1
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI `I-2' BENCH,
NEW DELHI
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No. 6008/DEL/2012
[A.Y 2008-09]
GE India Business Services Pvt. Ltd Vs. The A.C.I.T
401, 402, 4th Floor, Circle-10(1)
Aggarwal Millennium Tower, New Delhi
E-1, 2, 3 Netaji Subhash Place,
Wazirpur, New Delhi
PAN: AAACI6748J
[Appellant] [Respondent]
Date of Hearing : 10.09.2018
Date of Pronouncement : 25.09.2018
Assessee by : Shri Sachit Jolly, Adv
Shri Sidharth Joshi, Adv
Revenue by : Shri H.K. Choudhary, CIT-DR
ORDER
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
With this appeal, the assessee has challenged the correctness of
the order dated 28.09.2012 framed u/s 143(3) r.w.s 144C of the
Income-tax Act, 1961 [hereinafter referred to as 'the Act'].
2
2. Substantive grounds of the assessee read as under:
"1. That on the facts and circumstances of the case, and
in law; the Assessment Order passed in pursuance to the
directions issued by the Learned Dispute Resolution Panel
(`Ld. DRP') is a vitiated order as the Ld. DRP erred in
confirming the addition made by the Ld. Assessing
Officer (`AO') to the appellant's income.
2. The Ld. AO/TPO erred both on facts and in law in
confirming the addition of Rs.313,76,541 by holding that
the appellant's international related party transactions
pertaining to the provision 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 benchmarking 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
3
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 benchmarking a low risk
captive unit such as the appellant, with the single-minded
intention of making an addition to the returned income of
the appellant;
2.5 not allowing the appropriate economic adjustments
to the appellant by ignoring the differences in the
functional profile of the appellant and the comparables,
holding that the appellant bears the single customer risk;
4
2.6 committing a number of factual errors in the
computation of the operating profit margins of the
comparables/appellant;
2.7 relying on information of the companies collected by
exercising power granted to him under section 133(6) of
the Act that was not available to the appellant in the
public domain and not sharing with the appellant in case
of number of comparables the information/ reply
received by the Ld. TPO/ AO u/s 133(6);
2.8 using data as at the time of assessment proceedings,
instead of using the latest data that was available as on
the date of preparing the TP documentation for
comparable companies while determining arm's length
price; thereby ignoring the principle of `impossibility of
performance";
2.9 disregarding judicial pronouncements in India while
udertaking the TP adjustment.
3 That the Ld. AO grossly erred on facts and in law in
disallowing an amount of Rs. 63,207 on account of being
0.5% of the average value of investment under section
14A of the Income tax Act, 1961 ("Act") read with Rule
8D of Income tax Rules, 1962 ("Rules").
5
4. That the Ld. AO grossly erred on facts and in law in
making an addition under section 14A of the Act without
recording satisfaction in accordance with sub section (2)
of section 14A of the Act, that expenditure has been
incurred by the appellant for earning exempt income.
5. That the Ld. AO grossly erred on facts in making an
addition under section 14A of the Act even where own
funds have been used by the appellant for making
investments.
6. That the Ld. AO grossly erred on facts and in law in
disallowing an amount of Rs. 1,168,238 towards lease
rental payments, under section 40A(2)(b) of the Act as
being excessive and unreasonable, without bringing any
evidence on record to prove its unreasonableness or
excessiveness.
7. That the Ld. AO grossly erred on facts and in law in
ignoring the established principle of law that no
disallowance can be made under section 4oA(2)(b) of the
Act where there is no intention to evade taxes as per
6
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.
7
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) Limited, Mauritius. The
appellant company is a Business Process Outsourcing company, set up
as a captive service provider to provide offshore outsourcing services
primarily to various GE entities/ businesses worldwide. The primary
activity of the appellant company comprises of rendering IT Enabled
Services ("ITES") and financial support services to various overseas GE
Group companies. In return for rendering these services, the appellant
was remunerated on an arm's length cost plus basis i.e. it was
compensated for all its operating costs, plus a pre-agreed mark-up
thereon.
