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TMI Blog2020 (7) TMI 435X X X X Extracts X X X X X X X X Extracts X X X X ..... commission fee determined as arm's length rate by the income-tax authorities cannot be approved, though the ld. DRP in its direction has already restricted it to 1.5%. In the alternative, the addition that is required to be sustained is the position canvassed by the assessee before the Transfer Pricing Officer i.e. adoption of 0.50 per cent as arm's length rate for the purpose of determining the arm's length income on account of guarantee commission fee in the instant case. Considering the entirety of facts and circumstances of the case and on the basis of the material available on record, the rate of 0.50 per cent is to be upheld for the purpose of determining the arm's length rate of the guarantee commission fee. In the result this ground of appeal is partly allowed. Adjustment on account of provision of loan to AE s - HELD THAT:- Assessee vehemently submitted that direction of ld. DRP resulted in to total rate of interest at 8.8%. The Hon ble Delhi High Court in CIT Vs Cotton Naturals (I) (P) Ltd [ 2015 (3) TMI 1031 - DELHI HIGH COURT] while considering the question of law whether the Income-Tax Appellate Tribunal was right in holding that the interest @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w Sh. Madhur Agarwal Advocate For the Revenue : Sh. Anand Mohan CIT-DR ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. These two by assessee are directed against the assessment order passed in pursuance of directions of Dispute Resolution Penal (DRP) for assessment years 2008-09 and 2009-10. In both the appeals the assessee has raised certain common grounds of appeal, therefore, both the appeals were clubbed, heard together and are decided by common order. 2. The assessee in its appeal for AY 200-08-09 has raised has raised as many years 7 grounds of appeal and various sub- grounds of appeal, which are narrative or argumentative. We have summarized the ground of appeal in the following manner. I Transfer Pricing (1) General 1.1 The learned AO/Dispute Resolution Panel (DRP) erred in upholding the upward adjustment of ₹ 47.28 crore towards provision of call centre and data processing services, ₹ 1,09,738/-towards interest received on provision of loan to associated enterprises and ₹ 2.47 crore towards provision of guarantee made by the learned transfer pricing officer (TPO). 1.2 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 Interest received from Short Term loan Intelnet America Inc Snow Holding Co. Ltd 215,637/- 958,949/- Total 212,55,26,184/- 4. The assessee bench marked its ALP under Comparable uncontrolled Price Method (CUP) with regard to the transaction for provisions of call center and data processing activities. The TPO rejected the CUP method and applied Transaction Net Margin Method (TNMM) as most appropriate method for computation of ALP with regard to the transaction for provisions of call center and data processing activities. The TPO selected 22, following comparable company for benchmarking the transaction. 1. Mold Tek Technologies, 2. EClerck Services ltd 3. Accentia Technologies Ltd. (seg) 4. Accropetal Technology Ltd (seg), 5. Datamatics financial Ltd, (seg) 6. HCL Comnet Systems Services Ltd (seg), 7. Wipro Ltd. (seg), 8. Crossdomain Solution Ltd, 9. Triton Capital Ltd, 10. Cosmic Global Ltd. 11. Maple Esolutions Ltd, 12. Infosys BPO Ltd. 13. e4e Healthcare Business Services Ltd, 14. Spenco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enal (DRP). The ld. DRP after considering the objections of the assessee, on the issue of TP adjustment on account of provisions of call center and data processing activities directed the AO/TPO to recompute the adjustment after excluding two comparable i.e. Coral Hubs Ltd and Genesys International Corporation Ltd, from set of comparables and upheld the inclusion of remaining 20 comparables. However, on the issue of Corporate Guarantee the interest rate was restricted to 1.5%, thus granted partial relief. On the objection / issue of interest on loan to AE the AP/TPO was directed to adopt the domestic cost of borrowing. And the treatment of income from sub-lease was upheld. On receipt of the directions of the DRP the assessing officer passed the final assessment order dated 8.11.2012 under section 143(3) rws 144C(13) and made addition/ adjustment. Thus, further aggrieved the assessee has filed this appeal before this Tribunal. 8. We have heard the submission of ld. Authorized Representative (AR) of the assessee and the learned Departmental Representative (CIT-DR) for the revenue and perused the material available on record. The ld. AR for the assessee submits that Ground No.1 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion relating to provision of call centre and that a processing activities. Before us the learned AR of the assessee made his Limited submission only for seeking exclusion of 8 comparable, which is according to learned AR of the assessee are not comparable with the assessee. For exclusion of those 8 comparable the learned AR of the assessee mainly relied upon the four case laws referred above and would submit that those comparable are not at all comparable with the assessee as held by coordinate bench of Tribunal, with that assessee(s) engaged in similar business activities (BPO/ITeS) as undertaken by assessee. We have noted that Mumbai Tribunal in WNS Global Services Pvt Ltd (supra) for same AY i.e. 2008-09, considered the exclusion of HCL Comnet System and Services Ltd and passed the following order; COMPARABLES UNDER ITES SEGMENT i) HCL COMNET SYSTEMS AND SERVICES LTD. (SEGMENT) 79. Objecting to the selection of the aforesaid company, the learned Sr. Counsel for the assessee submitted, the Transfer Pricing Officer while selecting / rejecting comparables has applied related party transaction (RPT) filter and has rejected all companies which has RPT of more than 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g has held that it cannot be treated as a comparable. The Tribunal, Mumbai Bench, in Dialogic Network India Pvt. Ltd. (supra) has also rejected this company as a comparable since it has a different financial year ending. Since, the aforesaid decisions of the Tribunal pertain to the very same assessment year, respectfully following the ratio laid down therein, we exclude this company from the list of comparables. 11. We have further noted that Bangalore Tribunal in Flextronics Technologies (India) (P) Ltd (supra) while considering the exclusion of Mold-teck Technology, Eclerx Services Limited, Accentia Technology Limited, Wipro Limited, Accropetal Technology Limited, Infosys BPO Limited, and Cross Domain Solution Ltd for same AY i.e. 2008-09, passed following order; 12. The ld. counsel for the assessee, Shri Ajay Jain, submitted a chart and stated that Accentia Technologies Ltd. is uncomparable as its financial results are arising out of amalgamation. He relied on the decision of the coordinate Bench of the Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. v. ITO [2013] 38 taxmann.com 55 (Bang.