TMI Blog2016 (9) TMI 1395X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessing officer erred on facts and in law in completing the assessment under section 144C read with section 143(3) of the Incometax Act, 1961 ( the Act ) at an income of ₹ 1,83,22,823 as against income of ₹ 1,51,35,030 returned by the appellant. 2. That the assessing officer/TPO erred on facts and in law in making Date of Hearing 30.06.2016 Date of Pronouncement 27.09.2016 an addition of ₹ 30,43,842 allegedly on account of difference in the arm s length price of the international transaction of provision of risk consultancy services on the basis of the order passed under section 92CA(3) of the Act by the TPO. 2.1 That the DRP/TPO erred on facts and in law in rejecting the Transfer Pricing Documentation alleging that the appellant has not provided complete information/documents for the purpose of determination of arm s length price of the international transactions. 2.2 That the DRP/TPO erred on facts and in law in inadvertently characterizing the business of the appellant, as provider of financial advisory services and also erred in comparing the appellant with the companies engaged in the business of stock broking and trading of shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the fact that Central Investigation Security Services Ltd. has been excluded by the TPO himself on similar basis. 2.11 That the DRP/TPO erred on facts and in law in considering HCCA Business Services Ltd. as comparable not appreciating the fact that the TPO himself rejected ISSSDB Security Services Ltd. which is engaged in providing similar services. 2.12 That the DRP/TPO erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent service providers. 3. That the DRP/AO erred on facts and in law in disallowing an amount of ₹ 1,43,951 on account of interest on late deposit of TDS allegedly holding the same to be of penal nature. 4. That the Assessing Officer erred on facts and in law in levying interest u/s 234A, 234B and Section 234D of the Act. The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal. 2. Addressing the grounds raised, it was submitted by the Ld.AR that considering the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that he would have no objection to the prayer for remand subject to the assessee demonstrating how characterisation of the taxpayer has wrongly been done. 6. In the said background the Ld. AR invited attention to the TPO s order dated 27.01.2014 placed at pages 55 to 146 of the appeal set filed. Attention was invited to specific page 66 so as to highlight that the TPO has considered that the taxpayer was engaged in providing Investment and other financial advisory . Referring to the said page and the discussion which carries on to page 67 it was his submission that as a result of non-appreciation of the assessee s activity the comparable selection process of the TPO is full of flaws. As an illustration, attention was invited to appeal set page 126 internal page 73 of the TPO s order wherein the following comparable companies have been selected by the TPO:- Sl No. Name of the Company OP/OC 1 ICRA Management Consulting Services Ltd. 1.94 2 Ajcon Global Services Ltd. 32.88 3 Future C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of the assessee, as provider of financial advisory services and also erred in comparing the assessee with companies engaged in the business of stock broking and trading of shares. ( v). That the Assessing Officer /TPO erred on facts and in law in not appreciating the fact that the assessee was engaged in providing crisis and security consultancy as is evident from the articles of association of the assessee. 6.3. Attention was invited to Annexure to the copy of reply dated 16/01/2014 before the TPO which included Copy of Distributors Sales Agreement dated 06.01.2010 entered into between the subsidiaries of Control Risks Group Holding Ltd. (Group Companies). Specific page 233 to 249 was referred to and specific emphasis was laid on para B of the same in order to emphasize the nature of the activity. 6.4. For ready- reference, the relevant extract from the said page is reproduced hereunder:- DISTRIBUTION AND SALES AGREEMENT This Agreement is made on 6th January 2010. Between:- 1. The companies listed in Schedule 1 to this Agreement ( Seller ); and 2. The companies listed in Schedule 2 to this Agreement ( Service Provider ) Background ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CRGHL has a client base that includes investment banks, large multinationals, governments, non-governmental organizations and insurance underwriters. CRGHL has resources in each of the countries in which it operates, however, in areas where Control Risks Group does not have dedicated offices they will gain information through the use of sub-contractors. CRGHL tracks a number of different sectors and therefore its unique business has no significant competitor with an equivalent breadth of services or geographic footprint. However, its closest competitors are Kroll (part of March and McLennan Group), Risk Advisory Group, Live Group and, in Asia Pacific-Hill Associates. CRIPL was incorporated in August, 2007 for offering a comprehensive range of consultancy services that assist clients to manage political, security, operational and integrity risks at every stage of an investment. 