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TMI Blog2017 (5) TMI 1735X X X X Extracts X X X X X X X X Extracts X X X X ..... services of appellant assessee, hence, specific characteristics of the property transferred and functional profile according to us differs. Therefore, this comparable deserves to be rejected from comparability analysis. Cross domain solutions private limited - Looking to the functional profile of the comparable company as made available in judicial precedents for the same AY , this comparable is held to be KPO and the functional profile of the assessee with respect to the infrastructure support services do not lead to such a conclusion that it is also a KPO. Therefore, based on incomplete information, we direct the Ld. Transfer Pricing Officer to exclude this comparable from the comparability analysis. Deduction u/s 10 A - allocation of common expenditure for working out deduction - whether the allocation key should be turnover as applied by the ld AO or they should be specific to the nature of the expenditure incurred, as applied by assessee, as stated before us? - HELD THAT:- Turnover is a general allocation key, which can be employed in the end only after testing specific allocation keys, such as for salary and wages, etc, the man hours devoted, for travelling purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DER PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the assessee [ hereinafter referred to as Appellant‟ also] against the assessment order [ hereinafter referred to as the order‟ also ] of the ld DCIT, Circle-II, Delhi [ hereinafter referred to as the AO‟ ] dated 30.01.2014 u/s 143(3)(ii) r.w.s 144C(13) of the Income tax Act [ In short the Act‟] passed in pursuance of direction dated 28.11.2013 by the Learned Dispute Resolution Panel-II, Mumbai [ hereinafter referred to as The DRP‟] against the draft assessment order dated 27.02.2013 incorporating transfer pricing adjustment determining the Arm‟s length price [ The ALP‟] of International Transactions u/s 92CA made by ld Additional CIT (Transfer Pricing)-II (5), Mumbai [ Hereinafter referred to as The TPO‟] vide order dated 28.01.2013 for AY 2009-10. 2. The assessee has raised the following grounds of appeal:- The appellant objects to the order of Deputy Commissioner of Income - tax - Circle -II ('DCIT') dated 30 January 2014 (received on 30 January 2014) passed under section 143(3)(ii) r.w.s. 144C(13) of the Income tax Act, 1961 ('the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s remuneration and professional fees need to be allocated to STP units on the basis of sales ratio of all units even though the learned DCIT himself has agreed that due to the character of the expenses, the same are not allocable to any particular unit. 4.3 The learned DCIT erred in not appreciating that since the appellant had already considered all the expenses which are specifically identifiable and directly attributable to the respective units on actual basis (including professional fees), based on audited segmental accounts, there is no question of further attributing any other expenses on notional or on proportionate basis. 4.4 The learned DCIT erred in not appreciating that the appellant has already allocated professional fees allocable to each unit on an actual basis and accordingly, there is no question of further allocation of professional fees. 4.5 The learned DCIT erred in not appreciating that the managerial remuneration and auditor's remuneration are in the nature of corporate expenses which are not incurred for any STP unit and hence, there is no question of further allocation of these expenses. 4.6 The learned DCIT erred in not appreciating that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under section 271(l)(c) for concealing its income / furnishing inaccurate particulars of its income. 10. Each one of the above grounds of appeal is without prejudice to the other. 11. The appellant reserves the right to amend, alter or add to the grounds of appeal. 3. Ground No. 1 of the appeal of the assessee is general in nature and therefore we dismiss it. Ground No. 2 of the appeal is against the overall adjustment made to the returned income of the assessee contested in the separate grounds of appeal. Therefore, this ground of appeal is technical in nature and therefore dismissed. 4. Ground No. 3 of the appeal is against adjustment of ₹ 65 lakhs with respect to determination of arm‟s length price [in short ALP‟] of international transaction of provision of infrastructure support services. 