TaxTMI 
TaxTMI 
2020 (7) TMI 435
X X X X Extracts X X X X
X X X X Extracts X X X X
....the following manner. I Transfer Pricing (1) General 1.1 The learned AO/Dispute Resolution Panel (DRP) erred in upholding the upward adjustment of Rs. 47.28 crore towards provision of call centre and data processing services, Rs. 1,09,738/-towards interest received on provision of loan to associated enterprises and Rs. 2.47 crore towards provision of guarantee made by the learned transfer pricing officer (TPO). 1.2 The learned AO/DRP erred in confirming that the learned TPO has not violated the principle of res-judicata in making the transfer pricing adjustment. (2) Transfer pricing adjustment as regards provision of call centre and data processing services to the AE. (3) Transfer pricing adjustment as regards provision corporate guarantee to the AE. (4) Transfer pricing adjustment as regard provision of law to AEs. II Direct tax (5) Income from sub-lease treated as 'Income from Other Sources'. (6) Rent expenditure not allowed as deduction from "income from other sources". (7) General, for initiating penalty proceeding under section 271(1)(c). 3. Brief facts of the case are that the assessee-c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ltd. 13. e4e Healthcare Business Services Ltd, 14. Spenco Ltd, 15. Caliber Point Business Solutions Ltd., 16. I Services India Pvt. Ltd. 17. Asit C Mehta Financial Services Ltd, (seg), 18. R Systems International Ltd. (seg), 19. Aditya Birla Minacs Worldwide 20. Jindal Intellicom Pvt Ltd. 21. Coral Hubs Ltd and 22. Genesys International Corporation Ltd. 5. The TPO after including/ selecting 22 comparable worked out Arithmetic mean of margin of 27.53% and worked out difference between ALP of sales and value of international transaction and made adjustment of Rs. 47.28 Crore in the following manner: 1 Operating Cost Rs. 360,34,63,527/- 2 Arms length mean margin 27.53% of operating cost 3 ALP @ 127.53 % of operating cost Rs. 459,54,97,036/- 4 Price received Rs. 412,26,26,719/- 5 Shortfall being adjustment u/s 92CA Rs. 47,28,70,317/- 6. The TPO also noted that the assessee has extended Corporate Guarantee for secured loan granted by ICICI Canada and Performance Guarantee for its AE in Canada and UK. The TPO after issuing show cause notice charged....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ta processing activities. The ld AR for the assessee submits that he is making limited submissions only to examine the comparability of 8 comparable namely; Mold-teck Technology, Eclerx Services Limited, Accentia Technology Limited, Wipro Limited, Accropetal Technology Limited, Infosys BPO Limited, HCL Comnet System & Services Ltd and Cross Domain Solution Ltd, which are not comparable with the assessee. The ld. AR for the assessee further submits that exclusion of each comparable for benchmarking the international transaction in case of a company engaged in similar ITes/ BPO segment has been considered by Tribunal for same assessment year (AY) that is 2008-09. And in case, if these eight comparable are excluded the margins of the assessee would be within the tolerance range. The ld AR for the assessee filed the following case law compilation; • WNS Global Services Pvt Ltd Vs ITO (ITA No. 7378/Mum/2012), • Flextronics Technologies Ltd (India) (P) Ltd (ITA No. 1559/M/Bang/2012, • Dialogic Network (India)(P) Ltd (ITA No. 7280/M/2012 and • Goldman Sach (I) Securities (P) Ltd (ITA No. 6912/Mum/2012. 9. On the other hand the ld. DR ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has rejected some of the comparables selected by the assessee. He submitted, applying the same logic, this company has to be rejected as the RPT of the company is more than the threshold limit of 25% applied by the Transfer Pricing Officer. He submitted, the RPT of this company as a percentage of the revenue works out to 28.19%. Therefore, it cannot be treated as a comparable. In support of such contention, he relied upon the decision of the Tribunal, Delhi Bench, in H&S Software Development and Knowledge Management Centre Pvt. Ltd., ITA no.436 and 496/Del./2013, dated 20th March 2018. Without prejudice to the aforesaid contention, the learned Sr. Counsel submitted, the company's accounting year ends on 30th June, whereas, assessee's accounting year ends on 31st March. Thus, he submitted, the company cannot be treated as a comparable due to different accounting year ending. For such proposition, he relied upon the decision of the Tribunal, Mumbai Bench, in Dialogic Network India Pvt. Ltd. v/s ACIT, ITA no.7280/Mum./2012, dated 27th July 2018. 80. The learned Departmental Representative relied upon the observations of the DRP and the Transfer Pricing Officer. 81. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a comparable by the TPO and listed at Sl. No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that mere are extraordinary events that occurred during the previous year in this company. Our attention was drawn to the annual report of this company for the A.Y. 2007-08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Derafied Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extraordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows:- "I. Accentia Technologies Lt....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger." 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra- ordinary event like merger and demerger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then the aforesaid comparable has to be excluded." 11. We have considered the submissions of the ld. counsel for the assessee and are of the view that the ratio laid down by the Hyderabad Bench of the ITAT is squarely applicable to the present case also. It is clear that during the previous year there were extraordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable.' 13. With r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the BPO which requires high skill whereas the services performed by the Assessee are routine low-end ITES functions. We therefore hold that this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPO]." 