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TMI Blog2019 (6) TMI 1117X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors Report and the Annual Financial Statements shows that the contentions of the Ld. AR are correct on both the counts. We also note that the TPO himself has observed that the core activity of this company was providing analytical and testing services. We also note that this company had a significantly high proportion of testing instruments which was approximately 58% of its total net assets which implies that the functions performed by the company are capital intensive in nature and there is no similarity with the functions of a service provider. Rightly excluded by CIT(A). Vimta Labs Ltd. - A perusal of the Directors Report and the Annual Financial Statements shows that the contentions of the Ld. AR are correct on both the counts. We also note that this company had incurred huge expenditure on testing and analysis whereas the assessee company did not incur any expenditure on testing services. We also note that the assets employed by the assessee in terms of plant and machinery were approximately 70% of its total net assets which implies that the functions performed by this company were more capital intensive than the assessee company which was a mere service provider. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion for doubtful debts, gratuity etc. on the basis of actuarial valuation would have to be excluded from the net profit for computing the book profit u/s 115JB - ITA NO 3680/DEL/2013, C.O. No. 94/Del/2016 (IN ITA NO. 3680/DEL/2013) - - - Dated:- 19-6-2019 - Shri N.S. Saini, Accountant Member And Shri Sudhanshu Srivastava, Judicial Member For the Shri G.C. Srivastava, Adv., Shri Parichay Solanki, Adv For the Respondent : Ms Saweta Nakra, Sr. DR ORDER PER SUDHANSHU SRIVASTAVA, JM This appeal by the revenue is preferred against the order of the Ld. Commissioner of Income Tax (Appeals), Rohtak {CIT (A)} dated 28.3.2013 and pertains to assessment year 2004-05 and the C.O. has been preferred by the assessee. 2.0 Brief facts of the case are that, as per the assessment records, Comverse Technology Inc., which is the ultimate holding company of the group, was incorporated in the year 1984 and is engaged in designing, developing, manufacturing, marketing and supporting telecommunication systems and software for multimedia, communications and information processing applications. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.3 Aggrieved, the assessee approached the Ld. First Appellate Authority. The Ld. Commissioner of Income Tax (Appeals) partly allowed the assessee s appeal by deleting five out of the six comparables introduced by the TPO for determining the ALP. The Ld. Commissioner of Income Tax (Appeals) also deleted the partial disallowance of the Golf Club expenses and also gave relief to the assessee with respect to the disallowance of the provision for gratuity. 2.4 Aggrieved by the order of the Ld. Commissioner of Income Tax (Appeals), the department is now in appeal before this Tribunal (ITAT) and has raised the following grounds of appeal:- 1. Whether the Ld. CIT has erred in rejecting 5 of the 6 comparables taken by the AO/TPO for determining Arms Length Price. 2. Whether the Ld CIT has erred in deleting the part disallowance of club expenses, despite the fact that the assessee could not submit any evidence either during assessment proceedings or during appellate proceedings in favour of these expenses being 'wholly and exclusively' for the purpose of business. 3. Whether the Ld CIT (A) erred in admitting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts employed by the Respondent vis-a-vis the comparables. 4.3 Adopting a flawed approach by using single year dataas against the multiple year data used by the Respondent in accordance with law, to compute the arm s length price of the international transactions entered by the Respondent, using Transaction Net Margin Method ( TNMM ). 5. Without prejudice to above, the learned CIT-A has erred in holding that the benefits given by Proviso to section 92C of the Act is not available to the Respondent. 3.0 The Ld. Senior Departmental Representative (Sr. DR) submitted that the assessee had selected four comparables in the Transfer Pricing study viz. Enviro Technologies Ltd., Intelligent Communication System (India) Limited, Yashmun Engineers Limited and Vaibhav Heavy Vehicles Limited. The Ld. Sr. DR submitted that with respect to all these comparables the TPO had made observations in his order. It was submitted that the TPO observed that no data about product or services being provided by M/s Vaibhav Heavy Vehicles Limited was available. Similarly, no data for the products or services being provided by M/s Yashmun Engineers Ltd. was avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure had rightly been disallowed by the Assessing Officer but the Ld. Commissioner of Income Tax (Appeals) had erred in deleting the disallowance. 3.3 With respect to ground no. 3 pertaining to the relief granted to the assessee with respect to the disallowance pertaining to provision of gratuity, it was submitted that the Ld. Commissioner of Income Tax (Appeals) had erred in admitting additional evidence pertaining to the approval of the gratuity fund without calling for a remand report from the Assessing Officer. 