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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI NABIN KUMAR PRADHAN
Date of Hearing – 26.07.2016 Date of Order – 29.07.2016
O R D E R PER SAKTIJIT DEY, J.M.
Aforesaid appeal of the Department is directed against order dated 20th December 2010, passed by the learned Commissioner (Appeals)–15, Mumbai, for assessment year 2005–06. Department has raised following grounds:–
2 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] On the facts and in the circumstances of the ease and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:
1. 1. The order of CIT(A) is opposed to law and facts of the case.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that amount of Rs. 15.43 Lacs paid to Equant Network Services Ltd., was neither royalty nor fees for technical services without appreciating that - The payment made to Equant Network Services Ltd., is in the a. nature of royalty payment since it involves the use of commercial equipments. The decision of ITAT, Hyderabad in the case of Frontline Soft b. Ltd., wherein such payment was held to be 'royalty'.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the adjustment at Rs. 28.44 Lacs instead of Rs. 5.17 Crs made by the TPO without appreciating that– The assessee did not furnish the necessary information relating a. to the payment of technical fees. The reasons given by the TPO in considering the companies b. Vishal Information Technologies Ltd. & Cepha Imaging Pvt. Ltd. are comparables. The TPO had given allowance appropriate for working capital c. adjustment after giving reasons in his order. The CIT(A) erred in giving allowance for working capital d. adjustment at 4% of average mean without sufficient reasons. The CIT(A) had given allowance of safe limits, which is not e. applicable to the subject assessment year.”
4. For these and other grounds that may be urged at the time of hearing, the decision of the learned CIT(A) may be set aside and that of the A.O. restored.
Grounds no.1 and 4 being general in nature, do not require any specific adjudication.
3 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] 3. In ground no.2, Department has challenged the decision of the learned Commissioner (Appeals) in deleting the addition made of ` 15.43 lakh on account of disallowance under section 40(a)(i) of the Act.
Brief facts are, in the course of assessment proceedings, the Assessing Officer found that assessee during the relevant previous year, has paid certain amount towards satellite expenses to a non– resident company viz., Equant Network Services Ltd. The Assessing Officer being of the opinion that such payment made by the assessee is in the nature of “royalty” or “fees for technical services”, the assessee should have deducted tax at source while making such payment. Assessee having not done so, he proposed to disallow the expenditure claimed by invoking section 40(a)(i). The assessee objected to the proposed disallowance by stating that assessee receives data via computers and sends back the same after processing through internet for which it pays fees to Videsh Sanchar Nigam Ltd. and to Equant Network Services Ltd. for international lease line circuit charges. It was submitted, as these payments are made towards internet connectivity / international lease line charges, they are not in the nature of either “royalty” or “fees for technical services”, hence, there was no requirement of deduction of tax at source. The Assessing Officer, however, did not agree with the contention of the assessee as 4 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] according to him, the payment made to Equant Network Services Ltd. is in the nature of royalty. As the assessee did not deduct tax at source on such payments, he disallowed amount of ` 15,45,058. Being aggrieved of such disallowance preferred appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals) noticing that similar issue was decided in favour of the assessee in assessment year 2006–07 by his predecessor–in–office followed the same and deleted the addition made by the Assessing Officer.
Learned Departmental Representative supporting the view expressed by the Assessing Officer and referring to the definition of royalty under section 9 of the Act, submitted that the payment made by the assessee is in the nature of royalty. However, he was fair enough to submit that in assessment year 2006–07, learned Commissioner (Appeals) while deciding identical issue arising out of order passed under section 201 / 201(1A), has held that the payment made does not require deduction of tax at source.
Learned Authorised Representative strongly supporting the view of the learned Commissioner (Appeals) submitted that the issue stands decided in favour of the assessee not only by the orders of the learned Commissioner (Appeals) but by the Tribunal in assessee’s own case
5 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] both in respect of addition made in quantum assessment as well as in relation to order passed under section 201/201(1A) of the Act.
We have considered the submissions of the parties and perused the material available on record. It is observed that identical issue arising out of non–deduction of tax at source in respect of payment made to Equant Network Services Ltd. was subject matter of appeal before the Tribunal in assessee’s own case for assessment year 2006– 07 in ITA no.5129/Mum./2009 dated 31st May 2011. While considering the issue relating to demand raised under section 201/201(1A) of the Act the Tribunal held that the payment made to Equant Network Services Ltd. is not in the nature of royalty or fees for technical service, hence, it does not require deduction of tax at source under section 195. The same view was again expressed by the Tribunal in assessee’s own case while deciding the issue arising out of disallowance made under section 40(a)(i) for the assessment year 2006–07 in ITA no.8772/Mum./2010. In a recent decision, the Tribunal, Delhi Bench, in Bharti Airtel Ltd. v/s ITO, [2016] 178 (Trib.) 708, also expressed similar view. In view of the aforesaid, we hold that the payment made to Equant Network Services Ltd. not being in the nature of royalty or fees for technical service there is no requirement of deduction of tax at source, hence, disallowance made under section 40(a)(i) is not sustainable. We, therefore, uphold the 6 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] order of the learned Commissioner (Appeals) by dismissing ground no.2, raised by the Department.