14. --------- 15. As regards Cross Domain Solutions Ltd., the ld. counsel for the assessee submitted that it is functionally not comparable relying on the decision of the coordinate Bench decision of this Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. (supra), wherein it was held at paras 18 to 19 of its order as under:- '(4) Cross Domain Solutions Ltd. 18. This company was considered as a comparable and listed at Sl. No. 8 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. As observed in the case of Coral Hubs Ltd., the TPO rejected the plea of the assessee on the basis of a non-existent TP order passed for the A.Y. 2007-08. It is seen that the business profile of this company is re-engineered payr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high-end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. It has further been submitted that extraordinary events and peculiar circumstances prevail in the case of the assessee inasmuch as this company acquired a UK based company which has significantly contributed to the increase in the customer and revenue base of the company. This Tribunal in the case of Capital IQ Information Systems India (P.) Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- "14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that the concerned c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l take this company out of the list of comaparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable." 19. Regarding Mold-tek Technologies Ltd., the ld. counsel for the assessee submitted that it is not functionally comparable to that of the assessee company and relied on the coordinate Bench decision of this Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. (supra), wherein it was held at para 25 of its order as under:- "(8) Mold-tek Technologies Ltd. 25. This company is listed at Sl. No. 16 of the list of comparable companies chosen by the TPO. As far as this company is concerned, the submission of the assessee before us is that it is in the business of Knowledge Process Outsourcing and cannot be considered as a comparable. The functional profile of this company is as follows:- As per the annual report for the F.Y. 2007-08, the company primarily operates in two business segments: Plastic division: The plastic division is engaged in the manufacture of tube & oils, paints, pet products, consumer products, etc. The company demerged the said segment effective 1 Apri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....made while deciding Infosys BPO Ltd. as a comparable will equally apply to this company also. This company owns substantial intellectual property on software products. This company cannot therefore be regarded as a comparable. For the reasons given while disregarding Infosys BPO Ltd. as a comparable, this company is also directed to be excluded from the list of comparables." *( bold and underline is in the quoted decisions is made by us) 12. In view of the above discussions and respectfully following the decisions of coordinate bench, we direct the AO/TPO to exclude the 8 comparable namely; Mold-teck Technology, Eclerx Services Limited, Accentia Technology Limited, Wipro Limited, Accropetal Technology Limited, Infosys BPO Limited, HCL Comnet System & Services Ltd and Cross Domain Solution Ltd and recompute the APL as per direction/ observation hereinabove. In the result the Ground No. 2 of the appeal is partly statistically. 13. Ground No.3 relates to adjustment on account of provision of Corporate and performance guarantee. The ld. AR for the assessee submits that provision of corporate guarantee does not lead to any income generation for the assessee and hence, doe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ade good by such corporate. Keeping the aforesaid ratio of the Bombay High Court, it is quite clear that the manner in which the Transfer Pricing Officer has proceeded to determine the arm's length rate based on the probable rate being charged by the commercial banks is not justified. In this view of the matter, three per cent rate of guarantee commission fee determined as arm's length rate by the income-tax authorities cannot be approved, though the ld. DRP in its direction has already restricted it to 1.5%. In the alternative, the addition that is required to be sustained is the position canvassed by the assessee before the Transfer Pricing Officer i.e. adoption of 0.50 per cent as arm's length rate for the purpose of determining the arm's length income on account of guarantee commission fee in the instant case. Considering the entirety of facts and circumstances of the case and on the basis of the material available on record, the rate of 0.50 per cent is to be upheld for the purpose of determining the arm's length rate of the guarantee commission fee. In the result this ground of appeal is partly allowed. 17. Ground No. 4 relates to adjustment on account ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... held that Arm's length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. 20. Further, the Hon'ble Jurisdictional High Court in CIT Vs Tata Autocomp System Ltd (supra) also held that where assessee advanced loans to its AE situated in Germany, rate of interest was to be determined on basis of rate prevailing in Germany where loan had been consumed. Considering the aforesaid decisions of Hon'ble High Courts, we direct the AO/TPO to recompute the adjustment of interest on loan by following the decision of CIT Vs Tata Autocomp System Ltd (supra). The assessee is directed to provide necessary details to AO/TPO. In the result this Ground of appeal is allowed for statistical purpose. 21. Ground No. 5 relates to treating the income from sub-lease as income from other sources. The ld. AR for the assessee submits that during the relevant period under consideration the assessee had taken a lease of property from Magnus Properties Private Limited. Since, the assessee could not use the entire premises for the purpose of its business and in order to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... earning such income. Therefore, in our considered view no further direction is required. However the AO/TPO is directed to give effect to the order of DRP dated 21 December 2012. In the result the ground No. 5 of the appeal is partly allowed. 25. In the result the appeal of the assessee is partly allowed. ITA 1808/Mum/2014 by assessee for AY 2009-10 26. The assessee has raised following grounds of appeal; (1) Adjustment of Rs. 3,08,50,500/- as regards provision of guarantee. (2) Adjustment of Rs. 2,47,46,270/- as regards provision of loans. (3) Short Credit of TDS has been allowed to the extent of Rs. 2,07,96,985/- 27. We have noted that the Ground No. 1 is identical to the Ground No. 3 in appeal for AY 2008-09, which we have partly allowed, therefore, the AO/TPO is directed to recompute the adjustment by following the aforesaid directions. In the result this ground of appeal is partly allowed. 28. Ground No. 2 is identical to the ground No.4 in appeal for AY 2008-09, which we have allowed for statistical purpose, therefore, the AO/TPO is directed to recompute the adjustment by following our aforesaid direction. In the result this ground o....