5. In operating as an ITES and financial support service provider for
other GE Companies, and in being compensated on a cost plus revenue
model basis, the assessee is completely shielded from risks. Since the
appellant company's only customers are other GE Companies, and
other GE Companies takes on all the marketing and business
development functions overseas, with no involvement from the
assessee, it is also shielded from other critical risks such as credit
8
risk/debt collection risk and market risk.
6. The financial results of the appellant company for F.Y. 2007-08
are as under:
Description Amount
Operating Revenues Rs. 252,082,457
Operating Expenses Rs. 219,573,164
Operating Profit Rs. 3,25,09,293
NCP(%) 14.81%
Method used TNMM
PLI TNMM (%)
No of Comparables 6
7. As mentioned elsewhere, the assessee is engaged in providing
ITES and financial support services to its AEs as under:
S. No. Name of the Company Industry Vertical
1 Applabs Technologies Pvt. Ltd. Computer software
Caliber Point Business Solutions
2 BPO operations
Ltd.
3 Datamatics Technologies Ltd. Provision of ITES
Database management solution,
4
Mercury Outsourcing Mngt. Ltd. BPO operation
Consumer finance, Hospitality &
5
R Systems International Ltd.* Telecom
9
Manufacturing & retail; High Tech;
Telecom Media & Entertainment;
Banking & Financial services;
Transworks Information Insurance; Healthcare & public
6
Services Ltd. sector
8. International transactions as reported in the 92CE report read as
under:
a. Provision for ITES Rs. 24,65,72,039/-
b. Reimbursement of expenses Rs. 2,50,95,970/-
9. In the TP Study Report, the assessee has selected TNMM as the
most appropriate method, which, according to the assessee, is the
most appropriate method in the facts 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.
10
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 international transactions.
13. The TPO has further observed that since the assessee searched
the databases on 17.07.2008, obviously, the current year's data would
not be available on that date.
14. After giving effect to the order of the DRP u/s 144C(5) of the Act
and after recalculating the margins of M/s I-service India Pvt. Ltd and
11
after excluding M/s Mold-tek Technologies Limited, the margins of the
comparable companies were finally determined as under:
Adjusted Operating
S.
Profits on operating
No Name of the Company
Cost(%)
1 Accentia 44.50
2 Aditya Birla Minacs -0.55
3 Asit C Mehta 9.42
4 Caliber Point Business solutions 10.97
Coral Hub (Vishal Inf)
(Segment)
5 51.84
6 Cosmic Global 24.30
7 Ctossdomain solution Pvt. Ltd. 26.96
8 Datamatics Financial (BPO 34.87
9 e4e (earlier known Nitanny)
Dvision) 16.87
10 Eclerx 66.50
11 Genesys International 48.15
12 HCL Coinnet Systems & Services 32.97
13 ICRA (Seg)
Ltd. (Seg) 11.22
14 Infosys BPO 20.03
15 i-service India Private Limited 9.73
16 Spanco Limited (Seg) 8.94
17 Acropetal Technologies Limited 35.30
18 (Seg) BPO
Wipro 30.23
19 R System International Limited 4.30
(Seg) AVERAGE 25.61
Arithmetic mean PLI 25.60
Less: Working Capital Adjustment 3.22
Arm's Length Price 22.38
Based on the above, re-computation of the ALP is as given below
12
Operating Cost 225,308,772
Arms Length Margin 22.38% of the
Arms Length Price (ALP) OC
275,732,875
Price shown in the international 252,016,832
Transactions
Shortfall being adjustment u/s 23.716,043
92CA
Hence, amount of adjustment is revised to Rs 23,716,043/- from Rs
3,13,76,541/- as made in the original order."
15. Before us, the ld. AR presented his case for exclusion of the
following parties :
i) Coral Hub [Vishal Info]
ii) E Clerx
iii) Genesys International
iv) Infosys BPO
v) Cosmic Global
vi) Acropetal Technologies Ltd
vii) Accentia
16. Per contra, the ld. DR strongly supported the orders of the
authorities below.
