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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI S. JAYARAMAN
Per Sunil Kumar Yadav, Judicial Member These cross appeals are filed by the assessee as well as revenue
against the order of the AO passed consequent to the order of the DRP.
Since both these appeals were heard together, these are being disposed of
through this consolidated order.
IT(TP)A No.331/Bang/2015
This appeal is preferred by the assessee inter alia on the following
grounds:-
“Grounds of Appeal 1. On the facts and circumstances of the case and in law, the learned Assessing Officer ("AO") / learned Transfer Pricing Officer ("TPO") and the Hon'ble Dispute Resolution Panel ("DRP") erred in making an addition of Rs.31,309,364 to the returned income of the Appellant for the AY 2010-11. Grounds of appeal relating to transfer pricing adjustment 2. On the facts and circumstances of the case and in law, the learned AO /learned TPO and the Hon'ble DRP erred in determining an adjustment of Rs. 13,476,048 to the appellant's total income based on provisions of Chapter X of the Income tax Act, 1961 (,the Act'). 3. On the facts and circumstances of the case and in law, the learned AO / learned TPO and the Hon'ble DRP erred in rejecting the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Income-tax Act, 1961 ("Act") read with the Income Tax Rules, 1962 ("Rules"), thereby undertaking a fresh economic analysis during the course of assessment proceedings.
Not allowing use of multiple year data/contemporaneous data 4. On the facts and circumstances of the case and in law, the learned AO / learned TPO and the Hon'ble DRP erred in not allowing the use of multiple year data as prescribed under Rule 1OB(4) of the Rules.
On the facts and circumstances of the case and in law, the learned AO / learned TPO and the Hon'ble DRP erred in using data which was not available at the time of filing return of income for AY 2010-11, by rejecting Appellant's objections on use of contemporaneous data and
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ignoring the principle of impossibility of performance as per principles enshrined in various decisions of the Apex Court.
Rejecting the search process adopted by the Appellant and proposing a new search process 6. On the facts and circumstances of the case and in law, the learned AO / learned TPO and the Hon'ble DRP erred in rejecting the use of the search process applied by the Appellant in the documentation maintained under section 920 of the Act.
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During the pendency of the appeal, the assessee has also moved an application for raising additional ground which is as under:-
“13A. On the facts and in the circumstances of the case and in law, the ld. Transfer Pricing Officer (‘TPO’) has in his fresh transfer pricing study, erred in accepting Asian business Exhibition & Conferences Limited as comparable to the appellant. The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above ground of appeal, either before or during the hearing of the appeal.”
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In support of admission of this additional ground, the ld. Counsel for
the assessee has submitted that inclusion of this comparable was not
disputed before the DRP, as the datas of the comparable were not
available, but now the issue is covered by various judgments that Asian
Business Exhibition & Conferences Ltd. [hereinafter referred to as “ABEC
Ltd.”] cannot be taken as comparable on account of functional dissimilarity.
In support of his contention, he has placed reliance upon the order of the Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd.,
IT(TP)A No.212/Bang/2015. Copy of this order is placed on record. It was
also contended that now it is settled position of law that inclusion of
comparables can be disputed before the Tribunal even for the first time,
though it was not disputed before the DRP.
The ld. DR, on the other hand, has submitted that once the
assessee has not disputed the inclusion of particular comparables before
the DRP, it is precluded to raise any dispute with respect to inclusion of that
particular comparable before the Tribunal.
Having carefully examined the rival contentions in this regard, we
are of the view that now this controversy has been resolved through
various judicial pronouncements that assessee can raise dispute with
respect to particular comparables before the Tribunal, though it was not
disputed before the DRP. In the light of these facts, we admit the additional
IT(TP)A Nos.331 & 167/Bang/2015 Page 6 of 15
ground and prefer to adjudicate the same along with other grounds relating
to inclusion/exclusion of comparables while computing the ALP.
Ground Nos. 1 to 14 and the additional ground relate to the inclusion
of the comparables and necessary adjustments on account of working
capital while determining the ALP.
During the course of hearing, the ld. Counsel for the assessee has
invited our attention that he has objection with regard to inclusion of two
comparables; one is ABEC Ltd., and the other is H C C A Business
Services Pvt. Ltd. With regard to the first comparable, i.e., ABEC Ltd., the
assessee has not initially raised the dispute before the DRP, but the other
comparable was disputed before the DRP and being convinced with the
contentions of the assessee, the DRP has issued directions to the TPO/AO
to exclude H C C A Business Services Pvt. Ltd. and compute afresh the
ALP, but the AO has not passed the consequential order. In this regard,
we are of the view that if the AO has not passed the order consequent to
the directions of DRP, the assessee can approach the appropriate
authorities for compliance of the directions by the TPO/AO.
