M/s. Exl Service Com India Pvt. Ltd., New Delhi V. DCIT, New Delhi

CO 165/DEL/2014

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 3848 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 11 month(s) 24 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 18-06-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2009-2010
• Appeal Filed On: 24-06-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SANJAY I BARA
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Earning of tax free income; Wholly owned subsidiary; Commercial expediency
• Section: 143(3); 92D; 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 2559/DEL /2014 ASSESSMENT YEAR: 2009-10 DCIT, LTU NEW DELHI. VS M/S EXL SERVICE.COM INDIA PVT. LTD., 103-A, ASHOKA ESTATE, BARAKHAMBA ROAD, NEW DELHI. (PAN: AAACE5174C) (APPELLANT) (RESPONDENT) C.O. NO. 165/DEL/2014 (IN ITA NO. 2559/DEL /2014) ASSESSMENT YEAR: 2009-10 M/S EXL SERVICE.COM INDIA PVT. LTD., 103-A, ASHOKA ESTATE, BARAKHAMBA ROAD, NEW DELHI. VS DCIT, LTU NEW DELHI. (APPELLANT) (RESPONDENT) A PPELLANT BY : SHRI SANJAY I. BARA, CIT DR RESPONDENT BY : SHRI VISHAL KALRA, ADV . SHRI ANKIT SAHNI, ADV. DATE OF HEARING : 21.03.2018 DATE OF PRONOUNCEMENT : : 18.06.2018 ORDER PER SUDHANSHU SRIVASTAVA, J.M. THIS APPEAL HAS BEEN PREFERRED BY THE DEPARTMENT A GAINST THE FINAL ASSESSMENT ORDER PASSED U/S 144C OF THE I NCOME TAX ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 2 ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') RE AD WITH 143(3) PASSED SUBSEQUENT TO THE DIRECTIONS OF THE LD. DISP UTE RESOLUTION PANEL (DRP) FOR ASSESSMENT YEAR 2009-10. THE CROSS OBJECTION (CO) HAS BEEN PREFERRED BY THE ASSESSEE. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF EXL SERVICE HOLDINGS. THE ASSE SSEE IS ENGAGED IN RENDERING BUSINESS AND KNOWLEDGE PROCESS OUTSOURCING, RESEARCH AND ANALYSIS AND RISK ADVISOR Y (KNOWN AS IT ENABLED SERVICES) FOR CUSTOMERS OF THE EXL GROUP ENTITIES. THE RETURN WAS FILED DECLARING A TOTAL INCOME OF RS.17, 82,53,916/-. THE RETURN WAS SUBSEQUENTLY REVISED DECLARING A TOT AL INCOME OF RS. 19,89,23,287/-. THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE PERTAINED TO PROVISION OF IT ENABLE D SERVICES. THE ASSESSEE HAD SELECTED TNMM FOR COMPUTATION OF ARMS LENGTH PRICE (ALP) AND THE ALP COMPUTED BY THE TAXPAYER WA S RS. 50,96,699,481/-. IN RESPECT OF THESE SERVICES, THE ASSESSEE HAD SELECTED SEVEN COMPARABLES WHOSE AVERAGE MARGIN WAS 19.24% AS AGAINST THE ASSESSEES MARGIN OF 15%. SINCE THE MARGIN FELL WITHIN 5% RANGE, THE ASSESSEE WAS OF THE VIEW THAT THE TRANSACTION WAS AT ARMS LENGTH. ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 3 2.1 A REFERENCE WAS MADE TO THE TRANSFER PRICING OF FICER (TPO) WHO DID NOT AGREE WITH THE VARIOUS FILTERS USED BY THE ASSESSEE FOR THE TRANSFER PRICING STUDY AND HE USED CERTAIN MORE FILTERS AND REQUIRED THE ASSESSEE TO SUBMIT THE COMPARABLES ON THE BASIS OF NEW FILTERS. THE ASSESSEE SELECTED A SET OF 14 COMPARABLES AND THE TPO, OUT OF THE FOURTEEN, ACCEP TED NINE COMPARABLES. THE TPO ALSO INCLUDED TWO MORE COMPAR ABLES OUT OF THE ACCEPTED/REJECTED MATRIX. THUS, THE TPO SEL ECTED A FINAL SET OF 11 COMPARABLES WHOSE AVERAGE MARGIN WAS 22.2 6% AS AGAINST THE ASSESSEES MARGIN OF 7.14%. THE TPO PR OPOSED THE ADJUSTMENT OF RS. 72,36,07,916/- TO THE INCOME OF T HE ASSESSEE. APART FROM THIS, THE ASSESSING OFFICER ALSO MADE A DISALLOWANCE OF RS. 16,58,079/- U/S 14A OF THE ACT. THE ASSESSING OFFICER ALSO MADE AN ADDITION OF RS. 2,60,20,875/- WITH RESPECT TO INCOME OF BPRS ON THE GROUND THAT THE ASSESSEE HAD FAILED TO TAKE THIS INCOME IN THE FINAL COMPUTATION OF INCOME. 2.2 AGGRIEVED, THE ASSESSEE APPROACHED THE LD. DRP AND RAISED ITS OBJECTIONS. LD. DRP DIRECTED THAT THE ADJUSTME NT RELATING TO TRANSFER PRICING WAS TO BE DELETED. LD. DRP ALSO D IRECTED DELETION OF ADDITION WITH RESPECT TO INCOME FROM BPRS. HOWE VER, THE LD. ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 4 DRP UPHELD THE DISALLOWANCE U/S 14A TO THE TUNE OF RS. 14,34,861/-. 2.3 NOW, THE DEPARTMENT IS IN APPEAL BEFORE THE ITA T AND HAS CHALLENGED THE ACTION OF THE LD. DRP IN DELETING TH E ADDITION OF RS. 72,36,07,916/- BEING TRANSFER PRICING ADJUSTMEN T. THE GROUNDS RAISED BY THE DEPARTMENT ARE AS UNDER:- ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, HON'BLE DRP HAS ERRED IN DELETING THE ADDITION OF RS. 72,36,07,916/- BEING ADJUSTMENT ON ACCOUNT OF ARM'S LENGTH PRICE BY DIRECTING TO REMOVE ONE COMPA RABLE CASE OF M/S GENESYS INTERNATIONAL LTD. FROM THE FIN AL LIST OF COMPARABLES ON THE GROUND OF FUNCTIONAL DIFFEREN CES, WITHOUT APPRECIATING THE FACT THAT THIS COMPARABLE WAS SELECTED BY ASSESSEE ITSELF IN ITS TRANSFER PRICING DOCUMENTS. 2.4 THE ASSESSEE HAS PREFERRED CROSS OBJECTION AND IS CHALLENGING THE UPHOLDING OF DISALLOWANCE U/S 14A O F THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT' ). THE GROUNDS RAISED BY THE ASSESSEE IN THE C.O. ARE AS UNDER:- THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW: 1. THE LEARNED ASSESSING OFFICER (LD. AO)/ LD, TRAN SFER PRICING OFFICER (LD. TPO) ERRED IN NOT FOLLOWING THE DIRECTIONS ISSUED BY THE LD. DISPUTE RESOLUTION PAN EL (LD. DRP) IN CONTRAVENTION OF SECTION 144C(10) OF THE I NCOME TAX ACT, 1961 BY DENYING THE ECONOMIC ADJUSTMENT ON ACCOUNT OF ACCELERATED DEPRECIATION CHARGED BY THE RESPONDENT IN ITS BOOKS OF ACCOUNT, AS COMPARED TO THE DEPRECIATION RATES PRESCRIBED UNDER SCHEDULE XIV OF THE COMPANIES ACT, 1956; ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 5 2. THE LD. AO./ LD. TPO ERRED IN FOLLOWING AN INCONSI STENT AND ERRONEOUS APPROACH