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Income Tax Appellate Tribunal, DELHI BENCH “I-1”: NEW DELHI
Before: SHRI I. C. SUDHIR & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
This is an appeal filed by the assessee [ hereinafter referred to as „ Appellant‟ also] against the assessment order [ hereinafter referred to as the „order‟ also ] of the ld DCIT, Circle-II, Delhi [ hereinafter referred to as the „AO‟ ] dated 30.01.2014 u/s 143(3)(ii) r.w.s 144C(13) of the Income tax Act [ In short „the Act‟] passed in pursuance of direction dated 28.11.2013 by the Learned Dispute Resolution Panel-II, Mumbai [ hereinafter referred to as „The DRP‟] against the draft assessment order dated 27.02.2013 incorporating transfer pricing adjustment determining the Arm‟s length price [ The ALP‟] of International Transactions u/s 92CA made by ld Additional CIT (Transfer Pricing)-II (5), Mumbai [ Hereinafter referred to as „The TPO‟] vide order dated 28.01.2013 for AY 2009-10. [1] Teradata India Private Limited V DCIT
The assessee has raised the following grounds of appeal:- “The appellant objects to the order of Deputy Commissioner of Income - tax - Circle -II ('DCIT') dated 30 January 2014 (received on 30 January 2014) passed under section 143(3)(ii) r.w.s. 144C(13) of the Income tax Act, 1961 ('the Act'), for the aforesaid assessment year on the following among other grounds:
1. The order of the learned DCIT is bad in law, contrary to the provisions of law and facts of the case.
2. The learned DCIT erred in assessing the total income of the appellant at Rs. 14,36,66,350 as against Rs. 6,35,28,820 declared in the return of income by the appellant.
3. Adjustment of Rs. 65,00,000 with respect to international transaction of provision of provision of Infrastructure Support services needs to be deleted. 3.1 The learned DCIT has erred in making an upward adjustment of Rs. 65,00,000 to the total income of the appellant by holding that the international transaction relating to provision of Infrastructure Support services entered into by the appellant with its AEs were not at an arm's length. 3.2 The learned DCIT has erred in rejecting the scientific benchmarking study and the appropriate filters used by the appellant to arrive at arm's length results without providing cogent reasons. 3.3 The learned DCIT has erred in selecting comparables which are functionally not similar or incomparable to the appellant and / or have substantial related party transactions. 3.4 The learned DCIT has erred in rejecting the use of multiple year data for computing the margin of the comparable. 3.5 The learned DCIT has erred in not appreciating that considering the facts and circumstances of the case and the law prevailing on the subject the international transaction relating to provision of Infrastructure Support services entered into by the appellant with its AEs were at an arm's length and hence no adjustment in respect thereof was called for. Accordingly, the stand taken by the learned DCIT in this regard is misconceived, erroneous and incorrect.
4. Reduction in the deduction under section 10A to the extent of Rs. 6,46,66,012 4.1 The learned DCIT erred in allocating additional general expenses in nature of managerial remuneration, auditor's remuneration and professional fees of Rs. 6,46,66,012 to the appellant's units located in Software Technology Park ('STP'), thereby reducing the profits of the STP units and denying deduction under section 10A of the Act to these units to the extent of Rs. 6,46,66,012. 4.2 The learned DCIT erred in holding that the managerial remuneration, auditor's remuneration and professional fees need to be allocated to [2] Teradata India Private Limited V DCIT STP units on the basis of sales ratio of all units even though the learned DCIT himself has agreed that due to the character of the expenses, the same are not allocable to any particular unit. 4.3 The learned DCIT erred in not appreciating that since the appellant had already considered all the expenses which are specifically identifiable and directly attributable to the respective units on actual basis (including professional fees), based on audited segmental accounts, there is no question of further attributing any other expenses on notional or on proportionate basis. 4.4 The learned DCIT erred in not appreciating that the appellant has already allocated professional fees allocable to each unit on an actual basis and accordingly, there is no question of further allocation of professional fees. 4.5 The learned DCIT erred in not appreciating that the managerial remuneration and auditor's remuneration are in the nature of corporate expenses which are not incurred for any STP unit and hence, there is no question of further allocation of these expenses. 4.6 The learned DCIT erred in not appreciating that the STP units have their own heads, whose remuneration has been allocated to the said units and hence no further allocation is called for in respect of managerial remuneration. 4.7 The learned DRP erred in not accepting the additional evidence submitted by the appellant to justify its claim. 4.8 The learned DCIT erred in rejecting the method of allocation of expenses, without appreciating that the same method is consistently being followed by the appellant even in the previous assessment years. 4.9 The learned DCIT erred in construing that the appellant has nothing to offer with regard to basis for allocation of expenses between its STP and non-STP units. 4.10 The learned DCIT erred in observing that non-furnishing of specific information by the appellant was a part of deliberate exercise of it so as to not allow the revenue to examine the facts and arrive at the decision regarding the basis of allocation of expenses between its STP and non- STP units and rework the claim of deduction under section 10 A.
5. Non-allowance of rent of Rs. 90,00,000 disallowed in assessment year 2008-09 5.1 The learned DCIT erred in not granting deduction for rent of Rs. 90,00,000, which was disallowed in the assessment year 2008-09 on the ground that it is a prepaid expenditure. 5.2 The learned DCIT erred in not appreciating that since the expenditure was not allowed as revenue expenditure in assessment year 2008-09 on the ground that it is prepaid expenditure, the same ought to be allowed to the extent attributable to the year under consideration and debited to the profit and loss account i.e. Rs, 90,00,000.
