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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-2’ NEW DELHI
Before: SHRI N. K. SAINI & SMT SUCHITRA KAMBLE
ORDER PER SUCHITRA KAMBLE, JM
This appeal is filed by the Revenue and the Cross-Objection is filed by the assessee against the order dated 5/2/2013 passed by the CIT (A)’s XX, New Delhi.
The grounds of appeal of the revenue are as under:-
“1. On the facts and in the circumstances of the case and in law the Ld. CIT (A) has erred in deleting the adjustment of Rs.1,21,84,936/- made by the A.O on account of adjustment of Arms Length Price.” 3. The ground of appeal of the (Cross-Objection) assessee are as under:-
1. The order of the Ld. CIT(A)/TPO Assessing Officer in so far as it is against the Respondent, is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the respondent’s case.
2. The respondent prays leave of the Tribunal to raise the following questions in the cross objections which are pure questions of law and in accordance with the ratio of the apex court in National Thermal Power Corporation 229 ITR Page 383 has raised the same for adjudication for the advancement of substantial cause of justice. a. The order of the assessment is bad in law as the mandatory conditions to invoke the jurisdiction u/s92CA of the Act did not exist, or having not been complied with and consequently the orders of the Assessing Officer is bad in law for want of requisite jurisdiction. b. The Assessing Officer erred in not providing the copy of the approval granted by the Commissioner which is in violation of the settled principles of natural justice and thus the order of assessment needs to be set aside. c. The authorities failed to appreciate that as the Assessing Officer has to pass an order in conformity with the order of the transfer pricing officer, it is incumbent on them to give us an opportunity of being heard before referring the matter to the TPO and hence reference to TPO without hearing us before the reference is in violation of the principles of natural justice and on this count also the order requires to be cancelled.
The Ld. CIT (A), TPO and the Assessing Officer erred in rejecting the comparables selected by the respondent without giving any cogent reasons.
The Ld. CIT (A), TPO and the Assessing Officer erred in not applying employee cost filters for a labor intensive industry wherein the respondent operates.
5. Without prejudice, the Ld. CIT (A), TPO and the Assessing Officer failed to understand the spirit and intent of Rule 10B(1) (e)(ii) as per which even if one of the comparables selected by the respondent satisfied the computation mechanism for determination of the ALP, the determination of ALP by using arithmetic mean of different comparables is not warranted. Further in the absence of the Assessing Officer demonstrating by way of records in the course of assessment that TP adjustment has been made in respect of his own comparables which the TPO has adopted and which are less than the % offered by the respondent, the question of making any TP adjustment in the respondent case does not arise.
6. The Ld. CIT(A), TPO and the Assessing Officer have erred in denying the respondent the right to cross-examine the companies whose data called for u/s133(6) was used for the computation of ALP margin. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) while disposing the appeal u/s 250 of the Income-tax Act 1961(‘the Act’) has erred in: 7. Using financial information of the comparable companies to the Financial Year 2007-08 although such information was not available to the assessee at the time of preparation of ‘Transfer Pricing (‘TP’) documentation as per the requirement of the Act.
8. Confirming the rejection of transfer pricing documentation by transfer pricing officer (‘TPO’)
9. Confirming the application of arbitrary filters by TPO and not adjudicating on unjust rejection of certain filters by TPO applied by the assessee for selection/rejection of companies; 10. Approving use of information gathered by the TPO by exercising power u/s 133(6) of the Act without appreciating that the information is not available in public domain, which is contrary to the principles of natural justice; 11. Rejecting certain functionally comparable companies accepted by the assessee and accepting certain non-comparable companies selected by the TPO without giving any logical reasons; 12. Accepting certain companies engaged in performing Knowledge Process Outsourcing (‘KPO’) functions otherwise not comparable, as comparable to the assessee engaged in providing medical transcription services which are in the nature of back-end IT enabled services; 13. Accepting certain companies with abnormally high margins and certain companies with high turnover otherwise not comparable to the assessee; 14. Not granting comparability adjustment on account of difference in risk assumed by the assessee vis a vis the comparable companies and in ignoring the qualification of above adjustments for such difference; 15. Accepting the incorrect computation of the operating margins of some of the comparable companies by the TPO; and 16. Rejecting the plea that the assessee is a software technology park of India (“STPI”) unit which is entitled to tax holiday and consequently there is no motivation for shifting profits through transfer pricing mechanism. 17. The respondent craves leave to add, alter, delete, modify any of the grounds which are urged above.
For the above and such other grounds as may be urged at the time of hearing the respondent prays your Honour to consider the facts and circumstances of the case and justice be rendered.
