TMI Blog2012 (5) TMI 627X X X X Extracts X X X X X X X X Extracts X X X X ..... <![endif]--><!--[if gte mso 10]> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin-top:0cm; mso-para-margin-right:0cm; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0cm; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) failed to consider and appreciate the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the income Tax Rules, 1962 for determining the arm s length price of the provision of IT enabled services. Specifically, on facts and in law the Learned AO, Learned TPO and the Learned CIT(A) erred in : (a) Not accepting the analysis undertaken by the Appellant. (b) Not accepting that the appellant was justified in using data pertaining to financial years 2000-01 and 2001- 02 for the comparability analysis. (c) Accepting that the Learned TPO was justified in using data that became available only after the specified date/due date. (d) Applying an ad-hoc sales turnover filter to reject companies identified by the appellant. (e) Not computing the Net Operating Profit Margin of MCS Limited correctly and based on financial data as per its Annual Report. (f) Not allowing adequate opportunity to the appellant to undertake a fresh search and identify additional comparable companies based on data that became available only after the specified date/due date. (g) Failing to make appropriate adjustments for differences in depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis and control. During the year under consideration, the assessee received a sum of ₹ 213,25,80,456/- from Associated Enterprise (AE) for providing IT-enabled services to them. On reference by the Assessing Officer, the TPO determined the arm s length price to be charged from the AE and, accordingly, worked out the addition of ₹ 19,34,05,168/- as under :- 10. In the manner discussed above, the arithmetic mean of adjusted operating profit over the total cost margins of the comparables for the financial year works out to 16.70%. The arm s length price of the international transactions entered into by the assessee with its various associated enterprises is worked out as under. Total cost of provision of services by the assessee (as per Page 8 of TP Report): Rs.1,99,31,32,497/- Margin @ 16.70% of the above : Rs.33,28,53,127/- Arms length price to be charged from the AE : Rs.2,32,59,85,624/- 11. In the manner discussed above the arm s length price of the international transactions entered into by the assessee regarding provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16.70 11. On appeal, the learned CIT(A) worked out the addition at ₹ 15,92,72,896/- as under:- 16.7 On the above criteria the average net margin of the comparable companies is arrived at as under:- S.No. Companies Name Unadjusted OP/TC (Mar 03) Adjusted OP/TC (Mar 03) 1 Allsec Technologies Limited 15.06% 16.08% 2 Max Healthscribe Limited 12.98% 14.42% 3 MCS Limited 6.90% 15.17% Average (OP/TC) 16.32% 15.22% As the average adjusted OP/TC is 15.22%, accordingly adjustment on account of difference in the ALP of the international transaction has been computed as under: (A) Total Cost of provision of services to AEs Rs.1,99,31,32,497 (B) Margin @ 15.22% to be earned by appellant Rs.30,34,29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a TMT Limited has the following related party transactions on the expense side : Hinduja TMT FY 2002-03 Particulars Rs. In Lacs Rendering of services 2,579.82 Professional fee paid 30.00 Discounts and commission paid 483.15 Rent charges paid 97.40 Business promotion expense 4.29 Purchase/Miscellaneous expenses 6.26 Communication charges 22.31 Total 3223.23 I have also examined the total operating expense of Hinduja TMT. These are : Hinduja TMT FY 2002-03 Particulars Rs. In Lacs Direct Cost, Product Cost and Connectivity Cost 366.16 Employee Cost 2294.50 Administration and Other Expenses 1788.05 Total 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, scale, functions and risks analysis). I apply the filter turnover of ₹ 5 crores as held by me to be correct in last year and accordingly the comparables are used for the further comparability analysis. It may be mentioned here that on this issue remand report was sought from the TPO, but he has not given any comments on this issue. Therefore, by applying the turnover filter of 5 crores considering the fact during the year the appellants sales volume is ₹ 213 crores, I hold that companies with less than ₹ 5 crores as turnover should not be taken as comparable, accordingly, following companies get eliminated : 18. From the above, it is evident that learned CIT(A) has noted that in the earlier year, TPO himself has applied the turnover filter of ₹ 5 crores and selected the comparables exceeding the turnover of ₹ 5 crores. Moreover, the receipt of the assessee from the Associated Enterprise is ₹ 213 crores. Considering the receipt from the AE by the assessee, the turnover filter of ₹ 1 crore applied by the TPO is very less and, in our opinion, the turnover filter of ₹ 5 crores applied by the CIT(A) is quite fair and justifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it is an established fact that in order to nullify the effect of related party transactions one may use consolidated accounts. This office had financial results of Genesys International both on standalone basis and consolidated. It is a fact that standalone financials of Genesys International are showing better operating margins