6.6. It was his submission that no doubt the socio- political environment of a country would impact the financials however the taxpayer is not dealing or trading in shares as considered by the TPO. As a result of this incorrect factual appreciation, it was submitted the TPO has drawn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record:- 1. Engagement letters along with scope of services provided by the applicant to third parties are enclosed as Annexure 1. 2. Invoices raised by the applicant on the associated enterprise and unrelated third parties are enclosed as Annexure 2. 6.8. Referring to these documents and the prayer made on facts, it was submitted that these may be admitted as these are crucial and relevant for determining the issue before the tax authorities. Reliance was placed upon the decision of the Jurisdictional Delhi High Court in the case of CIT versus Text Hundred India Private Limited 239 CTR 263 (Delhi) pleading that procedures relating to filing of additional evidence is handmaid of Justice and Justice should not be allowed to be choked only because of some inadvertent error or oral omission on the part of the parties and the evidence may be taken into consideration. Reliance is also placed on CIT Vs. Hewlett Packard India: 314 ITR 55 (Del HC); CIT Vs. Chandra Kant Sahu Bhai: 202 Taxman 262 (Del HC); CIT Vs. Betterways Finance: ITA 995 of 2009 (Del HC); Jatia Investment Co V. CIT: 206 ITR 718 (Cal Hon'ble HC); Electra (Jaipur) Ltd. Vs. IAC: 26 ITD 236 (Del ITAT); a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which has been extracted in the earlier part of this order it would show that the assessee is engaged in the provision of crisis and security consultancy, outsourced security management, crisis response, investigative services, forensics and other risk management consultancy services ( the Consultancy Services ) in the territory in which they operate ( Territory ). When all this is considered in the context of the Copy of Agreement filed u/Rule 29 of the ITAT Rules there appears to be no doubt whatsoever that the tax authorities have not correctly appreciated the activity of the tax payer as a result thereof the characterization i.e the FAR analysis itself is flawed. For ready-reference, we extract the Annexure I u/Rule 29 for readyreference:- We understand that in acquired the business of and the of brand. At the time, was one of the leading Indian manufacturers of equipment. As part of the acquisition the two promoters of the company ( ) and ( ) also joined the newly formed company and the residual business of the erstwhile was spun off as .Control Risks was informed that during the acquisition the promoters signed a non-compete agreement with stating that would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view employees and suppliers to develop greater context around the allegations and the findings to date. Control Risks understands the sensitivities around the Investigation and is happy to work with the client to develop a relevant and appropriate reason for these enquiries. ( emphasis provided) 8.2. The assessee has also placed the following document in support of its (Nonfinancial) Pre-Investment background due diligence redacted document with a client:- Introduction and background This proposal follows emails between. Group Development Manager and Control Risks. Control Risks understands the Client is considering an investment into in India is founded and managed by and . As such, the Client would like Control Risks to undertake in-depth research into the background of the company and its key principals to ensure there are no undisclosed commercial, legal, ethical or regulatory issues in relation to their backgrounds. Control Risks research would also focus on any issues of concern from an international regulatory and compliance perspective, including the recently passed UK Bribery Act. The Client has indicated that which are not required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any pre-established corporate entities. Undertake thorough searches of English and local language media archives and specialist corporate databases in order to establish the public profile of the principals and the existence of any negative allegations. Identification of any issues of reputational or regulatory concern for the Client presented by the principal's (rack record, activities and reputation, including; _ Allegations of illegal or unethical business activities such as involvement In corruption, fraud or abuse of position; _ Evidence of improper relationships with government officials or individuals of influence; _ Designation on financial 'blacklists' maintained by domestic or international agencies; Phase two: Discreet source enquiries Control Risks will perform discreet source enquiries to provide greater context to information uncovered in Phase 1; to fill in gaps in (he public record; and to establish the reputation and trustworthiness of