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TMI Blog2017 (10) TMI 1145X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Rs. 86,430,318/- to the provision of non-binding investment advisory services transaction of the Appellant based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act'). 2. The learned AO 7 TPO erred on facts and in law in not complying with the directions of the Hon'ble Dispute Resolution Panel ('DRP'). 3. The learned AO/TPO under the directions of the Hon'ble DRP, erred on the facts and in law indisregarding the various submissions made by the Appellant rejecting the benchmarking analysis and most of the comparable companies selected by the Appellant without appreciating the fact that such selection was based on contemporaneous data and the transfer pricing study report prepared and maintained as per Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'). 4. The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law by arbitrarily classifying the appellant's services as Knowledge Process Outsourcing ('KPO') services, without taking into consideration the differences in the functions performed, assets employed and risks undertaken between the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction of provision of support services be deleted. Ground 2 - Disallowance of Provision for Legal and Professional fees of Rs. 10,00,000 1. The Ld. AO has erred on facts and in law in disallowing the provision for legal and professional fees of Rs. 10,00,000 incurred by the Appellant for the purposes of taking office premises on leave and licence basis in subject assessment year. 2. The Ld. AO erred on facts and in law in holding that such expenditure is capital in nature and not allowable under section 37(1) of the Act despite of the clear observation of the Hon'ble DRP in its directions that such expenditure cannot be termed as capital in nature because it represents legal fees payable in relation to acquiring premises on lease. 3. The Ld. AO erred on facts and in law in holding that the expenses were not incurred before the end of the relevant previous year and were of provision in nature despite the observation of the Hon'ble DRP in its directions that the expenses were actually been incurred by the Appellant, the amount was correctly reflected in the form of a provision in the Profit and Loss Account in accordance with the method of accounting. 4. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 percent model. The Ld. AO has accepted the revenue returned by the Appellant in its financial statements. Since, the Ld. AO has disallowed the travel and conveyance expenses to the tune of Rs. 1,50,00,000 and the Ld. AO ought to have reduced the revenue of Appellant by cost plus fifteen percent i.e. Rs. 1,72,50,000. The Appellant prays that the disallowance in relation to travel and conveyance expenses made by the Ld. AO and upheld by the Hon'ble DRP be deleted. Ground 4 - Initiation of Penalty Proceedings under section 271(1)(c) 1. The Ld. AO erred on facts and in law in initiating penalty proceedings under section 271(1) (c) of the Act for furnishing inaccurate particulars of income on proposed disallowance for provision for legal and professional expenses and travel and conveyance expenses.. The above grounds of objections are all independent and without prejudice to one another. The Appellant craves leave to add to, alter, amend or withdraw all or any of the grounds of appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law." 3. Ground No.1, Transfer P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices were excluded. The following 6 companies were selected by him, after applying the above filters and utilizing information gathered u/s 133(6). Sr. No. Name of the comparable NCP 1 Acropetal Technologies (Seg) 35.30 2 Coral Hubs Ltd. (Formerly Vishal Information Technologies Ltd.) 50.68 3 Crossdomain Solutions Ltd 26.96 4 Eclerx Services Ltd. 65.88 5 Mold Tek Technologies Ltd. 96.66 6 Triton Corp Ltd. 23.81 Arithmetic Mean 49.88 After considering the objections of the assessee, the TPO applied the average NCP margin of 49.88% on the total operating cost of the assessee and determined the adjustment of Rs. 8,64,30,318/-. 3.2 Upon assessee's objections, DRP considered the submissions. The DRP inter alia gave the following directions:- "With regard to the selection of comparables we are of the view that the fitters chosen by the TPO are all relevant and reasonable. Most of these filters are only a refinement of the search process undertaken by the assessee itself. Some of the objections of the assessee against these filters relate to the use and availability of current year's data, and these contentions have already been discussed above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Although the TPO has given valid reasons for rejecting the same as comparables, we find that the TPO has not completely disagreed with the functional comparability in the case of IDC (India) ltd. In fact, the TPO has observed that the company is a global provider of market intelligence advisory services for the IT, Telecom and Consumer Technology Markets. It appears from the Annual Report that the company is a market research company primarily dealing in research services and products. Considering this profile we are of the view that (DC (India) Ltd, should be included as a comparable. 6.9 Thus, the AO is directed to exclude Coral Hubs Ltd. and include IDC (India) Ltd. in the list of the comparables chosen by the TPO. Further, Triton Corporation Ltd. may also be excluded if It is found that it fails the export filter of 75% chosen by the TPO. The AO shall then compute the modified NCR margin and determine the consequential adjustment to be made." 3.3 Pursuant to the above directions, the Assessing Officer passed the order making addition of Rs. 8,64,30,318. While making the above addition, the Assessing Officer observed as under:- "During the year, the assessee has entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that there are many captive IT enabled service provider who were in exactly similar business as the tax payer. Learned Counsel submitted that this observation of the TPO is quite contradictory to his earlier observation. He further submitted that assessee is not engaged in IT enabled services or K.P.O. He submitted that assessee is engaged in providing specialized investment advisory to its AE and is being compensated on cost plus basis. Hence, it cannot be treated as engaged in IT enabled service or engaged as K.P.O. Learned Counsel submitted that TPO in his order has applied the following filters of criteria for searching comparables:-
Companies whose data is not available for the FY 2007-08 were excluded and the data for the FY 2007-08 has been considered for the period from 01-04-2007 to 31-03-2008.
