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TMI Blog2012 (5) TMI 627X X X X Extracts X X X X X X X X Extracts X X X X ..... yle-unhide:no; border:solid windowtext 1.0pt; mso-border-alt:solid windowtext .5pt; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-border-insideh:.5pt solid windowtext; mso-border-insidev:.5pt solid windowtext; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-fareast-language:EN-US;} SHRI G.D.AGRAWAL, VICE PRESIDENT AND SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER For the Appellant : S/Shri Arijit Chakravarty, Vijay Iyer, Manoneet Dalal & Atulan Shah, ARs. For the Respondent : Shri Piyush Jain, CIT-DR (Intl.). ORDER PER G.D.AGRAWAL, VP : These are cross-appeals filed against the order of learned CIT(A)- XX, New Delhi dated 28th August, 2009 for the AY 2003-04. 2. Ground No.1 of the assessee's appeal reads as under:- "That on facts and in law the Commissioner of Income-tax (Appeals) ("Learned CIT(A)") erred in upholding the orders passed by the Assessing Officer ("Learned AO")/(Transfer Pricing Officer ("Learned TPO") which were ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant have been accepted and certified by the Software Technology Park of India, which is the Government/Reserve Bank of India designated competent technical authority to deal with the appropriateness of the price charged. (i) Not adjudicating on the argument that final assessment should be "having regard" to ALP and not based thereon." 5. At the time of hearing before us, the learned counsel for the assessee did not press ground No.2.1. Accordingly, the same is rejected. 6. With regard to ground No.2.2, it is stated by the learned counsel that the said ground is only arguments with reference to the addition made by the Assessing Officer and partly sustained by the learned CIT(A) by way of transfer pricing adjustment. The same is already challenged by ground No.2 and, therefore, if ground No.2 is adjudicated, no separate adjudication of ground No.2.2 is required. 7. In the Revenue's appeal also, by way of ground No.1, the Revenue has challenged the relief allowed by the learned CIT(A) in respect of transfer pricing adjustment made by the AO. The said ground reads as under:- "1. On relief of Rs. 34132272/- on account of arm's length price : (a) Whether in the facts and circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endering services to them, i.e., the Assessing Officer shall enhance the income of the assessee by an amount of Rs. 19,34,05,168/- while computing its total income. No exemption u/s 10B shall be admissible on such adjustment in accordance with proviso of Sub-section (4) of Section 92C." 10. The above adjustment was worked out by the TPO by applying the TNMM. The TPO made the comparison by taking the operating margins of comparable companies, details of which are given in paragraph 8 of his order which is reproduced below for ready reference:- 8.0 Accordingly, operating profit over the total cost margin of the comparable companies was adjusted to take into account the difference in the working capital. The detailed computation of effect of working capital adjustment on operating profit/total cost margin is given in Annexure 1. The adjusted operating margins of comparable companies as a result of above adjustment are given in the table below: Mar-03 Mar-03 Company Name (OP/TC)% Adjusted (OP/TC)% Ace Software Exports Ltd. 9.23 10.13 Allsec Technologies Ltd. 14.68 16.19 Genesys International Corpn. Ltd. (Consolidated accounts) 29.63 26.47 Karvy Consultant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l outgoing of Hinduja TMT. He, however, submitted that even if the receipt of the related parties is compared with the total receipt and the outgoing of the related parties is compared with the total outgoing, there would be substantial payment to and from related parties. Therefore, Hinduja TMT was rightly rejected by learned CIT(A) as a comparable. He also alternatively submitted that this specific point can be restored back to the file of the Assessing Officer/TPO for verification of correct facts and then re-adjudication accordingly. 15. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that CIT(A) has recorded the following finding in this regard:- "13.10 As regards to appellant's submissions regarding rejection of Hinduja TMT Limited, I have gone through financials accounts and it is found that Hinduja TMT Limited has the following related party transactions on the expense side : Hinduja TMT - FY 2002-03 Particulars Rs. In Lacs Rendering of services 2,579.82 Professional fee paid 30.00 Discounts and commission paid 483.15 Rent charges paid 97.40 Business promotion expense 4.29 Purchase/Miscellaneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... last years appellate order that, after doing FAR analysis TPO applied a turnover filter of Rs. 5 crores and selected the comparables (but it is quite peculiar that in this year, the turnover filter was not applied when there is no change in the facts and circumstances in the appellants business, scale, functions and risks analysis). I apply the filter turnover of Rs. 5 crores as held by me to be correct in last year and accordingly the comparables are used for the further comparability analysis. It may be mentioned here that on this issue remand report was sought from the TPO, but he has not given any comments on this issue. Therefore, by applying the turnover filter of 5 crores considering the fact during the year the appellants sales volume is Rs. 213 crores, I hold that companies with less than Rs. 5 crores as turnover should not be taken as comparable, accordingly, following companies get eliminated :" 18. From the above, it is evident that learned