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TMI Blog2018 (9) TMI 1949X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision information technology enabled and financial support services do not satisfy the arm's length principle as envisaged under the Income Tax Act, 1961 ('The Act') and in doing so the Ld. AO/TPO has grossly erred in: 2.1 disregarding the arm's length price ('ALP') and the methodical bench marking process carried out by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules'); and in particular modifying/ rejecting the filters applied by the appellant; 2.2 rejecting comparability analysis in the TP documentation and in conducting a fresh comparability analysis based on application of additional filters in an arbitrary manner while determining the arm's length price; 2.3 including companies in the comparability analysis which do not satisfy the test of comparability, rejecting companies similar to the appellant while performing the comparability analysis and thereby resorting to cherry picking of comparables; 2.4 selecting high-profit making companies in the final comparables' set (including a company directed by Hon'ble DRP Panel to be rejected) for benchmarki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Circular No. 6-P issued by the Central Board of Direct taxes, dated July 06,1968. 8. That the Ld. DRP grossly erred on facts and in law in directing to restrict the allowance of lease rental payments to 15% of the cost of the vehicles as justified and reasonable, without giving any basis for arriving at the aforesaid restriction at 15%. 9. That the Ld. AO grossly erred on facts and in law in directing to restrict the allowance to Rs. 1,95,725/- under section 4o(a)(ia) in the subsequent years, out of total disallowance of Rs. 13,63,963 made in the financial year 2007-08, under section 4o(a)(ia) of the Act." 3. The representatives of both the sides were heard at length. The case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused. 4. Briefly stated, the facts of the case are that the appellant company was incorporated on 16.11.1999. The entire share capital is held by I Process Mauritius Limited, Mauritius alongwith its nominees, being GE Capital International (Mauritius) Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances of the case. 10. During the course of scrutiny assessment proceedings, the TPO found that the assessee has selected TNMM, its operating margin and has compared it with operating margins of comparable cases. However, the TPO found that the assessee has used multiple year data to determine the margins of the comparables in the TP study. The TPO, in his show cause notice, proposed to use only current year's data u/r 10B(4) of the Rules. 11. In its submissions, the assessee supported the use of multiple year data stating that using single year data of comparable companies may not adequately capture economic conditions and business cycles reflected in the industry. It was contended that Rule 10B(4) warrants use of earlier year data. Reliance was placed on the guidelines of OECD. Transfer pricing policies are determined based on historical data as the same has an influence on the transfer prices of the transactions being compared. 12. The submissions were not accepted by the TPO who was of the firm belief that Rule 10B(4) very clearly states that data of the comparable transactions should be the data pertaining to F.Y. in which the tax payer has entered into internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d., Eclerx Services Ltd., Genesys International Corpn Ltd. and Coral Hub [Vishal Information Technologies Ltd.] were considered by the coordinate bench in the case of United Health Group Information Services Pvt Ltd in ITA No. 6312/DEL/2012 for A.Y 2008-09 [which is the year under consideration] and the coordinate bench did not find these companies as good comparables for the business profile of United Health Group Information Services Pvt Ltd. 18. The relevant observations and findings of the coordinate bench read as under: "Cosmic Global Ltd. 9.1. This company was initially chosen by the assessee as its comparable and resultantly, the TPO included the same in the final list of comparables without any discussion. The ld. AR contended that this company was inadvertently chosen as comparable and hence the same should be eliminated on account of functional differences. 9.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual Report of this company that the financial results in the Balance sheet and Profit and loss account are available only on entity level. Income from operations has been shown as Rs. 5.86 crore, the br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pitability verticals. The solutions offered by it include data analytics, operation management, audit and reconciliation, 8 metrics management and reporting services. This company also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. A look at the functional profile of this company from its Annual report, it can be seen that it is nowhere close to the assessee's instant segment of 'manual claim processing services'. 