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TMI Blog2022 (12) TMI 999X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment qua the comparables - benchmarking the international transaction pertaining to provision of ITeS services - HELD THAT:- Companies functionally dissimilar with that of assessee need to be deselected from final list. - ITA No.1195/Mum./2020, Cross Objection no.140/Mum./2021 (Arising out of ITA No.1195/Mum./2020) - - - Dated:- 5-9-2022 - SHRI PRAMOD KUMAR, VICE PRESIDENT AND SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER Assessee by : Shri Nimesh Vora a/w,Ms. Moksha Mehta Revenue by : Shri Chetan M. Kacha, Sr. AR ORDER PER SANDEEP SINGH KARHAIL, J.M. The present appeal by the Revenue and cross objection by the assessee are against the order dated 15/11/2019, passed under section 250 of the Income Tax Act, 1961 ( the Act ) by learned Commissioner of Income Tax (Appeals) 57, Mumbai, [ learned CIT(A) ], for the assessment year 2012 13. ITA no.1195/Mum./2020 Revenue s Appeal A.Y. 2012-13 2. In its appeal, the Revenue has raised following grounds: (a) Whether on the facts and in the circumstances of the law, the Ld CIT(A) was justified in deleting the disallowance of Rs 25,10,58,134/- on account of Depreciation on Assets (Famer L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejecting Eclerx Services Ltd as a comparable 2.1 Whether on the facts and circumstances of the cave and in low, the ld CTT(A) is right in deleting Eclerx Services Ltd. as a comparable on one hand and accepting Accentia Technologies Ltd. as a comparable on the other had when both of the comparables are KPOs indicating inconsistent stabs taken by the CIT(A)? 2.2 Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in not following the principle that all the comparables retained by the CIT(A) should also be subjected to the same test of suitability as selected comparables as hell by the How ITAT Ahmedabad bench in the case of Allscripts India (P) Ltd. ITA no.2401(Ahd.) of 2013, reported in 37 Taxman.com 19? 2.3 Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is right in deleting Eclerx Services Ltd as a comparable without looking into the basic tenet of transfer pricing that in TNMM under Rule 10B(1)(e), the comparable need not be identical but suffice to be similar? 2.4 Whether on the facts and circumstances of the case and in law, the ld CIT(A) while deleting the comparable Eclerx Services Ltd. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial year? 3.7 Whether on the facts and circumstances of the case and in law, the Id CIT(A) is right in deleting Acropetal Technologies Limited as a comparable without looking into the basic tenet of transfer pricing that in TNMM under Rule 10B(1)(e), the comparable need not be identical but suffice to be similar? (e) On inclusion of Sparsh BPO Services Ltd as comparable 4.1 Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is right in including Sparsh BPO Services Ltd as a comparable without appreciating clause (d) of Rule 108(2) of the Income-tax Rules on conditions prevailing in the market and the fact of the extraordinary circumstances of ramp downs in the Telecom markets that affected the revenue of Sparsh BPO Services Ltd, dramatically during the year resulting in a fall in operating income of over 25% and that extraordinary event was also accompanied by delisting of the company from the stock exchange? 4.2 Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is right in including Sparsh BPO Services Lid as a comparable without appreciating that abnormal profits or losses of a comparable due to extraord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Ltd as comparable: 6.1 Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is right in excluding BVG India Ltd as a comparable by stating that there is a functional dissimilarity in the comparable without appreciating that even if the comparable is catering to different types of clients, the functions performed are similar e business Support services? 6.2 Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is right in excluding BVG India Ltd as a comparable without looking into the basic tenet of transfer pricing that in TNMM under Rule 10B(1)(e), the comparable need not he identical but suffice to be similar? (h) On rejecting Inmacs Management Services Limited as comparable: 7.1 Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is right in excluding Inmacs Management Services Limited as a comparable by stating that the annual report of the company was not available for analysis purposes without appreciating that the ld. CIT(A) under the Income-tax Act 1961 has the power to call for the same by invoking powers vested us 133(6) or calling for the same from the TPO? 7.2 Wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious paragraphs of the lease agreement, it has been mentioned that the assets are owned by the lessor/owner and will remain the property of the lessor/owner during the period of lease. The assessee further submitted that it has been mentioned in the lease agreement that the lessee has been given only right to use the asset for the terms of the lease on payment of specified lease rent for a lease period of 10 years. The Assessing Officer ( AO ) vide order dated 06/04/2016 passed under section 143(3) read with section 144C (3) of the Act, inter-alia, did not agree with the submissions of the assessee and disallowed the entire amount of depreciation claimed under section 32 on the block of assets plant and machinery i.e. Rs. 25,10,58,154. In appeal, learned CIT(A) vide impugned order dated 15/11/2019, inter-alia, allowed the appeal filed