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2023 (3) TMI 456
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....of the case and in law, the Ld. CIT(A) erred in allowing the benefit of -5% relief to the assessee, without appreciating the fact that no standard deduction of 5% to the assessee is envisaged under section 92C(2) of the Act". 3. The appellant prays that the order of the Ld. CIT(A) on the above ground be set aside and that of the AO be restored". 3. The grounds raised by the assessee in its appeal are reproduced as under: 1. The learned Commissioner of Income-tax (Appeals)-15, Mumbai ('CIT-A') erred on facts and in law in allowing only partial relief in relation to the transfer pricing adjustment made by Assessing Officer /Transfer pricing officer ('AO/TPO) despite the fact that the AO and the TPO have incorrectly disregarded the benchmarking analysis and the resultant comparable companies identified by the Appellant as part of its transfer pricing report (TP Report') maintained on a contemporaneous basis as per Section 92D of the Act read with Rule 10D of the Rules without assigning any cogent reasons thereof. 2. The learned CIT-A erred on facts and in law in upholding the order of the AO/TPO despite the fact that the AO/TPO erred in ma....
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.... on facts and in law in upholding the order of the AO/TPO despite the fact that the AO and the TPO did not allow any adjustments as warranted under Rule 10B(1)(e)(iii) of the Rules to account for difference between international transactions and the alleged comparable uncontrolled transactions selected by the learned AO/TPO. The Appellant prays that the additions to the appellant's income made in relation to transfer pricing matters by the AO/ TPO and upheld by the Hon'ble CIT(A) be deleted. Levy of Interest under Section 234B and 234C of the Act 8. On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under section 234B and 234C of the Act. The Appellant prays that the AO be directed to delete the interest under the Act. 4. At the outset, we may like to mention that the then Assessing Officer of the case vide letter dated 08/02/2021 intimated to the Departmental Representative for withdrawal of the appeal in view of the tax effect involved being below the limit prescribed by the Central Board of Direct Taxes(CBDT) vide Circular No. 17 of 2019. The said intimation duly forwarded by the concerned Range Office....
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....onal transactions carried out by the assessee, which are reproduced in para 4 of his order dated 21/10/2009. For ready reference, summary of said international transactions is extracted as under: Sr. No. Nature of Transaction Amount (Rs.) Method used 1. Provision of support services to Associated Enterprises 9,44,70,575/- TNMM 2. Interest paid on Overdraft facilities 1,38,522/- CUP 3. Interest paid on unsecured loans 19,56,644/- CUP 4. Payment of Rent and Utility charges 33,40,152/- TNMM 5. Payment on account of secondee salaried and other costs 82,90,036/- TNMM 6. Payment in respect of car provided to employee 1,87,340/- TNMM 7. Payment in respect of human resource cost shared 7,18,141/- TNMM 8. Payment in respect of accommodation provided to the Employee & Depreciation of Furniture provided 24,31,141/- TNMM 11,15,33,344/- 7.2 The Ld. TPO further noted in para five of his order that the assessee in its transfer pricing study selected Transactional Net Margin Method (TNMM) as the most appropria....
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....ree comparables chosen by the assessee namely 'Allsec Technologies Ltd.', 'Ace software exports' and 'Spanco Telemetry Systems and solutions Ltd'. The Ld. TPO himself carried out search of the database(s) and came out with a fresh list of comparables. After considering objections of the assessee, the Ld. TPO made a final list of comparables and arithmetic mean of their PLI was worked out to 24%. The list of the comparables, objection of the assessee and remarks of the TPO, reproduced in para 5.6.2 of the Ld. TPO, is extracted as under: Sl. No. Company Name Objection Remark 1. Ace Software Exports Ltd. Accepted 2. Allsec Technologies Ltd. Accepted 3. Apex Knowledge Solutions Pvt. Ltd. It is into software development In response to notice u/s 133(6), the company categorically stated that they are into IT enabled services. It also qualifies all the filters applied the TPO. The same is considered as a comparable. 4. Asit C Mehta Financial Services Ltd. (Earlier known as Nucleus Netsoft & GIS (India) Ltd) Annual report uses word ITES and software developme....