[3] Teradata India Private Limited V DCIT
6. Disallowance of provision for product and services of Rs. 317,672 The learned DCIT erred in disallowing provision for product support and services (i.e. provision for warranty) of Rs. 317,672 on the basis that the said expenditure is in the nature of unascertained liability.
7. Disallowance of depreciation of Rs. 66,09,672 The learned DCIT erred in disallowing depreciation of Rs. 66,09,672 on fixed assets acquired by the appellant from NCR Corporation India Private Limited. 8. Levy of interest under section 234B The learned DCIT erred in levying excess interest under section 234B of Rs. 84,20,180. 9. Initiation of penalty proceedings under section 271(l)(c) The learned DCIT erred in initiating penalty proceedings under section 271(l)(c) for concealing its income / furnishing inaccurate particulars of its income. 10. Each one of the above grounds of appeal
is without prejudice to the other.
11. The appellant reserves the right to amend, alter or add to the grounds of appeal.”
3. Ground No. 1 of the appeal of the assessee is general in nature and therefore we dismiss it. Ground No. 2 of the appeal is against the overall adjustment made to the returned income of the assessee contested in the separate grounds of appeal. Therefore, this ground of appeal is technical in nature and therefore dismissed.
4. Ground No. 3 of the appeal is against adjustment of Rs. 65 lakhs with respect to determination of arm‟s length price [in short „ALP‟] of international transaction of provision of infrastructure support services.
5. Assessee is a private limited company engaged in the business of data warehousing solution. It filed its return of income on 30.09.2009 for Rs. 63528820/-. The assessee is engaged in the business of providing data warehousing solutions in the nature of sales support and service of electronic data warehousing hardware and software. During the year the assessee has entered into following international transactions as under:- s. Nature of transaction AY 2009-10 Method Business No. Used Segment by assesse
[4] Teradata India Private Limited V DCIT
1 Purchases of 18,58,59,094 TNMM- Distribution Hardware & Software Distribution of EDW for Local Distribution 2 Provision 130,25,15,715 TNMM Software of Technical/ development Professional and R&D and BPO services (Receipt) 3 Availing of services (16,04,85,336) TNMM BPO 4 Import of fixed assets (45,38,608) TNMM 5 Reimbursement 4,83,61,874 No method of expenses (receipts) 6 Reimbursement (4,12,63,895) At cost of expenses (Paid)
The assessee benchmarked the above international transaction as under:- S.No. Type Metho assessee Comparables of d Internationa selecte l , d transaction Total value Price / Type Arithmetic of Margin of mean transaction companies price/ (Rs.) margin 1 Distribution TNMM 185,859,094 3% Software 3.17% S.No. Type Metho assessee Comparables of d International selecte transaction d Total Price / Type Arithmetic value of Margin of companies mean transaction price/margi (Rs.) n activity services (import of hardware & software) 2.1 Provision TNMM 1,302,515,7 13% Technical 9.51% of GCC 15 support services services 2.2 Provision TNMM 13% Software 10.36% of Contract Product R&D Development [5] Teradata India Private Limited V DCIT
services 2.3 Provisions TNMM 7% Infrastructur 9.24% of e support infrastructur services e support services
Therefore the ld Assessing Officer made a reference u/s 92CA (1) of the Act to the ld Transfer Pricing Officer for computation of arm‟s length price in relation to international transaction on 14.11.2011. On reference to the Ld. Transfer Pricing Officer, he noted that the assessee has not maintained any segment of accounts in the audit report as the auditor does not report segmental profits. He further held that normally in transactional net margin Method [TNMM] analysis net margin of tested party is compared with the net margin of comparables. However in the case of the assessee return refers to pricing mechanism where it is explained that the assessee has earned markup of 13% on contract research and development activities, 13% on hosting global consulting centers and 7% on infrastructure support services. He further noted that for sales of enterprise data warehousing products services, assessee has selected four comparables out of which two comparables were rejected and the margin of the comparables after rejection was held to be 4.17%. For technical Support service such as hosting global consulting Centre, assessee selected three comparables out of which one was rejected and therefore the margin of the comparables was determined at 29.41%. With respect to the software product development, assessee selected 14 comparables and the average margin by adopting Profit level indicator of operating profit/total cost computed the margin of comparable at (-)3.22%, whereas the Ld. Transfer Pricing Officer rejected four comparables, recomputed margin of 3 comparables and further added 14 comparables and derived average margin of the comparables at 13.3%. With respect to infrastructure support services, the assessee computed the average margin of the comparables at () 8.93%, whereas Ld. Transfer Pricing Officer rejected the comparables of the assessee and further introduced 26 comparables whose average margin was 28.45%. The Ld. Transfer Pricing [6] Teradata India Private Limited V DCIT Officer computed the margin of the assessee at 8.18%. Thereafter, the Ld. Transfer Pricing Officer applied the weighted margin of all the three segments of the assessee based on segmental turnover to total turnover and determined weighted average of the margins of the comparable at 22.25%. On that basis he computed the arm‟s length profit of the International transactions of assessee at Rs. 337966670/– against the actual profit of Rs. 124268019/– and determined the adjustment because of transfer pricing of Rs. 213698651/–. Further, with respect to the intragroup services of transaction value of Rs. 100485336/– he computed ALP of the same at Rs. Nil.