by the assessee on this issue by following the order passed by the coordinate bench of the Tribunal in assessee s own case in preceding assessment year. Being aggrieved, the Revenue is in appeal before us. 5. During the course of hearing, learned Departmental Representative ( learned DR ) vehemently relied upon the order passed by the AO. On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d generally the leased asset is of specialised nature such that only the lessee can use it without major modifications being made. Therefore, he came to the conclusion that in finance lease whether or not the lessor claimed depreciation on leased assets, but the lessee is entitled to claim depreciation. The AO further noted that the accounting treatment of the assessee in its books of accounts as also supports the case of the Revenue that the assessee has reduced entire value of plant and machinery from the computation of depreciation as per Companies Act. Therefore, it is abundantly clear that no depreciation relating to the plant and machinery given on lease has been debited in the books of accounts. However, the assessee has claimed depreciation in the statement of total income as per I. T. Act and also offered total lease rental received including lease rental on account of principal portion to taxation to argue that it is entitled for depreciation. The assessee has filed a confirmation from the lessee and stated that lessee did not claim depreciation on plant and machinery, because the ownership of the asset is not transferred to the lessee during subsistence of lease period. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed for earlier years, the same cannot be denied in the assessment year 2011-12 unless there is change in facts. We further noted that the assessee has Offered to tax total lease rental of Rs.36.4 crores as business income, even though, it has considered a sum of Rs.19.5 crores in its books of account by following AS-19 issued by the Department. When the department has accepted the income offered for taxation, it cannot be turnaround to deny depreciation only for the reason that in finance lease, the ownership of the asset was transferred to the lessee. Although, AS 19 issued by ICAI is required to be followed mandatorily for preparation of financial statements, but when it comes to taxation of income, what is relevant is the provision of the Act which deals with taxability of income, but not guideline issued by the ICAI. This fact has been further reiterated by CBDT vide its Circular No.2 dated 09/02/2001, where it was clarified that AS-19 will not have any implication on allowance of depreciation on assets under the provisions of the Income Tax Act. Further, the assessee has also filed a confirmation from the lessee, where it was stated that lessee did not claim depreciation on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which restrains his right. The term is, however, a nomen generalissimum, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied. The primary meaning of the word as applied to land is one who owns the fee and who has the right to dispose of the property, but the terms also included one having a possessory right to land or the person occupying or cultivating it. The term owner is used to indicate a person in whom one or more interests are vested his own benefit. The person in whom the interests are vested has 'title' to the interests whether he holds them for his own benefit or the benefit of another. Thus the term title unlike owner . It defines the term 'ownership' as Collection of right to use and enjoy property, including right to transmit it to others.... The right of one or more persons to possess or use a thing to the exclusion of others. The right by which a thing belongs to some one in particular, to the exclusion of all other persons. The exclusive right of possession, enjoyment or disposal; involving as an essential attribute the right to control, handle, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of 3% per month until payment thereof, such compensation to run from the day to day without prejudice to the lessor's rights under any terms, conditions and agreements herein expressed or implied. All costs incurred by the Lessor in obtaining payment of such arrears or in endeavoring to trace the whereabouts of the equipments or in obtaining or endeavouring to obtain possession thereof whether by action, suit or otherwise, shall be recoverable from the lessee in addition to and without prejudice to the lessors right for breach of this lease. 19. Expiration of Lease: Upon the expiration of this Lease, the Lessee shall deliver to the Lessor the assets at such place as the Lessor may specify in good repair, condition and working order. As soon as the return of the asset the Lessor shall refund the amount of security deposit. If the lessee fails to deliver the equipment to the Lessor in accordance with any direction given by the Lessor, the Lessee shall be deemed to be the tenant of the assets at the same rental and upon the same terms herein expressed and such tenancy may be terminated by the Lessor immediately upon default by the lessee hereunder or upon 7 day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them. 22. From the above discussion, it is clear that the transactions occurring in the business of the assessee appellant are leases under agreement, but not hire purchase transactions. In fact, they are transactions of 'hire Even viewed from the angle of the author of 'Lease Financing and Hire Purchase, the views of whom were discussed in pages 16 and 17 of this order, the transactions involved in the appellant business are nothing but lease transactions. 