies may not adequately capture economic conditions and business cycles reflected in the industry. It was contended that Rule 10B(4) warrants use of earlier year data. Reliance was placed on the guidelines of OECD. Transfer pricing policies are determined based on historical data as the same has an influence on the transfer prices of the transactions being compared.
The submissions were not accepted by the TPO who was of the firm belief that Rule 10B(4) very clearly states that data of the comparable transactions should be the data pertaining to F.Y. in which the tax payer has entered into international transactions.
The TPO has further observed that since the assessee searched the databases on 17.07.2008, obviously, the current year’s data would not be available on that date.
After giving effect to the order of the DRP u/s 144C(5) of the Act and after recalculating the margins of M/s I-service India Pvt. Ltd and
after excluding M/s Mold-tek Technologies Limited, the margins of the comparable companies were finally determined as under:
Adjusted Operating S. Profits on operating Name of the Company No Cost(%) 1 Accentia 44.50 2 Aditya Birla Minacs -0.55 3 Asit C Mehta 9.42 4 Caliber Point Business solutions 10.97 Coral Hub (Vishal Inf) (Segment) 51.84 5 6 Cosmic Global 24.30 7 Ctossdomain solution Pvt. Ltd. 26.96 8 Datamatics Financial (BPO 34.87 9 e4e (earlier known Nitanny) 16.87 Dvision) 10 Eclerx 66.50 Genesys International 48.15 11 12 HCL Coinnet Systems & Services 32.97 13 ICRA (Seg) 11.22 Ltd. (Seg) 14 Infosys BPO 20.03 15 i-service India Private Limited 9.73 16 Spanco Limited (Seg) 8.94 17 Acropetal Technologies Limited 35.30 18 Wipro BPO 30.23 (Seg) 19 R System International Limited 4.30 AVERAGE 25.61 (Seg) Arithmetic mean PLI 25.60 Less: Working Capital Adjustment 3.22 Arm’s Length Price 22.38 Based on the above, re-computation of the ALP is as given below
Operating Cost 225,308,772 Arms Length Margin 22.38% of the OC Arms Length Price (ALP) 275,732,875 Price shown in the international 252,016,832 Transactions Shortfall being adjustment u/s 23.716,043 92CA Hence, amount of adjustment is revised to Rs 23,716,043/- from Rs 3,13,76,541/- as made in the original order.”
Before us, the ld. AR presented his case for exclusion of the following parties :
i) Coral Hub [Vishal Info] ii) E Clerx iii) Genesys International iv) Infosys BPO v) Cosmic Global vi) Acropetal Technologies Ltd vii) Accentia
Per contra, the ld. DR strongly supported the orders of the authorities below.
We have given thoughtful consideration to the orders of the authorities below. There is no dispute as regards the application of TNMM as the most appropriate method, use of current year data alone, since the working capital adjustment has already been given by the
TPO, we have to only address the issue relating to the exclusion of the aforementioned comparables. We find that Cosmic Global Ltd., Eclerx Services Ltd., Genesys International Corpn Ltd. and Coral Hub [Vishal Information Technologies Ltd.] were considered by the coordinate bench in the case of United Health Group Information Services Pvt Ltd in ITA No. 6312/DEL/2012 for A.Y 2008-09 [which is the year under consideration] and the coordinate bench did not find these companies as good comparables for the business profile of United Health Group Information Services Pvt Ltd.
The relevant observations and findings of the coordinate bench read as under:
“Cosmic Global Ltd.
9.1. This company was initially chosen by the assessee as its comparable and resultantly, the TPO included the same in the final list of comparables without any discussion. The ld. AR contended that this company was inadvertently chosen as comparable and hence the same should be eliminated on account of functional differences.
9.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual Report of this company that the financial results in the Balance sheet and Profit and loss account are available only on entity level. Income from operations has been shown as Rs. 5.86 crore, the break-up of which is available in Schedule 9. It is discernible from the Schedule that the Medical transcription and consultancy services are only to the tune of Rs. 7.04 lac, whereas the major chunk is the amount of Translation charges standing at Rs. 5.59 crore with the last component of revenue from BPO at a figure of Rs. 19.63 lac. When we peruse the Expenditure side of the Profit and Loss of this company, it is palpable that it paid Translation charges amounting to Rs. 2.86 crore. Thus, it is manifest that the revenue from Medical transcription services, which could bear somewhat similarity with the assessee, is hardly 1% of the total revenues of this company. The major part is the income from Translation charges at Rs. 5.59 crore out of total revenues of Rs. 5.86 crore, which is totally dissimilar to that of the assessee. The assessee is not into any Translation business. As the assessee is engaged in rendering insurance claim processing services to it’s A.E under this segment, we find no logical comparison of Cosmic Global with that of the assessee.