Assessee preferred objections before the Ld. Dispute resolution panel who provided direction dated 28/11/2013 under section 144C of the income tax act directed the Ld. Transfer Pricing Officer to recompute the margins and to consider subvention fees as operating income. The DRP directed the Ld. Transfer Pricing Officer to delete the adjustment with respect to intragroup services. Consequently, the DRP deleted the adjustments except on infrastructure support services where the only adjustment of Rs. 8.64 percent on the cost of infrastructure support services is required to be made. Based on this direction, the Ld. Transfer Pricing Officer , recomputed the adjustment vide order dated 24th of January 2014 wherein the adjustment on account of ALP in infrastructure support services of Rs. 65 Lacs was made.
Consequent to that the Ld. Assessing Officer passed order under section 143 (3) read with section 144C (13) of the income tax act, 1961 on 30/01/2014 determining the total income of the assessee at Rs. 143666346/– against the returned income of Rs. 63528820/–. In the final assessment order over and above the transfer pricing adjustment of Rs. 65 Lacs, the disallowance of deduction under section 10A, disallowance of warranty expense etc were made. Assessee being aggrieved with the order of the Ld. Assessing Officer has preferred an appeal before us contesting corporate disallowances/additions as well as adjustment because of transfer pricing provisions.
[7] Teradata India Private Limited V DCIT
Ground No. 3 of the appeal is with respect to the adjustment of Rs. 65 Lacs with respect to determination of arm‟s length price of international transaction of provision of infrastructure support services.
Ld. senior advocate on behalf of the assessee submitted that assessee is only contesting inclusion of two comparables by the ld TPO. According to him, Ld. Transfer Pricing Officer has rejected the five comparables selected by the assessee, which are at page No. 7 of the order of the Ld. Transfer Pricing Officer and introduced 26 new comparables, which are at page No. 8 of his order. He submitted that assessee is contesting the inclusion of comparable number 5, i.e. BNR Udyog Ltd and comparable No. 9 i.e. Cross Domain Solutions Private Limited. He referred to page No. 324 of the paper book, which is an agreement of provision of integrated services cost distribution agreement between assessee and associated enterprise. He referred that the services shall be provided according to that agreement which is listed in Annexure A. According to him this infrastructure support services generally include certain finance, legal, human resources, information technology, and similar back-office functions. He submitted that during the year assessee provided infrastructure support services and received 7% markup on costs. He further referred to page No. 54 – 56 where functional analysis, assets employed and risk assumed by the entities are shown. 12. Coming to the functional dissimilarity of comparables i.e. BNR Udyog limited, he referred to page No. 167 to 169 of the paper book and submitted that that BNR Udyog Limited is carrying on medical transcription, construction and financial activities and it is also the member of National commodities and derivative exchange Ltd and multi commodity exchange of India Ltd. Further referring to the segmental reporting of the assessee, it was submitted that company‟s medical transcription segment has been considered as comparable wherein segmental revenue is shown to be Rs. 130.84 Lacs resulting into the profit of Rs. 37.44 Lacs. He further submitted that medical transcription business is not the same service compared with services provided by the assessee and therefore there is a functional difference between the comparable and the assessee. He further objected [8] Teradata India Private Limited V DCIT that corrected margin of the comparable is 38.72% against 40.10% computed by the Ld. Transfer Pricing Officer. He further referred to the annual accounts of the BNR Udyog Ltd for the financial year 2008 – 09 extensively to show the directors‟ Report , Profit and loss account, Notes on accounts etc harping upon functional dissimilarity and objecting inclusion of the above comparable for comparability analysis.
With respect to the Cross Domain Solutions Private limited, he referred to page No. 175 of the paper book and submitted that it is a business process management service company providing knowledge services. Outsourcing in insurance, healthcare, HR and accounting domains. It is further submitted that it offers business excellence, market research and data analytics and IT services. He therefore submitted that this company is not comparable functionally. He further submitted that this company did not appear in the databases when the search process was conducted. He further referred to the annual report of the company provided by the TPO, which does not have the profit and loss account for the year. He relied upon following judicial precedents for exclusion of the cross domain solutions private limited:- a. BNY Mellon International Operations India Private Limited V DCIT , Pune / PN/2014 A Y 2009-10 Para No 12-15 b. DCIT V Willis Processing Services India P Ltd ITA No 2152/Mum/ 2014 AY 2009-10 Para no 9 item no 3 page no 8 c. Vertex Customer services India P Ltd V DCIT ITA No 572/Del/2014 AY 2009-10 Para No 20-24 d. Cummins Turbo Technologies Limited V DDIT ITA no 784/PN/2014 A Y 2009-10 para no 15-17 In view of this, he submitted that both comparable (i) BNR Udyog Limited and (ii) Cross domain Solutions Private limited requires to be excluded.