23. As far as the factual portion is concerned now we could come to a conclusion that leasing of vehicles is nothing but hiring of vehicles. These two aspects are one and the same. However, we shall discuss the case law cited by both the parties on the point. 27. Finally, learned senior counsel appearing on behalf of the assessee also pointed out a large number of cases, accepted and unchallenged by the Revenue, wherein the lessor has been held as the owner of an asset in a lease agreement. CIT v. A.M. Constructions [1999] 238 ITR 775 (AP); CIT v Bansal Credits Ltd. [2003] 259 ITR 69/126 Taxman 149 (Delhi); CIT v. M.G.F. (India) Ltd. [2006] 285 ITR 142/[2007] 159 Taxman 335 (Delhi); CIT v.Annamalai Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the lessee did not claim depreciation on the leased asset. Therefore, considering over all facts of this case and also by following the ratio of the Hon'ble Supreme Court in the case of ICDS vs CIT (supra), we are of the considered view that the assessee is entitled for depreciation on the leased asset as per provisions of section 32(1)() of the Act. The Ld CIT(A) after considering relevant facts has rightly deleted additions made by the AO towards disallowance of depreciation, hence, we are inclined to uphold the findings of the Ld CIT(A) and reject the ground taken by the Revenue. 7. We further find that the coordinate bench of the Tribunal in assessee s own case in ACIT vs Reliance Corporate IT Park Ltd, in ITAs No. 1893 and No. 1894/Mum./2020, vide order dated 17/02/2022, for assessment years 2013 14 and 2014 15, by following earlier decision in assessment year 2011 12, rendered similar findings. The learned DR could not show us any reason to deviate from the aforesaid orders and no change in facts and law was alleged in the relevant assessment year. The issue arising in the present case is recurring in nature and has been decided by the coordinate bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of business support services provided by the assessee to its aforesaid associated enterprises, the scope of work included the following: Back office support on transaction processing analysis, Maintenance of accounting books in ERP system, Support on functional technical aspects to the end user, Providing support by way of evaluation recommendation for finalization of contracts of procurement of goods services, Providing back office support in matters relating to accounting, taxation, insurance, HR administration. Generating daily report on sales, collection and stock for Management dashboard, Generating daily report on receivable outstanding, age-wise analysis of receivables as well as overdue debtors, Report on performance review of Business Operations, Monitoring insurance policy, support for insurance claims, Updation of HR policy on employee performance, Introduction of Balance Score Card for Management Employees, Evaluation of employee performance on periodic basis, Providing training support for functional role as well as for employee development, System network manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Excel Inforways Ltd. (Segment) March 12 49.38% 5. Acropetal Technologies Ltd (Healthcare BPO segment) March 12 29.78% Arithmetic Mean 30.90% 14. The average operating profit to operating cost of aforesaid comparables selected by the TPO was computed at 30.90%. By applying the arm s length margin, the TPO proposed an upward adjustment of Rs. 2,02,86,420, in respect of international transaction of provision of ITeS services . 15. Further, in respect of international transaction pertaining to provision of business support services , the TPO only selected one comparable from the assessee s set and proposed inclusion of 5 more comparables for benchmarking the aforesaid international transaction. Accordingly, the TPO arrived at a set of following 6 comparables for benchmarking the international transaction pertaining to provision of business support services : Sr. no. Company Name Year OP/OC % ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d inclusion of Sparsh BPO Services Ltd, for the purpose of benchmarking of international transaction pertaining to provision of ITeS services . Further, in grounds no. (f) to (h), the Revenue has challenged exclusion of BVG India Ltd and Inmacs Management Services Ltd, and inclusion of Techprocess Solutions Ltd. for the purpose of benchmarking of international transaction pertaining to provision of business support services . Thus, we have confined our findings only in respect of these comparables in Revenue s appeal. (i) Excel Infoways Ltd. 18. The first comparable under dispute is Excel Infoways Ltd. for the purpose of benchmarking of international transaction pertaining to provision of ITeS services . Excel Infoways Ltd. was selected as a comparable by the TPO vide order passed under section 92CA(3) of the Act on the basis that ITeS segment of this company is comparable to the services provided by the assessee. In appeal, learned CIT(A) vide impugned order accepted the contention of the assessee and rejected this company as comparable for benchmarking the international transaction pertaining to provision of ITeS services . Being aggrieved, the Revenue is in appeal be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alytics services, which are in the nature of ITeS. In appeal, learned CIT(A) vide impugned order accepted the contention of the assessee and rejected this company as comparable for benchmarking the international transaction pertaining to provision of ITeS services by following the decision of coordinate bench of the Tribunal in assessee s own case for assessment year 2011 12. Being aggrieved, the Revenue is in appeal before us. 22. During the course of hearing, learned DR vehemently relied upon the order passed by the TPO. On the other hand, learned AR submitted that this company has been held to be functionally not comparable to the assessee in its own case for assessment year 2011 12 by the coordinate bench of the Tribunal. 