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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI N. K. SAINI & MS SUCHITRA KAMBLE
This appeal is filed against the order dated 28/02/2013 passed by CIT(A)-XX, New Delhi for Assessment Year 2008-09.
The grounds of appeal are as under:-
1. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.52,85,962/- made on account of Arm's Length Price.
2. On the facts and circumstance of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.73,339/- made on account of excess depreciation on computer accessories. The appellant craves leave to add, alter or amend any ground of appeal 3. raised above at the time of hearing.
It is prayed that the order of the Ld. CIT(A)-XX, being contrary to the facts on record and the settled position of law, be set aside and that of the Assessing Officer be restored.
The assessee is an Indian Company incorporated in the year 2004 and is a part of the Everest group of companies (Everest Group). The assessee is engaged in the business of providing IT-enabled Services(ITES) and business support services, such as financial reports/related documents, technical service for development of software and other similar services to its AE on a ‘cost plus mark up’ basis. The Assessee filed its return of income on 30.09.2008 declaring loss of Rs.2,04,28,438/-. During the relevant financial year, the assessee had the following international transactions with its AE: S. No. Nature of transaction Amount (in Rs.) Provision of IT enabled services 54,251,329 1 Provision of business support services 23,686,335 2 3 Payment of Royalty 828,920 4 Database access charge 1,128,000 5 Reimbursement of expenses 248,218 Recovery of expenses 4,310,648 6 The Assessee had two segments, namely, ITES and advisory support services. In both the segments the Assessee had taken OP/OC as the PLI under TNMM as the most appropriate method. A reference was made to the Transfer Pricing Officer (TPO) for determining arm’s length price under Section 92CA(3) in respect of international transactions entered into by the assessee during the financial year 2007-08. The Assessee had selected 13 comparable companies in ITES segment and 9 in advisory support service segment. The margin of the Assessee was 16% and 30% respectively in these two- segments. The margin of the comparables was less as compared to the Assessee company and therefore the TP study justified the international transaction as at arm's length. The TPO accepted the transaction in the advisory support service segment as at arm's length. However, TPO rejected the TP documentation relating to ITES segment. The TPO conducted independent search of the comparables based on different sets of quantitative filters. The information available in the public domain was supplemented by collecting further information from the comparable companies by using the powers u/s 133(6). The TPO issued a detailed show cause notice to the assessee. After the receipt of the response, the TPO analyzed the submissions and decided to take 20 comparables. The TPO has taken OP/TC as the PLI and TNMM as the most appropriate method and further allowed working capital adjustments to the comparables. As a result, the mean margin of the comparables was worked out at 27.33% which resulted into an adjustment of Rs. 52,85,962/- to the international transaction in ITES segment. The Assessment u/s 143(3) of the Income Tax Act, 1961 was completed on 22.02.2012. The Assessing Officer made an addition of Rs.52,85,962/- to the income of the assessee being difference between the Arm’s Length Price as well as disallowance u/s 14A r/w Rule 8D towards Rs.44,508/- and made addition of Rs. 73,339 towards excess claim of depreciation on computer accessories.
Being aggrieved by the Assessment Order, the Assessee filed appeal before the CIT(A). The CIT(A) allowed the appeal of the assessee.
As regards ground no. 1, the Ld. DR submitted that the CIT(A) has 5. rejected four companies i.e. Vishal Information Technologies Ltd., Mold-tek, Genesys International Ltd. and Wipro Ltd. These comparables have been properly considered by the TPO by following the correct filters. Therefore, the CIT(A) erred in rejecting these comparables. In fact, Genesys is a comparable which was taken by the assessee in its TP Study itself. As regards ground no. 2 relating to excess depreciation, the Ld. DR relied upon the Assessment Order.
