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TMI Blog2017 (7) TMI 1438X X X X Extracts X X X X X X X X Extracts X X X X ..... ere taken up and statutory notices were issued against which the AR of the assessee was asked to explain the case and file submissions. 2.2 Profile of the Taxpayer: The group is into ITES such as comprehensive advertising solutions to the advertisers. The taxpayer is primarily engaged in providing web development, web maintenance and support services. The taxpayer is subsidiary of Northgate India which is having 51% stake in this company. The name of the company was subsequently changed to Green Fire Agri Commodities P. Ltd. on 20/04/2010 and subsequently to the present name. The company is engage in 'commodities trading' activity in India. 2.3 During the relevant PY, as per the 3CEB report/TP document, the international transactions of the assessee reflected as under: A.E. Nature of transaction Amount (Rs.) Globe7 Pte Ltd Provision of ITES 4,30,24,994 Northgate Investment Pte Ltd. Investment in WOS 24,42,37,077 Globe7 (UK) Ltd. Investment in WOS 41,35,200 Globe HK Ltd. Reversal of reimbursement paid for 2008-09 82,29,827 Axil Europe Ltd. Reversal of reimbursement paid for 2008-09 75,73,677 Globe7 Pte Ltd. Reimbursement of expenses paid 1,99,792 Glob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd. 9.24 7. Informed Technologies Ltd. 18.85 8. Infosys BPO 28.93 9. Jeevan Scientific Technologies Ltd. 13.54 10. Jindal Intellicome Ltd. 21.78 11. Mastiff Tech P Ltd. 76.28 12. Microgentic Systems Ltd. 25.04 13. TCS E-serve ltd. -0.22 Total 334.49 Arithmetic Mean 25.73 2.9. After comparing the average margins of the comparables to the financials of the assessee, the TPO computed the adjusted arm's length margin as under: Description Amount Arm's Length Margin 25.73% Less: WCA -9.63% Adjusted Arm's Length Margin 35.36% Operation Cost (OC) 3,97,31,246 Adjusted Arm's Length Margin (%) (AALM) 35.36% Arm's Length Price (100+AALM)*OC= 5,37,80,215 Price Received (OR) 4,47,55,654 Adjustment u/s 92CA 90,24,561 2.10. Accordingly, the TPO who passed an order u/s 92CA(3) of the Act on 30/12/2014, recommended adjustment of Rs. 90,24,561/-. The same was incorporated by the AO in the draft assessment order. Assessee preferred a petition before the Dispute Resolution Panel (DR) raising various objections. 3. The DRP vide order dated 10/12/2015 directed TPO to exclude the following comparable companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... burden of interest has been shifted from those companies to the assessee company. Thus it is evident that the unsecured loan borrowed from SMIL has not been utilized wholly and exclusively for the purpose of India Ltd. business of the assessee. Therefore, interest paid by the assessee to an extent of Rs. 96, 62, 706 on the unsecured loan received from SMIL has not been laid out or expended wholly and exclusively for the purpose of business of the assessee. 4.3 Further, the AO observed that the assessee company has availed unsecured loan from M/s. SMIL which is a 100% subsidiary company of Globe 7 Pvt. Ltd which is a 100% subsidiary company of M/s. Northgate Investments Pvt. Ltd, Singapore. M/s. Northgate Investments Pvt. Ltd., Singapore is a holding company of M/s. Northgate Technologies Ltd and so also in Varquant Tech Securities Ltd which is a subsidiary company of M/s. Northgate Technologies Ltd. Thus it is clear that the amounts taken as unsecured loans from a subsidiary company has again been invested in a parent company and not used it for any business purposes. 4.4 In view of the above findings, the AO asked the AR vide order sheet entry dt:25.02.2015 to show cause as to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. 7. With regard to ground No.2, ld. AR submitted that his argument is on comparable cases, which are as under: 7.1 Accentia Technologies Ltd.: 1. Ld. AR submitted that this company is a diversified KPO company, operating from multiple locations in India, USA, UK, and the Middle East. Accentia is engaged in the business of healthcare documentation (medical transcription, Healthcare receivables cycle management (HRCM) and software. Accentia adopted EMR suite which has opened up avenues for an integrated end-to end. He submitted that the turnover of Accentia for the FY 2010-11 is Rs. 107,22,96,564/-. In comparison to the same, the revenue arising for providing IT enables services by the assessee company is Rs. 4,30,24,994/- which is only 3% of the revenue of Accentia. This would not form an appropriate basis for comparison. 2. Ld. AR submitted that Accentia Technologies Ltd. Is to be rejected as it is functionally different from the assessee and also on the basis that it is not correct to compare assessee with companies having very high turnover. It has a turnover of Rs. 107.22 crores and it has ventured into providing HRCM services of an integrated end to end SAAS model. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement activities. The professional services practice includes consulting, business analysis and solution testing. He submitted that this company also competes with companies which are larger, better financed and better known, companies of the same size and strength as well as captives. eClerx holds intangible assets in the form of computer software. 