9.3. We are not agreeable with the ld. DR that this company cannot be excluded because it was initially included by the
assessee in its list of comparables. The obvious reason is the differentiation in the functional profiles of two companies. Merely because the assessee inadvertently included this company in the list of comparable, can be no reason to bar the assessee from claiming that it was wrongly included. What is essential in this regard is to see whether the company is, in fact, comparable or not; and not whether it was included by the assessee or the TPO in the list of comparables. We, therefore, hold that Cosmic Global Ltd. is incomparable to the assessee and direct to exclude it from the list of comparables. The assessee succeeds.
Eclerx Services Ltd.
10.1. This company was included by the TPO in his list of comparables. The assessee objected to its inclusion by pointing out some functional differences. Not convinced, the TPO went ahead with its inclusion, which got the seal of approval from the DRP.
10.2. Having heard the rival submissions and perused the relevant material on record, it is observed that this company is engaged in providing data analytics and customized process solutions to a host of global clients. It provides services to the Banking, Manufacturing, Retail, Travel and Hospitability verticals. The solutions offered by it include data analytics,
operation management, audit and reconciliation, 8 metrics management and reporting services. This company also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. A look at the functional profile of this company from its Annual report, it can be seen that it is nowhere close to the assessee’s instant segment of ‘manual claim processing services’.
10.3. It is further relevant to note that this company acquired UK based Igenica and Travel Solutions Ltd. on 27.7.2007 and the financial results of that company are also included in its. Recently, the Delhi Bench of the Tribunal in Toluna India Pvt. Ltd. Vs ACIT (ITA No. 5645/Del/2013) vide its order dated 26.8.2014 has held that the mergers/de-mergers in a company make such year as unfit for comparison. In reaching this conclusion, the Delhi Bench followed an order passed by the Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs DCIT (2013) 154 TTJ (Mum.) 176 in which it has been held that a company cannot be considered as comparable because of exceptional financial results due to merger/de-merger etc. In view of the foregoing discussion, we are of the considered opinion that this company cannot be included in the list of comparables. The assessee succeeds.
Genesys International Corpn. Ltd.
11.1. The TPO included this company in the list of comparables by observing from its Annual report that it operated in a single business segment. The assessee objected to its inclusion, but without success. 11.2. After considering the rival submissions and perusing the relevant material in record, we find that this company is engaged in rendering geospatial services catering to the needs of consumer mapping, navigation and internet portals. It is providing mapping technologies managing the earth’s resources and surfaces at a time. Talent eco system with this company includes urban planners, cartographers, remote sensing scientists etc. and even rocket scientists, giving its skills in all kinds of land base work. When we consider the nature of work done by the assessee under its ITES segment, which is simply that of processing insurance claims manually, we fail to see as to how this company can be considered as comparable. We, therefore, order for the exclusion of this company from the list of comparables. The assessee succeeds.”
Vishal Informatics
12.1. The TPO included this company in the list of comparables by noticing that it was engaged in providing BPO services. The
assessee failed to convince him and the DRP that it was incomparable.
12.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it is mainly engaged in e-publishing business. It has more than 10,000 classic books to its credit which are also converted into large font titles for visually challenged. Apart from e-publishing, this company is also engaged in Documents scanning & Indexing. It can be seen from the financial results of this company that both the segments viz., epublishing and Documents scanning etc. have been combined and there are no separate financial results in respect of Documents scanning work, which may be comparable with the assessee to some extent. As the assessee is not engaged in any e-publishing business and the financials given by this company are on consolidated basis, we direct to exclude this company from the list of comparables. The assessee succeeds.”
Respectfully following the findings of the co-ordinate bench [supra], we direct the Assessing Officer TPO for the exclusion of the aforementioned comparables from the final list.
