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Income Tax Appellate Tribunal, DELHI BENCH: ‘I’ NEW DELHI
Before: SMT DIVA SINGH & SH.INTURI RAMA RAO
ORDER PER DIVA SINGH, JM These are cross appeals filed by the assessee and the Revenue assailing the correctness of the order dated 20.03.2008 of CIT(A)-XX, New Delhi pertaining to 2004-05 assessment year on grounds which read as under:- ITA No.-1982/Del/2008 1. “On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs.9.59 crores on account of difference in arm’s length price made by TPO/AO.
I.T.A .No.-1940 & 1982/Del/2008
The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of the hearing.
1. That the Commissioner of Income-tax (Appeals) erred on facts and m law in sustaining addition to the income of the appellant to the extent of Rs.18,85,44,612 on account of adjustment to the arm's length price of the 'international transactions' of transaction processing and interest and voice based customer care services (hereinafter referred as IT enabled services).
2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding the appellant company as a captive unit of' the foreign associated enterprises and not an independent service provider. 2.1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that the appellant is to be considered as a hybrid unit having elements both from captive and entrepreneurial units and accordingly, the compensation received by the appellant should contain an clement of fixed return and a variable component based on risk assumption. 2.2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the arrangement between the appellant and the associated enterprises was not that of a captive service provider inasmuch as the appellant is responsible for effective utilization of its resources and the associated enterprise does not assure minimum level of utilization. i.e., the appellant is to bear excess capacity or utilization risk. 2.3. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the position in this regard was accepted by the TPO in the preceding previous year and it was not open for the Revenue to take a different view in the relevant previous year. That the Commissioner of Income-tax (Appeals) / TPO erred on 3. facts and in law in not making an appropriate adjustment to the operating results of the comparables on account of the marketing functions / risk undertaken by the associated enterprises even while holding the appellant to be a hybrid / captive service provider. 3.1. That the Commissioner of Income-tax (Appeals)/ TPO erred on facts and in law in not making adjustment to the operating results of the appellant on account of: i) idle I abnormal costs on account of excess or unutilized capacity ii) higher rate of depreciation considered by the appellant in the audited accounts. The Commissioner of Income-tax (Appeals) erred on facts and in 4. law in not considering the normalized operating results of the appellant after eliminating the decline in the operating results on account of loss of significant business of its major client Conseco, during the relevant previous year. a. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not making due adjustments on account of the Page 2 of 15
I.T.A .No.-1940 & 1982/Del/2008 fact that during the relevant year, the appellant was not operating at optimum capacity, i.e., idle establishment cost was substantially high and losses were bound to occur, while determining the arm's length price applying Transactional Net Margin Method (“TNMM") . b. That the Commissioner of Income-tax (Appeals) erred on facts and In law In law in not applying the operating profit margin of the appellant over a period of business cycle (i.e., when the appellant was operating at optimum capacity) for comparing operating results of the established enterprises rendering similar services while applying TNMM, as per the recommendation of the OECD guidelines. c. That the Commissioner of Income-tax (Appeals) erred on facts and in law in observing that in absence of any working as to difference in (i) claim of depreciation, (ii) capacity utilization and (iii) certain risks, no appropriate adjustment could be made while determining the arms length price of 'international transactions' .
5. That the Commissioner of Income-tax (Appeals) erred on facts and in law in applying operating results for the relevant previous year as opposed to the contemporaneous data available at the time of effecting the Transfer Pricing documentation. a. The Commissioner of Income-tax (Appeals) erred on facts and in law in disregarding the multiple year data of operating results of the preceding two years of comparable companies relied upon for application of TNMM and accepted by the TPO. b. The Commissioner of Income-tax (Appeals) erred on facts and in law in considering only the current year's data of operating results. i.e., operating results for the relevant previous year for the purpose of benchmarking applying TNMM. c. That on facts and circumstances of the case. the Commissioner of Income-tax (Appeals) erred in not appreciating that preceding years' data of operating results of comparable companies had significant influence on determination of arm's length price of the' international transactions' and, therefore, such data ought to be relied upon for application of TNMM as per the proviso to rule 10B(4) of the Rules.
6. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that no adjustment was required to be made to the arm' s length price of the 'international transactions’ considering that the operating profit margin of the appellant was higher than some of the comparable companies identified in the Transfer Pricing documentation or by the TPO or by the Commissioner of Income-tax (Appeals).
7. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not excluding high profit or high loss making companies from the list of comparable companies relied upon for benchmarking applying TNMM.
That the Commissioner of Income-tax (Appeals) erred on facts and in law in rejecting the following comparable companies primarily engaged in rendering IT enabled services: Page 3 of 15
I.T.A .No.-1940 & 1982/Del/2008 S Name of Company Findings on comparability . 1 Allsec Technologies Rejected due to substantial erosion of net . Limited worth and having significant related party transactions. 2 Apex Logical Data Rejected due to non-availability of data. . Conversion Pvt.Ltd. 3 Compudyne Rejected due to very low turnover to net . WIngosystems fixed asset ratio, low employee cost to total cost ratio and having a distinctly different functional profile. 4 Giltedge Infotech Rejected due to non-availability of data. . Services Ltd., ND 5 Mapro Industries Rejected due to non-availability of financial . data for a complete period of 12 months. 6 Twinstar Software Rejected due to very low turnover to net . Exports Limited fixed asset ratio, low employee cost of total cost ratio despite having a similar functional profile. 7 Zigma Software Rejected due to low employee to total cost . Limited ratio and for having exclusive domestic orientation. a. That the Commissioner of Income-tax (Appeals) erred on facts and in law in disregarding Apex Logical Data Conversion Pvt. Ltd. and Giltedge Infotech Services as comparable companies for benchmarking analysis applying TNMM on the ground that current year operating results of each said company were not available. b. Without prejudice that the Commissioner of Income-tax (Appeals) erred in not considering the preceding year's operating results of Apex Logical Data Conversion Pvt. Ltd. and Giltedge lnfotcch for the purpose of benchmarking analysis applying TNMM.
That in case benchmarking had to be done using current year's data, then the lower authorities erred on facts and circumstances of the case, in not taking into account other LT. enabled companies (identified using 'Prowess' data base of CMIE), performing identical functions as comparable companies for the said benchmarking.
10. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the associated enterprise, too, incurred losses in the transactions undertaken with the appellant and there could not be an allegation of diversion of profit to justify transfer pricing adjustment in the hands of the appellant.
11. Without prejudice that the Commissioner of Income-tax (Appeals) erred in not appreciating that no adjustment to the arm's length price of international transactions' was warranted considering the overseas associated enterprises as tested parties for benchmarking analysis applying TNMM.
12. Without prejudice that the Commissioner of Income-tax (Appeals) erred on facts and in law in not allowing variation to Page 4 of 15
I.T.A .No.-1940 & 1982/Del/2008 the extent of [+/(-)] 5%. while determining the arm's length price of the 'international transactions' 13. That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining disallowance of provision for expenses amounting to Rs.36,52,675.
14. Without prejudice that the Commissioner of Income-Tax (Appeals) erred on facts and in law in recomputing the deduction under section 10B of the Act, with respect to the increased profits and gains of the undertakings of the appellant after considering the disallowance of provision for expenses amounting to Rs.36,52,675.
15. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in sustaining levy of interest under sections 234B and 234C of the Act. The appellant craves leave to add, amend, alter or vary from the above grounds of appeal before or at the time of hearing.”
2. Addressing the grounds raised
the Ld.AR invited attention to the summary of Transfer Pricing adjustment filed in the Court and submitted that Ground No.1 is general; Ground No.5; 6; 8; 9; 11; and 12 are not bring pressed as such required no adjudication.
