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TMI Blog2017 (7) TMI 1438X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity, which is 23% of the total expenditure. Since the assessee has not entered into any sub-contracting business, this company also cannot be compared with the assessee. In our considered view, DRP has excluded all the above three companies as non-comparables with the proper justification that these companies cannot be considered as comparables to that of the assessee. Accordingly, we sustain the finding of the DRP for exclusion of above three companies. As profit margin of the assessee is at arm's length as the same falls within tolerance band of 5% of arm's length margin of 21.46% of the comparable companies, it is observed that when the TPO arrives the ALP, if it falls within the range of +/- 5%, he has to give advantage to the assessee. Therefore, we direct the TPO/AO to extend this benefit to the assessee as per TP guidelines. Disallowance of interest on unsecured loan taken from own 100% subsidiary and extending to its step down foreign subsidiary - HELD THAT:- It is observed that the assessee has taken loan from one of its subsidiary and invested the same funds in the step down foreign subsidiaries as investment in shares and in application money. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in providing web development, web maintenance and support services. The taxpayer is subsidiary of Northgate India which is having 51% stake in this company. The name of the company was subsequently changed to Green Fire Agri Commodities P. Ltd. on 20/04/2010 and subsequently to the present name. The company is engage in 'commodities trading' activity in India. 2.3 During the relevant PY, as per the 3CEB report/TP document, the international transactions of the assessee reflected as under: A.E. Nature of transaction Amount (Rs.) Globe7 Pte Ltd Provision of ITES 4,30,24,994 Northgate Investment Pte Ltd. Investment in WOS 24,42,37,077 Globe7 (UK) Ltd. Investment in WOS 41,35,200 Globe HK Ltd. Reversal of reimbursement paid for 2008-09 82,29,827 Axil Europe Ltd. Reversal of reimbursement paid for 2008-09 75,73,677 Globe7 Pte Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.65 2.6 TPO noticed that the company had the following transaction, which was not reported in Form 3CEB and no bench marking analysis has been done in the TP study: A.E. Nature of transaction Amount (Rs.) Globe7 Ltd. Pte Receivables 2,12,08,303 2.7 On going through the TP document, the TPO noted the search process is not in confirmity with the TP regulations as also the choice of filters which resulted in selection of inappropriate comparables. In view of the same, the TP document of the taxpayer was rejected and an independent analysis was made by aggregating all the transactions under TNMM. 2.8 The final comparables selected by Transfer Pricing Officer (TPO) with OP to OC are as under: Sl.No. Name of the company OP/OC 1. Accentia Technologies Ltd. 29.29 2. Acropetal Technologies Ltd (Seg.) 15.57 3. Cosmic Global Ltd. 9.81 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For balance 3 comparables, assessee is in appeal before us, which are: Sl.No. Name of the company 1. Accentia Technologies Ltd. 2. Crossdomain Solutions P. Ltd. 3. eClerx Services Ltd. However, on giving effect to the rejection of the above comparables, the mean margin worked out to more than the mean margin computed by the TPO, the DRP upheld the ALP determined by the TPO. 3.1 Considering the above findings of DRP, the AO has kept the adjustment u/s 92CA at Rs. 90,24,561/-. 4. In the draft assessment order, a disallowance of Rs. 62,23,081/- was made u/s 37(1) of the Act, by observing as under: 4.1 During the course of assessment proceedings for AY 2010-11, it was observed that the assessee obtained a unsecured loan (inter corporate loan) of Rs. 11,20,23,500/- from one of its step-down subsidiary M/s Social Media India Ltd. (SMIL) and the assessee invested the entire loan amount in its wholly owned subsidiaries as follows: S.No Nature of Investment Subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f M/s. Northgate Technologies Ltd. Thus it is clear that the amounts taken as unsecured loans from a subsidiary company has again been invested in a parent company and not used it for any business purposes. 4.4 In view of the above findings, the AO asked the AR vide order sheet entry dt:25.02.2015 to show cause as to why Rs. 96,62,706 being the interest paid on the unsecured loan which was passed on to the subsidiaries should not be disallowed u/ s. 37(1) of the Act. 4.5 In reply, the assessee submitted that during the FY 2010-11, out of the unsecured loan of Rs. 11,20,23,500/- an amount of Rs. 3,61,58,790/- was repaid to M/s. SMIL and hence the interest disallowance on the same works out to Rs. 62,23,081/-. 4.6 The AO observed that during the year the loan amount remains in existence and repaid an amount of Rs. 3,61,58,790/- during the year 2011-12 and, therefore, proportionate amount of interest of Rs. 62,23,081/- needs to be considered as disallowance. Accordingly, he disallowed the same. 4.7 When the assessee preferred appeal before the DRP, the DRP following its order in AY 2010-11, confirmed the action of the AO. 5. Aggrieved, the assessee is in appeal before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that Accentia Technologies Ltd. Is to be rejected as it is functionally different from the assessee and also on the basis that it is not correct to compare assessee with companies having very high turnover. It has a turnover of Rs. 107.22 crores and it has ventured into providing HRCM services of an integrated end to end SAAS model. He relied on the following cases to submit that the Tribunal has excluded this company from the list of comparables in these cases: 1. S P Capital IQ (India) Ltd. Vs. DCIT, [2016] 72 Taxmann.com 326 (Hyd. Trib.). 2. Orange Business Services India Solutions (P) Ltd. Vs. DCIT, [2016] 71 Taxmann.com 206 (Delhi Trib.) AY 2011-12. 3. Swiss Re Shared Services India Pvt. Ltd. Vs. ACIT, 76 Taxmann.com 22 ( Bang. Trib. ) AY 2011-12. 