the principals. Although the scope of our enquiries would depend in part on any issues identified in Phase I, we would expect to cover the following key areas in Phase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the contrary. We find that the taxpayer no doubt undertakes financial services but these are not activities engaged in stock broking; trading; depositaries etc. these are in the context of forensic, investigative, risk assessments etc. requiring appreciation of socio-political and geopolitical studies which necessarily impact the financials and may be incorporated in the financial comparative information provided by various other taxpayers however when coupled with the forensic services which the taxpayer definitely renders which is evident from the extract of the redacted agreements entered into by the assessee company with its customers the nature of the activity impacting its FAR needs to be addressed. It is seen that even if the nature of activities impact the ultimate decision-making qua the financial information provided however, by no stretch of imagination the assessee can be compared with companies who are trading in shares and investments. Accordingly holding the fresh evidences as relevant and crucial to determine the issues, the fresh evidence is admitted. Support is drawn from the decision of the Jurisdictional High Court in the case of CIT vs Text Hundred India P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and law, the issue is restored to the file of the TPO to carry out a FAR analysis of the assessee after characterizing its activity on the basis of evidence on record and then proceed to selecting comparables as per Rules and in accordance with law. Needless to say that the assessee shall be afforded a reasonable opportunity of being heard. 10. Addressing Ground No. 3, the Ld. AR submitted that the issue has been considered by the Assessing officer at internal page 3 marked as page 10 and 11 of the appeal set:- During the year under consideration the assessee company claimed interest expenses amounting to ₹ 10,17,083/- on account late deposit of Service tax and TDS vide this office letter dated 18/2/2014 the assessee company was requested to provide the details of Service tax an TDS and also show cause as to why these expenses should not be disallowed being penal in nature. In response the assessee company vide letter dated 26/2/2014 submitted as under:- The assessee company has paid interest of ₹ 10,17,083/- on account of late deposit of Service Tax accounting to ₹ 73,132/- and late deposit of TDS amounting to ₹ 1,43,951/-. It should not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of a penalty and since it has been incurred wholly and exclusively for the business of the assessee, the same may be allowed. 12. The Ld.Sr.DR relied upon the order and said that a speaking order has been passed by the DRP. 13. We have heard the rival submissions and perused the material available on record. We find on considering the submissions of the parties that in the facts as brought on record, no variation in the order is called for. Agreeing with the following conclusion on facts and law as considered by the DRP which has been followed by the AO, we reject the ground of the assessee. The relevant extract of the DRP s order is reproduced hereunder for ready-reference:- 11.2. A perusal of the draft assessment shows that during the year under consideration the taxpayer claimed interest expenses amounting to ₹ 10,17,083/- on account late deposit of Service Tax and TDS. The AO accepted the argument of the taxpayer that the interest under section 75 of the Finance Act 1994 for late payment of service tax is compensatory in nature, has the same character as service tax and it is not in nature of any penalty or fine allowable under section 37 of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held that interest for delayed filling of return in not deductible u/s 37(1). The court held that it cannot be said that interest paid for delay in filing the return has any connection with the business of the taxpayer. If income taxes is not a permissible deduction under section 37, any interest payable for default committed by the taxpayer, in discharging its statutory obligation under the Income tax Act which is calculated with reference to the tax or income, cannot be allowed as a deduction. In certain cases, the taxpayer had taken loan/ borrowals for payment of the taxes and the issue before the courts was whether interest paid on such loans is an allowable deduction or not. In the case of East India Pharmaceutical Works Ltd. V. CIT [1997] 91 Taxman 185 / 224 ITR 627 (SC), it was held by the Hon'ble Supreme Court that interest that is paid by the taxpayer on any sum borrowed by him for payment of income -tax is not deductible from his net income. In the case of Aruna Mills Limited vs. CIT [1957] 31 ITR 153 (Bom), the Bombay High Court observed that it was difficult to understand how, when a business man commits default in discharging his statutory obligatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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