3. Addressing the issue raised in Ground No.2 it was submitted that the assessee has filed the same merely to keep the issue alive and is not seeking adjudication of the issue in view of the peculiar facts which he would place on record. On facts it was submitted that that EXL US entered into a contract with the clients/customers for rendering customer care services. The services are thereafter outsourced to the assessee and the assessee thereafter execute such contract by rendering IT enabling services to the clients/customers. It was submitted that since the business is provided to the assessee by the AE i.e EXL US and the assessee only performs part of the business outsourcing services which are outsourced to the assessee by the AE where all significant corporate management functions i.e business strategy and development investor relationship management; client relationship management; marketing, contract negotiation and execution with the clients; clients relationship management; debt structuring and management; fund flow management etc. are undertaken by the AE and the assessee only performs services which are outsourced by the AE. Consequently all the key resources like the top management of the group i.e CEO, COO, CFO, CMO, CTO etc. are all on the payrolls of the AE. The assessee is an independent low risk service provider inasmuch as the entire Page 5 of 15
I.T.A .No.-1940 & 1982/Del/2008 marketing effort is undertaken by the EXL US who bears the consequent risks and rewards. The assessee on the other hand it was submitted is exposed to the following risks:-(i) risk on account of receivable from its customers; (ii) marketing risk; (iii) price risk; (iv)recovery risk; (v) credit risk etc. However as far as the warranty risk is concerned it was submitted the risk is borne by the AE. In the event the customer is dissatisfied with the services provided by the assessee then the service liability risk falls on the AE. The assessee receives compensation for services rendered regardless of whether or not the AE receives payment from its buyers or not. The assessee it was submitted being a captive service provider operates on a cost plus basis and assumes limited risks. Accordingly the comparables considered by the TPO have assumed credit, marketing and technical risk during the year. The assessee on the other hand is insulated from enterprise risks marketing risk and credit risk etc. Thus appropriate downward adjustment it was submitted would be required for comparing operating profit margin of the assessee with the operating profit margin earned by the full fledged entrepreneur companies to establish the comparability. In support of the said submission, reliance was placed upon Intelligent India Technology Pvt. Ltd. vs ITO (ITA No.-1237/Bang./2010); DCIT vs Hello Soft India Pvt. Ltd. 153 TTJ 322; and Excellence Data Pvt. Ltd. vs ITO (ITA No.159/Hyd./2014.). Having thus argued it was his submission that in all fairness it would be appropriate to point out that in 2003-04 assessment year on similar facts and circumstances and vide para 6.1 to para 6.3, the issue was rejected by the ITAT thus it was his submission that the assessee has raised the grounds and would like to keep the issue alive however no further arguments were advanced. 3.1. Considering the argument advanced the Ld. CIT DR relying on past history of the assessee itself submitted that the issue be decided in favour of the Revenue.
Having heard the submissions and considered the order of the ITAT in assessee’s own case in the light of the submissions of the parties, Ground No.2 alongwith the sub-grounds is dismissed following the order of the Co-ordinate Bench.
I.T.A .No.-1940 & 1982/Del/2008
Addressing Ground No.-3.1 & 4 wherein the assessee agitates the adjustment on account of the idle capacity, the Ld.AR has canvassed that 95% of the total revenue of the assessee came from “Conseco”. As a result of loss of this business the capacity of the assessee was not completely utilized as the group was trying to obtain other customers. In view of this fact it was submitted that the assessee could not close any of its facilities nor could the assessee terminate its employees as such a conduct would have adversely effected its reputation in the market. The profitability of the assessee it was submitted was driven down by idle time and the other employee related cost including idle capacity. Due to the loss of its major business from Conseco the average ideal time of the employees was as high as 23.40%. Attention was invited to paper Book page 78 to 82. The capacity utilization considering the seating capacity on triple shift basis it was stated was as low as 27%. Accordingly appropriate adjustments for un-utilized capacity relying upon Paper Book pages 78 to 82 was prayed for. The jurisprudence in support of such an action it was submitted is available. Reliance was placed on the following decisions:- (1) Global Turbine Services Inc. vs. ADIT (ITA No.3484/Del/2011); (2) ACIT vs Fiat India Pvt.Ltd. (ITA No.1848/Mum/2009); (3) Brintons Carpers Aisa Pvt.Ltd. vs ACIT (ITA No.1296/PN/2010); (4) E.I.Dupont India Pvt.Ltd. vs DCIT (ITA No.5336/Del/2010); (5) Transwitch India Pvt.Ltd. vs ACIT (ITA no.6083/Del/2010)-The said order of the Tribunal was upheld by the Jurisdictional High Court vide order dated 17.07.2013; (6) DCIT vs Panasonic AVC Networks India Co. Ltd. (ITA No.4620/Del/2011) 5.1. Reliance was also placed on the decision of the dated 10.07.2014 in in the case HCL Technologies BPO Services Ltd. vs ACIT (copy filed).after considering various decisions including the decisions has mandated such an adjustment. Accordingly relying upon Paper Book page 78- 82 it was his submission that after excluding the abnormal cost the operating profit margin of the assessee, the operating cost ratio to work out to 27.92% as against 12.80% in the case of the comparables. Thus since the operating profit to cost ratio of the assessee is higher at 27.92%, the entire adjustment made would be deleted.