as compared to consolidated but to meet the objection of related party transaction it is decided that consolidated accounts of Genesys International would be used. 21. However, the learned CIT(A) examined the consolidated accounts of Genesys International Corporation Limited and found that in the case of Global Information Services (GIS) segment in the consolidated revenue, 60% is the revenue earned by the subsidiary. While in the case of IT enabled services, 95% of the revenue is earned by the subsidiaries. He, therefore, held that even the consolidated accounts of Genesys International Corporation Limited are not comparable. The relevant finding of learned CIT(A) reads as under:- Particulars GIS IT Consultancy Consolidated revenue A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m subsidiaries and only 5% from Genesys International India operations. The subsidiary of Genesys International Corporation Limited is in United States. Similarly, even in respect of Global Information Services (GIS) segment, 60% of the consolidated revenue is from subsidiaries and only 40% from Genesys International Corporation Limited. In view of the above, in our opinion, the CIT(A) rightly held that Genesys International Corporation Limited cannot be considered as a comparable company for the purpose of determining arm s length price of IT enabled services rendered by the assessee. We, therefore, reject ground No.1(c) of the Revenue s appeal. 23. Now, we come to ground No.2 of the assessee s appeal. The limited argument of the learned counsel for the assessee was with regard to operating margin of MCS Ltd. It was stated by the learned counsel for the assessee that the CIT(A) has wrongly taken the operating margin of MCS Ltd. at 15.17%. The correct margin of MCS Ltd. is 7.64%. In this regard, he referred to page 262 and 263 of the assessee s paper book Part C wherein the working of operating profit is given. He also stated that this working was given to the CIT(A) but he has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Prime Rate 11.13% Inventory adjustment (INR) -- ACCOUNTS PAYABLE ADJUSTMENTS AEIPL s accounts payable/operating cost 12.96% Comparable s accounts payable/operating cost 3.60% % difference -9.36% Multiplied by comparable s operating cost 222,034,333 Difference (INR) (20,789,413) Multiplied by Prime Rate/(1+Prime Rate) 10.01% Payables adjustment (INR) (2,081,280) Adjusted Operating Revenue 241,247,338 Adjusted Operating Expenses 224,115,613 Adjusted Operating Profit 17,131,725 % age 7.64% Average (%age) 26. We do not find any comment on this working of operating profit of MCS Ltd. by the CIT(A). However, we also agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant and during the appellate proceeding it has been explained by the appellant that on incurring the pre- operative expenses, these expenses were not routed through profit loss account and they have been shown as a balance sheet item by showing the holding company as a debtor and when reimbursement is received the Debtors are reduced to that extent, hence there is no impact on the profit and loss account as a result of the transaction as whatever the appellant has incurred has been reimbursed to it. At the time of incurring expenditure, the appellant passed the entry debiting pre-operative expense account and crediting bank account. When the expenditure is reimbursed to the appellant, the appellant reversed the pre-operative expenditure by debiting AETRSCo s account who agreed to reimburse all the expenditure incurred on setting up of an undertaking. In view of the above, I agree that as the said expenditure is fully reimbursable from AETRSCo and which has been reimbursed, the same should not be added in the taxable income as the transaction had no impact on profit and loss item. Hence, grounds 3.1 3.2 are decided in favour of the appellant. 31. Thus, the CIT(A) has clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the appellant and the observations of the Assessing Officer as well as that of the Additional Commissioner of Income Tax. I have also gone through the following case laws in which the issue of splitting up and reconstruction has been considered : Chenab information Technologies (P) Ltd. vs. ITO [2008] (25 SOT 432)(Mumbai ITAT). JCIT vs. Associated Capsules (P) Ltd. (304 ITR 85) (Mumbai ITAT). ITO vs. DSM Soft (P) Ltd. [ ITA No.2345/Mds/05](Chennai ITAT). PRP Granites vs. ACIT (17 DTR 234) (Madras High Court). CIT vs. Mahaan Foods Ltd. (177 Taxman 274)(Delhi ITAT). ITO vs. Servion Global Solutions Ltd. (308 ITR 375)(Chennai ITAT). Based on the above, my observations and comments are as follows : a) It is seen from the records made available, that the FCE unit (EOU) applied to NEPZ for broad branding of its scope of activities vide application dated September 12, 2002 and the approval was granted by NEPZ vide letter dated September 16, 2002. The new AEGSC unit (STP) commenced its call centre prior to the FCE unit (EOU) applying for the broad branding before NEPZ. b) The appellant started its business with the FCE unit (EOU) only and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Development, Ministry of Industry, Government of India Registered with Software Technology Park of India (STPI) under STP Scheme 6 Source of Funds AEIPL started its business with the FCE unit (EOU) only and the funds were received from the shareholders as Share Capital Investment made from specifically borrowed funds (i.e. fresh funds) 7 Customers Various American Express overseas entities. American Express Travel Related Services Company Inc., USA ( AETRSCO ). 