19 20. In so far as the exclusion of Accentia Technologies Ltd and Infosys BPO is concerned, these comparable were excluded by the coordinate bench in assessee’s own case in ITA No. 6906/DEL/2014 for A.Y 2010-11. The relevant findings of the coordinate bench read as under:
“8. After considering the rival submissions and perusing relevant material on record, we find that the issue relating to the inclusion or exclusion of the concerned 5 entities in question has already been considered and decided in the various decisions of this Tribunal. In one of such decisions rendered for the same assessment year i.e. A.Y. 2010-11 in the case of M/s Rampgreen Solutions Pvt. Ltd. (ITA No. 1066/Del/2015 dated 4.11.2015), an assessee engaged primarily in providing I.T. enabled services to its parent company, like the assessee in the present case, M/s Accentia Technologies was excluded by the Tribunal from the final list of comparables for the following reasons given in paragraph no. 16 to 20 of its order:
“As regards Accentia Technologies Ltd., ld. counsel referred to pages 350 & 351 of the PB-II, wherein the
20 annual report of this company is contained. He pointed out that in the year under consideration Asscent Infoserve Ltd. amalgamated with this company w.e.f. 1-4- 2008. He pointed out that Accentia Technologies Ltd. was engaged in the business of medical transcription and coding and had softwares which were being used by the Accential Technologies Ltd. in serving the end to end results. Thus, functionally amalgamating company and amalgamated companies were different as performing different functions.
The effect of amalgamation has been pointed out in the annual accounts and it is merely stated therein that in view of the amalgamation being effective the figures for the year ended 31-3-2010 were inclusive of the figures relating to the amalgamating company and, thus, were not comparable with those of the previous year.
Ld. counsel further referred to page 355 of the PB, wherein fixed asset schedule of the said company is contained in which, in the block goodwill/ brand/ IPR an addition ITA No. 6906/Del/2014 7 of Rs. 19,651,057/- has been shown. Thus, he pointed out that the asset base had substantially increased in the year under
21 consideration and, therefore, this could not be taken as comparable because of the extraordinary event. Ld. counsel further referred to the decision of the ITAT dated 6-7-2015 in the case of Techbook International Pvt. Ltd. for AY 2010-11, contained at pages 649 to 699 of the PB, wherein this comparable has been excluded on account of this event, observing as under:
“10. 1.2 . We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company, a copy of which has been placed .on page 435 onwards of the paper book. Notes to Accounts of this company, which have been placed on page 443 of the paper book, indicate about the amalgamation or Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DClT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal 'in several cases including Ciena India Pvt.
22 Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables.”
Having gone through the annual report and keeping in view the extraordinary event in the year under consideration, we are in agreement with ld. counsel that this comparable cannot be taken into consideration while determining the average margin earned by the comparables. Ld. counsel has submitted that in the case of Techbook International Pvt. Ltd. (supra), this company has been excluded and, accordingly, in the present case also this should be excluded, because the functional profile of Techbook International Pvt. Ltd. (supra) and that of assessee is similar. We find that Tribunal in the case of Techbook International Pvt. Ltd. (supra), in regard to the business profile of Techbook International Pvt. Ltd. (supra), has observed as under:
23 Succinctly, the assessee was incorporated as a wholly owned subsidiary of Aptarausa. It is engaged in the development of customized electronic data. It converts data from hard copy or files into XML/SGML/HTML, creating electronic style files and modifying the user interface for CD-ROM delivery. In the process, raw data received from the customers in hard copy / electronically, is converted into electronic form. Thereafter, the data is arranged and formatted. Thus, it can be said that the assessee is primarily engaged in providing ITES to its associated enterprise (AE).”
The assessee’s business profile has been considered in para 2 this order and a comparison of the business profile of Techbook International Pvt. Ltd. (supra) with assessee clearly shows that both are providing ITES services to its AEs. Therefore, the finding in Techbook International Pvt. Ltd. (supra), regarding various comparables is applicable to the present set of facts. Therefore, respectfully following the order of the ITAT in the case of Techbooks International Pvt. Ltd. (supra), we direct this comparable to be excluded from the final list of comparables.
24 9. By its order passed in the case of M/s Rampgreen Solutions Pvt. Ltd. (supra), the Tribunal also excluded M/s I-gate Global Solutions Limited and M/s Infosys BPO Limited from the list of comparables.
Respectfully following the Tribunal’s decision in the case of Techbook International Pvt. Ltd. (supra), this company is excluded from the list of comparables. 34. Infosys BPO: In the case of Techbook International Pvt. Ltd. (supra), the Tribunal has excluded this company from the list of comparables by observing as under:
10.5.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, which is available on page 449 onwards of the paper book, that there was acquisition by this company of McCamish Systems LLC. Such information is available on page 456 of the paper book. Acquisition of McCamish Systems LLC during the year, being an extraordinary financial event, renders it incomparable. Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables.”
In so far as Acropetal Technologies is concerned, the assessee has strongly objected for inclusion of this comparable on the ground that the TPO had proposed to compare the engineering design services of
Acropetal which cannot be compared with ITES/BPO services provided by the assessee. The ld. counsel for the assessee brought to our notice that the TPO has used the information collected u/s 133(6) of the Act without affording any opportunity to the assessee to rebut the same. The ld. counsel for the assessee drew our attention to the judgment of the Hon'ble High Court of Delhi in the case of Cashedge India Pvt. Ltd WP(C) 3628 of 2016 and CM No. 15535 of 2016 and stated that the assessee should be given an opportunity to explain the data collected by the TPO u/s 133(6) of the Act.