I.T.A .No.-1940 & 1982/Del/2008
The Ld. Sr. DR submitted that the calculations may be verified however no contrary view judgement or fact was referred to on behalf of the Revenue.
Considering the submissions of the parties and the material available on record in the face of the consistent orders of the ITAT including the latest decision wherein one of us is a party (authored by Ld. AM) respectfully following the orders of the Tribunal, the issue is restored back to the file to the TPO for verification and necessary relief. 8. Addressing the issue raised in Ground No.3.1(ii) the Ld.AR submitted that the assessee follows an aggressive method of depreciation of its assets which would be evident from a perusal of its balance sheet. The assessee it was submitted depreciates its assets at a higher rate than as per Schedule XIV to the Companies Act, 1956. For the year under consideration it was submitted the assessee has charged additional depreciation of Rs.14,19,51,272/- to its P&L A/c thus impacting its profit margin. 8.1. On the said issue the DRP in 2006-07 assessment year directed the TPO to recompute the depreciation charged by the comparables at the rate applied by the assessee. Further the ITAT also in 2003-04 assessment year vide its order dated 22.12.2014 in in para 5.23 directed that operating profit of the comparables should be recomputed by the TPO in line with the rates of depreciation charged by the assessee under the SLM. Accordingly, it was submitted if the OP/OC ratio of the comparable companies considered by the CIT(A) is considered then it worked out to -15% and if OP/OC ratio of comparables considered by the TPO is considered then it works out to - 8.4%. Since the average operating profit margin of the assessee is at -3.14% then the international transactions undertaken by the assessee it was submitted would be at arms length applying TNMM. 8.2. Addressing the background, attention was invited to pages 1-42 of the Paper Book which contain transfer pricing documentation made available to the TPO. Referring to the same, it was submitted that the assessee in its transfer pricing study had selected the following 9 comparables:- S.No. Name of the Company Margins (OP/TC) Weighted 2003 2002 average 1. Ace Software Exports 11.64% 17.63% 14.88% 2. Allsec Technologies Ltd. 12.55% 9.53% 11.65% 3. Apex Logical Data Conversion Pvt.Ltd. 14.30% 22.26% 17.80% Page 8 of 15
I.T.A .No.-1940 & 1982/Del/2008
4. Compudyne WIngosystems Ltd. 0.18% 52.78% 20.05% 5. Fortune Infotech limited 107.46% 68.03% 96.87% 6. Mapro Industries Limited (4.19)% 21.43% 6.09% 7. Necleus Netsoft and GIS India Ltd. (17.70)% (10.37)% (13.92)% 8. Twinstar Software Exports Limited (73.35)% (25.81)% (45.80)% 9. Zigma Software Limited 0.78% 17.05% 6.96% Mean 12.73% Appellant’s Margin (AY 04-05) -3.14% Appellant’s margin (AY 04-05 & 05-06) 11.42% 8.3. These calculations it was submitted were without making adjustments on account of depreciation/idle capacity. The TPO as per internal page 8 of his order rejected 6 comparables out of the above list of comparables selected by the assessee and retained only the following three comparables:- S.No. Name of the Company Data for year OP/TC% 1. Ace Software Exports Limited 2004 1.14% 2. Apex Logical Data Conversion Pvt.Ltd. 2003 14.3% 3. Fortune Infotech Limited 2004 44.22% Average 19.88% 8.4. The issue it was submitted was carried in appeal before the CIT(A) who deleted the Apex Logical Data Conversion Pvt. Ltd. one of the comparables retained by the TPO and instead introduced two new comparables namely Nucleus Netsoft & GIS India Ltd. and Karvy Consultants Ltd. As a result of this, it was submitted the CIT(A considering the four comparables finally at page 47 concluded that the average of the OP/TC margin of 12.03% was to be taken as the basis of the results of the four comparables. For ready-reference the four comparables considered by the CIT(A) are tabulated hereunder:- S.No. Name of the Company OP/TC (%) without OP/TC(%) with working Capital working capital Adjustment adjustment 1. Ace Software Exports Limited 0.69% -0.45% 2. Fortune Infotech Limited 39.01% 36.56% 3. Nucleus Netsoft & GIS India Ltd. 16.87% 17.36% 4. Karvy Consultants Limited -5.37% -5.37% Arithmetic Mean 12.80% 12.03% 8.5. In the said background, relying on the judicial precedent in assessee’s own case in 2003-04 assessment year wherein the Co-ordinate Bench vide its order dated 22.12.2014 upheld the claim of comparability adjustment on account of higher rate of depreciation charged by the assessee in its book of accounts it was submitted that if the Revenue’s appeal was to be allowed than Page 9 of 15