-Trib.), wherein it has been held as follows:- '(1) A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oval of the shareholders. The shareholders of the company gave approval for the merger and the demerger on 25.01.2008 and the Hon'ble High Court of Andhra Pradesh had approved the merger and de-merger on 25th July, 2008. Subsequently, the accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months from the end of the financial year 31.3.2008. The assessee filed Form No. 21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company does the business of export of software services. It is also seen from the segmental revenue of this company (Note 15 to the notes on accounts to Annual Report for 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fall in the definition of ITES. 13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No. 15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee. The performance of Engineering Design Services is regarded as providing high-end ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of Cross Domain ranges from high-end KPO services, development of product suites and routine low-end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. 19. We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. We hold accordingly.' 16. As far as Eclerx Services Ltd. is concerned, the ld. counsel for the assessee submitted that it had super normal profit and is functionally not comparable with the assessee company relying on the coordinate Bench decision of this Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. (supra), wherein it was held at paras 20 21 of its order as under:- '(5) Eclerx Services Ltd. 20. This company is listed at Sl. No. 11 in the list of comparable companies chosen by the TPO. It is the stand of the assessee that this company offers solutions that include data analytics, operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit loss account of this company for the F.Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F.Y. 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at ₹ 31,863 crores. Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comaparables. We therefore accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anical product design, plant engineering, IT services and GIS services. As we have already seen, this company is to be classified as KPO and cannot be compared with the assessee. The decision of the Bangalore Bench of the ITAT in the case of First Advantage Offshore Services Ltd. (supra) which we have referred to in the earlier part of this order will clearly apply to this company. We therefore direct this company to be excluded from the list of comparables. 20. With regard to Wipro Ltd. (Seg), the ld. counsel for the assessee submitted that it is distinguishable for different scale of operations on account of brand value of parent company and not comparable with the assessee relying on the decision of the coordinate Bench decision of this Tribunal in the case of Symphony Marketing Solutions India (P.) Ltd. (supra), wherein it was held at para 26 of its order as under:- (8) Wipro Ltd. 26. This company is listed at Sl. No. 18 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the discussion made while deciding Infosys BPO Ltd. as a comparable will equally apply to this company also. This company owns substantial intellectual pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee vehemently submitted that mere extending corporate and performance guarantee does not lead to any income generation for the assessee and hence, does not fall within the ambit if section 92of the Act and relied on the decisions of coordinate bench(supra). However, the Hon ble Jurisdictional High Court in the case of Everest Kento Cylinders Ltd. Vs DCIT (supra), while considering a similar situation, where in the matter of guarantee commission fee the adjustment made by the income-tax authorities was based on instances of commercial banks providing guarantees. The Hon ble High Court has explained that instances of commercial banks providing guarantees could not be compared to instances of issuance of corporate guarantee. As per Bombay High Court, when commercial banks issue bank guarantees, the same is quite distinct in character than the situation where a corporate issues guarantee to the effect that, if a subsidiary associated enterprise does not repay a loan, the same would be made good by such corporate. Keeping the aforesaid ratio of the Bombay High Court, it is quite clear that the manner in which the Transfer Pricing Officer has proceeded to determine the arm's len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the lower authorities. We have also deliberated on the various case laws relied by the assessee. The TPO made adjustment on account of loan based on third party domestic rate i.e. Crisil taking the rate @ 14.39%. The DRP after considering the submissions on the objections of the assessee and directed to made adjustment based on domestic cost of borrowing + 3% markup. The ld. AR for the assessee vehemently submitted that direction of ld. DRP resulted in to total rate of interest at 8.8%. The Hon ble Delhi High Court in CIT Vs Cotton Naturals (I) (P) Ltd (supra) while considering the question of law whether the Income-Tax Appellate Tribunal was right in holding that the interest @ 4% p.a. charged by the respondent assessee from its subsidiary i.e. the Associated Enterprise was arm's length rate of interest and the adjustment made in the Assessment Order determining the arms' length rate of interest at 12.20% was unwarranted, held that Arm's length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. 20. Further, the Hon ble Jurisdic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt the assessing officer noted that the assessee has claimed deduction under section 10 A against the business income list of the assessee also credited a rental income of ₹ 6.53 crore in its profit and loss account and the same was included in the head of income from business on which the assessee claimed deduction under section 10A. The assessing officer took his view that the rental income is not eligible for deduction under section 10A. The DRP affirm the action of assessing officer as the same is not qualified for deduction under section 10A. Before us, the learned AR of the assessee failed to bring any convincing fact to treat the said rental income as a business income of the assessee. 24. We have noted that the DRP on the application of assessee for seeking rectification for its direction dated 07/09/2012, vide order dated 21st December 2012 has already directed the assessing officer/TPO to allow expenditure incurred in earning such income. Therefore, in our considered view no further direction is required. However the AO/TPO is directed to give effect to the order of DRP dated 21 December 2012. In the result the ground No. 5 of the appeal is partly allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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