TMI Blog2018 (7) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... back-office research and data analytics services to Exl Group Companies (which includes Inductis companies as well) thus companies functionally dissimlar with that of assessee need to be deselected. Disallowance under section 14 A read with rule 8D - Held that:- Under such circumstances respectfully following the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd versus CIT (2015 (9) TMI 238 - DELHI HIGH COURT) in our considered opinion Section 14 A cannot be invoked as assessee do not have exempt income for the year under consideration and the disallowance deserves to be deleted. - ITA No. 1438/Del/2016 - - - Dated:- 13-7-2018 - SHRI P.M.JAGTAP, ACCOUNTANT MEMBER AND SMT. BEENA A PILLAI, JUDICIAL MEMBER For The Assessee : Sh. Vishal Kalra, Adv. And Sh. S.S.Tomar, Adv. For The Department : Sh. HK Chaudhary, CIT-DR ORDER PER BEENA A PILLAI, JUDICIAL MEMBER The present appeal has been preferred by the assessee against the final assessment order dated 28/01/16 passed by Ld. DCIT Circle 12 (1), New Delhi under section 143 (3) read with 144C read with 154 of the Income Tax Act, 1961 (the Act) for Assessment Year 2011-12 on the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including in the final comparable set certain companies with completely different functional profile; 3.4. excluding certain companies considered by the Appellant in its TP Documentation/fresh search on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 3.5. including companies having abnormal margins/ volatile operating margins in the final comparables' set, that signify high element of entrepreneurial risk, thereby not appreciating the risk profile of the services rendered by the Appellant and not allowing risk adjustment to the Appellant; 3.6. without prejudice, that if risk adjustment is not allowed to compensate for risk free activities of the Appellant and hence considered it to be risk bearing, in that case appropriate tested party for the arm's length analysis should be the Appellant's overseas Associated Enterprise ( AEs ); 3.7. following a contradictory approach, in principle, and committing a number of factual errors in the computation of the operating profit margins of the comparables by considering provisions for expenses/write back as non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . TPO for computation of the ALP, as is required under section 92CA(1) of the Act. 8. The Ld. A.O./ Ld. TPO erred in enhancing the income of the Appellant by ₹ 15,33,91,864 holding that the international transactions do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 9. The Ld. A.O./Ld. TPO has grossly erred on facts and in law by disregarding judicial pronouncements in India in undertaking the TP adjustment. 10. The Ld. DRP/Ld.AO erred in law and on the facts and circumstances of the case by making notional addition of ₹ 21,478 per provisions of section 14A of the Act read with rule 8D of the Income-tax Rules, 1962 ( Rules ). 10.1. The Ld. AO/Ld. DRP erred in law and on the facts and circumstances of the case by not taking cognizance of the detailed submission filed by the Appellant and erred in stating that the Appellant's case is a fit case for disallowance under section 14A of the Act despite of the fact that the Appellant did not have investment on which it could ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e making the addition on account of TP adjustment disallowance under section 14A at ₹ 21478/-was also made. On receipt of draft assessment order, assessee filed objections before DRP. Hon ble DRP passed order dated 21/12/15 with certain directions to Ld. TPO to recalculate the transfer pricing adjustment by making following observations: The DRP directed to exclude following companies from the final set of comparables selected by TPO which are: Acropetal Technologies Ltd (segment) Eclerx services Ltd ICRA Techno Analytics Ltd Microland Ltd (segment) 2.2 . On complying with directions of DRP, Ld.AO computed the transfer adjustment at ₹ 6,69,62,508/-. Disallowance under section 14 A to the extent of ₹ 21,478/-was also made. 2.3 . Aggrieved by the final assessment order passed, assessee is in appeal before us now. 3. Ld.Counsel at the outset submitted that in respect of the grounds raised on the transfer pricing issues: Ground No. 1 2 are general in nature and therefore do not require any adjudication. He submitted that amongst sub ground of Ground No. 2 assessee do not wish to press Ground No. 2.1, 2.2 . 3.1. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering actual reimbursement received from AE and actual cost incurred by assessee in operating income/expenditure. Assessee shall file all the requisite bills raised by upon AE relating to reimbursement of the expenses, along with vouchers/bills, proving details of total expenditure incurred by assessee, on behalf of AE. Ld.TPO shall then verify the same. In the event it is found to be reimbursements on actual, no adjustments are called for. Ld.AO shall allow the claim of assessee to the extent it is reimbursements of expenditure incurred by assessee on behalf of AE. 5.5. Accordingly we allow this ground raised by assessee for statistical purposes. 6. Ground No. 2.4, 5-9 All these grounds relate to computation of interest on outstanding receivables being the main issue and the selection/rejection of comparables by Ld. TPO. 6.1 . We shall first deal with the issue relating to interest on outstanding receivables. 6.2. It has been alleged that ld.TPO enhanced the income of assessee by ₹ 2,93,13,479/- by re-characterising the outstanding receivables from its AE as short-term. It was observed by Ld. TPO that receivables were pending from overseas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of outstanding receivables on the profitability has been taken into account. If the pricing/profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted. 9. The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was also submitted with the Ld. TPO. A snapshot of the result is provided below: Segment Name Appellant's Margin (OP/TC) Working capital adjusted margins of comparables (OP/TC) Manufacturing Activity 46.33% 11.84% Trading Activity 17.44% 8.36% 10. The above analysis empirically demonstrates that the differential impact of working capital of the assessee vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee which is more than that working capital adjusted margin of the comparables. Hence, any further adjustment to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s direction, in which the Panel has relied on the Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT (2015- TII-347-ITAT-DELTP) for holding that interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 has inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: ( i) the expression