The Ld. AR submitted that as relates to Ground No 1 regarding the exclusion of the comparables, the Tribunal in assessee’s own case for A.Y. 2007-08 rejected the three comparables i.e. Vishal Information Technologies Ltd., Wipro Ltd., Mold-tek Technological Ltd. (DCIT vs. M/s Everest Business Advisory India (P) Ltd. being & 1191/Del/2013 for AY 2007-08 order dated 15.12.2017. The Ld. AR further submitted that as relates to exclusion of Genesys International Ltd., the said comparable is functionally different. But this year it is affecting the +/_ ratio and not in earlier year, so the assessee has not argued the exclusion of this comparable in the earlier year for +/- percentage coming within 5%. As relates to Ground No. 2, the Ld. AR relied upon the order of the CIT(A).
We have heard both the parties and perused the material available on record. It is pertinent to note that the Tribunal in assessee’s own case for A.Y. 2007-08 rejected the three comparables i.e. Vishal Information Technologies Ltd., Wipro Ltd., Mold-tek Technological Ltd. ( DCIT vs. M/s Everest Business Advisory India (P) Ltd. being & 1191/Del/2013 for AY 2007-08 order dated 15.12.2017. The Tribunal held as under:
“VISHAL INFORMATION TECHNOLOGIES LTD. (VISHAL) 55. The taxpayer sought to exclude Vishal on ground of functional dissimilarity having huge assets and company is operating on outsourcing business model having low asset base with employee cost of 2% of the turnover vis-à-vis the taxpayer who has employee cost/turnover ratio of 36%.
The Ld. DR for the Revenue contended that in case Vishal is to be excluded on ground of outsourcing its work then Cosmic Global and Spanco are also liable to exclude. However, to counter this argument, the Ld. AR for the taxpayer contended that even exclusion of Cosmic and Spanco will not cause prejudice to the taxpayer in any manner. In these circumstances, we are not going into the merits of this argument as the comparability of a company is required to be examined on the basis of functional comparability and in the light of section 10B(2) of the Act.
Annual report of Vishal is available at pages 336 to 347 of the paper book shows that its sales is pegged at Rs. 30,60,10,382/-, salaries and wages to the tune of Rs. 70,27,632/- i.e. 2.3% as against sales of the taxpayer at Rs. 5,01,05,563/- and salaries/wages at Rs. 1,82,37,882/- i.e. @ 36%. Vishal has been excluded by the coordinate Bench of the Tribunal in ITO vs. Heartland Delhi Transcription & Services Pvt. Ltd. – Techbooks International Ltd. vs. ACIT – ITA No. 4990/Del/2011 and IQOR India Services (P) Ltd. vs. ITO – (2015) 69 SOT 37 (Delhi – Trib.), on ground of different business model as it outsourced its work to external vendors to save the cost on employees which is apparent from the figure of employee cost vis-à-vis sales detailed in the preceding paras. So, we order to exclude Vishal from the final set of comparables for benchmarking the international transactions. WIPRO LTD. (SEG.) (WIPRO) 58. The taxpayer further sought to exclude Wipro from the final set of comparables on the ground inter alia that it is functionally dissimilar being into wide spectrum of services; that the nature of Wipro is highly capital intensified having 24X7 operation; that the Wipro is having revenue of Rs. 940 crores and operating assets employed in BPO business is Rs. 781 crores; that Wipro incurred huge expenditure on research and development to the tune of 8.5% of the total revenue; having employee base of 17464; that Wipro is a giant in its area of business having huge brand value and goodwill and owns significant intangibles; that Wipro is having inorganic method of growth which it acquires from goodwill, brand value and presence in the global market.
Ld. DR for the Revenue contended that before TPO and CIT(A) the taxpayer have only argued high turnover and abnormal margin as the reason for its exclusion which cannot be a reason for exclusion as has been held by Hon’ble High Court in Chryscapital Investment Advisors (India) (P) Ltd. vs. DCIT – (2015) 56 taxmann.com 417 (Delhi). Ld. DR further contended that since the TPO did not have the opportunity to examine the argument now addressed before the Tribunal, it should be restored back for fresh decision. However, we are of the considered view that when the entire annual reports relied upon by the taxpayer to examine the business profile to Wipro was there and comparability issue is to be decided in view of the settled principle of law though not argued specifically, the matter is not liable to be restored.