17. We have given thoughtful consideration to the orders of the
authorities below. There is no dispute as regards the application of
TNMM as the most appropriate method, use of current year data alone,
since the working capital adjustment has already been given by the
13
TPO, we have to only address the issue relating to the exclusion of the
aforementioned comparables. We find that Cosmic Global Ltd., 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.
14
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
break-up of which is available in Schedule 9. It is discernible
from the Schedule that the Medical transcription and
consultancy services are only to the tune of Rs. 7.04 lac,
whereas the major chunk is the amount of Translation charges
standing at Rs. 5.59 crore with the last component of revenue
from BPO at a figure of Rs. 19.63 lac. When we peruse the
Expenditure side of the Profit and Loss of this company, it is
palpable that it paid Translation charges amounting to Rs.
2.86 crore. Thus, it is manifest that the revenue from
Medical transcription services, which could bear somewhat
similarity with the assessee, is hardly 1% of the total
revenues of this company. The major part is the income from
Translation charges at Rs. 5.59 crore out of total revenues of
Rs. 5.86 crore, which is totally dissimilar to that of the
assessee. The assessee is not into any Translation business.
As the assessee is engaged in rendering insurance claim
processing services to it's A.E under this segment, we find no
logical comparison of Cosmic Global with that of the assessee.
9.3. We are not agreeable with the ld. DR that this company
cannot be excluded because it was initially included by the
15
assessee in its list of comparables. The obvious reason is the
differentiation in the functional profiles of two companies.
Merely because the assessee inadvertently included this
company in the list of comparable, can be no reason to bar the
assessee from claiming that it was wrongly included. What is
essential in this regard is to see whether the company is, in
fact, comparable or not; and not whether it was included by
the assessee or the TPO in the list of comparables. We,
therefore, hold that Cosmic Global Ltd. is incomparable to the
assessee and direct to exclude it from the list of
comparables. The assessee succeeds.
Eclerx Services Ltd.
10.1. This company was included by the TPO in his list of
comparables. The assessee objected to its inclusion by
pointing out some functional differences. Not convinced, the
TPO went ahead with its inclusion, which got the seal of
approval from the DRP.
10.2. Having heard the rival submissions and perused the
relevant material on record, it is observed that this company
is engaged in providing data analytics and customized process
solutions to a host of global clients. It provides services to
the Banking, Manufacturing, Retail, Travel and Hospitability
verticals. The solutions offered by it include data analytics,
16
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 results due to merger/de-merger etc.
In view of the foregoing discussion, we are of the considered
opinion that this company cannot be included in the list of
comparables. The assessee succeeds.
17
Genesys International Corpn. Ltd.
11.1. The TPO included this company in the list of comparables
by observing from its Annual report that it operated in a
single business segment. The assessee objected to its
inclusion, but without success. 11.2. After considering the rival
submissions and perusing the relevant material in record, we
find that this company is engaged in rendering geospatial
services catering to the needs of consumer mapping,
navigation and internet portals. It is providing mapping
technologies managing the earth's resources and surfaces at a
time. Talent eco system with this company includes urban
planners, cartographers, remote sensing scientists etc. and
even rocket scientists, giving its skills in all kinds of land base
work. When we consider the nature of work done by the
assessee under its ITES segment, which is simply that of
processing insurance claims manually, we fail to see as to how
this company can be considered as comparable. We,
therefore, order for the exclusion of this company from the
list of comparables. The assessee succeeds."
Vishal Informatics
12.1. The TPO included this company in the list of comparables
by noticing that it was engaged in providing BPO services. The
18
assessee failed to convince him and the DRP that it was
incomparable.
12.2. Having heard the rival submissions and perused the
relevant material on record, we find from the Annual report
of this company that it is mainly engaged in e-publishing
business. It has more than 10,000 classic books to its credit
which are also converted into large font titles for visually
challenged. Apart from e-publishing, this company is also
engaged in Documents scanning & Indexing. It can be seen
from the financial results of this company that both the
segments viz., epublishing and Documents scanning etc. have
been combined and there are no separate financial results in
respect of Documents scanning work, which may be
comparable with the assessee to some extent. As the
assessee is not engaged in any e-publishing business and the
financials given by this company are on consolidated basis, we
direct to exclude this company from the list of comparables.