3.4 With respect to ground no. 4 pertaining to the adjustment of book profits u/s 115JB of the Act with respect to provision of gratuity and provision for leave encashment, the Ld. Sr. DR submitted that the Ld. Commissioner of Income Tax (Appeals) had erred in treating these two provisions as ascertained liability whereas these two provisions were based on assumptions and were not based on any actuarial valuation. 4.0 In response, the Ld. Authorised Representative (AR) put forth his arguments on the issue of various comparables as under: (i) M/s Hindustan Housing Co. Ltd. The Ld. AR subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. With respect to this company, the Ld. AR submitted that this company was a leading provider of multi-disciplinary contractresearch and testing services in India. It was submitted that this company is mainly engaged in providing testing services in India in areas of clinical research, environmental assessments, preclinical animal studies, clinical reference lab services and analytical testing of a wide variety of products. Our attention was drawn to page 340 of the paper book containing the annual report of this company wherein these functions were mentioned. It was also highlighted that this company had incurred huge expenditure on testing and analysis whereas the assessee company did not incur any expenditure on testing services. It was also submitted that the assets employed by the assessee in terms of plant and machinery were approximately 70% of its total net assets which implied that the functions performed by this company were more capital intensive than the assessee company which was a mere service provider and, therefore, this company was also not comparable to the assessee company. 4.0.1 With respect to the other two comparables viz. Scal S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de during the year. Our attention was drawn to pages 373- 374 of the paper book containing the chart pertaining to gratuity and notes on account wherein these figures had been duly mentioned. 4.3.1 With respect to provision of leave encashment amounting to ₹ 4,21,697/- our attention was drawn to the notes on account wherein in Para (e) it had been mentioned that this provision was based on actuarial valuation of assessee s liability. Reliance was placed on the judgment of the Hon ble Bombay High Court in the case of C.I.T. vs. Echjay Forgings (P) Ltd. reported in (2001) 116 Taxmann 322 (Bombay) wherein it has been held that where the assessee had made a provision for doubtful debts, gratuity etc. on the basis of actuarial valuation, such provisions would have to be excluded from net profit for working out the book profit u/s 115J of the Act. 5.0 The Ld. AR submitted that the C.O. of the assessee was not being pressed. 6.0 We have heard the rival submissions and perused the material available on record. We take up the issue relating to the comparables first. Our adjudication on the comparables is as under:- (i) Hindus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company was providing analytical and testing services. We also note that this company had a significantly high proportion of testing instruments which was approximately 58% of its total net assets which implies that the functions performed by the company are capital intensive in nature and there is no similarity with the functions of a service provider. Therefore, we find no infirmity in the order of the Ld. CIT (A) directing the exclusion of this company from the final set of comparables. (iii) Vimta Labs Ltd. With respect to this company, it has been submitted that this company is a leading provider of multi-disciplinary contractresearch and testing services in India. It has also been submitted that this company is mainly engaged in providing testing services in India in areas of clinical research, environmental assessments, pre-clinical animal studies, clinical reference lab services and analytical testing of a wide variety of products. A perusal of the Directors Report and the Annual Financial Statements shows that the contentions of the Ld. AR are correct on both the counts. We also note that this company had incurred huge expenditure on te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. Commissioner of Income Tax (Appeals) has not admitted any evidence which could be taken as being in the nature of additional evidence. The approval letter pertaining to the gratuity fund is a matter of record and we find no infirmity in the action of the Ld. Commissioner of Income Tax (Appeals) in taking cognizance of this approval letter while deleting the related disallowance. Thus, ground no. 3 also stands dismissed. 6.4 As far as ground no. 4 is concerned wherein the department has contested the action of the Ld. Commissioner of Income Tax(A) in treating the provision of gratuity and the provision for leave encashment as ascertained liability for the purpose of calculation of book profit u/s 115JB of the Act, it is undisputed from the disclosure made by the assessee in its notes on account that as against accumulated provision of ₹ 8,55,136/-, a payment of ₹ 8,50,000/- has been made against the gratuity and, thus it is not an estimate as inferred by the Assessing Officer but is based on actual payment. As far as the provision for leave encashment is concerned, it is undisputed that it is based on actuarial valuation of the assessee s liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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