In ground no.3, the Department has raised couple of issues relating to deletion of addition made on account of transfer pricing adjustment.
The first issue relates to exclusion of two comparables by learned Commissioner (Appeals) viz. Vishal Technologies Ltd. and Cepha Imaging Pvt. Ltd.
Supporting the view of the Assessing Officer, learned Departmental Representative sought inclusion of this company.
Learned Authorised Representative on the other hand submitted, Vishal Information Technologies Ltd. cannot be considered as a comparable to the assessee as it is functionally different from the assessee in the sense it does not undertake ITES on its own but out sources it to third parties which is evident from the low employee cost of 0.95%. He, therefore, submitted the company has been rightly rejected by the learned Commissioner (Appeals).
7 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] 13. We have considered the submissions of the parties and perused the material available on record. It is evident from the material placed before us that personnel cost of Vishal Information Technologies Ltd. as a percentage of its turnover is only 0.95% as against the employee cost of 47.86% of the assessee. The aforesaid fact signifies that the company does not carry out the ITES activities on its own but out sources it to third party vendors. For the very same reason in various decisions of the Tribunal as well as High Court, this company has been rejected as a comparable to ITES services provider. For the aforesaid reasons, we do not find any infirmity in the order of the learned Commissioner (Appeals) in excluding this company.
Learned Departmental Representative objecting to exclusion of this company by the learned Commissioner (Appeals) submitted that the functional profile of the company would suggest that it broadly fits into the category of ITES services provider, therefore, there is no reason to exclude this company.
Learned Authorised Representative vehemently opposing the submissions of the learned Departmental Representative contended that Cepha Imaging Pvt. Ltd. is engaged in software development services, hence, cannot be comparable. Further, learned Authorised
8 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] Representative submitted the audited financial results of this company for financial year 2004–05 is not available in public domain. He submitted, only report of financial year 2005–06 is available in public domain and relying upon the information available in annual report for financial year 2005–06, Transfer Pricing Officer has selected it as a comparable which is not proper. The learned Authorised Representative submitted, even otherwise also the information available indicates that the company has sundry debtors which constitute 35.56% of the revenue generated which signifies that the company bears collection risk. Hence, the functional profile being different it cannot be held as a comparable to ITES service provider. In this context, he relied upon the following decisions:– i) ACIT v/s M/s. Hapag Llyod Global Services Pvt. Ltd., ITA no.8499/Mum./2010, 28.2.2013; ii) ACIT v/s M/s. Maersk Global Service Centre (India) Pvt. Ltd., ITA no.3774/Mum./2011, [2012] 66 DTR (Mum.) (Trib.), 90; iii) M/s. Mercer Consulting (I) Pvt. Ltd. v/s DCIT, [2014] 150 ITD 001 (Del.).
We have considered the submissions of the parties and perused the material available on record. It is seen from the order of the learned Commissioner (Appeals), he has excluded this company as it is involved in software development and production of spares. He also noted that company is engaged in document scanning and conversion,
9 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] content conversion, content indexing and extended metadata text encoding. He also noted that company bears collection risk and incurs selling and administration expenses. We have also noted that for this very reason, the Tribunal in the decisions cited by the learned Authorised Representative has found this company to be functionally different from ITES service provider, hence, excluded it as a comparable. As these decisions relied upon by the learned Authorised Representative are for the very same assessment year, respectfully following the same, we uphold the exclusion of the company as a comparable.
The next issue raised by the Department is in relation to relief granted by the learned Commissioner (Appeals) on account of payment made by the assessee to its A.E. for availing technical services.
Brief facts are, while computing the arm's length price of the international transaction, the Transfer Pricing Officer noticed that the assessee has paid ` 1,11,18,275 towards availabing of technical service from the A.E. Alleging that the assessee has failed to submit adequate document to justify the arm's length price of the transaction, Transfer Pricing Officer disallowed the payment by determining the arm's length price at nil. Challenging the disallowance, assessee filed
10 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] appeal before the learned Commissioner (Appeals). It was submitted by the assessee before the learned Commissioner (Appeals) that the assessee is following cost plus model for charging fees to the A.E. while rendering ITES and the cost of technical service also forms part of total cost, based on which cost plus mark–up is charged. The learned Commissioner (Appeals) after considering the submissions of the assessee in the context of facts and material on record, held that if cost is to be disallowed in the hands of the assessee then similar adjustment has to be made to the income by not taxing the same in the hands of the assessee. Accordingly, he deleted the addition.