CIT(A) has noted that in the earlier year, TPO himself has applied the turnover filter of Rs. 5 crores and selected the comparables exceeding the turnover of Rs. 5 crores. Moreover, the receipt of the assessee from the Associated E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dards but also under section 92A of Income Tax Act, this would qualify to be an Associated enterprises. However, difficulty of related party transactions can be overcome by using consolidated accounts of the Genesys International since it is an established fact that in order to nullify the effect of related party transactions one may use consolidated accounts. This office had financial results of Genesys International both on standalone basis and consolidated. It is a fact that standalone financials of Genesys International are showing better operating margins as compared to consolidated but to meet the objection of related party transaction it is decided that consolidated accounts of Genesys International would be used." 21. However, the learned CIT(A) examined the consolidated accounts of Genesys International Corporation Limited and found that in the case of Global Information Services (GIS) segment in the consolidated revenue, 60% is the revenue earned by the subsidiary. While in the case of IT enabled services, 95% of the revenue is earned by the subsidiaries. He, therefore, held that even the consolidated accounts of Genesys International Corporation Limited are not comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from Genesys International Corporation Limited. In view of the above, in our opinion, the CIT(A) rightly held that Genesys International Corporation Limited cannot be considered as a comparable company for the purpose of determining arm's length price of IT enabled services rendered by the assessee. We, therefore, reject ground No.1(c) of the Revenue's appeal. 23. Now, we come to ground No.2 of the assessee's appeal. The limited argument of the learned counsel for the assessee was with regard to operating margin of MCS Ltd. It was stated by the learned counsel for the assessee that the CIT(A) has wrongly taken the operating margin of MCS Ltd. at 15.17%. The correct margin of MCS Ltd. is 7.64%. In this regard, he referred to page 262 and 263 of the assessee's paper book Part C wherein the working of operating profit is given. He also stated that this working was given to the CIT(A) but he has not given any reason for not accepting the same. 24. The learned DR, on the other hand, relied upon the orders of the authorities below on this point and stated that the working given by the assessee cannot be accepted without verification. Therefore, if at all Bench is inclined to consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opportunity to the assessee. It was also contended by the learned counsel that if the above adjustments are made, then even as per the order of the CIT(A), the variation in the margin would be within the permissible range under Section 92C(2). However, as we have already set aside the issue of working of the margin of the comparable cases, therefore, the question whether the variation between the margin of comparable cases and the assessee's case is within the permissible range under Section 92C(2) or not can be verified only after the redetermination of the margin of the comparable cases. We, therefore, direct the AO to examine this contention of the assessee after redetermination of the margin of the comparable cases. 27. Ground No.2 of the Revenue's appeal reads as under:- "Whether in the facts and circumstances of the case, the ld.CIT(A) was right in allowing relief of Rs. 1,91,72,777/- on account of pre-operative expenses incurred in the F.Y. 2001-02." 28. It was explained by the learned counsel that the assessee never claimed any deduction for pre-operative expenses. The entire pre- operative expenditure was disclosed in the balance sheet because it was to be reimbursed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise. During the year under consideration, the only incident was of reimbursement of the expenditure by 'AETRSCO' which is credited to the pre-operative expenses account. Therefore, since no expenditure was claimed during the year under consideration, the Assessing Officer was not justified in disallowing the same. We, therefore, uphold the order of learned CIT(A) on this point and reject ground No.2 of the Revenue's appeal. 32. Ground No.3 of the Revenue's appeal reads as under:- "Whether in the facts and circumstances of the case, the ld.CIT(A) was right in holding that AEGSC(STP) unit was eligible for deduction u/s 10-A of the Act which in the opinion of was formed by splitting up/expansion of existing business of FCE(EOU) which was already enjoying the benefit u/s 10-B of the I.T.Act." 33. The facts of the case are that the assessee is having a EOU unit at A-37, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi which commenced its business on 1st June, 1995. This unit is being allowed exemption under Section 10B from AY 1996-97. The assessee applied for setting up a unit under STPI Scheme on 10th January, 2002 and approval was granted on 15th January, 2002. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate, Mathura Road, New Delhi - 110044 Plot no.A-26, Sector- 34, Infocity, Gurgaon, Haryana 2 Nature of activities Carries out processes by utilizing telecommunication equipment & machines (including computers) and other technology equipments, on raw data received in electronic form and exports the output to customers located overseas Provides call centre services to Group companies and back office support in relation to resolving card member matters related to billing 3 Call Centre license FCE Unit (EOU) does not undertake any call centre activities and hence does not require any such license Obtained license from the Department of Telecommunications, Ministry of Communications, Government of India ['DoT'] to set-up an international Call Centre 4 Infrastructure & Technology Has own separate physical infrastructure in terms of office, space, plant & machinery, furniture & fixtures etc. and does not have similar infrastructure as that of AEGSC Unit a) Has high speed reliable multiple (E1 link) capacity telecommunications bandwidth to the US for running voice and data network b) Has high-end voice related equipment like CMS for ensuring analysis of call traffic and work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of above findings, it is clear that the new AEGSC unit (STP) was not formed by splitting up or reconstruction of existing business of FCE unit (EOU) and hence, I hold that the AEGSC unit is eligible for deduction under section 10A. Accordingly, ground nos.2.1 is decided in favour of the appellant." 35. The Revenue, aggrieved with the above finding of learned CIT(A), is in appeal before us. 36. We have heard both the parties and perused the material placed before us. We find that the CIT(A) has considered all the parameters which may be necessary for adjudicating whether the set up of the new unit is by way of splitting up of the existing business or it is a new set up over and above the existing set up. He has recorded the finding that the physical location of both the units is different. The nature of activities is different, separate license is obtained for the new unit, separate infrastructure is created in the new unit, fresh funds have been invested in the new unit and even after the setting up of the new unit, the turnover of the old unit has not reduced but, on the other hand, increased. During AY 2002-03, when no new unit was in existence, the turnover of old unit wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the business of the assessee then netting off cannot be granted as there is no inextricable link between the earning of the interest and payment of interest. We also do not find force in the contention of the assessee that since the payment of tax was made out of overdraft facility, therefore, interest receipt on income tax refund should be adjusted against interest paid on overdraft facility as according section 57(iii) only such expenditure (not being in the nature of capital expenditure) can be allowed if it is laid down or expanded wholly and exclusively for the purpose of making or earning of such income. Payment of income tax cannot be said to be made for earning of interest, hence the case of the assessee will also be out of the purview of section 57(iii). 26. In view of the above discussion, we are of the opinion that the relief has wrongly been granted by the ld.CIT(Appeals) as he did not properly appreciate the facts of the case. The earlier decision of the Tribunal in assessee's own case has no bearing on the facts of the present case. These grounds are decided against the assessee and in favour of the Revenue and these grounds of the Revenue are allowed." 39. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t applying the Proviso to section 92C(2) of the Act and has failed to allow the Appellant an option for the downward variation of 5 percent in determining the arm's length price." 46. At the time of hearing before us, at the outset, it was pointed out by the learned DR that in the Finance Bill, 2012, there is a proposed amendment in Section 92C(2) which will settle the issue raised by the assessee vide ground No.3. He, therefore, suggested that the issue raised by the assessee vide ground No.3 should be set aside to the file of the AO/TPO to be readjudicated after the Finance Bill, 2012 comes into operation. The learned counsel for the assessee did not object to his suggestion of the learned DR. 47. In view of the above, we set aside the issue raised by the assessee vide ground No.3 of its appeal to the file of the AO to be readjudicated in accordance with law after coming into force of the Finance Bill, 2012. 48. Ground No.4 of the assessee's appeal reads as under:- "4.1 That on facts and in law the learned CIT(A) erred in treating the compensation of Rs. 16,260,000 received from landlord for delay in actual delivery of leased premises and related work facilities in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rused the material placed before us. We find force in the contention of the learned counsel. When the rent was paid by the assessee, it was debited to rent account. Part of it was for the period prior to commencement of STP unit which was transferred to pre- operative expenses and the part of the rent which was for the period after the commencement of STP unit was debited to profit & loss account. If any part of the rent was received back by way of compensation, naturally the same is to be credited against the rent paid by the assessee. Therefore, the refund of the rent of pre- operative period was rightly credited in the pre-operative expenses account and the rent of post-operative period was credited to rent account (which was transferred to profit & loss account). The CIT(A) accepted the assessee's claim with regard to sum of Rs. 7,11,000/- which was reduced from the rent debited to profit & loss account. In our opinion, the nature of entire compensation of Rs. 1,69,71,000/- is the same. Merely because the assessee bifurcated it into two portions and reduced one portion from the expenses (rent) debited to profit & loss account and another portion from the expenses (rent) debited ..... X X X X Extracts X X X X X X X X Extracts X X X X
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