5. Assessee is a private limited company engaged in the business of data warehousing solution. It filed its return of income on 30.09.2009 for ₹ 63528820/-. The assessee is engaged in the business of providing data warehousing solutions in the nature of sales support and service of electronic data warehousing hardware and software. During the year th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services 2.1 Provision of GCC services TNMM 1,302,515,715 13% Technical support services 9.51% 2.2 Provision of Contract R D services TNMM 13% Software Product Development 10.36% 2.3 Provisions of infrastructure support services TNMM 7% Infrastructure support services 9.24% 7. Therefore the ld Assessing Officer made a reference u/s 92CA (1) of the Act to the ld Transfer Pricing Officer for computation of arm‟s length price in relation to international transaction on 14.11.2011. On reference to the Ld. Transfer Pricing Officer, he noted that the assessee has not maintained any segment of accounts in the audit report as the auditor does not report segmental profits. He further held that normally in transactional net margin Method [TNMM] analysis net margin of tested party is compared with the net margi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP directed the Ld. Transfer Pricing Officer to delete the adjustment with respect to intragroup services. Consequently, the DRP deleted the adjustments except on infrastructure support services where the only adjustment of ₹ 8.64 percent on the cost of infrastructure support services is required to be made. Based on this direction, the Ld. Transfer Pricing Officer , recomputed the adjustment vide order dated 24th of January 2014 wherein the adjustment on account of ALP in infrastructure support services of ₹ 65 Lacs was made. 9. Consequent to that the Ld. Assessing Officer passed order under section 143 (3) read with section 144C (13) of the income tax act, 1961 on 30/01/2014 determining the total income of the assessee at ₹ 143666346/ against the returned income of ₹ 63528820/ . In the final assessment order over and above the transfer pricing adjustment of ₹ 65 Lacs, the disallowance of deduction under section 10A, disallowance of warranty expense etc were made. Assessee being aggrieved with the order of the Ld. Assessing Officer has preferred an appeal before us contesting corporate disallowances/additions as well as adjustment because of trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rected margin of the comparable is 38.72% against 40.10% computed by the Ld. Transfer Pricing Officer. He further referred to the annual accounts of the BNR Udyog Ltd for the financial year 2008 09 extensively to show the directors‟ Report , Profit and loss account, Notes on accounts etc harping upon functional dissimilarity and objecting inclusion of the above comparable for comparability analysis. 13. With respect to the Cross Domain Solutions Private limited, he referred to page No. 175 of the paper book and submitted that it is a business process management service company providing knowledge services. Outsourcing in insurance, healthcare, HR and accounting domains. It is further submitted that it offers business excellence, market research and data analytics and IT services. He therefore submitted that this company is not comparable functionally. He further submitted that this company did not appear in the databases when the search process was conducted. He further referred to the annual report of the company provided by the TPO, which does not have the profit and loss account for the year. He relied upon following judicial precedents for exclusion of the cross doma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merous cases. ITAT Delhi in the case of Nokia India (P) Ltd. vs DCIT [2014] 52 taxmann.com 492 (Delhi - Trib.) after considering the ratio of all relevant judgments and orders has categorically held that the percentage of RPT to make a company as ineligible for comparison should be taken as more than 25% and not 15% as suggested on behalf of the assessee. In the above judgment the Hon'ble ITAT has further held that balance sheet items have to be ignored while computing RPT percentage and has also held that the numerator and denominator should be of same nature i.e. either income/sales or expenses. The relevant extract of the above judgment is reproduced below:- 16. We find that this submission has two components, viz., the composition of numerator and denominator and the percentage of such numerator to the denominator. We agree in principle that if any company though functionally comparable, but, has more than a specific percentage of the RPTs, then, the same should be ignored by treating it as a controlled transaction. However, the percentage of RPTs to make a company as ineligible for comparison, in our considered opinion, should be taken as more than 25% and not 15% as su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the per se international transactions finding place in the balance sheet of the company calling for exclusion. 19. The numerator of this formula consists of all the related party transactions of a company sought to be chosen as comparable which affect the profit earned directly from operations. If, however a related party transaction is of such a nature which does not directly affect or insignificantly affects the profit earned from the bare profit producing activity, then it should not be taken into consideration. The reason for the exclusion of such related party transactions from the numerator is that they have not at all or very insignificantly affected the operating profit of such a company, which is the driving force for the purposes of making a comparison under the TNMM. To cite an example, the RPT of rent paid by a company which is engaged in the business of trading or manufacturing cannot constitute a part of the numerator, because transaction of rent payment has no direct bearing on the trading or manufacturing activity. 