I.T.A .No.-1940 & 1982/Del/2008 considering the comparables retained by the TPO the following position would emerge:- Comparable companies considered by the CIT(A) S.No. Name of the Company OP/TC (%) OP/TC(%) after depreciation adjustment 1. Ace Software Exports Limited 1.14% -21.21% 2. Apex Logical Data Conversion 14.3% DNA Pvt.Ltd. 3. Fortune Infotech Limited 44.22% 4.41% Average 19.88% -8.4% Appellant’s margin -3.14%
9. Contrasting this with the position, if the comparables of the CIT(A) are considered than the following position would emerge:- Comparable companies considered by the CIT(A) S.No. Name of the Company OP/TC (%) as per OP/TC(%) after CIT(A) depreciation adjustment 1. Ace Software Exports Limited 0.69% -21.21% 2. Fortune Infotech Limited 39.01% 4.41% 3. Nucleus Netsoft & GIS India Ltd. 16.87% -37.85% 4. Karvy Consultants Limited -5.37% -5.37% Arithmetic Mean 12.80% -15.00% Appellant’s margin -3.14%
Considering the judicial precedent in assessee’s own case the Ld. CIT DR stated that as far as the calculations are concerned the issue has to be verified by the TPO and in the face of the order of the Co-ordinate Bench as the issue has to go back it was submitted that he would have no objection if the calculations as considered by the TPO are taken on record and the departmental ground is allowed. The Ld. AR in reply submitted the let the TPO consider both the calculations and he would have no objection.
We have heard the rival submissions and perused the material available on record following the judicial precedent in the light of the submissions of the parties, we allow the departmental appeal as canvassed by the ld. CIT DR and not opposed by the Ld. AR and direct the TPO/AO to recompute the operating margins of the comparables retained by the TPO in line with the rates of depreciation charged by the assessee under the straight line method. Accordingly departmental appeal is allowed and Ground No.3.1(ii) of the assessee is also allowed for statistical purposes. Page 10 of 15
I.T.A .No.-1940 & 1982/Del/2008
Qua Ground No.7 the assessee prays for exclusion of Fortune Infotech Ltd. The request for such a relief was based on the argument that the said company has extraordinary profits during the year. This fact it was submitted is evident from its Annual Report-copy available in the Paper Book. The said issue it was also submitted has already been taken into consideration for this specific assessment year by the Banglore Bench of the Tribunal in the case of 24/7 Customer.Com Ltd. vs DCIT in 227/Bang./2010 which has further taken into consideration the fact that Fortune Infotech Ltd. has developed its own software namely “Fine Tran” and “Image index”. In the assessee’s own case also it was submitted that the ITAT though has rejected the exclusion of Fortune in 2003-04 assessment year however while so holding the Bench returned a finding that Fortune Infotech in 2003-04 Financial year relevant for 2004-05 assessment year developed its own intangibles thus in the year under consideration it was submitted it should be excluded as a comparable. For ready-reference, the relevant extract from the order at paper book page 117-118 is reproduced hereunder:- 8.3. Turning to the facts of this company, we find that the ld. AR has harped on higher OP/OC margin of this company for the year under consideration at 108%, in contrast to 67% for the preceding year and 39% for the succeeding year to contend for its exclusion due to abnormal profits. In our considered opinion, the year in question cannot be considered as abnormal when viewed in the light of the fact that its profit rate has progressed from the preceding year. The decline in the profit rate for the succeeding year is due to the reasons given by the company in its Annual report for next year, a copy which is available on pages 178 onwards of the paper book. In his message to the shareholder, the Managing Director of the company stated that the year ending 31st March 2004 (i.e. succeeding year) was a year of consolidation in which it “sacrificed immediate profits for much larger gains by preparing ourselves for future growth”. The Annual report of this company for the next year indicates that it developed its own intangibles in such next year. These factors indicate that financial year 2003-04 relevant to assessment year 2004-05 was abnormal for Fortune Infotech Ltd. But for that, its profit progressed from assessment year 2002-03 to assessment year 2003- 04 in question. 8.4. Reference to the Tribunal order in the case of 24/7 Customer (supra), for seeking exclusion of Fortune Infotech Ltd., is again misplaced. The palpable reason for our this conclusion is that the Tribunal order in that case is for the assessment year 2004-05 and we have noticed from the Annual report of this company that it was an abnormal year of its operations in which it sacrificed immediate profits for larger gains in future by developing its Page 11 of 15
