AI Drafter 
TaxTMI 
TaxTMI 
2018 (9) TMI 1949
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....ional related party transactions pertaining to the provision information technology enabled and financial support services do not satisfy the arm's length principle as envisaged under the Income Tax Act, 1961 ('The Act') and in doing so the Ld. AO/TPO has grossly erred in: 2.1 disregarding the arm's length price ('ALP') and the methodical bench marking process carried out by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules'); and in particular modifying/ rejecting the filters applied by the appellant; 2.2 rejecting comparability analysis in the TP documentation and in conducting a fresh comparability analysis based on application of additional filters in an arbitrary manner while determining the arm's length price; 2.3 including companies in the comparability analysis which do not satisfy the test of comparability, rejecting companies similar to the appellant while performing the comparability analysis and thereby resorting to cherry picking of comparables; 2.4 selecting high-profit making companies in the final comparables' set ....
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....ring the established principle of law that no disallowance can be made under section 4oA(2)(b) of the Act where there is no intention to evade taxes as per Circular No. 6-P issued by the Central Board of Direct taxes, dated July 06,1968. 8. That the Ld. DRP grossly erred on facts and in law in directing to restrict the allowance of lease rental payments to 15% of the cost of the vehicles as justified and reasonable, without giving any basis for arriving at the aforesaid restriction at 15%. 9. That the Ld. AO grossly erred on facts and in law in directing to restrict the allowance to Rs. 1,95,725/- under section 4o(a)(ia) in the subsequent years, out of total disallowance of Rs. 13,63,963 made in the financial year 2007-08, under section 4o(a)(ia) of the Act." 3. The representatives of both the sides were heard at length. The case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused. 4. Briefly stated, the facts of the case are that the appellant company was incorp....
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.... for ITES Rs. 24,65,72,039/- b. Reimbursement of expenses Rs. 2,50,95,970/- 9. In the TP Study Report, the assessee has selected TNMM as the most appropriate method, which, according to the assessee, is the most appropriate method in the facts and circumstances of the case. 10. During the course of scrutiny assessment proceedings, the TPO found that the assessee has selected TNMM, its operating margin and has compared it with operating margins of comparable cases. However, the TPO found that the assessee has used multiple year data to determine the margins of the comparables in the TP study. The TPO, in his show cause notice, proposed to use only current year's data u/r 10B(4) of the Rules. 11. In its submissions, the assessee supported the use of multiple year data stating that using single year data of comparable companies may not adequately capture economic conditions and business cycles reflected in the industry. It was contended that Rule 10B(4) warrants use of earlier year data. Reliance was placed on the guidelines of OECD. Transfer pricing policies are determined based on historical data as the same has an influence on the transfer prices of the t....
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....a 16. Per contra, the ld. DR strongly supported the orders of the authorities below. 17. We have given thoughtful consideration to the orders of the authorities below. There is no dispute as regards the application of TNMM as the most appropriate method, use of current year data alone, since the working capital adjustment has already been given by the TPO, we have to only address the issue relating to the exclusion of the aforementioned comparables. We find that Cosmic Global Ltd., Eclerx Services Ltd., Genesys International Corpn Ltd. and Coral Hub [Vishal Information Technologies Ltd.] were considered by the coordinate bench in the case of United Health Group Information Services Pvt Ltd in ITA No. 6312/DEL/2012 for A.Y 2008-09 [which is the year under consideration] and the coordinate bench did not find these companies as good comparables for the business profile of United Health Group Information Services Pvt Ltd. 18. The relevant observations and findings of the coordinate bench read as under: "Cosmic Global Ltd. 9.1. This company was initially chosen by the assessee as its comparable and resultantly, the TPO included the same in the final list of co....
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....y was included by the TPO in his list of comparables. The assessee objected to its inclusion by pointing out some functional differences. Not convinced, the TPO went ahead with its inclusion, which got the seal of approval from the DRP. 10.2. Having heard the rival submissions and perused the relevant material on record, it is observed that this company is engaged in providing data analytics and customized process solutions to a host of global clients. It provides services to the Banking, Manufacturing, Retail, Travel and Hospitability verticals. The solutions offered by it include data analytics, operation management, audit and reconciliation, 8 metrics management and reporting services. This company also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. A look at the functional profile of this company from its Annual report, it can be seen that it is nowhere close to the assessee's instant segment of 'manual claim processing services'. 10.3. It is further relevant to note that this company acquired UK based Igenica and Travel Solutions Ltd. on 27.7.2007 and the financial res....