international transaction shall include- (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; . . Ld. DR submitted that expression debt arising during the course of business refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same is needs to be considered within transfer pricing adjustment, on account of interest i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvanced by both the sides in the light of the records placed before us. 6.6. On perusal of the Annexures, in respect of outstanding receivables attached to order passed by Ld.TPO, it is observed that except for a few, most of the payments have been received beyond 90 days. However from the records it is not discernible if credit period beyond 90 days has been admittedly granted by assessee to its AE. 6.8. On a query being put up by this Bench to Ld.Counsel regarding whether assessee is a debt free company for the year under consideration as was for Assessment Year 2010-11, the reply was in affirmative. Ld.Counsel submitted that assessee is a debt free company even for the year under consideration which was substantiated from the audited accounts placed at page 4 - 53 of paper book. Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered to its AE s only. AE has incurred certain expenses on behalf of assessee which were subsequently reimbursed by assessee on actual basis. It has been submitted that these expenses have been incurred in relation to the IT enabled services by assessee and the same have been treated as closely linked to the said international transaction of assessee and has not been evaluated separately from Transfer Pricing perspective. During the year assessee has also incurred certain cost on behalf of AE s in the nature of travel costs , marketing costs etc which were recharged to its AEs by assessee. It is observed that assessee has received payment in respect of provision of analytics and advisory services. Assessee has been reimbursed all its costs incurred along with the markup of 19%. Cost refers to actual cost incurred by assessee pertaining to the provision of services in India. Assessee raises invoices on a monthly basis in US dollars and AE pays invoice within a period of 90 days of receipt of the invoice. On the backdrop of the above, the functions performed by assessee are limited to provision of services in the nature of research, analytics and risk advisory services. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejection of certain comparables which are as under: * R Systems International Ltd., ( I) Accentia Technologies Ltd Ld.Counsel submitted that this comparable has been selected by TPO. He submitted that this company is engaged in offering a wide range of services and products like medical transcription and discrete reportable transcription, medical billing, practice management consulting, medical coding, receivables management, software as services. It also has some products in the form of software. Ld.Counsel submitted that activity carried on by this company has been classified under a single segment namely Healthcare Receivable Management and audited accounts shows income received under 3 heads namely, medical transcription, billing and coding. Ld.Counsel submitted that there has been an extraordinary circumstance of acquisition from the year 2006 including the subject Assessment Year which has significantly increased its revenues between the interregnum financial years. It has also been submitted that this company own significant amount of intangibles in the form of brands, IPR and goodwill. On the contrary Ld. CIT DR submitted that entire income is from I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs (India) (P.) Ltd. ( supra ) cannot be applied. Instead ratio laid down by Hon'ble Delhi High Court in the case of Rampgreen Solutions (P.) Ltd. ( supra ) would be applicable. Hence we are of the opinion that this company cannot be taken as a comparable. We therefore direct to exclude this company from the final list. ( III) R Systems International Ltd., This comparable was excluded by ld. TPO for the simple reason that it followed a different financial year ending. Ld.Counsel submitted that this cannot be the only reason for not considering the comparable. By placing reliance upon the decision of Delhi Tribunal in the case of Mercer consulting (India) (P) Ltd vs DCIT reported in (2014) 47 Taxmann.com 84 , which has been subsequently upheld by Hon ble Punjab and Haryana High Court in the case of CIT vs Mercer Consulting (India) (P) Ltd., reported in (2016) 76 Taxmann.com 153 , submitted that the basis on which this comparable has been rejected is contrary to Rule 10 (B) (4) of the ITAT Rules. Ld.Counsel submitted that Rule does not exclude from consideration the data of any entity merely because it s financial year is different from the finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Further it is observed that it deals in analysing data on financial fundamentals serving the needs of financial content sector in USA. In our opinion this activity requires immense knowledge as has been observed by Delhi Tribunal in the case of Mckinsey knowledge Centre India Pvt. Ltd., vs. DCIT reported in (2017) 77 Taxmann.com 164. Thus in our considered opinion this comparable has been rightly rejected by Ld.TPO. 11.1. Accordingly this ground stands partly allowed. 12. Additional Ground Raised by assessee That on the facts and circumstances of the case and in law, the Dispute Resolution Panel ( DRP ) vide directions dated December 21, 2015, erred in inadvertently issuing directions for providing working capital adjustment on margins of comparable companies vis-a-vis the Appellant, despite the fact that the Appellant had not raised any ground of objection to this effect. That on the facts and circumstances of the case and in law, the DRP/ TPO have erred in making negative working capital adjustment for the differences in working capital between comparable companies vis-a-vis the Appellant. 12.1 . Ld.Counsel submitted that DRP in its directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y assessee apart from this. Even in Schedule 12 representing other income assessee has earned merely dividend from mutual fund investments which is not traded for the year under consideration. Ld. counsel placed reliance upon the decision of Hon ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT reported in (2015) 61 Taxmann.com 118, wherein it has been held that: 23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Under such circumstances respectfully following the decision of Hon ble Delhi High Court in the case of Cheminvest Ltd versus CIT (supra) in our considered opinion Section 14 A cannot be invoked as assessee do not have exempt income for the year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X
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