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.... the filters applied by the TPO including RPT filter (241% of the revenues). Thus it is considered as a comparable. The illustrations given by assessee are part of ITES only. 13. Vishal Information Technologies Ltd It has related party transactions, therefore Uncontrolled In response to letter issued u/s 133/6), the company has stated that it did not have any transaction with any associated enterprise 7.5 The Ld. TPO rejected the contention of the assessee for providing working capital adjustment as well as risk adjustment in absence of any quantifiable data provided by the assessee. 7.6 The Ld. TPO vide his order dated 21/10/2009 computed the adjustment of Rs.1,06,65,264/-as under: 5.8 Determination of Arms Length Price: Total Cost incurred by assessee on providing Office Services (In absence of separate accounts (proportionate cost being taken) (Rs.9,64,87,892/-/107507875*94470575) Rs.8,47,86,967/- Mark Up as per comparables 10,51,35,839/- Transaction Price Rs.9,44,70,575/- Adjustment Rs.1,06,65,264/- 8. The Ld. Assessing Officer issued draft ....
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..... Under the TNMM, for comparison of the assessee with the comparable companies, functions carried out, assets deployed and risk assumed (FAR) by the assessee are to be compared with the FAR analysis of the comparable companies. Therefore, before we embark upon adjudication of exclusion/inclusion of comparables, it is necessary to refer the FAR analysis of the assessee company, available on page 13 to 16 of the paperbook, which is reproduced as under: "4. Functional Analysis 4.1 Functions Performed HPSI is responsible for providing appropriately skilled professionals to the Contracting Entity so as to enable the Contracting Entity to carry out its auditing activity. There are various departments within HSBC, which conduct internal audits relating to inter alia Retail, Credit, General, Investment Bank, Insurance, Treasury, Securities, Private Banking, Management Office and IT systems/projects. HPSI has to recruit professionals possessing the requisite academic qualifications and appropriate skill-sets. HPSI believes that a large portion of the global needs for audit personnel can be sourced from India, as staffing cost in India are lowe....
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....port for the sections that have been assigned to them. A typical overseas audit schedule for an auditor at HPSI would involve two weeks of onsite auditing and one week of compilation of findings/report writing (offsite work) at the HPSI office. Due to the specialisation aspect, an auditor would normally work for the same Contracting Entity all the time, although an auditor may be requested to assist an alternate Contracting Entity in case of manpower shortages. 4.1.1 Other functions HPSI avails of certain overdraft and loan facilities from the Bank. We understand that the Bank offers these facilities at terms and conditions similar to those offered to independent third parties. The Bank has seconded certain employees to HPSI. These employees remain on the payroll of the Bank and are accordingly paid salaries by the Bank. Such payroll cost is cross-charged by the Bank to HPSI on a pure cost basis. HPSI has been allocated office space by the Bank. The Bank recovers share of rent cost/security deposit from HPSI. 4.2 Risks Assumed 4.2.1 Contract risk The professionals deputed by HPSI work under the control and guidanc....
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....ort writing (off-site work) at the office of the assessee. 14. The assessee has entered into agreement for provision of audit services with Associated Enterprises. A copy of one of such agreement with Associated Enterprise namely HSBC electronic data processing (Guangong) Limited (HDPG), is placed on page 121 to 127 of the paperbook. The range of professional audit services rendered by the assessee to HDPG is listed in clause -2 (on page 122 of PB) along with Schedule-I, available on page 126 of the paperbook. The details of said services is reproduced as under: "2. Services 2.1 HPSI will be responsible for providing sufficient auditors to enable the adequate execution of the Services. The range of professional audit services ("Services") rendered by HPSI to HDPG is noted in the attached Schedule 1. 2.3 Both parties will follow the operational procedures and service levels as agreed between the parties from time to time. 2.4 The Services will be provided in accordance with the guidelines provided by the HSBC Group Audit Standards Manual in force at that time. Schedule 1 The Services The range of profes....
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....f his contention has relied on the decision of the Hon'ble Punjab and Haryana High Court in the case of PCIT Vs IHG IT services India Private Limited for assessment year 2006-07 reported in (2017) 88 taxmann.com 642 (P& H). On the contrary, the Ld. DR submitted that nowhere outsourcing world has been mentioned in the Annual Report and data entry charges incurred by the assessee might have been separately identified and grouped in the annual report, and merely on the basis of separate identifying of data entry charges, the company cannot be classified as outsourcing model company. 17. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that Hon'ble Punjab and Haryana court in the case of IHG IT services India Private Limited (supra) for assessment year 2006-07 has observed as under: "5. As far as Vishal Information Technologies Limited is concerned, there is no difficulty whatsoever for the Tribunal has come to a clear finding of fact that it outsourced about 44.81% of its business. For instance, it was observed that Vishal Information Technologies Limited has a low employee cost of 1.25% of operating....