Against this Ld. senior apartment representative submitted as under:- Ground No, 3: TP Adjustment of Rs.65,00,000/- confirmed by the DRP in the Infrastructure Support Services (ISS) Segment: The Ld. DRP has allowed relief of Rs.30 cr to the assessee and has confirmed only the TP Adjustment of Rs.65 lakhs by holding that subvention income of Rs.22 cr should be considered in the BPO [9] Teradata India Private Limited V DCIT
Segment instead of the Distribution Segment, by directing that the Cost- Plus Markup margin of the comparables should be adopted at 15.64% and by holding that TP Adjustment on account of Intra Group Services is double addition. The submission of the assessee is fit to be rejected on account of the following reasons:- a. All the five comparables selected by the assessee are functionally not comparable as evident from their profiles given at in the TP Study Report (pg 78 of Vol.-II of PB). Besides the above, in none of the cases data for the FY 2008-09 is available as mentioned in the TP Study Report (pg 288 of Vol.-II of PB). b. The TPO has rejected the use of multiple year data of comparables in view of the various decisions of the Court including of the jurisdictional High Court given in case of Chrys capital Investment Advisors [2015] 56 taxmann.com 417 (Delhi) (2015) 376 ITR 183 (Del) wherein the Hon'ble Court has held that while determining comparability of transactions, multiple year data can only be included in manner provided in rule 10B(4) and, thus, it is not open to the assessee to rely upon previous year's data as a general rule. c. The assessee has submitted for the exclusion of certain comparables adopted by the TPO on account of high RPT (RPT>15%). RPT filter of 25% has been universally accepted by the Hon'ble Courts in numerous cases. ITAT Delhi in the case of Nokia India (P) Ltd. vs DCIT [2014] 52 taxmann.com 492 (Delhi - Trib.) after considering the ratio of all relevant judgments and orders has categorically held that the percentage of RPT to make a company as ineligible for comparison should be taken as more than 25% and not 15% as suggested on behalf of the assessee. In the above judgment the Hon'ble ITAT has further held that balance sheet items have to be ignored while computing RPT percentage and has also held that the numerator and denominator should be of same nature i.e. either income/sales or expenses. The relevant extract of the above judgment is reproduced below:- 16. We find that this submission has two components, viz., the composition of numerator and denominator and the percentage of such numerator to the denominator. We agree in principle that if any company though functionally comparable, but, has more than a specific percentage of the RPTs, then, the same should be ignored by treating it as a controlled transaction. However, the percentage of RPTs to make a company as ineligible for comparison, in our considered opinion, should be taken as more than 25% and not 15% as suggested on behalf of the assessee. The view adopting more than 25% RPTs making a company incomparable has been taken by various benches of tribunal including Agilent Technologies (International) (P.) Ltd, v. Asstt. CIT[2013]33 taxmann.com 425 (Delhi); Stream International Services (P.) Ltd, v. Asstt. PIT (IT) 12013] 141 ITD 492/31 taxmann.com 227(Mum.) ; and Actis Advisers (P.) Ltd, v. Dy. C1T [2011] 10 taxmann.com 24 (Delhi). We, therefore, hold that a company can be considered as incomparable if its RPTs exceed 25%. [10] Teradata India Private Limited V DCIT
17. Now, we take up the second argument of the composition of numerator and denominator. Ratio of the RPTs represents the proportion of transactions with the associated enterprises (numerator) vis-a-vis the total of transactions (denominator). In order to decide that what should constitute the contents of numerator and denominator for the purposes of finding out the percentage of RPTs, it is relevant to note the logic behind applying this filter. It is manifest that the aim of the transfer pricing regime is to ensure that the international transactions are recorded at arm's length price. This is done under the TNMM by comparing the profit earned from the international transaction with that earned by the comparable independent parties in an uncontrolled situation. Thus, while choosing comparables, it must be ensured that the profit earned by them correctly reflects true profit as is earned by an enterprise from an independent third party. If such a chosen company, though functionally comparable, has also entered into international transactions beyond a particular percentage with the related parties, it is quite possible that its overall profit may have been distorted due to such transactions rendering it as incomparable. That is why, this filter is applied to make certain that a company sought to be considered as comparable should have its profit uninfluenced by the impact of the related party transactions.
In view of the foregoing discussion, it is manifest that the transactions which do not impact the profitability, such as loan given or taken or other items finding place in the balance sheet, can have no place either in the numerator or the denominator of this formula. However, any income or expenditure resulting/relating from/to or likely to result/relate from/to such items of assets or liabilities, should not be confused with the per se international transactions finding place in the balance sheet of the company calling for exclusion. 19. The numerator of this formula consists of all the related party transactions of a company sought to be chosen as comparable which affect the profit earned directly from operations. If, however a related party transaction is of such a nature which does not directly affect or insignificantly affects the profit earned from the bare profit producing activity, then it should not be taken into consideration. The reason for the [11] Teradata India Private Limited V DCIT exclusion of such related party transactions from the numerator is that they have not at all or very insignificantly affected the operating profit of such a company, which is the driving force for the purposes of making a comparison under the TNMM. To cite an example, the RPT of rent paid by a company which is engaged in the business of trading or manufacturing cannot constitute a part of the numerator, because transaction of rent payment has no direct bearing on the trading or manufacturing activity.
