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TMI Blog2015 (10) TMI 2576X X X X Extracts X X X X X X X X Extracts X X X X ..... es which are on similar standard can only be comparables Fortune Infotech Ltd. is excluded from the list of the comparables in view of the fact that it holds unique intangibles which position is not disputed by the Revenue. - ITA. No. 1940/Del/2008 and ITA No. 1982/Del/2008 - - - Dated:- 16-10-2015 - SMT DIVA SINGH, JUDICIAL MEMBER AND SH. INTURI RAMA RAO, ACCOUNTANT MEMBER. Appellant by Sh. Ajay Vohra, Sr. Adv., Sh. Neeraj Jain, Adv. and Sh. Abhishek Agarwal, CA. Respondent by: Sh. Amrindra Kumar, CIT DR ORDER PER DIVA SINGH, JM These are cross appeals filed by the assessee and the Revenue assailing the correctness of the order dated 20.03.2008 of CIT(A)-XX, New Delhi pertaining to 2004-05 assessment year on grounds which read as under:- ITA No.-1982/Del/2008 1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of ₹ 9.59 crores on account of difference in arm s length price made by TPO/AO. 2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of the hearing. ITA No.1940/Del/2008 1. That the Commissioner of Income-tax (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot considering the normalized operating results of the appellant after eliminating the decline in the operating results on account of loss of significant business of its major client Conseco, during the relevant previous year. a. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not making due adjustments on account of the fact that during the relevant year, the appellant was not operating at optimum capacity, i.e., idle establishment cost was substantially high and losses were bound to occur, while determining the arm's length price applying Transactional Net Margin Method ( TNMM ) . b. That the Commissioner of Income-tax (Appeals) erred on facts and In law In law in not applying the operating profit margin of the appellant over a period of business cycle (i.e., when the appellant was operating at optimum capacity) for comparing operating results of the established enterprises rendering similar services while applying TNMM, as per the recommendation of the OECD guidelines. c. That the Commissioner of Income-tax (Appeals) erred on facts and in law in observing that in absence of any working as to difference in (i) claim of deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rejected due to substantial erosion of net worth and having significant related party transactions. 2. Apex Logical Data Conversion Pvt. Ltd. Rejected due to non-availability of data. 3. Compudyne WIngosystems Rejected due to very low turnover to net fixed asset ratio, low employee cost to total cost ratio and having a distinctly different functional profile. 4. Giltedge Infotech Services Ltd., ND Rejected due to non-availability of data. 5. Mapro Industries Rejected due to non-availability of financial data for a complete period of 12 months. 6. Twinstar Software Exports Limited Rejected due to very low turnover to net fixed asset ratio, low employee cost of total cost ratio despite having a similar functional profile. 7. Zigma SoftwareLimited Rejected due to low employee to total cost ratio and for ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner of Income-Tax (Appeals) erred on facts and in law in sustaining levy of interest under sections 234B and 234C of the Act. The appellant craves leave to add, amend, alter or vary from the above grounds of appeal before or at the time of hearing. 2. Addressing the grounds raised the Ld.AR invited attention to the summary of Transfer Pricing adjustment filed in the Court and submitted that Ground No.1 is general; Ground No.5; 6; 8; 9; 11; and 12 are not bring pressed as such required no adjudication. 3. Addressing the issue raised in Ground No.2 it was submitted that the assessee has filed the same merely to keep the issue alive and is not seeking adjudication of the issue in view of the peculiar facts which he would place on record. On facts it was submitted that that EXL US entered into a contract with the clients/customers for rendering customer care services. The services are thereafter outsourced to the assessee and the assessee thereafter execute such contract by rendering IT enabling services to the clients/customers. It was submitted that since the business is provided to the assessee by the AE i.e EXL US and the assessee only performs part of the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rejected by the ITAT thus it was his submission that the assessee has raised the grounds and would like to keep the issue alive however no further arguments were advanced. 3.1. Considering the argument advanced the Ld. CIT DR relying on past history of the assessee itself submitted that the issue be decided in favour of the Revenue. 4. Having heard the submissions and considered the order of the ITAT in assessee s own case in the light of the submissions of the parties, Ground No.2 alongwith the sub-grounds is dismissed following the order of the Co-ordinate Bench. 5. Addressing Ground No.-3.1 4 wherein the assessee agitates the adjustment on account of the idle capacity, the Ld.AR has canvassed that 95% of the total revenue of the assessee came from Conseco . As a result of loss of this business the capacity of the assessee was not completely utilized as the group was trying to obtain other customers. In view of this fact it was submitted that the assessee could not close any of its facilities nor could the assessee terminate its employees as such a conduct would have adversely effected its reputation in the market. The profitability of the assessee it was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f its assets which would be evident from a perusal of its balance sheet. The assessee it was submitted depreciates its assets at a higher rate than as per Schedule XIV to the Companies Act, 1956. For the year under consideration it was submitted the assessee has charged additional depreciation of ₹ 14,19,51,272/- to its P L A/c thus impacting its profit margin. 