2. He submitted that however, the assessee neither provides any expertise nor does it provide a host of services to it's clients. It's only client is Globe 7 Pte and it only provides back end support services by utilizing their IPRs. The company does not face any competition and charges only profit margin to Globe 7 Pte. He relied on the following cases to submit that the Tribunal has excluded this company from the list of comparables in these cases: "1. S&P Capital IQ (India) Ltd. Vs. DCIT, [2016] 72 Taxmann.com 326 (Hyd. Trib.). The Tribunal has observed in this case as under: 8. Ld. DR submitted that the assessee is also a KPO and is primarily engaged in providing web development, web maintenance and support services. He submitted that the company is dealing in web development and maintenance is nothing but dealing wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... freebies, if any, and include maintenance and upgradation of the websites belonging to Globe7 Pte Ltd. Its back office support services include maintaining the networks, computers, communication links and ensuring configuration of the systems. The taxpayer also takes part in corporate strategy determination, finance, accounting, treasury and legal functions and Human Resource Management functions. Quality Assurance, Data Extraction and analysis, software maintenance and support function and IT support services are the functions performed by Northgate India." By considering the functions performed by the assessee, it is clear that the assessee has carried on the services of support only this year. It is not important what the profile of the assessee describes but what are the actual functions carried on by the assessee during the year. During the year, the assessee carried on services like rendering services through web site. The assessee company is into providing back end support services to its overseas subsidiary. The assessee company provides 'websites services' which is 'Information Technology Enabled Services (ITES)'. The same is demonstrated by the order p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 1850/Hyd/2012). The relevant para of the order is as under: "III. CROSSDOMAIN SOLUTIONS LTD. : This company was considered as a comparable and listed at Sl.No.7 of the comparables chosen by the TPO. It is the stand of the assessee that this company is not functionally comparable. It is seen that the business profile of this company is re-engineered payroll service. This company is also engaged in the development of information systems. The review and business functions of Cross Domain is as follows:- "With a decade of experience in Payroll Outsourcing, Crossdomain. has created a re-engineered payroll service EFFIPAY - that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours*. With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000. " "Crossdomain's IT knowledge and domain competence has provided the edge to develop informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogenetics Ltd (c) Cosmic Global Ltd. As according to him, the DRP should have considered all the three companies as comparables since these companies were selected by the TPO in his fresh search process and out of these companies, two companies were originally selected by the assessee in its TP study. He further submitted that all the three companies are functionally comparable to that of assessee company. 12. Ld. DR submitted that DRP has excluded these three companies as they are not comparable to that of assessee company reason being that in case of Cosmic Global Ltd., it was noticed that the expenses to the extent of 41% on sub-contracting suggest a different working model which may have significant effect on the margin and therefore, the company cannot be retained as comparable. In the case of Informed Technologies, the DRP observed that on perusal of the annual report, it was noticed from page No. 6 that the company is operating as IT enabled services, knowledge based back office processing. It was also noticed that out of the gross revenue of Rs. 4,07,73,057/- the sales and service income is only Rs. 1,75,39,22/- and therefore, it fails the service revenue filter of 75% app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Ground No. 5 is consequential in nature to ground No. 3. 15. Ground No. 6 is regarding disallowance of interest of Rs. 62,23,081/- on unsecured loan taken from M/s Social Media India Ltd., its 100% subsidiary and extending to its step down foreign subsidiary. 16. Ld. AR submitted that during the AY 2010-11, the assessee has availed an unsecured loan from Social Media India Ltd., a step down subsidiary to the tune of Rs. 11,20,23,500/- and invested the entire loan amount in its wholly owned subsidiaries as under: 1. Northgate Investment Pte Ltd., Singapore Rs. 10,40,23,500 2. Var Quant Tech Securities Pvt. Ltd., Hyd. 80,00,000 16.1 Ld. AR submitted that in AY 2011-12, of the unsecured loan of Rs.11,20,23,500/- an amount of Rs.3,61,58,790/- was repaid to M/s. Social Media India Limited and for the balance amount of Rs.7,58,64,710/- proportionate interest of Rs. 62,23,081/- was considered to be paid and the same was disallowed by the AO. He submitted that the AO treated the loan borrowed as not incurred for the assessee's business but for making investment in its wholly owned subsidiary companies. However the same is incurred for business purposes only. 16.2 Ld. AR relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as wholly and exclusively for the purpose of business and consequently the interest paid was incurred wholly and exclusively for the purpose of the business. Accordingly, he prayed the Hon'ble Bench to allow the interest amount claimed. 17. The ld. DR submitted that the assessee is heavily relying on the case of SA Builders whereas that case will not be applicable to the case of assessee. He submitted that the assessee has taken loan from Indian Subsidiary company and invested in foreign subsidiary company and do not know the whole funds were utilized by the foreign company. He relied on the orders of AO/DRP and also relied on the following case laws: 1. K. Somasundaram & Brothers Vs. CIT, [1999] 238 ITR 939 (Mad.) 2. CIT Vs. VI Bay & co., [2002] 123 Taxman 894 (Ker.) 18. Considered the rival submissions and perused the material facts on record. It is observed that the assessee has taken loan from one of its subsidiary and invested the same funds in the step down foreign subsidiaries as investment in shares and in application money. The ld. DR has relied on the decision of Madras and Kerala High Courts. In the case of K. Somasundaram & Bros Vs. CIT, the assessee is a part ..... X X X X Extracts X X X X X X X X Extracts X X X X
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