So far as exclusion of other comparables i.e. ABEC Ltd. is
concerned, the ld. Counsel for the assessee has submitted that the
business profile of ABEC Ltd. is to organize exhibitions and events and
therefore is not comparable with the support services provided by the
assessee to its AE. In support of his contention, the ld. Counsel has
IT(TP)A Nos.331 & 167/Bang/2015 Page 7 of 15
invited our attention to the business profile of the assessee and as
mentioned in the TPO’s order, according to which, the assessee is
engaged in providing support functions to the sales organizations with the
objective of converting every sales opportunity effectively and efficiently,
whereas the profile of ABEC Ltd. was discussed in the order of Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. in IT(TP)A
No.212/Bang/2015 wherein in para 52 of the order it was observed that
ABEC Ltd. is mainly engaged in organization of exhibitions and events as
well as conducting conferences on behalf of various clients for various
products and business. Therefore, the company cannot be compared as
good comparable with the assessee, who was engaged in the support
services. A copy of the order is placed on record.
The ld. DR simply placed reliance on the order of DRP.
Having carefully examined the orders of lower authorities in the light
of rival submissions, we find that undisputedly the assessee is engaged in
providing support functions to sales organizations with the objective of
converting every sales opportunity effectively and efficiently to its AE;
whereas ABEC Ltd. is engaged in the organizing exhibitions and events or
conferences. The issue whether ABEC Ltd. can be called to be a good
comparable with the assessee where the assessee is engaged in support services was examined by the Tribunal in the case of DCIT v.
Electronics for Imaging India Pvt. Ltd. (supra) and it was categorically held
IT(TP)A Nos.331 & 167/Bang/2015 Page 8 of 15
that ABEC Ltd. cannot be considered to be as good comparable with the assessee. The relevant observation of the Tribunal is extracted hereunder for the sake of reference:-
“50. The assessee has raised various objections in the CO. However, we find that the only effective ground raised by the assessee in the marketing support segment is regarding Asian Business Exhibition & Conference Ltd., a comparable selected by the TPO and retained by the DRP. 51. The assessee objected against this company on the ground that this company is functionally different as it is engaged in organizing exhibitions and conferences. The DRP did not accept the contention of the assessee and held that this company received income in the nature of consultancy for organizing exhibitions and events. Therefore this company is functionally similar to the functions carried out by the assessee. 52. Before us, the ld. AR of the assessee has submitted that functional comparability of this company has been examined by the Mumbai Bench of the Tribunal in the case of RGA Services India Pvt. Ltd. vide order dated 20.11.2015 in ITA No.22/Mum/2015 and submitted that the Mumbai Tribunal has held that the operation of organizing exhibition and events is not comparable with support services provided by the assessee to its AE in respect of reinsurance and actuarial activities. Thus, the ld. AR has submitted that this company cannot be considered as functionally comparable with the assessee’s activity of providing sales and marketing services to its AE. 53. We have considered the rival submissions and considered the relevant material on record. As it is clear that the assessee is providing sales and marketing services to its AE which includes identifying potential customers by conducting road shows, presentation and the like, the working also includes educating potential users of the benefit and features of the AEs range of products. However, products for which the assessee is providing sales and marketing services is only software/information technology products. Therefore, Asian Business Exhibition & Conference Ltd. which is mainly engaged in the organization of exhibitions and events as well as conducting conferences on
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behalf of the various clients for their various products and businesses. The functions of this company are entirely different from the assessee who is providing sales and marketing support services to its AE for software/IT products. The Mumbai Bench of the Tribunal in the case of RGA Services India Pvt. Ltd. (supra) while considering the functional comparability of this company has held at paras 11 and 12 as under:- “11. We have considered the submission of the parties and perused the relevant material on record. On perusal of the order passed by the TPO it is noticed that the TPO while dealing with assessee’s objection with regard to selection of Asian Business Exhibition and Conferences Limited as a comparable has admitted that the nature of function performed by this company is event management. It is further relevant to observe, on perusal of annual report of this company it is seen that as per directors report, the main operation is organizing exhibition and events. Further, schedule 12 of the profit and loss account as well as notes to the accounts reveals, revenue earned by the company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc. 12. Thus, on overall analysis of facts and materials placed on record it is very much clear that the business model of the assessee and Asian Business Exhibition and Conferences Limited are totally different. While assessee undoubtedly is providing support services to its overseas AE’s, Asian Business Exhibition and Conferences Limited is primarily and fundamentally engaged in event management. Thus, under no circumstances it can be considered as a comparable to the assessee. Therefore, for the aforestated reasons the DRP, in our view, was justified in excluding this company as a comparable. As far as the contention of learned DR that reasons on which this company was excluded equally applies to other comparables retained by the DRP, we may observe, such argument of learned DR is not at all relevant as the issue raised by the department in the present appeal is confined to exclusion of Asian Business Exhibition and Conferences Limited as a comparable. As far as objection of learned departmental representative that assessee itself has selected this company as a comparable, we may observe, that cannot be the sole criteria to reject assessee’s
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objection with regard to selection of a comparable. At the time of preparing T.P. Study report assessee had selected some comparables by considering multiple year data and information available at the relevant time. However, if subsequently on the basis of information available in public domain it is found on the basis of functionality or some other reason a company is not at all comparable, assessee cannot be precluded from objecting to selection of the company as a comparable. This legal proposition is fairly well settled by the decision in case of DCIT V/s. Quark Systems (P) Ltd. (2010)132TTJ(Chd)(SB)1 as well as decisions relied upon by the counsel for the assessee. In view of the aforesaid, we do not find any infirmity in the directions of DRP in excluding Asian Business Exhibition and Conferences Limited as a comparable. The ground raised is therefore dismissed.” 54. In view of the above facts as well as decision of the Mumbai Bench of the Tribunal, this company cannot be considered as a good comparable with the assessee.”