8.1. On the said issue the DRP in 2006-07 assessment year directed the TPO to recompute the depreciation charged by the comparables at the rate applied by the assessee. Further the ITAT also in 2003-04 assessment year vide its order dated 22.12.2014 in ITA no.1939/Del/2008 in para 5.23 directed that operating profit of the comparables should be recomputed by the TPO in line with the rates of depreciation charged by the assessee under the SLM. Accordingly, it was submitted if the OP/OC ratio of the comparable companies considered by the CIT(A) is considered then it worked out to -15% and if OP/OC ratio of comparables considered by the TPO is considered then it works out to 8.4%. Since the average operating profit margin of the assessee is at -3.14% then the international transactions undertaken by the assessee it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of depreciation/idle capacity. The TPO as per internal page 8 of his order rejected 6 comparables out of the above list of comparables selected by the assessee and retained only the following three comparables:- S. No. Name of the Company Data for year OP/TC% 1. Ace Software Exports Limited 2004 1.14% 2. Apex Logical Data Conversion Pvt. Ltd. 2003 14.3% 3. Fortune Infotech Limited 2004 44.22% Average 19.88% 8.4. The issue it was submitted was carried in appeal before the CIT(A) who deleted the Apex Logical Data Conversion Pvt. Ltd. one of the comparables retained by the TPO and instead introduced two new comparables namely Nucleus Netsoft GIS India Ltd. and Karvy Consultants Ltd. As a result of this, it was submitted the CIT(A considering the four compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition, if the comparables of the CIT(A) are considered than the following position would emerge:- Comparable companies considered by the CIT(A) S. No. Name of the Company OP/TC (%) as per CIT(A) OP/TC(%) after depreciation adjustment 1. Ace Software Exports Limited 0.69% -21.21% 2. Fortune Infotech Limited 39.01% 4.41% 3. Nucleus Netsoft GIS India Ltd. 16.87% -37.85% 4. Karvy Consultants Limited -5.37% -5.37% Arithmetic Mean 12.80% -15.00% Appellant s margin -3.14% 10. Considering the judicial precedent in assessee s own case the Ld. CIT DR stated that as far as the calculations are concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to abnormal profits. In our considered opinion, the year in question cannot be considered as abnormal when viewed in the light of the fact that its profit rate has progressed from the preceding year. The decline in the profit rate for the succeeding year is due to the reasons given by the company in its Annual report for next year, a copy which is available on pages 178 onwards of the paper book. In his message to the shareholder, the Managing Director of the company stated that the year ending 31st March 2004 (i.e. succeeding year) was a year of consolidation in which it sacrificed immediate profits for much larger gains by preparing ourselves for future growth . The Annual report of this company for the next year indicates that it developed its own intangibles in such next year. These factors indicate that financial year 2003-04 relevant to assessment year 2004-05 was abnormal for Fortune Infotech Ltd. But for that, its profit progressed from assessment year 2002-03 to assessment year 200304 in question. 8.4. Reference to the Tribunal order in the case of 24/7 Customer (supra), for seeking exclusion of Fortune Infotech Ltd., is again misplaced. The palpable reason for our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Fine had developed its own software called fine tran and image index for performing specialized services in medical prescription and patients record management. In these circumstances, we are of the view that a comparable company which has developed unique software cannot be considered to be a comparable company of the assessee who is an IT-enabled company who is performing the work generated for it by its AE wherein the substantial intangibles are owned by the AE. The said company cannot be considered a comparable for the assessee. The ownership of unique intangibles in the case of the said comparables in the year under consideration has been taken not of by the Co-ordinate Bench in asessee s own case in the immediately preceding assessment year where this fact was not in existence. Accordingly applying the principle that only companies which are on similar standard can only be comparables Fortune Infotech Ltd. is excluded from the list of the comparables in view of the fact that it holds unique intangibles which position is not disputed by the Revenue. 15. Addressing Ground no.10 it was submitted by the Ld.AR that on facts there was no transfer of profit by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s appeal are against the sustenance of disallowance of provision of expenses amounting to ` 32,08,612/-. 10.2. Briefly stated, the facts of these grounds are that the assessee created provision for expenses to the tune of ` 5,18,03,004/- and claimed deduction for the same. As the assessee failed to furnish specific bills for which the above provision was made, the AO made addition of equal sum. The ld. CIT(A) observed that the assessee was not provided adequate opportunity of adducing necessary evidence in support of its claim of provision for expenses. After considering the relevant material furnished by the assessee, the ld. CIT (A) deleted addition of ` 4.85 crore for which the invoices were available. As regards the remaining amount of ` 32.08 lac for which the invoices were not available, the ld. CIT (A) sustained the addition. The assessee is aggrieved against the sustenance of addition to this extent. 10.3. After considering the rival submissions and perusing the relevant material on record, it is observed that the assessee is constantly making provision for expenses on year-to-year basis on the estimate of reasonable expenses incurred but the bills ..... X X X X Extracts X X X X X X X X Extracts X X X X
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