20. Now, we take up the contents of the denominator of this formula. The percentage of numerator to denominator can be calculated only when the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Chryscapital Investment Advisors [2015] 56 taxmann.com 417 (Delhi) that mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from list of comparables for purposes of determination of ALP. e. The assessee has requested for exclusion of certain comparables on ground of a new filter of Employee Cost/Sales. This filter has not been taken either by the assessee in the TP Study Report nor by the TPO. This argument was not even taken by the assessee before the TPO. A new filter cannot be introduced now by the assessee. f. The assessee has submitted for exclusion of comparables on the ground that they have significant intangible/goodwill and thus ar functionally not similar. It has been held by the Hon'ble ITAT in case of Copal Research India (P.) Ltd. [2016] 73 taxmann.com 157 (Delhi - Trib.) v. DCIT that -where the assessee can demonstrate that the comparable has undergone an extraordinary event by way of amalgamation/ Acquisition etc wherein net profitability of the specific comparable company has been impacted or by inclusion offmancials of the amalgamating subsidiary having any extraordinary abnormality has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 16. It is apparent that judicial precedents cited before us have demonstrated that the comparables contested here by the assessee are different on the above stated four counts in the case of that assessee in whose case the decision has been rendered. Those precedents have not laid down a universal law that comparables excluded in those judicial precedents are excludible in case of everybody else also. Admittedly, in assessee‟s own case there is no judicial precedent with respect to the comparables in dispute. Therefore, we would be perusing the above decisions, only with the perspective that certain functions recorded of those comparables in those cases, if also renders the impugned comparables incomparable on the above four counts then only, it deserves to be excluded in the present case. From this perspective, we examine b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th respect to the assets employed, this company has normal assets and does not include any intangibles. While looking at its income from operations in schedule VIII of its annual accounts, it is apparent that it has major income of ₹ 12646824/ out of the total income of ₹ 20175789/ from medical transcription business. The other income includes brokerage, interest, dividend, commission, and sale of property. It is also apparent from the segmental information provided that out of the profit of ₹ 40.92 lakhs, assessee has earned profit of ₹ 37.44 Lacs from medical transcription business only. Therefore, it can be conclusively established that assessee is engaged in the medical transcription business predominantly. The comparable company itself has mentioned in its own website what the medical transcription business is. According to that, it is a hospital like dictation system using a toll-free number. The doctors will be provided with the unique identification and access to the state of the art digital dictation system and record their dictation. The dictation instructions are simple and user-friendly which would be available 24 x 7 and from anywhere and anyt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting to note that Ld. Transfer Pricing Officer has not included this comparable in comparability analysis for assessment year 2008 -2009 in case of the assessee despite functional similarity in opinion of ld TPO. It is functionally comparable. However, to look at situation from holistic view, It was noted that according to the director‟s report comparable company is performing it services under Exdion Brand.