Comparability of the Wipro has been examined by the Hon’ble Delhi High Court and coordinate Bench of the Tribunal in cases of CIT vs. Agnity India Technologies Pvt. Ltd. in ITA 1204/2011 dated 10.07.2013, Calibrated Healthcare Systems India Pvt. Ltd. vs. ACIT – ITA No. 5271/Del/2012, New River Software Services (P) Ltd. vs. ACIT – ITA No. 451/Del/2013 and United Health Group Information Services (P) Ltd. vs. ACIT – and ordered to be excluded by taking into account its functional profile, risk profile, nature of services, ownership of IP rates, expenditure on R&D etc.
When we compare the aforesaid business profile of Wipro vis-à-vis the taxpayer, there are stark dissimilarities as Wipro is a giant company having huge asset base, brand value, goodwill and presence in the global market, spending 8.5% of the total revenue on R&D and it is a full fledged risk bearing service provider. Moreover, marketing expenses of Wipro is 3% of the total turnover.
So, we are of the considered view that Wipro is not a suitable comparable for benchmarking the international transactions.” MOLDTEK TECHNOLOGIES LTD.
The Ld. DR for the Revenue contended that Moldtek Technologies Ltd. is a suitable comparable and the reasons given by the Ld. CIT (A) that indulging in evasion of tax by overstating profit in the 100% exempt ITES Division and understating the profit in the plastic division which is without any evidence.
However, Ld. AR for the taxpayer while supporting the order passed by the Ld. CIT (A) justified the exclusion of Moldtek Technologies Ltd. on two grounds : one, functional dissimilarity and two, merger of Tech-men Tools Pvt. Ltd. w.e.f. 01.10.2006 and acquisition of Crossroads Inc. USA w.e.f. 28.04.2007. When we examine the reply filed by Moldtek Technologies Ltd. u/s 133(6), available at pages 253 & 254 of the paper book, as well as in the light of the annual report, it is not in dispute that, “Mold-Tek Technologies Ltd. is engaged in Engineering Consulting Services as part of its IT of KPO division of the company. The company specializes in providing Structural Design & Detailing services for a range of PEMB, Industrial, Commercial, structures with attachments for Canda, USA, Europe, Dubai and Australia. We are an ITES company registered with Software Technology Parks of India.” So, business profile of Moldtek Technologies Ltd. is diametrically dissimilar vis-à- vis the taxpayer being engaged in Engineering Consulting Services, being specialist in Structural Design & Detailing services, Industrial, Commercial, structures with attachments for Canada, USA, Europe, Dubai & Australia. Moldtek Technologies Ltd. also used software tools to provide structural engineering outputs. So, on ground of functional dissimilarity, Moldtek Technologies Ltd. has been rightly excluded by the Ld. CIT (A).
The Ld. CIT (A) has rightly taken the view that extra ordinary profit in ITES segment reaching up to 113% for the year under assessment shows that the company has diverted its profit to evade taxes of its plastic division by showing losses to the ITES segment which is 100% exempted unit. So, the Ld. CIT (A) has rightly excluded Moldtek Technologies Ltd. on ground of extra ordinary profit of 113% which needs no interference.