3. Finally he submitted that the function which were done by Accentia and the functions which were rendered by the assessee were entirely different. One cannot say that the type of services done by the assessee was of a level as sophisticated as the one which was being provided by Accentia Technologies Ltd. 7.2 Cross Domain Solutions Ltd. 1. Ld. AR submitted that this company is into outsourcing, consulti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Q (India) Ltd. Vs. DCIT, [2016] 72 Taxmann.com 326 (Hyd. Trib.). The Tribunal has observed in this case as under: 8. Ld. DR submitted that the assessee is also a KPO and is primarily engaged in providing web development, web maintenance and support services. He submitted that the company is dealing in web development and maintenance is nothing but dealing with high end market. This company falls into category of KPO. He submitted that the assessee has not properly selected the comparables and did not analyse FAR analysis of the comparables either horizontally or vertically. Moreover, the case laws relied upon by the ld. AR are not relevant to the present case as various judicial forums have adjudicated that ITES services cannot be compared with KPO. He submitted that the ld. AR is primarily relying on these case laws, which have no relevance to the present case simply because the assessee itself a KPO. 9. In the rejoinder, ld. AR submitted that, no doubt, assessee's profile is development of web and maintenance. However, the assessee company is into providing back end support services to its overseas subsidiary. The assessee company provides 'websites services' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee during the year. During the year, the assessee carried on services like rendering services through web site. The assessee company is into providing back end support services to its overseas subsidiary. The assessee company provides 'websites services' which is 'Information Technology Enabled Services (ITES)'. The same is demonstrated by the order passed by the TPO wherein the TPO has acknowledged the fact that the Group is into ITES. Also in the functions performed by the assessee as mentioned in the TP order, the TPO has mentioned that the assessee is in providing back office support services. Hence, the assessee company is a low end service provider. 10.1 The support services carried on by the assessee and has not carried on the web development nor web maintenance. These are the findings of the TPO and the same was not controverted by DRP. The ld. DR cannot expand the issue which was already accepted and final orders were issued by TPO/DRP. Accordingly, we cannot consider the assessee as KPO and provider of support services during this AY. Considering the above discussion, let us analyze the comparables objected by the assessee. All these companies were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000. Crossdomain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn-a round-time for business critical processes. As can be seen from the above, the 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. III. I. 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 c9mpany as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. Similar view was also taken in the case of Symphony Marketing Solutions India( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Informed Technologies, the DRP observed that on perusal of the annual report, it was noticed from page No. 6 that the company is operating as IT enabled services, knowledge based back office processing. It was also noticed that out of the gross revenue of Rs. 4,07,73,057/- the sales and service income is only Rs. 1,75,39,22/- and therefore, it fails the service revenue filter of 75% applied by the TPO. Therefore, this company cannot be retained as comparable. In the case of Microgenetics, the DRP observed that on perusal of annual report, it was noticed that out of the total expenses of Rs. 1,07,91,015/- debited in P L A/c, the expenses to the extent of Rs. 24,98,323/- has been incurred as medical transcription charges, which indicates that the expenses to the extent of Rs. 23% has been incurred in outsourcing of the medical transcription activity. Therefore, it will not be appropriate to retain the above company as comparable. Referring to the above observations of DRP, the ld. DR submitted that the comparables excluded by the DRP is proper and just. 13. Considered rival submissions and perused the material facts on record. On careful consideration of the submissions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a India Limited and for the balance amount of Rs.7,58,64,710/- proportionate interest of Rs. 62,23,081/- was considered to be paid and the same was disallowed by the AO. He submitted that the AO treated the loan borrowed as not incurred for the assessee's business but for making investment in its wholly owned subsidiary companies. However the same is incurred for business purposes only. 16.2 Ld. AR relied on the decision of Delhi High Court in the case of EKL Appliances[2012J 24 taxmann.com 199 (Delhi) wherein it was held that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur . 16.3 In the case of Hill County Properties Ltd. v. ACIT [2014J 48 taxmann.com 94 (Hyderabad Trib.) the Hon'ble Hyderabad held as under: 34. We have heard both the parties and perused the record. The revenue authorities disallowed the notional interest on the amounts advanced to sister concerns on the reason that interest bearing borrowed funds were used by the assessee for non-business purposes. However, the assessee made a plea before us that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ker.) 18. Considered the rival submissions and perused the material facts on record. It is observed that the assessee has taken loan from one of its subsidiary and invested the same funds in the step down foreign subsidiaries as investment in shares and in application money. The ld. DR has relied on the decision of Madras and Kerala High Courts. In the case of K. Somasundaram Bros Vs. CIT, the assessee is a partnership firm diverted borrowed funds to the relatives and partners. Since the diversion is not related to the business, the Hon'ble Madras High Court has properly disallowed the interest charges claimed by the assessee. In the case of CIT Vs. V.I. Baby, the assessee is a firm paid huge interest to the bank on borrowings but advanced interest free loans to the partners, their relatives and sister concerns. The Hon'ble High Court of Kerala has considered these transactions as not related to the business of the assessee and accordingly, confirmed the addition. In our considered view, the case under consideration is of the company which is taken loan from its sister concern and invested in the foreign subsidiary companies. The cases referred by the ld. DR will not a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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