We have carefully considered the submissions made by the ld. counsel for the assessee in the light of the judgment of the Hon'ble jurisdictional High Court of Delhi in the said judgment that :
“when reliance is placed on the data provided by different parties, the petitioner would have no opportunity of rebutting the data unless the persons who submitted the data were subject to cross examination. This is all the more so because the data that was submitted was not part of the audited accounts. ”
With this observation, the Hon'ble High Court set aside the impugned order and remitted the matter to the TPO for affording
opportunity to the petitioner. Finding parity on the facts with the facts of the case in hand, respectfully following the Hon'ble High Court decision, we set aside this issue and remit the matter to the TPO for affording an opportunity to the assessee to cross examine the data collected and used by the TPO.
Respectfully following the findings of the co-ordinate bench, we direct for exclusion of these two comparables from the final list of comparables. Ground Nos. 1 and 2 with all its sub-grounds are allowed.
Ground Nos. 3 to 5 relates to the disallowance made u/s 14A of the Act r.w.r 8D of the Rules.
The Assessing Officer found that the assessee has earned dividend income of Rs. 1.96 crores on investment of Rs. 1.26 crores. The Assessing Officer further found that the assessee has not made any suo moto disallowance u/s 14A of the Act. The assessee was asked to explain as to why disallowance should not be made u/s 14A of the Act r.w.r 8D of the Rules.
In its reply, the assessee pointed out that it does not have any borrowed funds and the investments were made out of its own funds. It was further explained that since there was no administrative cost in investment, Rule 8D is not applicable.
The Assessing Officer was not convinced with the reply of the assessee and was of the opinion that the disallowance of expenditure u/s 14A of the Act r.w.r 8D of the Rules is mandatory and, accordingly, computed the disallowance at Rs. 63,207/-.
Before us, the ld. counsel for the assessee vehemently stated that the action of the Assessing Officer is not in accordance with the settled principle of law in as much as no satisfaction was recorded before making disallowance u/s 14A of the Act.
Strong reliance was placed on the judgment of the Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd in Civil Appeal No. 7020 of 2011.
Per contra, the ld. DR strongly stated that disallowance u/s 14A is mandatory. It is the say of the ld. DR that the decision of the
Hon'ble Supreme Court relied upon by the ld. counsel for the assessee will apply only when there is some suo moto disallowance made by the assessee and the Assessing Officer has not recorded any satisfaction on that count.
We have carefully considered the orders of the authorities below. It is true that the provisions of section 14A states that “Where the Assessing Officer is not satisfied with the claim of the assessee”. What the law postulates is the requirement of satisfaction in the Assessing Officer that having regard to the account of the assessee as placed before him, it is not possible to generate a requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of section 14A(2) and (3) r.w.r 8D of the Rules would become applicable. In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer to hold that the claims of the assessee that no expenditure was incurred to earn dividend income cannot be accepted. Neither any basis has been disclosed establishing the reasonable nexus between the expenditure disallowed and the dividend income received. For this proposition, we draw support from the judgment of the Hon'ble Supreme Court in the case of Godrej &
Boyce manufacturing Co (supra). Considering the facts in totality, we do not find any merit in the addition of Rs. 63,207/-. We direct the Assessing Officer/TPO to delete the same. Ground Nos. 3 to 5 are, accordingly, allowed.
Ground Nos. 6 to 8 relate to the disallowance towards lease rental payment u/s 40A(2)(b) of the Act.
During the course of assessment proceedings, the A.O observed that the assessee has taken certain assets on finance lease and in relation to such assets, the assessee has paid total EMI of 27.42 lakhs. This amount comprised of 19.99 lakhs of principal portion of the EMI and Rs. 7.42 lakhs of interest on such finance lease. The Assessing Officer found that these transactions are mainly entered with persons specified in section 40A(2)(b) of the Act. The assessee was asked to justify the payment.