I.T.A .No.-1940 & 1982/Del/2008 own intangible. It is further relevant to note that the functional profile of this company is similar to that of the assessee company as it is also a BPO, as is the assessee. It was not due to some inadvertence that the assessee initially included this company in the list of comparables. It can be seen from page 43 of the impugned order that this company figured in the TP reports of the assessee across the earlier years and the assessee chose it on the basis of functional similarity and this continued even for the succeeding year. Further there are no specific intangibles used by Fortune Infotech Ltd in its operations for the year under consideration. We cannot permit the exclusion of this otherwise comparable company from the list of comparables on the simple ground of higher profit earned by it during the extant year. First proviso to section 92C(2) provides that where more than one price is determined by the most appropriate method, the ALP shall be taken to be the arithmetical mean of such prices. It therefore, transpires that the Indian legislation talks of considering all the comparables and then finding out the arithmetic mean of the price/profit of such comparables. Unlike some countries adopting interquartile range, which is also called middle fifty, the Indian legislation stipulates for calculating arithmetic mean of price/profit of all the otherwise comparable companies. Simply because the profit rate of a company is higher or it has a higher turnover, can be no reason to seek exclusion. This has been held by the Delhi bench of the tribunal in the case of Nokia India (supra). (emphasis provided) 13. The Ld.CIT DR placed reliance on the impugned order. However no contrary fact or decision as referred to by the Revenue to canvass a contrary view.
We have heard the rival submissions and perused the material available on record. It is seen that the Co-ordinate Bench in the case of 24/7 Customer.Com Ltd. (cited supra) vide its decision dated 09.11.2012 for 2004-05 assessment year has taken into consideration that the said company i.e M/s Fortune Infotech Ltd. Fine had developed its own software called “fine tran” and “image index” for performing specialized services in medical prescription and patients record management. In these circumstances, we are of the view that a comparable company which has developed unique software cannot be considered to be a comparable company of the assessee who is an IT-enabled company who is performing the work generated for it by its AE wherein the substantial intangibles are owned by the AE. The said company cannot be considered a comparable for the assessee. The ownership of unique intangibles in the case of the said comparables in the year under consideration has been taken not of by the Co-ordinate Bench in asessee’s own case in the immediately Page 12 of 15
I.T.A .No.-1940 & 1982/Del/2008 preceding assessment year where this fact was not in existence. Accordingly applying the principle that only companies which are on similar standard can only be comparables Fortune Infotech Ltd. is excluded from the list of the comparables in view of the fact that it holds unique intangibles which position is not disputed by the Revenue.
Addressing Ground no.10 it was submitted by the Ld.AR that on facts there was no transfer of profit by the assessee to AE in other jurisdictions. The issue in assessee’s own case has been dismissed by the ITAT in for 2003-04 assessment year vide para 7.1 to 7.3 and in the present proceedings the assessee is not serious in contesting the issue as on facts the assessee is confident that there would be no transfer pricing adjustments. Thus the ground has been filed only to keep the issue alive and reliance is placed on Sony India Pvt. Ltd. vs CBDT 288 ITR 52 (Del.) and Sony Ericson Mobile Communications India Pvt. Ltd. vs CIT and Ramp Green Solutions Pvt. Ltd. vs CIT (ITA No.102/2015) of the Delhi High Court.