23. We have considered the rival submissions and perused the material available on record. We find that the coordinate bench of the Tribunal in assessee s own case in Reliance Corporate IT Park Ltd vs DCIT, in ITA No. 4717 and 4873/Mum/2017, vide order dated 26/06/2019, for assessment year 2011 12, while directing rejection of Eclerx Services Ltd as a comparable to the assessee, observed as under: 29. We have heard both parties, perused the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. Further, the company has again featured as a top 5 KPO vendor in Global Services 100. Thus, in view of the above and respectfully following the decision of the coordinate bench of the Tribunal in assessee s own case cited supra, we find no infirmity in the impugned order passed by the learned CIT(A) rejecting Eclerx Services Ltd as comparable to the assessee for benchmarking the international transaction pertaining to provision of ITeS services . As a result, ground no. (c) raised in Revenue s appeal is dismissed. (iii) Acropetal Technologies Ltd. 25. The next comparable under dispute is Acropetal Technologies Ltd for the purpose of benchmarking of international transaction pertaining to provision of ITeS services . Acropetal Technologies Ltd was selected as a comparable by the TPO vide order passed under section 92CA(3) of the Act on the basis that Healthcare BPO segment of the company is comparable to the assessee. In appeal, learned CIT(A) vide impugned order accepted the contention of the assessee and rejected this company as comparable for benchmarking the international transaction pertaining to provision of ITeS services . Being aggrieved, the Revenue is in ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d perused the material available on record. Sparsh BPO Services Ltd provides business process outsourcing, technology and consulting services in India. There is no objection regarding the functional profile of this company. We find that TPO considered Sparsh BPO Services Ltd as a comparable to the assessee while benchmarking the international transaction of provision of ITeS services for assessment year 2011 12. Even in the year under consideration, the TPO has not doubted the functional comparability of this company with the assessee. In its order passed under section 92CA(3) of the Act, the TPO rejected this company as a comparable on the basis that it has negative net worth. Before the learned CIT(A), assessee submitted that the TPO has computed the net worth of this company at INR (73.98 crore), as under: Particulars Amount In INR (Crore) Total Assets (A) 200.84 Preference share capital 100.00 Non-Current Liabilities 129.96 Current Liabilities 44.86 Total Liabilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding and undertaking facility management, mechanised housekeeping, transportation, plant relocations, attendance services and labour supply. As per the disclosure of general information about the company at page 1066 of the paper book, the company also undertakes various projects for garden development, slum rehabilitation, landscaping, beautification projects, rural electrification and other contracts for government and private organisations. Thus, from the above it is evident that the company is functionally different as it has too many business verticals. Further, from the financials at page 1059 of the paper book, it is evident that the entire Revenue of the company from services i.e. Rs. 206,90,73,302 is from the domestic contracts, whereas assessee s entire earnings is from export of services under international transaction of provision of business support services . Therefore, BVG India Ltd cannot be considered to be functionally comparable to the assessee. Accordingly, we find no infirmity in the impugned order passed by the learned CIT(A) rejecting BVG India Ltd as a comparable to the assessee for benchmarking the international transaction pertaining to provision of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing available in public domain, this company cannot be considered as comparable to the assessee. Therefore, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, ground no. (h) raised in Revenue s appeal is dismissed. (vi) Techprocess Solutions Ltd. 37. The next comparable under dispute is Techprocess Solutions Ltd. for the purpose of benchmarking of international transaction pertaining to provision of business support services . Techprocess Solutions Ltd. was selected as a comparable by the assessee for benchmarking of aforesaid international transaction. The TPO vide order passed under section 92CA(3) of the Act rejected this company as a comparable on the basis that the company is having high intangibles which is not a normal feature of a company involved in providing normal support services. The TPO also held that certain functions performed by this company are totally different and not comparable to the assessee. In appeal, learned CIT(A) vide impugned order included this company as comparable to the assessee after examination and verification of the annual report. Being aggrieved, the Revenue is in appeal before us. 38. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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