The assessee succeeds."
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.
19
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 regards Accentia Technologies Ltd., ld. counsel
referred to pages 350 & 351 of the PB-II, wherein the
20
annual report of this company is contained. He pointed
out that in the year under consideration Asscent
Infoserve Ltd. amalgamated with this company w.e.f. 1-4-
2008. He pointed out that Accentia Technologies Ltd. was
engaged in the business of medical transcription and
coding and had softwares which were being used by the
Accential Technologies Ltd. in serving the end to end
results. Thus, functionally amalgamating company and
amalgamated companies were different as performing
different functions.
17. The effect of amalgamation has been pointed out in
the annual accounts and it is merely stated therein that
in view of the amalgamation being effective the figures
for the year ended 31-3-2010 were inclusive of the
figures relating to the amalgamating company and, thus,
were not comparable with those of the previous year.
18. Ld. counsel further referred to page 355 of the PB,
wherein fixed asset schedule of the said company is
contained in which, in the block goodwill/ brand/ IPR an
addition ITA No. 6906/Del/2014 7 of Rs. 19,651,057/-
has been shown. Thus, he pointed out that the asset base
had substantially increased in the year under
21
consideration and, therefore, this could not be taken as
comparable because of the extraordinary event. Ld.
counsel further referred to the decision of the ITAT
dated 6-7-2015 in the case of Techbook International
Pvt. Ltd. for AY 2010-11, contained at pages 649 to 699
of the PB, wherein this comparable has been excluded on
account of this event, observing as under:
"10. 1.2 . We have heard the rival submissions and perused
the relevant material on record. We have also gone
through the Annual report of this company, a copy of
which has been placed .on page 435 onwards of the paper
book. Notes to Accounts of this company, which have
been placed on page 443 of the paper book, indicate
about the amalgamation or Asscent Infoserve Pvt. Ltd.
with it as approved by the shareholders in the court
convened meeting held on 25.4.2009 and, subsequently,
sanctioned by the Hon'ble High Court on 21.8.2009. The
Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd.
Vs. DClT (2013) 154 TTJ (Mum) 176, has held that a
company cannot be considered as comparable because of
exceptional financial results due to mergers/demergers.
Similar view has been bolstered by the Delhi Bench of
the Tribunal 'in several cases including Ciena India Pvt.
22
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 Techbook International
Pvt. Ltd. (supra), has observed as under:
23
Succinctly, the assessee was incorporated as a wholly
owned subsidiary of Aptarausa. It is engaged in the
development of customized electronic data. It converts
data from hard copy or files into XML/SGML/HTML,
creating electronic style files and modifying the user
interface for CD-ROM delivery. In the process, raw data
received from the customers in hard copy /
electronically, is converted into electronic form.
Thereafter, the data is arranged and formatted. Thus, it
can be said that the assessee is primarily engaged in
providing ITES to its associated enterprise (AE)."
20. The assessee's business profile has been considered
in para 2 this order and a comparison of the business
profile of Techbook International Pvt. Ltd. (supra) with
assessee clearly shows that both are providing ITES
services to its AEs. Therefore, the finding in Techbook
International Pvt. Ltd. (supra), regarding various
comparables is applicable to the present set of facts.
Therefore, respectfully following the order of the ITAT
in the case of Techbooks International Pvt. Ltd. (supra),
we direct this comparable to be excluded from the final
list of comparables.
24
9. By its order passed in the case of M/s Rampgreen
Solutions Pvt. Ltd. (supra), the Tribunal also excluded
M/s I-gate Global Solutions Limited and M/s Infosys BPO
Limited from the list of comparables.
33. Respectfully following the Tribunal's decision in the case of
Techbook International Pvt. Ltd. (supra), this company is excluded
from the list of comparables. 34. Infosys BPO: In the case of
Techbook International Pvt. Ltd. (supra), the Tribunal has excluded
this company from the list of comparables by observing as under:
10.5.2. After considering the rival submissions and perusing the
relevant material on record, we find from the Annual report of this
company, which is available on page 449 onwards of the paper book,
that there was acquisition by this company of McCamish Systems
LLC. Such information is available on page 456 of the paper book.
Acquisition of McCamish Systems LLC during the year, being an
extraordinary financial event, renders it incomparable. Following the
reasons taken note of above, we order for the elimination of this
company from the final set of comparables."