20. Now, we take up the contents of the denominator of this formula. The percentage of numerator to denominator can be calculated only when the contents of a part representing the RPT of a particular nature is seen with reference to the contents of whole of that nature. Both the numerator and denominator have to have the same nature of contents. This can be done by segregating transactions of one nature, like, comparing RPT of purchase with the total purchases or RPT of sales with the total amount of sales of the company. It is also possible to club small transactions of a distinct but related income producing activity with a large transactions of major income producing activity as one unit, both in the numerator as well as in the denominator. For example, RPT of major sale transaction and minor job income can be combined to find out the percentage of RPTs with the total of sales and job income taken together. In a given case, similar to what is prevailing before us, where the RPTs comprise of purchase, sales, small non-operating expenses and service income, we can preferably find out two percentages of RPTs by ignoring the RPT of payment of non-operating expense of rent, which does not directly affect the profit earned from trading activity. First percentage of RPT purchases with total purchases and second of RPT sales and service income as one unit with the total of sales and service income again as one unit. The decision as to whether such a company be included in the list of comparables by applying the filter of more than 25% RPT, would depend on the outcome of two such percentages of RPTs. If either of the two breaches the 25% threshold, then the company will cease to be comparable. If however, both the percentages are less than 25%, then the company would be liable for inclusion in the list of comparables. We want to make it clear that the above discussion about the components of RPT formula is relevant only in the case of an assessee who is a Trader/Distributor and not a Service provider/receiver or [12] Teradata India Private Limited V DCIT
a Manufacturer. Since we are concerned in the extant case with the application of RPT filter in the case of a Trader, we have restricted ourselves only to a trader and have thus desisted from examining the contents and other relevant considerations in the application of this filter to a Service provider/receiver or a Manufacturer. d. The assessee has submitted for exclusion of certain comparables on ground of high profit/supernormal profit. It has been held by the Hon'ble Delhi High Court in case of Chryscapital Investment Advisors [2015] 56 taxmann.com 417 (Delhi) that mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from list of comparables for purposes of determination of ALP. e. The assessee has requested for exclusion of certain comparables on ground of a new filter of Employee Cost/Sales. This filter has not been taken either by the assessee in the TP Study Report nor by the TPO. This argument was not even taken by the assessee before the TPO. A new filter cannot be introduced now by the assessee. f. The assessee has submitted for exclusion of comparables on the ground that they have significant intangible/goodwill and thus ar functionally not similar. It has been held by the Hon'ble ITAT in case of Copal Research India (P.) Ltd. [2016] 73 taxmann.com 157 (Delhi - Trib.) v. DCIT that "-where the assessee can demonstrate that the comparable has undergone an extraordinary event by way of amalgamation/ Acquisition etc wherein net profitability of the specific comparable company has been impacted or by inclusion offmancials of the amalgamating subsidiary having any extraordinary abnormality has impacted the net profitability, prayer for exclusion is justified. -The mere ownership oflPRs/brands by itself may not be a good enough ground to exclude a comparable unless the assessee is able to demonstrate that as a result of this fact the net profitability is impacted" Thus, mere possession of intangible/goodwill will not make the comparable unfit for benchmarking. It can be excluded only when the possession of intangible impacts profitability. The onus was on the assessee to establish the above, which the assessee failed to discharge. g. The Hon'ble ITAT Delhi has held in case of Interra Information Technologies (India) (P.) Ltd. [2012] 27 taxmann.com 1 (Delhi - Trib.) that the contention of the assessee that the transfer pricing adjustment should not be made for the reason that its income is exempt under section 10A and hence there is no. motive to divert [13] Teradata India Private Limited V DCIT profit has to be rejected applying the judgment of the Special Bench of the Tribunal rendered in the case of Aztec Software Technology Services Ltd. v. Asstt. CIT [2007] 15 SOT 49/162 Taxman 119 (Bang.) h. The functions performed by the assessee in the ISS Segment is not evident from the copy of the agreement available at pg no 324 of Vol.- Il of PB.”
We have carefully considered the rival contentions and also perused reliance placed by both the parties on several judicial precedents for exclusion or for inclusion of the two comparables in dispute before us. The Ld. departmental representative has also contested that functions performed by the assessee in the infrastructural support segment is not evident. Firstly, coming to the issue about the judicial precedents relied upon before us, we are of the opinion that comparability analysis of the assessee‟s international transaction with an uncontrolled transaction shall be judged with reference to the following, namely :- a) the specific characteristics of the property transferred or services provided in either transaction ; b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
It is apparent that judicial precedents cited before us have demonstrated that the comparables contested here by the assessee are different on the above stated four counts in the case of that assessee in whose case the decision has been rendered. Those precedents have not laid down a [14] Teradata India Private Limited V DCIT universal law that comparables excluded in those judicial precedents are excludible in case of everybody else also. Admittedly, in assessee‟s own case there is no judicial precedent with respect to the comparables in dispute. Therefore, we would be perusing the above decisions, only with the perspective that certain functions recorded of those comparables in those cases, if also renders the impugned comparables incomparable on the above four counts then only, it deserves to be excluded in the present case. From this perspective, we examine both the comparables and the argument of the Ld. departmental representative.
First, we deal with the argument of the Ld. departmental representative that functions performed in infrastructure support services are not clear/available. In this respect, we refer to the order of the Ld. Transfer Pricing Officer wherein at page No. 3 of his order, the same have been recorded as under.:- “III. Provision of Infrastructure Support Services The assessee also provides certain infra structure support services to other non Indian Teradata affiliates pursuant to an Integrated Services Agreement. In general/ these activities consist of the support activities necessary for the smooth functioning of a large business as it is not efficient or economical for each individual member of Teradata Group to perform these activities itself. These infra structure support services generally include certain finance, legal, human resources, information technology and similar back office, functions. (emphasis supplied) TPO's Comments; based on the submissions , it is held that this class of activity belongs to the domain of 'business process outsourcing'” Therefore, in view of the clear finding of the Ld. Transfer Pricing Officer that the class of the activity belongs to the domain or business process outsourcing now it cannot be said that the functions of assessee with respect to these services are not clear. Furthermore before us the submission made by the Ld. departmental representative in para number (a) to (g) have not been contested by assessee, as the assessee is only
[15] Teradata India Private Limited V DCIT contesting for exclusion of 2 comparables as mentioned by the Ld. departmental representative in his written submission. In view of this, we reject this submission of the Ld. departmental representative on these counts.
18. Now we come to both the comparables to examine whether they can be excluded in conducting the comparability analysis of the international transaction of the assessee.