10.3. It is further relevant to note that this company acquired UK based Igenica and Travel Solutions Ltd. on 27.7.2007 and the financial results of that company are also included in its. Recently, the Delhi Bench of the Tribunal in Toluna India Pvt. Ltd. Vs ACIT (ITA No. 5645/Del/2013) vide its order dated 26.8.2014 has held that the mergers/de-mergers in a company make such year as unfit for comparison. In reaching this conclusion, the Delhi Bench followed an order passed by the Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs DCIT (2013) 154 TTJ (Mum.) 176 in which it has been held that a company cannot be considered as comparable because of exceptional financial res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. Respectfully following the findings of the co-ordinate bench [supra], we direct the Assessing Officer TPO for the exclusion of the aforementioned comparables from the final list. 20. In so far as the exclusion of Accentia Technologies Ltd and Infosys BPO is concerned, these comparable were excluded by the coordinate bench in assessee's own case in ITA No. 6906/DEL/2014 for A.Y 2010-11. The relevant findings of the coordinate bench read as under: "8. After considering the rival submissions and perusing relevant material on record, we find that the issue relating to the inclusion or exclusion of the concerned 5 entities in question has already been considered and decided in the various decisions of this Tribunal. In one of such decisions rendered for the same assessment year i.e. A.Y. 2010-11 in the case of M/s Rampgreen Solutions Pvt. Ltd. (ITA No. 1066/Del/2015 dated 4.11.2015), an assessee engaged primarily in providing I.T. enabled services to its parent company, like the assessee in the present case, M/s Accentia Technologies was excluded by the Tribunal from the final list of comparables for the following reasons given in paragraph no. 16 to 20 of its order: "As regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een bolstered by the Delhi Bench of the Tribunal 'in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact that there was merger of Asscent Infoserve Pvt. Ltd. with Accentia Technologies Ltd. by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extra-ordinary financial event. Accordingly, the same is directed to be excluded from the final list of comparables." 19. Having gone through the annual report and keeping in view the extraordinary event in the year under consideration, we are in agreement with ld. counsel that this comparable cannot be taken into consideration while determining the average margin earned by the comparables. Ld. counsel has submitted that in the case of Techbook International Pvt. Ltd. (supra), this company has been excluded and, accordingly, in the present case also this should be excluded, because the functional profile of Techbook International Pvt. Ltd. (supra) and that of assessee is similar. We find that Tribunal in the case of Techbook International Pvt. Ltd. (supra), in regard to the business profile of T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly objected for inclusion of this comparable on the ground that the TPO had proposed to compare the engineering design services of Acropetal which cannot be compared with ITES/BPO services provided by the assessee. The ld. counsel for the assessee brought to our notice that the TPO has used the information collected u/s 133(6) of the Act without affording any opportunity to the assessee to rebut the same. The ld. counsel for the assessee drew our attention to the judgment of the Hon'ble High Court of Delhi in the case of Cashedge India Pvt. Ltd WP(C) 3628 of 2016 and CM No. 15535 of 2016 and stated that the assessee should be given an opportunity to explain the data collected by the TPO u/s 133(6) of the Act. 22. We have carefully considered the submissions made by the ld. counsel for the assessee in the light of the judgment of the Hon'ble jurisdictional High Court of Delhi in the said judgment that : "when reliance is placed on the data provided by different parties, the petitioner would have no opportunity of rebutting the data unless the persons who submitted the data were subject to cross examination. This is all the more so because the data that was submitted was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded any satisfaction on that count. 32. We have carefully considered the orders of the authorities below. It is true that the provisions of section 14A states that "Where the Assessing Officer is not satisfied with the claim of the assessee". What the law postulates is the requirement of satisfaction in the Assessing Officer that having regard to the account of the assessee as placed before him, it is not possible to generate a requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of section 14A(2) and (3) r.w.r 8D of the Rules would become applicable. In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer to hold that the claims of the assessee that no expenditure was incurred to earn dividend income cannot be accepted. Neither any basis has been disclosed establishing the reasonable nexus between the expenditure disallowed and the dividend income received. For this proposition, we draw support from the judgment of the Hon'ble Supreme Court in the case of Godrej & Boyce manufacturing Co (supra). Considering the facts in totality, we do not find any m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EMI and interest as lease rentals only However, if one goes on to see the extent of payment i.e 27,42,695/- vis-a-vis the value of assets taken on lease i e. Rs. 1,04,96,296/-, it indicates that related parties are being paid @ 26.13% on their assets This extent of payment is definitely unreasonable. The AO has stated in the draft order that "In the fitness of things I estimate 10% of the payments of the value of the assets taken on lease justified and balance of 16 13% of the payments as excessive and unreasonable Accordingly, the amount of Rs. 16,93,052/- ( 16.13% of Rs. 1,04,96,296/-) is disallowance u/s 40A(2)(b) however, a sum of Rs. 13,63,963/- has already been disallowed u/s 40(a) by the assessee itself, therefore, difference of Rs. 3,29,089/- (Rs. 16,93,052/- less Rs. 13,63,963/-) is hereby added to the income of the assessee", 36. Before us, the ld. counsel for the assessee stated that the disallowance made by the Assessing Officer and confirmed by the DRP has been made in a mechanical way without properly appreciating the provisions of section 40A(2)(b) of the Act. It is the say of the ld. counsel for the assessee that without brining any comparable case, the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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