In its reply, the assessee stated that since it is not the owner of these assets, depreciation on such assets has not been claimed. Accordingly, principal repayment has been claimed as deduction. It was pointed out that out of total payment of lease rent made during
30 the year, 13.63 lakhs has already been considered for disallowance u/s 40A of the Act. The contention of the assessee did not find much favour with the Assessing Officer who observed as under:
“Submissions made by the assessee have been considered. Perusal of the total movement of assets taken on finance lease as reflected in financial statement, reveals that the assessee was having opening book balance of such leased assets amounting to Rs 45,04,863/-, and during the year there was further addition of Rs 59,91433/- Thus total value of leased assets is at Rs. 1,04,96,296/- As already pointed out the transaction have mainly been entered with the parties specified in section 40A{2)(b), hence assessee was asked to give justification and reasonableness of the lease rents paid. From the reply and details on record, what emerges is that though the assets are owned by lessor companies, assessee is paying the EMI along with interest on such assets. In effect, assessee is bearing all costs towards the acquisition of the assets, though technically these still retain the ownership of the lessors. Therefore, the issue needs examination as to whether the EMI and interest paid towards these assets is justified and if so, whether its extent is reasonable Since the assets are not owned by the lessee i e. the assessee company I am inclined
to hold the payments towards EMI and interest as lease rentals only However, if one goes on to see the extent of payment i.e 27,42,695/- vis-a-vis the value of assets taken on lease i e. Rs. 1,04,96,296/-, it indicates that related parties are being paid @ 26.13% on their assets This extent of payment is definitely unreasonable. The AO has stated in the draft order that "In the fitness of things I estimate 10% of the payments of the value of the assets taken on lease justified and balance of 16 13% of the payments as excessive and unreasonable Accordingly, the amount of Rs. 16,93,052/- ( 16.13% of Rs. 1,04,96,296/-) is disallowance u/s 40A(2)(b) however, a sum of Rs.13,63,963/- has already been disallowed u/s 40(a) by the assessee itself, therefore, difference of Rs 3,29,089/- (Rs.16,93,052/- less Rs 13,63,963/-) is hereby added to the income of the assessee”,
Before us, the ld. counsel for the assessee stated that the disallowance made by the Assessing Officer and confirmed by the DRP has been made in a mechanical way without properly appreciating the provisions of section 40A(2)(b) of the Act. It is the say of the ld. counsel for the assessee that without brining any comparable case, the Assessing Officer cannot make any disallowance u/s 40A(2) of the Act. For this proposition, reliance was placed on the judgment of the
Hon'ble High Court of Delhi in the case of Sigma Corporation India Ltd in ITA No. 795 of 2016 and CM No. 41578 of 2016.
Per contra, the ld. DR supported the findings of the Assessing Officer but could not bring any distinguishing decision in favour of the Revenue.
We have carefully considered the judgment of the Hon'ble jurisdictional High Court of Delhi [supra] qua the issue vis a vis the facts of the case. We find force in the contention of the ld. counsel for the assessee. The Hon'ble High Court of Delhi was seized with the following question of law:
“Did the ITAT fall into error in restoring the disallowance of 50% of Rs. 48 lakhs paid to the appellant/assessee employee for the relevant assessment year validly under Section 40A(2)(b) of the Income Tax Act, 1961?"
The Hon'ble High Court examined the provisions of section 40A(2) of the Act and held as under:
33 “10. Having regard to the above position, this Court is of the opinion that the ITAT in the present case overlooked the materials that were to be taken into account, i.e. reasonableness of the expenditure having regard to the prudent business practice from a fair and reasonable point of view. The AO's order nowhere seeks to benchmark the expertise of Mr. Preetpal Singh with any other consultant and proceeds on an assumption that he could not have performed multiple tasks for more than one concern. In this Court's opinion, such a stereotyped notion can hardly be justified in today's business world where consultants perform different tasks, not only for one concern but for several business entities. A common example would be that of an accountant or a legal professional, who necessarily has to multi task and are recipients or retainers of payments from many concerns having regard to their special expertise. Likewise in other fields i.e. journalism, the medical profession etc. more than one entity may engage or retain a single professional on the basis of his experience, learning and expertise, unless there is a deeper scrutiny that involves comparable analysis of like situations (a highly difficult task), additions made under Section 40A(2) would be suspect.
In the circumstances, this Court is of the opinion that the ITAT's conclusions were not justified. The impugned order is accordingly set aside. The CIT (A)'s order is restored. The question of law is answered in favour of the appellant/assessee and against the Revenue. The appeal is allowed in the above terms.”
Respectfully following the findings of the Hon'ble High Court [supra], we direct the Assessing Officer/TPO to delete the impugned addition. Ground Nos. 6 to 8 are allowed and grievance raised vide Ground No 9 becomes otiose.
In the result, the appeal filed by the assessee in ITA No. 6008/DEL/2012 is allowed.
The order is pronounced in the open court on 25.09.2018.
Sd/- Sd/- [SUDHANSHU SRIVASTAVA] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 25th September, 2018
VL/