4. The Assessee is a company incorporated in India and was engaged in providing medical transcription services to associated enterprises. For the relevant assessment year, case of the Applicant was selected for scrutiny and the Assessing Officer (‘A.O’) referred the same to the Transfer Pricing Officer (“TPO”) for determination of Arm’s Length Price (‘ALP’). The TPO determined the ALP of the international transaction at Rs.19,55,47,963/- thereby proposed an addition of Rs.1,21,84,936/- to the total income of the Applicant, without giving benefit of adjustment of +-5% as per provisions of Section 92C(2) of the Income-tax Act, 1961 (‘the Act’), as were prevailing prior to October 1, 2009. Consequently, following the recommendation of the TPO, A.O made additions to the total income of the Applicant. The assessee appealed against the said order of the A.O before the Commissioner of Income Tax (Appeals) [‘CIT (A)’]. The CIT (A) did not adjudicate the said ground, relating to the deduction of 5% from the ALP.
The assessee challenged the said order of CIT (A) before this Hon’ble Tribunal in present appeal and also raised the additional ground, which reads as under:-
“(i) That on the facts and circumstances of the case and in law, the Commissioner of Income tax (Appeals) as well as the Assessing Officer / Transfer Pricing Officer erred in not providing relief of 5% standard deduction as per section 92C(2) of the Income-tax Act, 1961, as prevailing prior to October 1, 2009.” It is submitted that the said ground/issue is squarely covered in favour of the assessee by the decision of this Hon’ble Tribunal for the assessment year 2006-07. The relevant observations of ITAT, are inter alia as under:
“5 per cent standard deduction has been denied on the ground that proviso to Section 92C (2) of the Act has been amended though the said Amendment has been made by Finance (No.2) Act, 2009 with effect from 1/10/2009. Prior to this amendment as per proviso to Section 92C (2) the assessee was eligible for 5 percent of adjustments. Since the amendment has been made effective form 1/10/2009 it is held that the assessee will be eligible for 5 percent of adjustment while computing arm’s length price. The Assessing Officer is directed accordingly.”
Thus, following the principle of consistency, the Applicant shall be allowed the benefit of 5 % standard deduction while determining the ALP of the international transactions.
It is further submitted that the aforesaid additional grounds of appeal is purely legal in nature and does not involve any fresh investigation into facts, and the Applicant by way of this application, craves leave of this Hon’ble Bench to raise the aforesaid additional grounds.
Reliance is placed on the decisions of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. Vs. CIT [1998] 229 ITR 383 (S.C)and in the decision in the case of Jute Corporation of India Vs. CIT [1991] 187 ITR 688 (S.C). It was stated that the discretion vest in the I.T.A.T under Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, it is prayed that the aforesaid additional ground of appeal may kindly be admitted and adjudicated on merits.
The assessee emphasises that the request should be acceded to.
The Ld. AR further submitted that he is not pressing Ground No. 1, 2(b), 2(c), 3 to 15, 17 & 18 of assessee’s cross-objection and contesting only Ground No. 2(a) read with 16. Hence, Ground No. 1, 2(b), 2(c), 3 to 15, 17 & 18 are dismissed.
The Ld. DR submitted that after merger and de-merger of the assessee company there was an abnormal profit and therefore, the comparable related to Mold-Tek Technologies Ltd. should have been added as comparable because core business was similar to that of the assessee company.
While giving rejoinder, the AR submitted that the assessee’s business is of medical transcription and the comparable which has been excluded by the CIT (A) was rightly excluded. This company has OP/TC of 93.06% in the ITES segment: In this case, the assessee had raised serious objections before the TPO as well. The assessee contended that the comparable excluded by the Ld. CIT(A) was functionally not similar. The functions performed are mainly engineering design and detailing services, website design services, software testing, in-houses software development etc. As a result of this, this company was treated as functionally not similar. Further, the appellant has placed reliance on the decision of the I.T.A.T in the case of Adobe Systems India Pvt. Ltd. (ITA NO. 5043) which has underlined the significant principle that if high loss making companies are not accepted, the high profit making companies should also not be accepted as comparables.
The Ld. AR presented a table indicating the revenue growth rate of the Company as under:-
Table-2:
Particulars Financial Year Financial Year Financial Year Financial Year 2005 2006 2007 2008 Segmental 1.18 3.75 11.40 17.85% Sales in Crores CAGR of the Company for 2005 147% to 2007 On the basis of the above table it was submitted that, the Company grew with a Compounded Annual Growth Rate (“CAGR”) of 147% for 3 years, which is evidently above the industry average. Hence on the basis of the evidence as provided above, it was submitted that Mold-Tek ought to be rejected as a comparable company due to the consistently abnormal profits earned by the Company. Further the assessee stated that company was involved in merger and acquisition activities during the year under consideration.