Companies whose IT enabled service income X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that the above comparables selection was totally incorrect. Referring to the above, learned Counsel submitted that those comparables were liable to be rejected because of functional difference in the business models, and some of the data was not available in public domain and some of them had abnormal high profits. Learned Counsel of the assessee submitted that the DRP has accepted the assessee contention and directed to exclude Coral Hubs Ltd. and include IOC India Ltd. in the comparables and has further directed that Triton Corp Ltd. may also to be excluded if it is found that it fails export filter of 75% chosen by the TPO. Learned Counsel submitted that these directions of the DRP have not been followed by the Assessing Officer. 3.8 Learned Counsel further submitted that the TPO has treated the assessee as a KPO and has hence taken comparables from KPO business. In this regard, learned Counsel placed reliance upon the decision of ITAT Mumbai Benches in the case of KGN India Advisors Pvt. Ltd. v. DCIT 70 Taxmann.com 219, wherein it was held that company providing management and advisory services of various types of industries cannot be compared with company engaged in pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tone Advisors India P.Ltd. ITA No.1581/Mum/2014 AGM India Advisors (P.) Ltd. (Mumbai ITAT) (2016) 70 taxmann.com 219 General Atlantic Pvt. Ltd. ITA No.1019/Mum/2014 Warburg Pincus India Pvt. Ltd. (Mumbai ITAT) ITA No.1612/ Mum/2015 Goldman Sachs India Securities Private Limited (Mumbai ITAT) ITA No.927/Mum/2016 (ii) Informed Technologies India Limited. Temasek Holdings Advisors (I) Pvt. Ltd. 160 TTJ 556 Temasek Holdings Advisors (I) Pvt. Ltd. ITA No.968/Mum/2014 Temasek Holdings Advisors (I) Pvt. Ltd. ITA No.776/Mum/2015 TPG Capital India Pvt. Ltd. (Mumbai ITAT) ITA No.880/2013 3.11 Learned Counsel submitted that if the above four comparables are excluded and the two comparables as submitted above are included, the assessee will come within the arm's length margin. Learned Counsel further submitted that two year later on with the APA with Government of India, margin has been accepted at 20%. 3.12 Per contra, learned Departmental Representative submitted that assessee has rightly been treated as KPO by the TPO. He submitted that assessee is providing advisory services where high level of knowledge is required. The learned DR further submitted that he would not argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the premises on lease which will give the assessee enduring benefits extending beyond the year under consideration. Therefore, the Assessing Officer held the same to be capital expenditure, not allowable u/s 37(1) of the Act. 4.3 Upon assessee's objection, the DRP held that the amount was disallowable u/s 40(a)(ia). The relevant portion of DRP's direction reads as under:- "We are of the view that such expenditure cannot be termed as capital in nature only because it represents legal fees payable in relation to acquiring premises on lease. We also accept the assessee's contention that since the expenses had actually been incurred, the amount was correctly reflected in the form a provision in the P&L A/c in accordance with the method of accounting. However, tax has not been deducted at sources u/s 194J at the time of crediting this amount in the books. The relevant provisions state that tax is deductible at the time of payment or credit, even if the credit is to a suspense account. The assessee's contention that tax was not deductible since the amount did not constitute income in the hands of the recipient, is not acceptable. The revenue nature of the expenditure is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to visit various countries to participate in conferences or events, or to carry out meaningful analysis of various companies. It is also stated that the assessee is compensated by Its AE at a 15% mark up on the cost incurred and even these expenses have been considered by the AE for remunerating the assessee. 5.3 Considering the above, the DRP granted adhoc relief and upheld the disallowance amounting to Rs. 1.5 crores. The DRP's direction is as under:- "On examining the matter we are in agreement with the AO's findings that if there are only 9 employees in the company, it should not have been difficult for the assessee to provide full details of the travelling expenses. The assessee has made only general statements but has not provided the specific details even before us. It is also seen that the corresponding expenditure in the earlier year was only Rs. 0.49 crores. No explanation has been forthcoming from the assessee as to why the expenses have increased by almost 5 times this year. The fact that the assessee is compensated by the AE on a cost plus basis is not relevant for determining the allowability of expenses under the Income-tax Act. We are also of the view t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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