AMERICAN EXPRESS (INDIA) PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

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ITA 3532/DEL/2014Status: DisposedITAT Delhi15 October 2015AY 2006-0716 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that one comparable company (Vishal Information Technology Ltd.) should be excluded due to significant outsourcing differences. It also directed the inclusion of two other companies (Kirloskar Computer Services Limited and Mercury Outsourcing Management Ltd.) based on functional comparability, irrespective of turnover.

What were the facts?

The assessee, American Express (India) Pvt. Ltd., appealed against a transfer pricing adjustment and denial of deductions. The case was previously remanded by the ITAT for a speaking order from the DRP.

What were the issues?

The key issues were the comparability of certain companies for transfer pricing adjustments and the eligibility of interest income for deductions under Sections 10A/10B.

Which sections of the Income-tax Act were involved?

Section 10A,Section 10B,Section 143(3),Section 144C(5)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI BENCHES : I-2 : NEW DELHI

Before: SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM

For Appellant: Shri Nageshwar Rao, Advocate
For Respondent: Shri Peeyush Jain, CIT, DR
Hearing: 13.10.2015

Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact that there was a merger by way of amalgamation during the year itself, we hold that Nucleus Netsoft and GIS (India) Ltd. cannot be considered as comparable due to this extraordinary financial event. Accordingly, we direct to eliminate this company from the final set of comparables.

(ii) Vishal Information Technology Ltd. 8.1. The assessee initially considered this company as comparable which the TPO included as such. No dispute was raised before the DRP in the first round. It was only during the second round of proceedings before the DRP that the assessee argued for the exclusion of this company from the final set of comparables. The DRP refused to accept the assessee’s contention, inter alia, on the ground that the functional differences pointed out by the assessee were not significant enough to warrant its rejection as a good comparable. The assessee argued before the DRP that this company outsourced a significant part of its operations, inasmuch as such outsourcing charges constitute 65.98% of the total costs and that was one of the reasons rendering it incomparable.

Though the DRP upheld the inclusion of this company, but it did not adversely comment on this aspect of outsourcing of significant parts of its operations. The assessee is aggrieved against the inclusion of this company.

8.2. We have taken into consideration the Annual report of this company which is available in the paper book, from which it can be seen that it has outsourced its manual activities. As against the assessee’s contention before the DRP of this company’s outsourcing costs at 65.98%, we find that the assessee’s outsourcing cost is roughly 8%.

This is an important factor which has its impact on the overall profitability of a company. Several Benches of the Tribunal across the board have unanimously held this factor to be a relevant one in deciding the question of exclusion of a particular company from the list of comparables. Copies of some of such orders expunging companies on this score have been placed by the ld. AR on record. In view of this different business model adopted by Vishal Information Technology Ltd. (now known as Coral Hub Ltd.) vis-à-vis the assessee, we order for the omission of this company from the list of comparables.

(iii) Kirloskar Computer Services Limited (Seg.) and Mercury Outsourcing Management Ltd. 9.1. These two companies were originally included by the assessee in its list of comparables, which were eliminated by the TPO on the ground of failing turnover filter of Rs.1 crore. The assessee is aggrieved against the exclusion of these companies.

9.2. We have heard the rival submissions and perused the relevant material on record. We find that the TPO has accepted the functional comparability of these companies on segmental level. The ld. DR was also fair enough to candidly accept the functional similarity of the relevant segment of these companies. In such circumstances, the question arises as to whether the relevant segment of these companies can be excluded from the list of comparables merely on the ground that the revenue from this segment is very limited? In our considered opinion, the quantum of turnover can be no reason for the exclusion of a company, which is otherwise comparable. The Hon’ble jurisdictional High Court in the case of ChrysCapital Investment Advisors (India) P.

Ltd vs. DCIT (2015) 93 CCH 29 DelHC has held that high turnover or high profit can be no reason to eliminate an otherwise comparable company. The same applies with full force in the converse manner as well to a low turnover/low profit company. We, therefore, hold that a company cannot be excluded from the list of comparables on the ground of its low turnover. In principle, we direct the inclusion of the relevant segment of these companies in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of these companies in the final set of comparables, after due 13 verification of the necessary figures for determination of their operating profit margin etc.

10.

In the final analysis, we set aside the impugned order and remit the matter to the file of AO/TPO for a fresh computation of the ALP of the international transaction under Category-1 in consonance with our above directions/observations. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in this regard.

11.

First corporate ground is against the denial of deduction u/s 10A amounting to Rs.36,31,98,760/- in respect of AEGSC (STP) unit set up by the assessee during the financial year 2002-03 on the ground that the STP unit was set up after splitting up its existing business of FCE (EOU).

12.

Having heard the rival submissions and perused the relevant material on record, it is observed that this is a recurring issue coming from earlier years. This fact has also been recognized by the DRP on page 19 of its directions in which it has been noticed that the Tribunal has accepted the assessee’s claim for the benefit of section 10A in this regard. We have also gone through the order passed by the Tribunal in the assessee’s own case for the A.Y. 2004-05, a copy of which has been placed on record. This aspect has been discussed on page 21 of the order. After following the view taken by the Tribunal in the assessee’s own case for the A.Y. 2002-03, the Tribunal has granted the benefit of deduction u/s 10A in respect of profits of newly set up AEGSC unit. In the absence of any distinguishing feature having been brought to our notice by the ld. DR, respectfully following the precedent, we grant the benefit of deduction u/s 10A in respect of profits of AEGSC unit. This ground is allowed.

13.

The only other ground which survives for consideration is against treating interest on short-term deposits amounting to Rs.4,54,09,340/- as ‘Income from other sources’ and thereby denying the benefit of deduction u/s 10A/10B. Here again, it is an admitted position that the Tribunal has decided this issue in the assessee’s favour in earlier years by holding such interest on short-term deposits to be in the nature of `Business income’ and thereby eligible for the benefit of deduction u/s 10A/10B. Respectfully following the precedent, we allow this ground of appeal.

14.

In the result, the appeal is partly allowed.

The order pronounced in the open court on 15.10.2015.

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