Learned Departmental Representative submitted, the assessee did not furnish any details before the Transfer Pricing Officer for which he disallowed the cost. He submitted, the learned Commissioner (Appeals) without appreciating this aspect has deleted the addition.
Learned Authorised Representative on the other hand relied upon the observations of the learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record. Undisputedly, the assessee is remunerated at cost plus of mark–up of 10% by the A.E. towards provisions of ITES. Therefore, whatever cost incurred by the assessee is reimbursed by the A.E. with mark–up. That being the case, as the 11 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] cost has already been reimbursed by the A.E. with mark–up and has been taken as part of income of the assessee the Transfer Pricing Officer was not justified to disallow the cost without making similar adjustment in the income. In the aforesaid view of the matter, we find the conclusion drawn by the learned Commissioner (Appeals) to be appropriate and logical, hence, there is no reason to interfere with the same. Accordingly, ground raised by the Department is dismissed.
In the course of hearing, the assessee has filed an application under rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963, seeking to raise certain additional issues / grounds.
We have heard the parties on the admissibility of the application made under rule 27. After considering the submissions of the parties in the light of the decisions of the Hon'ble Jurisdictional High Court in Skol Breweries Ltd. v/s ACIT, Income Tax Appeal no.34 of 2009, dated 9th February 2009, and the decision of the Tribunal, Hyderabad Bench in ACIT v/s Late Allam Adavaiah, ITA no.1336/Hyd./2012 and Ors. dated 10th July 2015, we admit the application made under rule 27 and propose to deal with the grounds raised therein by the assessee.
The first issue raised by the assessee relates to rejection of certain comparables which are Airline Financial Support Services India Ltd. and Saffron Global Ltd. Objecting to selection of Airline Financial
12 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] Support Services India Ltd., the learned Authorised Representative submitted that the related party transactions (RPT) of this company is 31.75% which is more than 25% RPT filter applied by the Transfer Pricing Officer. He, therefore, submitted, this company cannot be treated as comparable. In support of such contention, learned Authorised Representative relied upon the decision of the Tribunal, Mumbai Bench, in ACIT v/s Maersk Global Service Centre (I) Pvt. Ltd., [2012] 66 DTR (Mum.) (Trib.) 90 and ITAT, Delhi Bench, in ITO v/s NTT Data Global Delivery Services Ltd., ITA no.1382/Del./ 2012 dated 16th May 2016.
Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer / learned Commissioner (Appeals).
We have considered the submissions of the parties and perused the material available on record. It is evident from the order of the Transfer Pricing Officer, while applying filter for selecting comparables has excluded companies having RPT of more than 25%. It is the contention of the assessee that RPT of Airline Financial Support Services India Ltd. is 31.75%, hence, it does not qualify RPT filter applied by the Transfer Pricing Officer himself. On a perusal of the material submitted before us, we find the aforesaid contention of the 13 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] learned Authorised Representative to be correct. Moreover, in case of NTT Data Global Delivery Service Ltd. v/s ITO, the Tribunal, Delhi Bench, considering the fact that the RPT of this company roughly at 32% is more than RPT filter of 25% held that it cannot be treated as comparable. The same view was also expressed by the Tribunal, Mumbai Bench, in case of ACIT v/s Maersk Global Service Centre India Pvt. Ltd. Thus, the assessee having been able to demonstrate that for the impugned assessment year RPT of this company fails more than 25% RPT filter applied by the Transfer Pricing Officer, we are inclined to exclude this company as a comparable. Though, the assessee had also objected to another company viz. Saffron Global Ltd., however, in the course of hearing the learned Authorised Representative fairly submitted that on exclusion of Airline Financial Support Services India Ltd. the margin of the assessee comes within the tolerance band of ± 5% requiring no further adjustment. In that view of the matter, the issue relating to comparability of Saffron Global Ltd. being of academic interest is not required to be adjudicated upon.
One more issue raised by the assessee in the application under rule 27 of the IT(AT) Rules pertains to allowance of risk adjustment. However, considering the fact that after exclusion of certain comparable companies and other relief granted to the assessee, no further adjustment is required to be made to the price charged by the 14 M/s. Trinity Computer Processing (I) Pvt. Ltd., [Now known as Willis Processing Services (I) Pvt. Ltd.] assessee, this issue has become academic, hence, we do not intend to adjudicate the same. However, it is open for the assessee to raise such issue in an appropriate case in future.
In the result, Department’s appeal is dismissed and the grounds raised by the assessee in its application under rule 27 of Income Tax (Appellate Tribunal) Rule, 1963 are allowed to the extent indicated above. Order pronounced in the open Court on 29.07.2016