8 Customer Agreements and Invoices The FCE unit (EOU) and AEGSC unit (STP) have their own separate agreements with their respective customers, and issue separate invoices to them 9 Books of Accounts The FCE unit (EOU) and AEGSC unit (STP) maintain their separate books of accounts 10 Customs Bonding The premises of FCE unit (EOU) and AEGSC unit (STP) are separately bonded by the Custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up of the existing business or it is a new set up over and above the existing set up. He has recorded the finding that the physical location of both the units is different. The nature of activities is different, separate license is obtained for the new unit, separate infrastructure is created in the new unit, fresh funds have been invested in the new unit and even after the setting up of the new unit, the turnover of the old unit has not reduced but, on the other hand, increased. During AY 2002-03, when no new unit was in existence, the turnover of old unit was ₹ 129 crores which, after the setting up of the new unit, has increased to ₹ 294 crores in AY 2008-09. In view of the above facts, we do not find any infirmity in the order of learned CIT(A). The same is sustained and ground No.3 of the Revenue s appeal is rejected. 37. Ground No.4 of the Revenue s appeal reads as under:- Whether in the facts and circumstances of the case, the ld.CIT(A) was right in allowing deduction u/s 10-B on interest earned from I.T. refund (Rs.24,84,307/-) and housing loan (Rs.1,27,741/-) given to employee being Non- business income. 38. We have heard both the parties and per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. Payment of income tax cannot be said to be made for earning of interest, hence the case of the assessee will also be out of the purview of section 57(iii). 26. In view of the above discussion, we are of the opinion that the relief has wrongly been granted by the ld.CIT(Appeals) as he did not properly appreciate the facts of the case. The earlier decision of the Tribunal in assessee s own case has no bearing on the facts of the present case. These grounds are decided against the assessee and in favour of the Revenue and these grounds of the Revenue are allowed. 39. In view of the above, respectfully following the decision of ITAT in assessee s own case for AY 2002-03, we hold that interest from income tax refund does not qualify for deduction under Section 10B. 40. So far as housing loan to the employees is concerned, we agree with the finding of the learned CIT(A) that it was for the purpose of business. The loan was given to the employees during the course of carrying on of the assessee s business. He has also recorded a finding that there is a direct nexus between interest paid and interest received by the appellant. Such finding recorded by the CIT(A) with rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, 2012 comes into operation. The learned counsel for the assessee did not object to his suggestion of the learned DR. 47. In view of the above, we set aside the issue raised by the assessee vide ground No.3 of its appeal to the file of the AO to be readjudicated in accordance with law after coming into force of the Finance Bill, 2012. 48. Ground No.4 of the assessee s appeal reads as under:- 4.1 That on facts and in law the learned CIT(A) erred in treating the compensation of ₹ 16,260,000 received from landlord for delay in actual delivery of leased premises and related work facilities in respect of AEGSC (STP) unit as revenue receipt taxable under the Act though it relates to pre-operative period. 4.2 That on facts and in law the learned CIT(A) erred in treating the said compensation received from landlord taxable under the head Income from other sources . In this regard, the learned CIT(A) failed to appreciate that the said compensation is in relation to AEGSC (STP) unit and thus is profits of the business of the undertaking as mentioned in section 10A(4) of the Act. 49. At the time of hearing before us, it is stated by the learned counsel that during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. Therefore, the refund of the rent of pre- operative period was rightly credited in the pre-operative expenses account and the rent of post-operative period was credited to rent account (which was transferred to profit loss account). The CIT(A) accepted the assessee s claim with regard to sum of ₹ 7,11,000/- which was reduced from the rent debited to profit loss account. In our opinion, the nature of entire compensation of ₹ 1,69,71,000/- is the same. Merely because the assessee bifurcated it into two portions and reduced one portion from the expenses (rent) debited to profit loss account and another portion from the expenses (rent) debited to pre- operative expenses, different treatment cannot be given to them. In our opinion, the assessee rightly reduced the entire sum of ₹ 1,69,71,000/- from the rent expenses, whether pertaining to pre- operative period or post-operative period. We, therefore, delete the addition of ₹ 1,62,60,000/- sustained by the CIT(A). Accordingly, ground No.4 of the assessee s appeal is allowed. 53. In the result, both the appeals are partly allowed. Decision pronounced in the open Court on 18th May, 2012. - - TaxT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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