The CIT(A) after considering the submission of the assessee, the order of the TPO and the annual report of the company, came to the conclusion that there was merit in the claim of the assessee that the company had mergers and acquisition activities during the year. He also pointed out that there were several other irregularities in the financial statements of M/s Mold Tek Technologies Ltd. which had been confirmed by Hyderabad ITAT in the case of Capital IQ Information Systems (India) Pvt. Ltd. The Ld. CIT(A) accordingly rejected Mold Tek Technologies Ltd as a comparable.
Before us, the Ld. AR also relied upon the judgment in case of Maersk Global Centre India Pvt. Ltd Vs. Addl. Commissioner of Income Tax decided by Special Bench of ITAT Mumbai reported at (2014) 147 ITD 83 wherein the same company which was excluded by the CIT(A) in the present case, has been excluded by the Tribunal on the following reasoning:
“Para 81. In so far as the case of Mold-Tek Technologies Ltd. is concerned, it is observed from the annual report of the said company for the Financial Year 2007-08 placed at page 139 to 151 of the paper book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further information of Mold-Tek Technologies Ltd. available on their Website is furnished in the form of printout at page 158 to 165 of the paper book and a perusal of the same shows that is leading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill tests. It is also stated to have consistently helped the clients to cut down design and development costs of civil, mechanical and plant design by 30-40% and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in-house software development team, quality control training and troubleshooting facilities. M/s Mold-Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services. It may be pertinent to note here that the Financial
Year 2007-08 was a unique year for Mold-Tek Technologies Ltd. as the scheme of arrangement involving amalgamation between Tekmen Tool Pvt. Ltd. and Mold-Tek Technologies Ltd. and de- merger between Mold-Tek Technologies Ltd. simultaneously was sanctioned by the Hon’ble AP High Court by 15th July, 2008 with the appointed date for amalgamation and de-merger being 1st October, 2007 and 1st April, 2007 respectively. It is also pertinent to note that while working out the operating margin of the said company, provision for derivate loss of Rs.6.43crores made by Mold-Tek Technologies Ltd. was excluded by the A.O. treating the same as non-operating expenses whereas in the case of Rushabh Diamond (supra), it was held by the Division Bench of this Tribunal that the gain or loss arising from the forward contract entered into for the purpose of foreign currency exposure on the export and import has to be taken into consideration while computing the operating profit.”
The Ld. AR further relied upon the case of TATA Consultancy in respect of the ground of assessee in Cross-Objection related to invocation of jurisdiction u/s 92CA, the said judgment by the ITAT Mumbai in Para 26 has given a finding that it was the statutory duty of the Assessing Officer to decide independently, whether the determination of Arm’s Length Price of the assessee should be accepted or whether or not after applying the provisions of Section 92CA the Transfer Pricing Adjustment should be made. This is a statutory safeguard for the assessee.
12. We have perused all the records and taken into consideration the contentions of the parties as relates to Revenue’s appeal the same is only on the issue that exclusion of Mold-Tek Technologies Ltd as comparable by the CIT(A) is not just and proper but when we take into account, the special Bench Judgment in case of Mold-Tek Global Centre India Pvt. Ltd it can clearly be taken into account that the company grew with a compounded annual growth rate (CAGR) of 147% for 3 years which is evident from the chart given in the impugned order of the Ld.CIT(A) and on the basis of the said chart, CIT(A) has rightly rejected Mold-Tek as comparable company due to the consistently abnormal profits earned by the company. The CIT(A) by deciding this issue has studied annual report of the company and found that there were several irregularities in the financial statements. When we look into all these aspect, we find that the CIT(A) was correct in excluding Mold-Tek Technologies Ltd. as comparable and hence the Revenue is not proper in harping that Mold-Tek has to be taken into account as a comparable in TP study. As regards to the Cross-objection of the assessee is concerned the Ld. A.R during the course of hearing stated that the same may be treated as not pressed if the appeal of the Department is dismissed. Since in the former part of the order, we have dismissed the appeal of the Department, the Cross Objection of the assessee which mainly supports the impugned order of the CIT(A) is dismissed as not pressed.
In result, appeal of the Revenue as well as Cross-objection are dismissed.
The order is pronounced in the open court on 14th of March 2016.