21. In so far as Acropetal Technologies is concerned, the assessee has
strongly objected for inclusion of this comparable on the ground that
the TPO had proposed to compare the engineering design services of
25
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 not part
of the audited accounts. "
23. With this observation, the Hon'ble High Court set aside the
impugned order and remitted the matter to the TPO for affording
26
opportunity to the petitioner. Finding parity on the facts with the
facts of the case in hand, respectfully following the Hon'ble High Court
decision, we set aside this issue and remit the matter to the TPO for
affording an opportunity to the assessee to cross examine the data
collected and used by the TPO.
24. Respectfully following the findings of the co-ordinate bench, we
direct for exclusion of these two comparables from the final list of
comparables. Ground Nos. 1 and 2 with all its sub-grounds are
allowed.
25. Ground Nos. 3 to 5 relates to the disallowance made u/s 14A of
the Act r.w.r 8D of the Rules.
26. The Assessing Officer found that the assessee has earned
dividend income of Rs. 1.96 crores on investment of Rs. 1.26 crores.
The Assessing Officer further found that the assessee has not made any
suo moto disallowance u/s 14A of the Act. The assessee was asked to
explain as to why disallowance should not be made u/s 14A of the Act
r.w.r 8D of the Rules.
27
27. In its reply, the assessee pointed out that it does not have any
borrowed funds and the investments were made out of its own funds.
It was further explained that since there was no administrative cost in
investment, Rule 8D is not applicable.
28. The Assessing Officer was not convinced with the reply of the
assessee and was of the opinion that the disallowance of expenditure
u/s 14A of the Act r.w.r 8D of the Rules is mandatory and, accordingly,
computed the disallowance at Rs. 63,207/-.
29. Before us, the ld. counsel for the assessee vehemently stated
that the action of the Assessing Officer is not in accordance with the
settled principle of law in as much as no satisfaction was recorded
before making disallowance u/s 14A of the Act.
30. Strong reliance was placed on the judgment of the Hon'ble
Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd in
Civil Appeal No. 7020 of 2011.
31. Per contra, the ld. DR strongly stated that disallowance u/s 14A
is mandatory. It is the say of the ld. DR that the decision of the
28
Hon'ble Supreme Court relied upon by the ld. counsel for the assessee
will apply only when there is some suo moto disallowance made by the
assessee and the Assessing Officer has not recorded 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 &
29
Boyce manufacturing Co (supra). Considering the facts in totality, we
do not find any merit in the addition of Rs. 63,207/-. We direct the
Assessing Officer/TPO to delete the same. Ground Nos. 3 to 5 are,
accordingly, allowed.
33. Ground Nos. 6 to 8 relate to the disallowance towards lease
rental payment u/s 40A(2)(b) of the Act.
34. During the course of assessment proceedings, the A.O observed
that the assessee has taken certain assets on finance lease and in
relation to such assets, the assessee has paid total EMI of 27.42 lakhs.
This amount comprised of 19.99 lakhs of principal portion of the EMI
and Rs. 7.42 lakhs of interest on such finance lease. The Assessing
Officer found that these transactions are mainly entered with persons
specified in section 40A(2)(b) of the Act. The assessee was asked to
justify the payment.
35. In its reply, the assessee stated that since it is not the owner of
these assets, depreciation on such assets has not been claimed.
Accordingly, principal repayment has been claimed as deduction. It
was pointed out that out of total payment of lease rent made during
30
the year, 13.63 lakhs has already been considered for disallowance u/s
40A of the Act. The contention of the assessee did not find much
favour with the Assessing Officer who observed as under:
"Submissions made by the assessee have been considered.
