TMI Blog2017 (10) TMI 1145X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer is directed to give the assessee an opportunity to give the details and canvass the veracity of expenses - ITA No.628/Mum/2013 - - - Dated:- 12-9-2017 - Shri Shamim Yahya, AM And Shri Ram Lal Negi, JM For The Appellant : Shri Porus Kaka Shri Manish Kanth For The Respondent : Shri S.C.Tiwari ORDER Per Shamim Yahya, AM This appeal by the assessee is directed against the order of Assessing Officer passed u/s 144C r.w.s.143(3) of the Income-tax Act, 1961, dated 30.11.2012 pursuant to the direction of the Dispute Resolution Panel I, Mumbai ( DRP for short) vide direction dated 04.09.2012 pertaining to assessment year 2008-2009. 2. The grounds of appeal read as under:- The grounds stated hereunder are without prejudice to one another. Ground 1 - Transfer Pricing Adjustment relating to international transaction of provision of non-binding investment advisory services of ₹ 86,430,318/- 1. On the facts and in the circumstances of the case, the learned Assessing Officer ('Ld. AO') / Transfer Pricing officer ('TPO') erred on facts and in law in making an addition of ₹ 86,430,318/- to the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment to the comparables as is required to be done in accordance with the provisions of Rule 10B(1)(e)(iii) of the Income-tax Rules, 1962 to account for difference between the risk profile of the Appellant and the alleged comparables selected by the learned AO/TPO. 8. The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law in upholding / confirming the action of the TPO of arbitrarily rejecting the without prejudice contention of the Appellant to provide the benefit / reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act, while determining the arm's length price for the international transaction. 9. Without prejudice to the above, the learned AO / TPO erred on facts and in law in not excluding the expenses disallowed by the AO, from the cost base, while computing the Transfer pricing adjustment in connection with the international transaction of provision of non-binding investment advisory services. The Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/ TPO and upheld by the Hon'ble DRP in respect of the international transaction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and in law in disallowing the Travel and Conveyance expenses of ₹ 1,50,00,000. 2. The Ld. AO under the directions of the Hon'ble DRP erred in holding that the Appellant has made only general statements but has not provided the specific details, disregarding the fact that the Appellant had not only furnished the purpose for travel but also submitted the specific details in the format prescribed by the Ld. AO. 3. The Hon'ble DRP erred on facts and law in holding that no explanation had been forthcoming from the Appellant as to why the expenses had increased by almost 5 times during the previous year, given the fact that the Appellant was never asked to provide any explanation in this regard. 4. Hon'ble DRP erred on facts and law in comparing the current year's expenditure with that of the earlier year i.e. financial year 2006-07 (Rs. 4.9 million), given the fact that the Appellant was incorporated on 16 October 2006, hence the expenses incurred during that year were only for 5.5 months and therefore not comparable with financial year 2007-08 (i.e. year under consideration). 5. Without prejudice to above, the Ld. AO has failed to appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 IDC (India) Ltd. 15.38 5 Informed Technologies India Ltd 3.82 6 KPIT Cummins Global Business Solutions Ltd. (-) 4.93 Arithmetic Mean 4.99 Since the NCP margin in the case of assessee was 15.03%, it was submitted before the TPO that the international transaction should be considered as being at arm's length. The TPO examined the functional profile of all these 6 companies and found that none of them was engaged in investment advisory services. He also observed that considering the functions performed and risks assumed by the assessee, the assessee could be characterized as a knowledge process outsourcing (KPO) entity. He accordingly carried out a fresh search for comparables using the following filters :- a. Only those companies were selected where data was available for the F.Y,2007-08. b. Companies having income from IT enabled services of less than Rs.l0 crores and more than ₹ 250 crores were excluded. c. Companies whose revenue from I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference in business models * Abnormal high profits * Low employee cost or other factors for falling the TPO s filters * Substantial intangible assets in asset base. 6.2 In the case of Acropetal Technologies ltd. the TPO has considered the Engineering Design Services Segment and hence this company is held to be functionally comparable to the assessee. The contention that the company has substantial intangible assets is not evidenced from the record 6.3 In respect of Vishal Information Technologies Ltd., now known as Coral Hubs Ltd., we find that a major part of the business of the company comprises outsourcing of services. We are therefore, in agreement with the assessee that this company is functionally different and should be deleted from the list of comparables, 6.4 Cross Domain Solution Pvt. Ltd. is mainly engaged in insurance claims processing and pay roll processing services. We do not find any reason to hold that it cannot be considered to be a comparable for the purpose of TNMM. 6.5 Eclerx Services Ltd. offers various high-end services including portfolio risk management services etc. It is therefore, functionally comparable. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1(6), Mumbai for determination of Arms Length Price of the International Transactions. The DCIT, TP -1(6), Mumbai vide order dated 11-10-2011 passed u/s. 92CA(3) of the Act made an adjustment of ₹ 8,64,30,318/- to the Arm's Length Price as shown below. Description Amount Total Operating Cost 2 4,80,29,908 NCP Mark-up as per comparable @ % 49.88% Arm s Length Revenue as per comparable (A) 37,17,47,226 Transaction Price (B) 28,53,16,908 Amount of adjustment of total Income (A B) 8,64,30,318 The DRP, Panel -1, Mumbai has vide its order dated 03-09-2012 has directed the AO to exclude Coral Hubs Ltd. and include IDC (India) Ltd. in the list of the comparables chosen by the TPO. Further, Triton corporation Ltd. may also be excluded if it is found that it falls the export filter of 75% chosen by the Transfer Pricing Officer. Since the order was passed by the DCIT, TP 1(6), Mumbai, a letter has written to modify the order passed by him. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded Companies who have less than 75% of the revenues as export safes were excluded Companies who have diminishing revenues/persistent losses for the period under consideration were excluded Companies having different financial year ending (i.e. not March 31, 2008} or data of the company does not fail within 12 month period i.e. 01-04-2007 to 31-03-2008, were rejected Companies that are functionally different from that of taxpayer or working in peculiar economic circumstances, after giving valid reasons, were excluded. Companies that are not mainly engaged in KPO services were excluded. 3.6 Learned Counsel further assailed the TPO s order by observing that the TPO in para 8 has himself mentioned that his search process was carried under the sub-head Non-financial Services Services (Other than Financial) Information Technology ITES. Learned Counsel submitted that this is totally not in line with the tax payer s activity which is investment advisory services. He submitted that by no stretch of imagination assessee can be considered to be engaged in a non-financial service. Learned Counsel referred to the following from the final comparables proposed by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer. 3.8 Learned Counsel further submitted that the TPO has treated the assessee as a KPO and has hence taken comparables from KPO business. In this regard, learned Counsel placed reliance upon the decision of ITAT Mumbai Benches in the case of KGN India Advisors Pvt. Ltd. v. DCIT 70 Taxmann.com 219, wherein it was held that company providing management and advisory services of various types of industries cannot be compared with company engaged in providing KPO and Information Services. Learned Counsel further submitted that the proportion that tax payers engaged in providing KPO cannot be compared with investment advisory service, has also been upheld by the ITAT decision in the case of Caryle India Advisors (P) Ltd. vs. ACIT [(2012) 146 TTJ 521] which has also been upheld by the Hon ble Bombay High Court reported in 357 ITR 584. Furthermore, this proposition has also similarly been upheld in the case of Temasek Holdings Advisors India Pvt. Ltd. by ITAT Mumbai Benches in several cases. Learned Counsel further reiterated his submission that the following comparables selected by the TPO are not comparable for the service for the reasons mentioned hereinabove. He furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables as submitted above are included, the assessee will come within the arm s length margin. Learned Counsel further submitted that two year later on with the APA with Government of India, margin has been accepted at 20%. 3.12 Per contra, learned Departmental Representative submitted that assessee has rightly been treated as KPO by the TPO. He submitted that assessee is providing advisory services where high level of knowledge is required. The learned DR further submitted that he would not argue much about the exclusion of Acropetal Technologies and Crossdomain Solutions Limited. However, for the other two comparables, he submitted that they should be included. 3.13 Upon careful consideration, we note that out of the comparables chosen by the TPO, the DRP has itself accepted exclusion of two of the comparables namely Coral Hubs Limited and Triton Corp Limited. Furthermore, we find considerable cogency in the submission of the learned Counsel of the assessee that for the reasons mentioned hereinabove, in para 3.8 above, following four comparables cannot be taken as comparables to the assessee who is engaged in investment advisory services:- (i) Eclerx Services Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correctly reflected in the form a provision in the P L A/c in accordance with the method of accounting. However, tax has not been deducted at sources u/s 194J at the time of crediting this amount in the books. The relevant provisions state that tax is deductible at the time of payment or credit, even if the credit is to a suspense account. The assessee's contention that tax was not deductible since the amount did not constitute income in the hands of the recipient, is not acceptable. The revenue nature of the expenditure is not in dispute, and the assessee has no way of knowing the method of accounting followed by the recipient which would determine whether the amount constituted income of the relevant year in its hands. The amount is therefore held to be disallowable u/s 40(a)(ia). The AO is directed to make the necessary modification in the assessment order. 4.4 Against this order and direction, the assessee is in appeal before us. 4.5 We have heard both the Counsel and perused the records. Learned Counsel of the assessee submitted that the above is provision for legal expenses. He submitted that the said provision was reimbursed in the next year and the actual expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee to provide full details of the travelling expenses. The assessee has made only general statements but has not provided the specific details even before us. It is also seen that the corresponding expenditure in the earlier year was only ₹ 0.49 crores. No explanation has been forthcoming from the assessee as to why the expenses have increased by almost 5 times this year. The fact that the assessee is compensated by the AE on a cost plus basis is not relevant for determining the allowability of expenses under the Income-tax Act. We are also of the view that considering the nature of services provided as stated by the assessee, such a huge expenditure on foreign travel or for attending conferences etc. is not justified, However, we are also of the view that some expenditure for travelling and conveyance would certainly be required to be incurred. In the earlier year such expenses amounting to about ₹ 49 lakhs has been allowed in the assessment. We therefore, hold that in the interests of justice the disallowance of expenses in this year should be restricted ₹ 1.5 crores out of the total amount of ₹ 2.43 crores. 5.4 Against the above order, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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