As per the annual report furnished before us for financial year 2008 – 09 BNR Udyog Limited, it is carrying on medical transcription, construction, and financial activities. It is also the member of the National commodities and derivatives exchange Ltd and multi commodity exchange of India. This company has assumed geographical risk, human resources risk as well as foreign exchange risk. With respect to the assets employed, this company has normal assets and does not include any intangibles. While looking at its income from operations in schedule VIII of its annual accounts, it is apparent that it has major income of Rs. 12646824/– out of the total income of Rs. 20175789/– from medical transcription business. The other income includes brokerage, interest, dividend, commission, and sale of property. It is also apparent from the segmental information provided that out of the profit of Rs. 40.92 lakhs, assessee has earned profit of Rs. 37.44 Lacs from medical transcription business only. Therefore, it can be conclusively established that assessee is engaged in the medical transcription business predominantly. The comparable company itself has mentioned in its own website what the medical transcription business is. According to that, it is a hospital like dictation system using a toll-free number. The doctors will be provided with the unique identification and access to the state of the art digital dictation system and record their dictation. The dictation instructions are simple and user-friendly which would be available 24 x 7 and from anywhere and anytime in US. The servers for dictations are built with minimum fault tolerance and redundancy in the system is provided. It is a fully automated transcription process developed in-house on specific requirements. After the transcription is processed proofreaders, who are more experienced and more [16] Teradata India Private Limited V DCIT proficient will check the transcript and they perform word by word checking to eliminate errors and omissions. After this 1st level editing, further editing would be done by the team of quality control comprising of doctors checking the transcript for being a quality output. All the above 3 level quality control system provides a high level of accuracy, which is having a turnaround time of 12 to 24 hours and 4 to 5 hours for reports. There is a process of online storage and retrieval of those reports. From above functional profile it is apparent that 1st stage of the process of dictation is automated, which a qualified proofreader subsequently edited and thereafter it is vetted for quality control process by the doctors employed by the comparable. Therefore, it is apparent that it does not give simple output by out with value addition from experts in medical profession. On looking at the functional profile of the assessee company with respect to integrated support service agreement, services, which are the necessary for the day to day operations of the service recipients business, are provided. The natures of services are also described in the order of the Ld. Transfer Pricing Officer . The above services do not envisage employment of highly qualified professionals such as doctors, but operates as back-office functions. Therefore, there is a functional differentiation in the activities of the comparable vis-à-vis services of appellant assessee, hence, specific characteristics of the property transferred and functional profile according to us differs. Therefore, this comparable deserves to be rejected from comparability analysis.
Now coming to the functional profile of the Cross domain solutions private limited. Firstly, we find that the annual accounts provided by the Ld. Transfer Pricing Officer to the assessee does not contain the profit and loss account of the comparable company , which is an important piece of information giving the revenue model, cost model of the comparable, and therefore the information provided to the assessee is incomplete. It is interesting to note that Ld. Transfer Pricing Officer has not included this comparable in comparability analysis for assessment year 2008 -2009 in case of the assessee despite functional similarity in opinion of ld TPO. It is functionally comparable. However, to look at situation from holistic view, [17] Teradata India Private Limited V DCIT It was noted that according to the director‟s report comparable company is performing it services under „ Exdion Brand.‟ This fact has been noted by the coordinate bench in its decision in DCIT versus Willis processing services India private limited (supra) for assessment year 2009 – 10, at page No. 8 that the cross domain is engaged in providing the services high end services in payroll to target the insurance industry in the US. Further, the coordinate bench in its decision in for assessment year 2009 – 10 in Cummins Turbo technologies Ltd dated 30/03/2016 has noted in para No. 16 that this company is engaged in high end knowledge process outsourcing services and therefore it is not comparable with the normal IT enabled service providers. Furthermore it is noted that on vertex customer services India private limited versus DCIT ITA No. 572/del/2014 for assessment year 2009 – 10 , margin of this company applying PLI of OP/OC is noted as 25.63%, whereas in the case of the assessee margin applying the same PLI is noted at 29.40%. Therefore, this fact is not verifiable in absence of the profit and loss account not provided by the Ld. Transfer Pricing Officer to the assessee. Incompleteness in the information itself deserves this comparable to be rejected. Looking to the functional profile of the comparable company as made available in judicial precedents for the same AY , this comparable is held to be KPO and the functional profile of the assessee with respect to the infrastructure support services do not lead to such a conclusion that it is also a KPO. Therefore, based on incomplete information, we direct the Ld. Transfer Pricing Officer to exclude this comparable from the comparability analysis. In view of this ground No. 3 of the appeal of the assessee is allowed considering ground No. 3.3 with respect to selection of the comparables. All other contentions mentioned in ground No. 3 of the appeal are not contested and therefore except ground No. 3.3 all other grounds covered under Main ground. 3 of the appeal of the assessee are dismissed.
Now we come to the ground No. 4, where there is a deduction under section 10 A of the assessee is reduced by Rs. 64666012/–. During the year the assessee has claimed deduction under section 10 A of the income tax act of Rs. 35080640/– and Rs. 53412877/– in respect of Pune and Hyderabad [18] Teradata India Private Limited V DCIT units of the assessee. The Ld. Assessing Officer compared the profit percentage of STP units, which is at 17.03% as against 5.16% in respect of other units. Assessee was asked to furnish unit wise profit and loss account and balance sheet and the basis of the allocation of expenses to the respective units. The assessee furnished the unit wise profit and loss account. However, the basis for allocation of expenses was not given. Therefore, the Ld. Assessing Officer found that managerial remuneration and auditor remuneration and foreign travelling expenses as well as professional services fees with respect to the STP units and non-STP units were not allocated properly and therefore the total expenses under this head amounting to Rs. 32665 0401/– was allocated on the basis of the sales of respective units. Therefore, after allocation a sum of Rs. 39562650/– and 73480877/– was allocated to Pune and Hyderabad unit resulting losses in both these units. On the basis of allocation the Ld. Assessing Officer noted that there is no profit as assessee is having a loss in both the STP units, hence no deduction available to the assessee under section 10 A of the act. Assessee objected to the same before the Ld. dispute resolution panel who vide para No. 8 of its direction held that additional evidences submitted by the assessee is not admitted considering the limitation of time available at the disposal. Further, it was held that managerial remuneration of directors, auditors remuneration, foreign travel expenditure etc are required to be allocated and it was also contended that foreign travel expenditure has been incorrectly considered while making the allocation by ignoring the fact that allocable foreign travel expenditure has already been allocated by the assessee to its STP units and therefore, the Ld. dispute resolution panel directed the Ld. Transfer Pricing Officer /Assessing Officer for verification of these claim and to give an appropriate effect. Pursuant to above direction the Ld. Assessing Officer worked out deduction allowable to the assessee at Rs. 23827505/–. Therefore, assessee is in appeal before us.