Since identical issue has been examined by the Tribunal in similar set of facts, we find no justification to take a contrary view in this case. Accordingly following the same, we hold that ABEC Ltd. cannot be called to be a good comparable with the assessee, therefore we direct the TPO/AO to exclude it while computing the fresh ALP.
The ld. counsel for the assessee has also raised an issue with regard to reasonable adjustment on account of working capital, but during the course of hearing, he has candidly admitted that he has not furnished the data with regard to working capital of the assessee as well as other comparables; but he contended that the matter be restored back to the
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TPO to readjudicate the issue afresh in the light of details of working capital of assessee as well as other comparables for computing the ALP.
The ld. DR, on the other hand, has also agreed that the whole issue be examined by the TPO while computing fresh ALP in terms of the order of the Tribunal.
Having carefully considered the rival submissions, we find that reasonable adjustment on account of working capital should be made while computing the ALP. Accordingly, we direct the TPO to examine the issue of adjustment on account of working capital of the assessee as well as other comparables in accordance with law.
With regard to ground No.15, the ld. counsel for the assessee has contended that the AO has not allowed deductions on account of disallowance of ESOP expenses. In support of his claim, he has placed reliance upon certain judgments. which are as under:-
(a) Precision Camshafts Ltd. [ITA No.70/PN/2012] (b) M/s. Polaris Financial Technology Ltd. v. DCIT [ 2013-TIOL- 774-ITAT-MAD] (c) Performica Software Pvt. Ltd. v. DCIT [2013-TIOL-1030-ITAT- HYD] (d) M/s. Cognizant Technology Solutions India Pvt. Ltd. v. ACIT [2013-TIOL-745-ITAT-MAD] (e) Batronics India Ltd. [ITA No.2188/Hyd/2011 and 2189/Hyd/2011
IT(TP)A Nos.331 & 167/Bang/2015 Page 12 of 15
(f) M/s. International Gold Co. Ltd. v. ITO [2010-TIOL-652-ITAT- MUM] (g) Virinchi Technologies Ltd. v. DCIT [ITA No.209/Hyd/2010] (h) Zavata India Pvt. Ltd. v. ACIT [ITA No.1100/Hyd/2009]
The ld. counsel for the assessee submitted that on account of disallowance, the income has been increased and assessee is entitled for deduction thereon u/s. 10B of the Act.
We have carefully examined the issue and the submissions of the assessee and we find that the assessee has not raised any dispute in this regard before the DRP. Since we are restoring the matter of recomputation of the ALP to the TPO/AO in the terms indicated in the order, the aspect of claim of deduction u/s. 10B on disallowance on account of ESOP expenses be examined by the AO while passing the consequential order. Accordingly, this issue is restored to the AO to adjudicate it in the light of the judgments referred to by the assessee in accordance with law.
IT(TP)A No.167/Bang/2015 19. This appeal is preferred by the revenue against the order of DRP inter alia on various grounds which are as under:-
IT(TP)A Nos.331 & 167/Bang/2015 Page 13 of 15
IT(TP)A Nos.331 & 167/Bang/2015 Page 14 of 15
During the course of hearing, the ld. counsel for the assessee has placed reliance only upon TPO/AO’s order. He has not pointed out any specific defect in the order of DRP. However, we have carefully examined the order of DRP and we find that ground Nos. 1 to 4 raised in the revenue’s appeal relate to the exclusion of the expenditure incurred in foreign currency from the export turnover and this issue was examined by the DRP in the light of judgment of jurisdictional High Court in the case of CIT v. M/s. Tata Elxsi Ltd. and therefore we find no infirmity in the order of DRP. Accordingly, we confirm the same.
With regard to the other issue of inclusion/exclusion of comparables, we find that this issue was examined by us in the assessee’s appeal and we have issued certain directions to the TPO/AO to recompute the ALP in the terms indicated in the order. Therefore, we do not find any justification to deal with the issues again. Accordingly, these grounds are disposed of.
In the result, the appeal of assessee is allowed for statistical purposes and that of the revenue is dismissed.
Pronounced in the open court on this 21st day of October, 2016.
Sd/- Sd/- ( S. JAYARAMAN ) (SUNIL KUMAR YADAV ) Accountant Member Judicial Member
Bangalore, Dated, the 21st October, 2016. /D S/
IT(TP)A Nos.331 & 167/Bang/2015 Page 15 of 15
Copy to:
Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar, ITAT, Bangalore.