The Ld. CIT DR relying upon the decision of the ITAT in assessee’s own case in the 2003-04 assessment year submitted that he would want to rely on the detailed finding therein on similarity of facts and circumstances and it was further stated that facts of no two case can be identical.
We have heard the rival submissions and perused the material available on record where the ground is raised only to keep the issue alive. In view thereof the assessee’s ground is dismissed following the order of the ITAT in assessee’s own case. The dismissal here will not prejudice the assessee from arguing this issue if so warranted in some other year.
Addressing the facts qua Ground No.13 & 14 reliance was again placed on the order of the ITAT in its own case passed in 2003-04 assessment year specific paras 10.1 to 10.3 of the same.
The record shows that the AO considering the reply of the assessee in regard to provision of expenses disallowed the same holding that the provision on adhoc basis was to be added back to its income as the expenses had not been incurred by the assessee. In appeal the CIT(A) partly allowed the assessee’s appeal following the view taken in 2003-04 assessment year. The position has I.T.A .No.-1940 & 1982/Del/2008 been considered by the Co-ordinate Bench in the aforesaid order. For ready- reference, it is reproduced hereunder:- 9. “Having dealt with all the issues raised by the ld. AR on the addition towards transfer pricing adjustment, we set aside the impugned order on this issue and send the matter back to the TPO/AO for making a fresh determination of the ALP under this segment in conformity with our above observations and conclusions, after allowing a reasonable opportunity of hearing to the assessee. 10.1. Ground Nos. 16 and 17 of the assessee’s appeal are against the sustenance of disallowance of provision of expenses amounting to ` 32,08,612/-. 10.2. Briefly stated, the facts of these grounds are that the assessee created provision for expenses to the tune of ` 5,18,03,004/- and claimed deduction for the same. As the assessee failed to furnish specific bills for which the above provision was made, the AO made addition of equal sum. The ld. CIT(A) observed that the assessee was not provided adequate opportunity of adducing necessary evidence in support of its claim of provision for expenses. After considering the relevant material furnished by the assessee, the ld. CIT (A) deleted addition of ` 4.85 crore for which the invoices were available. As regards the remaining amount of ` 32.08 lac for which the invoices were not available, the ld. CIT (A) sustained the addition. The assessee is aggrieved against the sustenance of addition to this extent. 10.3. After considering the rival submissions and perusing the relevant material on record, it is observed that the assessee is constantly making provision for expenses on year-to-year basis on the estimate of reasonable expenses incurred but the bills not received up to the year-ending. When in the subsequent year, the bills are received, such provision is reversed. If the actual amount of expenses for which the provision was made falls short of such provision, then deduction is claimed for the excess expenditure and in the converse situation, the earlier excess provision created is reversed in the succeeding year. This method of accounting has been accepted by the Revenue in the past without any question. Now simply because the invoices were not available when the matter was considered by the ld. CIT(A), it cannot be said that the liability ceased to exist. From the details of the sustenance of disallowance, it can be seen that the expenses are basically in the nature of professional fee, telephone expenses, communication expenses and consultation, etc. The point for determination of the question of deduction is the crystalization of liability for incurring such expenses and not the actual receipt of the invoices. This contention raised on behalf of the assessee about the incurring of actual liability in respect of these expenses has not been controverted on behalf of the Revenue. Going by the mandate of the mercantile system of accounting and following the rule of consistency, we order for the deletion of the addition sustained in the first appeal. This ground of appeal is allowed.”
The Ld. CIT DR relies upon the order of the authorities below. Page 14 of 15
I.T.A .No.-1940 & 1982/Del/2008
We have heard the rival submission and considered the material available on record. In the absence of any distinguishing fact or circumstance referred to by the Revenue where admittedly the facts and circumstances need to be verified the issue is restored to the AO to consider the correctness of the claim and grant necessary relief in accordance with law.
In the result, the appeal of the Revenue is allowed and the appeal of the assessee is partly allowed for statistical purposes. The order is pronounced in the open court on 16th October, 2015.