Ld. senior advocate on behalf of assessee submitted that assessee has properly allocated expenditure with respect to STP unit Pune and Hyderabad and other locations. He referred to page No. 432 of the paper book wherein the detailed unit wise profit and loss has been worked out [19] Teradata India Private Limited V DCIT
allocating all the expenses. He submitted that the managerial remuneration has been included in the salaries and allowances of Rs. 617882206/- which has been allocated in page No. 432 of the paper book with respect to the various units. Therefore, the finding of the Ld. Assessing Officer is incorrect to that extent. He also submitted that the professional services fees amounting to Rs. 17592 1519/– has also been allocated. He also submitted the audit expenses are also allocated. With respect to the foreign travel expenses he submitted that it is included in travelling expenses. In substance he referred to page No. 432 to substantiate his claim that proper expenditure have been allocated to the various units whether exempt or normal therefore, the adjustment in the deduction claimed by the assessee by the Ld. Assessing Officer was incorrect. He submitted that allocation of the common expenditure even otherwise based on the turnover is not appropriate. He further submitted that assessee submitted certain details before the Ld. Dispute resolution panel, which were not admitted by them due to paucity of time. He submitted that the need for submitting the additional evidence arose because of the reason that the Ld. Assessing Officer did not raise this query during assessment proceedings. He referred to para No. 8.2 of the order of Ld. dispute resolution panel to substantiate his claim. He also relied upon the host of judicial precedents to support its claim, such as a. Zandu Pharmaceutical works Ltd versus CIT 350 ITR 366 (BOM) (para No. 9) to submit that while computing the profits and gains of the concern undertaking only expenses relating thereto can be deducted. It was further held that the expenses attributable to any other unit or the head office expenses which have no relevance to the industrial undertaking cannot be deducted in respect of the said undertaking while computing the profits and gains of the undertaking. b. Commissioner of income tax versus JiyajiRao cotton Mills Ltd 79 taxman 51 (CAL) to say that managing agency commission proportionately cannot be required to be deducted from the profits of the eligible industrial undertaking.
[20] Teradata India Private Limited V DCIT c. CIT versus Hindustan Lever Ltd (2014) 42 Taxmann.com 132 (Madras) to submit that the common head office expenses should not be did proportionately distributed among various units individually on the basis of respective turnover for purpose of calculation of the aforesaid deduction.
The Ld. departmental representative vehemently contested that allocation made by the Ld. Assessing Officer and approved by the Ld. dispute resolution panel is proper in absence of any evidence submitted by the assessee with respect to the allocation of common expenditure for claim of the deduction under section 10 A of the income tax act. He made written submission before us as under:- “iii. Ground No.4: Reduction in deduction u/s 10A to the extent of Rs.6,46,66,012/-: The submission of the assessee that common expenses like managerial remuneration, auditor's remuneration and professional fees are corporate expenses and thus have not been incurred for any unit is not legally and factually tenable. The Directors and Auditors have provided their services to the entire assessee company including all the units. Besides the above, the contention of the assessee that since separate P&L A/c of all the units have been submitted hence the above allocation is not warranted is legally and factually not tenable. The assessee has not maintained separate books of account as mandated by the Rule 18BBB. It has only submitted separate P&L A/c and as held by the AO no basis for the above has been submitted. The law is settled that the common expenses like managerial remuneration, auditor's remuneration and professional fees etc. are required to be attributed to all the units of the assessee on the basis of the turnover. The Hon'ble ITAT Mumbai in case of Datamatics Financial Services v. ACIT dated 29.06.2012 has clearly held that the head office caters to the needs of all the units and therefore the head office expenses are required to be attributed to the various units and, in our view, attribution of expenses based on turnover is quite appropriate. The above view has been affirmed by the Hon'ble ITAT Mumbai in case of Ganesh Polycam Ltd, v. ITO ITA no. 3270/Mum./2014 dated 06.01,2016.” Therefore, he submitted that the Ld. Assessing Officer correctly makes reduction in the deduction u/s 10A of the act. [21] Teradata India Private Limited V DCIT
We have carefully considered the rival contention and also perused the orders of the lower authorities as well as the direction of the Ld. dispute resolution panel with respect to the allocation of common expenditure for working out deduction under section 10 A of the income tax act. According to the provisions of section 10 A of the income tax act assessee is entitled to deduction of profit derived by an eligible undertaking from the export of articles or things or computer software for a period of 10 consecutive assessment years from the total income of the assessee. To determine the sum of profit derived by an eligible unit, It is necessary that all expenditure directly or indirectly related to earning of such profit directly or indirectly should be reduced from the eligible profit. According to page No. 432 of the paper book the assessee has allocated expenditure amounting to Rs. 1520040914/– which is total of the expenditure debited in the profit and loss account comprising of cost of material consumed of Rs. 227291404/–, operating expenses of Rs. 1193276643/- and depreciation of Rs. 99472866/–. According to us, that does not leave any expenditure, which has not been considered by the assessee for allocation. Therefore it is not the case of the revenue that assessee has excluded any of the expenditure for