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....rt from e-publishing, this company is also engaged in Documents scanning & Indexing. It can be seen from the financial results of this company that both the segments viz., epublishing and Documents scanning etc. have been combined and there are no separate financial results in respect of Documents scanning work, which may be comparable with the assessee to some extent. As the assessee is not engaged in any e-publishing business and the financials given by this company are on consolidated basis, we direct to exclude this company from the list of comparables. The assessee succeeds." 19. Respectfully following the findings of the co-ordinate bench [supra], we direct the Assessing Officer TPO for the exclusion of the aforementioned comparables from the final list. 20. In so far as the exclusion of Accentia Technologies Ltd and Infosys BPO is concerned, these comparable were excluded by the coordinate bench in assessee's own case in ITA No. 6906/DEL/2014 for A.Y 2010-11. The relevant findings of the coordinate bench read as under: "8. After considering the rival submissions and perusing relevant material on record, we find that the issue relating to the inclusion or exclu....
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....y, a copy of which has been placed .on page 435 onwards of the paper book. Notes to Accounts of this company, which have been placed on page 443 of the paper book, indicate about the amalgamation or Asscent Infoserve Pvt. Ltd. with it as approved by the shareholders in the court convened meeting held on 25.4.2009 and, subsequently, sanctioned by the Hon'ble High Court on 21.8.2009. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DClT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal 'in several cases including 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 merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables." 19. Having gone through the annual report and keeping....
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....ing as under: 10.5.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, which is available on page 449 onwards of the paper book, that there was acquisition by this company of McCamish Systems LLC. Such information is available on page 456 of the paper book. Acquisition of McCamish Systems LLC during the year, being an extraordinary financial event, renders it incomparable. Following the reasons taken note of above, we order for the elimination of this company from the final set of comparables." 21. In so far as Acropetal Technologies is concerned, the assessee has strongly objected for inclusion of this comparable on the ground that the TPO had proposed to compare the engineering design services of Acropetal which cannot be compared with ITES/BPO services provided by the assessee. The ld. counsel for the assessee brought to our notice that the TPO has used the information collected u/s 133(6) of the Act without affording any opportunity to the assessee to rebut the same. The ld. counsel for the assessee drew our attention to the judgment of the Hon'ble High Court of Delhi in the cas....
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....emently stated that the action of the Assessing Officer is not in accordance with the settled principle of law in as much as no satisfaction was recorded before making disallowance u/s 14A of the Act. 30. Strong reliance was placed on the judgment of the Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd in Civil Appeal No. 7020 of 2011. 31. Per contra, the ld. DR strongly stated that disallowance u/s 14A is mandatory. It is the say of the ld. DR that the decision of the Hon'ble Supreme Court relied upon by the ld. counsel for the assessee will apply only when there is some suo moto disallowance made by the assessee and the Assessing Officer has not recorded any satisfaction on that count. 32. We have carefully considered the orders of the authorities below. It is true that the provisions of section 14A states that "Where the Assessing Officer is not satisfied with the claim of the assessee". What the law postulates is the requirement of satisfaction in the Assessing Officer that having regard to the account of the assessee as placed before him, it is not possible to generate a requisite satisfaction with regard to the correctness of the clai....
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.... specified in section 40A{2)(b), hence assessee was asked to give justification and reasonableness of the lease rents paid. From the reply and details on record, what emerges is that though the assets are owned by lessor companies, assessee is paying the EMI along with interest on such assets. In effect, assessee is bearing all costs towards the acquisition of the assets, though technically these still retain the ownership of the lessors. Therefore, the issue needs examination as to whether the EMI and interest paid towards these assets is justified and if so, whether its extent is reasonable Since the assets are not owned by the lessee i e. the assessee company I am inclined to hold the payments towards EMI and interest as lease rentals only However, if one goes on to see the extent of payment i.e 27,42,695/- vis-a-vis the value of assets taken on lease i e. Rs. 1,04,96,296/-, it indicates that related parties are being paid @ 26.13% on their assets This extent of payment is definitely unreasonable. The AO has stated in the draft order that "In the fitness of things I estimate 10% of the payments of the value of the assets taken on lease justified and balance of 16 13% of the paym....