‟ This fact has been noted by the coordinate bench in its decision in DCIT versus Willis processing services India private limited (supra) for assessment year 2009 10, at page No. 8 that the cross domain is engaged in providing the services high end services in payroll to target the insurance industry in the US. Further, the coordinate bench in its decision in ITA No. 784/P/N/2014 for assessment year 2009 10 in Cummins Turbo technologies Ltd dated 30/03/2016 has noted in para No. 16 that this company is engaged in high end knowledge process outsourcing services and therefore it is not comparable with the normal IT enabled service providers. Furthermore it is noted that on vertex customer services India private limited versus DCIT ITA No. 572/del/2014 for asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as allocated to Pune and Hyderabad unit resulting losses in both these units. On the basis of allocation the Ld. Assessing Officer noted that there is no profit as assessee is having a loss in both the STP units, hence no deduction available to the assessee under section 10 A of the act. Assessee objected to the same before the Ld. dispute resolution panel who vide para No. 8 of its direction held that additional evidences submitted by the assessee is not admitted considering the limitation of time available at the disposal. Further, it was held that managerial remuneration of directors, auditors remuneration, foreign travel expenditure etc are required to be allocated and it was also contended that foreign travel expenditure has been incorrectly considered while making the allocation by ignoring the fact that allocable foreign travel expenditure has already been allocated by the assessee to its STP units and therefore, the Ld. dispute resolution panel directed the Ld. Transfer Pricing Officer /Assessing Officer for verification of these claim and to give an appropriate effect. Pursuant to above direction the Ld. Assessing Officer worked out deduction allowable to the assessee at & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o say that managing agency commission proportionately cannot be required to be deducted from the profits of the eligible industrial undertaking. c. CIT versus Hindustan Lever Ltd (2014) 42 Taxmann.com 132 (Madras) to submit that the common head office expenses should not be did proportionately distributed among various units individually on the basis of respective turnover for purpose of calculation of the aforesaid deduction. 23. The Ld. departmental representative vehemently contested that allocation made by the Ld. Assessing Officer and approved by the Ld. dispute resolution panel is proper in absence of any evidence submitted by the assessee with respect to the allocation of common expenditure for claim of the deduction under section 10 A of the income tax act. He made written submission before us as under:- iii. Ground No.4: Reduction in deduction u/s 10A to the extent of ₹ 6,46,66,012/-: The submission of the assessee that common expenses like managerial remuneration, auditor's remuneration and professional fees are corporate expenses and thus have not been incurred for any unit is not legally and factually tenable. The Directors and Auditors have provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1193276643/- and depreciation of ₹ 99472866/ . According to us, that does not leave any expenditure, which has not been considered by the assessee for allocation. Therefore it is not the case of the revenue that assessee has excluded any of the expenditure for allocating such expenditure to the respective eligible and non eligible units. Now the issue remains that whether the allocation key should be turnover as applied by the ld AO or they should be specific to the nature of the expenditure incurred, as applied by assessee, as stated before us. We submit that turnover is a general allocation key, which can be employed in the end only after testing specific allocation keys, such as for salary and wages, etc, the man hours devoted, for travelling purposes wise, etc. The Ld. Transfer Pricing Officer has adopted the turnover as the allocation key, which we reject because we are of the opinion that allocation key should be specific with respect to the nature of expenditure incurred. As per page No. 432 of the paper book it is not clear what kind of allocation key has been used by the assessee for the purpose of allocation of expenditure. Further, the assessee was not asked durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o decide it afresh which will depend on the outcome of the finding of the Ld. Assessing Officer with respect to the assessment year 2008 09, if other conditions of the law are fulfilled. In the result ground No. 5 of the appeal of the assessee is allowed with above direction. 27. Ground No. 6 of the appeal of the assessee is with respect to the disallowance of provision for product support and services (i.e. provision for warranty) of ₹ 317672/ on the basis that the said expenditure is in the nature of unascertained liability. It was submitted by the Ld. authorized representative that the issue is squarely covered by the decision of the coordinate bench in assessee‟s own case for the previous year in ITA No. 791/del/2013 for assessment year 2008 09 wherein vide para No. 10.8, coordinate bench has set aside the issue back to the file of the Ld. Assessing Officer for verifying the provision in view of the decision of the Hon‟ble Supreme Court in case of Rotork controls India private limited versus CIT 314 ITR 62. In view of this, we also set aside this ground of appeal to the file of the Ld. Assessing Officer to decide it in accordance with the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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