allocating such expenditure to the respective eligible and non eligible units. Now the issue remains that whether the allocation key should be turnover as applied by the ld AO or they should be specific to the nature of the expenditure incurred, as applied by assessee, as stated before us. We submit that turnover is a general allocation key, which can be employed in the end only after testing specific allocation keys, such as for salary and wages, etc, the man hours devoted, for travelling purposes wise, etc. The Ld. Transfer Pricing Officer has adopted the turnover as the allocation key, which we reject because we are of the opinion that allocation key should be specific with respect to the nature of expenditure incurred. As per page No. 432 of the paper book it is not clear what kind of allocation key has been used by the assessee for the purpose of allocation of expenditure. Further, the assessee was not asked during the course of assessment proceedings that how the allocation of expenditure have been made as according to the assessee this issue has not been raised and additional evidence submitted [22] Teradata India Private Limited V DCIT before the Ld. dispute resolution panel were also not considered due to paucity of time. In view of this we set aside the issue of verification of allocation key with respect to allocation of expenditure as submitted at page No. 432 of the paper book to the file of the Ld. Assessing Officer and then to determine the profit derived by the eligible undertaking for working out deduction under section 10 A of the income tax act, after affording reasonable opportunity of hearing to the assessee. In view of this ground No. 4 of the appeal of the assessee is allowed with above direction.
Ground No. 5 of the appeal of the assessee is with respect to not granting deduction for rent of Rs. 90 lakhs, which was disallowed in the assessment year 2008- 2009 on the ground that it is a prepaid expenditure. While filing return of income of the assessee for this year in the computation of total income, assessee has disallowed the above sum stating that rent debited to the prepaid expenses claimed in assessment year 2008 – 09 of Rs. 90 lakhs may be disallowed only if the same is allowed in that year. The note at point No. 5 is that the assessee has claimed deduction in respect of rent paid to the landlord of Rs. 24695642/- in the assessment year 2008 – 09, which was accounted as prepaid expenses. Accordingly, the rent amounting to Rs. 90 lakhs debited to the profit and loss account during the year ended 31st part 2009 is added back. The Ld. dispute resolution panel did not allow claim of assessee for the reason that assessee is in appeal before coordinate bench for that previous year objecting to the disallowance of the rent amount paid in that previous year.
Ld. authorized representative submitted that now the issue has been decided by the coordinate bench vide order dated 01/08/2016 wherein at page No. 22, while deciding the ground No. 9 of the appeal vide para No. 9, coordinate bench has set aside the issue to the file of the Ld. Assessing Officer for verification of the facts and to allow the claim of the assessee if the same is found to be admissible as per law. In view of this we also set aside this ground of appeal to the file of the Ld. Assessing Officer to decide it afresh which will depend on the outcome of the finding of the Ld. Assessing Officer with respect to the assessment year 2008 – 09, if other conditions of [23] Teradata India Private Limited V DCIT the law are fulfilled. In the result ground No. 5 of the appeal of the assessee is allowed with above direction.
Ground No. 6 of the appeal of the assessee is with respect to the disallowance of provision for product support and services (i.e. provision for warranty) of Rs. 317672/– on the basis that the said expenditure is in the nature of unascertained liability. It was submitted by the Ld. authorized representative that the issue is squarely covered by the decision of the coordinate bench in assessee‟s own case for the previous year in for assessment year 2008 – 09 wherein vide para No. 10.8, coordinate bench has set aside the issue back to the file of the Ld. Assessing Officer for verifying the provision in view of the decision of the Hon‟ble Supreme Court in case of Rotork controls India private limited versus CIT 314 ITR 62. In view of this, we also set aside this ground of appeal
to the file of the Ld. Assessing Officer to decide it in accordance with the order of the coordinate bench. In the result ground No. 6 of the appeal of the assessee is allowed with above direction.
28. Ground No. 7 of the appeal of the assessee is with respect to the disallowance of depreciation of Rs. 6609672/– on fixed assets acquired by the appellant from NCR Corporation India private limited. The Ld. authorized representative submitted that the issue similar to ground No. 11 of the appeal of the assessee covered by the decision of the coordinate bench in assessee‟s own case for assessment year 2008 – 09 wherein the coordinate bench set aside the whole issue back to the file of the Ld. Assessing Officer in terms of para No. 11.6 of that order. In view of the decision of the coordinate bench in the assessee‟s own case for assessment year 2008 – 09, we also set aside this ground of appeal of the assessee to the file of the Ld. assessing officer, as the depreciation will always depend upon the written down value of the assets in earlier year. Accordingly ground No. 7 of the appeal of the assessee is allowed with above direction.
29. Ground No. 8 of the appeal of the assessee is with respect to the chargeability of interest under section 234B of the income tax act of Rs. 8420180. This ground of appeal is consequential to the assessment of the assessee and therefore it is rejected. [24] Teradata India Private Limited V DCIT
Ground No. 9 of the appeal of the assessee is against the initiation of penalty proceedings under section 271 (1) ( c) of the act. According to us this ground of appeal
of the assessee is premature as ld AO has just initiated penalty proceedings and therefore it is dismissed.
31. In the result, appeal of the assessee is partly allowed.