Perusal of the total movement of assets taken on finance
lease as reflected in financial statement, reveals that the
assessee was having opening book balance of such leased
assets amounting to Rs 45,04,863/-, and during the year
there was further addition of Rs 59,91433/- Thus total
value of leased assets is at Rs. 1,04,96,296/- As already
pointed out the transaction have mainly been entered with
the parties specified in section 40A{2)(b), hence assessee
was asked to give justification and reasonableness of the
lease rents paid. From the reply and details on record, what
emerges is that though the assets are owned by lessor
companies, assessee is paying the EMI along with interest
on such assets. In effect, assessee is bearing all costs
towards the acquisition of the assets, though technically
these still retain the ownership of the lessors. Therefore,
the issue needs examination as to whether the EMI and
interest paid towards these assets is justified and if so,
whether its extent is reasonable Since the assets are not
owned by the lessee i e. the assessee company I am inclined
31
to hold the payments towards 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 Officer cannot make any disallowance u/s 40A(2) of the Act.
For this proposition, reliance was placed on the judgment of the
32
Hon'ble High Court of Delhi in the case of Sigma Corporation India Ltd
in ITA No. 795 of 2016 and CM No. 41578 of 2016.
37. Per contra, the ld. DR supported the findings of the Assessing
Officer but could not bring any distinguishing decision in favour of the
Revenue.
38. We have carefully considered the judgment of the Hon'ble
jurisdictional High Court of Delhi [supra] qua the issue vis a vis the
facts of the case. We find force in the contention of the ld. counsel
for the assessee. The Hon'ble High Court of Delhi was seized with the
following question of law:
"Did the ITAT fall into error in restoring the disallowance
of 50% of Rs. 48 lakhs paid to the appellant/assessee
employee for the relevant assessment year validly
under Section 40A(2)(b) of the Income Tax Act, 1961?"
39. The Hon'ble High Court examined the provisions of section 40A(2)
of the Act and held as under:
33
"10. Having regard to the above position, this Court is of
the opinion that the ITAT in the present case overlooked
the materials that were to be taken into account, i.e.
reasonableness of the expenditure having regard to the
prudent business practice from a fair and reasonable point
of view. The AO's order nowhere seeks to benchmark the
expertise of Mr. Preetpal Singh with any other consultant
and proceeds on an assumption that he could not have
performed multiple tasks for more than one concern. In
this Court's opinion, such a stereotyped notion can hardly
be justified in today's business world where consultants
perform different tasks, not only for one concern but for
several business entities. A common example would be that
of an accountant or a legal professional, who necessarily has
to multi task and are recipients or retainers of payments
from many concerns having regard to their special
expertise. Likewise in other fields i.e. journalism, the
medical profession etc. more than one entity may engage or
retain a single professional on the basis of his experience,
learning and expertise, unless there is a deeper scrutiny
that involves comparable analysis of like situations (a highly
difficult task), additions made under Section 40A(2) would
be suspect.
34
11. In the circumstances, this Court is of the opinion that
the ITAT's conclusions were not justified. The impugned
order is accordingly set aside. The CIT (A)'s order is
restored. The question of law is answered in favour of the
appellant/assessee and against the Revenue. The appeal is
allowed in the above terms."
40. Respectfully following the findings of the Hon'ble High Court
[supra], we direct the Assessing Officer/TPO to delete the impugned
addition. Ground Nos. 6 to 8 are allowed and grievance raised vide
Ground No 9 becomes otiose.
41. In the result, the appeal filed by the assessee in ITA No.
6008/DEL/2012 is allowed.
The order is pronounced in the open court on 25.09.2018.
Sd/- Sd/-
[SUDHANSHU SRIVASTAVA] [N.K. BILLAIYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 25th September, 2018
VL/
35
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar,
ITAT, New Delhi
Date of dictation
Date on which the typed draft is placed before
the dictating Member
Date on which the typed draft is placed before
the Other Member
Date on which the approved draft comes to the
Sr.PS/PS
Date on which the fair order is placed before the
Dictating Member for pronouncement
Date on which the fair order comes back to the
Sr.PS/PS
Date on which the final order is uploaded on the
website of ITAT
Date on which the file goes to the Bench Clerk
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant
Registrar for signature on the order
Date of dispatch of the Order
|