So far as the question of merger of Tech-men Tools Pvt. Ltd. and acquisition of Crossroads Inc. USA w.e.f. 01.10.2006 and 28.04.2007 respectively by the taxpayer is concerned, its financial results, available at page 245 of the paper book (Annual Report), shows that Moldtek Technologies Ltd.’s segmental sale have gone up by 35.17% from Rs. 70.87 crores to Rs. 85.80 crores largely fuelled by growth of 204% in IT (KPO) Division Billings from Rs. 375 lakhs in 2005-06 to Rs. 1140 lakhs in 2006-07. Moldtek Technologies Ltd. has also achieved a profit of Rs. 830.71 lakhs as against Rs. 394.97 lakhs in the previous year registering a growth of 134%. IT/KPO Division rose sharply from Rs. 1.60 crores to Rs. 5.75 crores registering a growth of 259.4%. It is also categorically referred in Director’s report, available at page 246 of the paper book, that the company is planning to pursue further acquisition opportunities to maintain a better average rate of growth for structural engineering services. So, we are of the considered view that the factum of merger and acquisitions also make Moldtek Technologies Ltd. as unsuitable comparable vis-à-vis the taxpayer and has been rightly excluded by the Ld. CIT (A).” The facts are not different in the present year as well, therefore, in the present year also following the order of the Tribunal in A.Y. 2007-08 in assessee’s own case these three comparables has to be excluded as these comparables are functionally different from the assessee company. As relates to the Genesys International Corporation Ltd., the Ld. AR pointed that this company is functionally different and cannot be included. After going through the records it is pertinent to note that the comparable provides Geospatial Services, viz., photogrammetric services, preparation of cadastral maps from aerial photographs etc. using niche software tolls which requires a different skill set, e.g., services of draftsman, cartographers and civil engineers etc. and need highly skilled manpower. The CIT(A) held as under:
“vii) Genesys International Corporation Limited: Assessee’s contention: The TPO has proposed to compare a very high end BPO with the assessee. Genesys is only into GIS services. Genesys is heavily into research and development whereas the assessee is not in to any kind of research and development at all. This is evidenced by the following extract from the Directors Report of Genesys for the year ended March 2008: Research and Development Your Company is currently doing pioneering research in the area of Image Intelligence and Recognition, mobile mapping as well as LIDAR. It is working closely with leading universities as well as world experts in this field. Our R&D efforts are being recognized by our customers as well as other peers in the industry segments that your Company operates in.
The TPO has stated in the notice that unusual economic activity is one of the reasons for rejecting a company. Corporate restructuring within a comparable is surely an unusual economic activity. A scheme of arrangement has been approved by the Mumbai High Court in Spetember 2007 and this is evidenced from the Note no. 3 as given in the Notes to Accounts. The same is being reproduced below for your reference: 3. Pursuant to the scheme of arrangement (as per Section 391 to 394 of the Companies Act, 1956) sanctioned in the High Court of judicature at Mumbai vide order dated 7th September, 2007, with effect from 01st April, 2006 the business of Engineering and Information Technology Division has been transferred and demerged into M/s G I Engineering Solutions Ltd., the Resulting Company. Effects of the order passed by the High Court of Judicature, Mumbai have already been given in the annual accounts for the previous financial year 2006-07. Further, during the year, it had acquired ladya systech private ltd. Reasons for acceptance given by TPO: The TPO has considered the submission of the assessee and the extraordinary event being the reason to reject this company did not find favour with him. Reasons for decision:
This company provides Geospatial Services, viz., photogrammetric services, preparation of cadastral maps from aerial photographs etc. using niche software tolls. It requires a different skill set, e.g., services of draftsman, cartographers and civil engineers etc. Though it is an ITeS company but it performs functions that need highly skilled manpower. Though it is an ITeS company but it performs functions that need highly skilled manpower. Therefore, I am in agreement with the contention of the assessee that it is not functionally comparable with the assessee. Therefore, I hold that this company should be excluded.” The CIT(A) has given a categorical finding as to the function of the comparable and the requirement of the highly skilled manpower. Therefore, this comparable is rightly rejected by the CIT(A). The CIT(A) further while deciding on the final list of comparables held as under:
10.2 Based on the above discussion, the final set of comparables is as follows: S.No. Company OP/TC (%) 1. Accentia 41.75 2. Acropetal Technologies Ltd. (seg) 29.89 3. Aditya Birla Minace -7.88 4. Asit C Mehta 8.41 5. Caliber Point Business Solution (seg) 8.18 Coral Hub (Vishal Inf.) 6. Cosmic Global 25.31 7. Crossdomain Solution P. Ltd. 27.26 8. Datamatics Financial (BPO Div) 34.51 9. E4e (earlier known Nitanny) 15.7 10. Eclerx 66.68 Genesys International 11. HCL Comnet Systems & Services Ltd. (seg) 31.59 12. ICRA (Seg) 9.13 13. Infosys BPO 19.88 14. I-service Ind. P. Ltd. 9.28 Mold Tek 15. R System International Ltd. (seg) 4.05 16. Spanco Ltd. (seg.) 4.51 Wipro BPO Average 20.52 *After working capital adjustment 10.3 As the margin of the assessee as accepted by the TPO is 16.09%. Therefore, the margin of the assessee in the ITES segment is within +/-5% of the mean margin of the comparable companies. In view of this, TPO/AO is directed to delete the addition made in this regard. As assessee gets a benefit of +/-5%, the dispute regarding the calculation as per the proviso to Section 92C is not separately adjudicated.
Thus, there is no need to interfere with the findings of the CIT(A). Therefore, Ground No. 1 of the Revenue’s appeal is dismissed.
As relates to Ground No. 2, the CIT(A) held as under:
12.2 The issue is settled due to the judgment of the Hon’ble Jurisdictional High Court in CIT vs. BSES Yamuna Powers Ltd. (I.T. Appeal No. 1267/Del/2010 dated 31.08.2010).
“We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciate at the higher rate of 60%.” The assessee’s case is squarely covered by the above judgment of Jurisdictional High Court. Further, reliance has also been placed on the following judgments: • DCIT vs. Datacraft India Ltd. (Mumbai Special Bench ITAT in and 754) • ACIT vs. Container Corporation of India Limited (2009-TIOL-195- ITAT-DEL) Delhi ITAT • Expeditors International India (P) Ltd. vs. Addl. CIT (118 TTJ 652) (Delhi Tribunal) • ACIT, Circle 3(1), New Delhi vs. Cincom System India Pvt. Ltd. (Delhi Tribunal in ITA No. 1534/Del/2008) • ACIT, Circle 3(1), New Delhi vs. Continental Carriers Pvt. Ltd. (Delhi Tribunal in ITA No. 2137/Del/2008) • ITO vs. Samiran Majumdar (280 ITR (AT) 74 Kolkata Tribunal)
Reasons for decision:
12.3 The submission made by the assessee is carefully examined. The assessee had purchased computer peripherals like wireless access point, G- Tran, Carry cass, Pan Cards, spike buster, pen drive, ETI enhancements, switches, keylock, battery, tae, extension card, tv tune, convertor, charger etc. Rs. 1,62,975/- as computer peripherals. They are classified as eligible items for depreciation at 60% by the decisions of the Hon’ble Courts and Tribunals cited above. Therefore, I hold that the assessee is entitled for depreciation at 60% on the purchases made under the head “computers”. The AO is directed to allow the depreciation accordingly at 60%.” The CIT(A) has given the finding that the assessee had purchased computer peripherals like wireless access point, G-Tran, Carry cass, Pan Cards, spike buster, pen drive, ETI enhancements, switches, keylock, battery, tae, extension card, tv tune, convertor, charger etc. Rs. 1,62,975/- as computer peripherals. The Hon’ble Jurisdictional High Court in BSES Yamuna Powers Ltd. classified these items as eligible items for depreciation at 60%. Therefore, the decision of the Hon’ble Jurisdictional High Court is squarely applicable in assessee’s case. Therefore, Ground No. 2 of the Revenue’s appeal is dismissed.
In result, appeal of the Revenue is dismissed.