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.... 20. We have heard rival submission of the parties on the issue in dispute. As evident from the paperbook page 323 (Annual Report page 31), another company namely Nucleus Netsoft and GIS (India) Ltd. was amalgamated with the Company. The relevant information of the annual report is reproduced as under : "1. AMALGAMATION a. Pursuant to the scheme of amalgamation ('the scheme). Nucleus Netsoft And GIS (India) Ltd (NNGIL) was amalgamated with the Company with effect from the appointed date i.e. April 2005 as sanctioned by the Hon'ble High Court of Judicature at Bombay, on February 10, 2006, and filed with Registrar of Companies on February 22, 2006. All the assets and liabilities of erstwhile Nucleus Netsoft And GIS (India) Ltd stand transferred to and vested with the Company with effect from April 1, 2005, the appointed date. The scheme has accordingly been given effect to above financial statements. b. The amalgamation has been accounted for under the "Pooling of Interest Method" as prescribed in Accounting Standard (AS14) issued by the Institute of Chartered Accountants of India. Accordingly the assets, liabilities and reserves of the ....
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.... comparable. The Ld. counsel however did not file financials of the company to support his contention and relied on the decision of the Tribunal Mumbai Bench in the case of Franklin Templeton International services India Private Limited Vs DCIT reported in (2018) 89 taxmann.com 439 (Mumbai-Trib). 22. The Ld. DR submitted that this comparable was not challenged by the assessee before the Ld. CIT(A) and it has been challenged for first time before the Tribunal. The Ld. DR further referred to objection of the assessee before the Ld. TPO and the remark of the Ld. TPO, wherein the assessee sought to exclude the company on being functionally different, whereas the Ld. TPO called for the information under section 133(6) of the Act and after verification that it qualifies all the filters and functions are in the nature of ITes only, he included the company into set of comparables. 23. We have heard rival submission of the parties. We find that the Ld. TPO has gathered financial and functional details of the company by way of using his authority under section 133(6) of the Act. Since the said information has not been provided to the assessee, we feel it appropriate to restore t....
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....sis of foreign exchange earning being less than 25% of the total revenue of the company. 28. The Ld. DR on the other hand referred to the remark of the Ld. CIT(A), wherein he has held that the Ld. TPO has only considered BPO division at segment level as comparable with its sales at Rs.5.03 crores and not the total revenue . He submitted that the export turnover is with respect to another division of telecom sector and therefore said filter does not apply on the BPO segment of the company. 29. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of the page 409 of the paperbook we find that sales of the company are from two divisions. The first division is telecom and insulated divisions, wherein the turnover has been bifurcated in domestic turnover at Rs.25,84,43,794/- and export turnover of Rs.2,29,721/-. The other division is BPO division wherein the turnover has been mentioned at Rs.5,02,71,015/-. In the BPO division no such bifurcations of domestic and export turnover has been reported. Since the Ld. TPO has considered only BPO division for comparison with the assessee, the contention of the Ld. coun....
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....ionally dissimilar. The Ld. DR on the other hand submitted that assessee itself has classified in the category of ITes/BPO and if assessee insist for exclusion of the company on the ground of call centre, then other comparables selected by the assessee also need to be excluded being functionally dissimilar. The Ld. DR further submitted that allegation of fraud on the owners/directors were pertaining way back to almost more than 20 years and therefore merely on substantiated allegation of fraud, company cannot be excluded. 34. We have heard rival submission of the parties on the issue in dispute. We find that on the issue of non-reliability of financial data of the company, the Hon'ble High Court of Bombay in the case of Commins turbo technologies Ltd (supra) has held as under: "15. In our considered opinion, the difference in functions sought to be canvassed by the assessee is emerging from record. Merely because the two kind of activities are referred to as ITES in a Notification by the CBDT does not imply that the same have to be understood as functionally identical/similar. In-fact, the dissimilarity in the functions performed by assessee and Maple eSolutions Ltd. is....