WHILE ALLOWING ADJUSTMENT ON ACCOUNT OF DIFFERENCES IN WORKING CAPITAL IN THE CA SE OF CERTAIN COMPARABLES; 3. THE LD. AO ERRED IN CONTESTING THE DIRECTIONS OF L D. DRP ON REJECTION OF M/S GENESYS INTERNATIONAL LIMITED F ROM THE FINAL COMPARABLE SET BASED ON THE MERE PREMISE THAT THE SAID COMPARABLE IS CONSIDERED BY THE RESPONDENT IN ITS TRANSFER PRICING (TP) DOCUMENTS WITHOUT APPRE CIATING THE FACT THAT THE SAID COMPARABLE IS FUNCTIONALLY D IFFERENT TO THE ACTIVITIES CARRIED OUT BY THE RESPONDENT AND IN DOING SO, ALSO ERRED IN DISREGARDING THE JUDICIAL PRECEDENCE THAT THE TAXPAYER CANNOT BE ESTOPPED FRO M REJECTING THE COMPARABLES CONSIDERED BY IT IN THE T P DOCUMENTATION; 4. THE LD. DRP ERRED IN CONFIRMING THE LD. AO/ LD. TP OS APPROACH OF DETERMINING THE ARMS LENGTH PRICE (AL P) OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO PROVIS ION OF INFORMATION TECHNOLOGY (IT) ENABLED SERVICES. IN DOING SO, THE LD. DRP HAS GROSSLY ERRED IN: 4.1 DISREGARDING THE ALP AS DETERMINED BY THE RESPONDENT IN THE TP DOCUMENTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 (RULES) AS WELL AS FRESH S EARCH AND IN PARTICULAR MODIFYING/ REJECTING THE FILTERS APPLIED BY THE RESPONDENT; 4.2 AGREEING WITH THE LD. TPOS ACTION OF HOLDING THAT ONLY CURRENT YEAR (I.E FY 2008- 09) DATA FOR COMPARABLE COMPANIES SHOULD BE USED FOR COMPARABILITY ANALYSIS DESPITE THE FACT THAT THE SAME WAS NOT NECESSARILY AVAILABLE TO THE RESPONDENT AT THE TIME OF PREPARIN G ITS TP DOCUMENTATION; 4.3 NOT APPROPRIATELY CONSIDERING THE FUNCTIONS, ASSET S AND RISK PROFILE OF THE COMPANIES USED FOR COMPARISON W ITH THE RESPONDENT, THEREBY INCLUDING IN THE FINAL COMPARAB LE SET CERTAIN COMPANIES WITH COMPLETELY DIFFERENT FUNCTIO NAL PROFILE; ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 6 4.4 AGREEING WITH THE LD. TPOS ACTION OF RESORTING TO ARBITRARY REJECTION OF LOW-PROFIT/ LOSS MAKING COMP ANIES BASED ON ERRONEOUS AND INCONSISTENT REASONS; 4.5 UPHOLDING EXCLUSION OF CERTAIN COMPANIES CONSIDERE D BY THE RESPONDENT IN ITS TP DOCUMENTATION/ FRESH SE ARCH ON ARBITRARY/ FRIVOLOUS GROUNDS EVEN THOUGH THE Y ARE COMPARABLE TO THE RESPONDENT IN TERMS OF FUN CTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 4.6 ERRONEOUSLY RETAINING COMPANIES HAVING ABNORMAL MARGINS/ VOLATILE OPERATING MARGINS IN THE FINAL COMPARABLES SET, THAT SIGNIFY HIGH ELEMENT OF ENTREPRENEURIAL RISK AS OPPOSED TO THE RESPONDENT W HO IS A CAPTIVE SERVICE PROVIDER BEARING LIMITED RISK; 4.7 UPHOLDING THE CONTRADICTORY APPROACH FOLLOWED BY TH E LD. TPO IN CONSIDERING COMPANIES DEMONSTRATING SUPERNORMAL GROWTH/ PROFIT WHILE REJECTING COMPANIE S WITH PERSISTENT LOSSES; 4.8 DENYING THE ADJUSTMENT ON ACCOUNT OF DIFFERENCES IN THE RISK PROFILE OF THE RESPONDENT AND THE COMPARABLES; 4.9 NOT APPRECIATING THE FACT THAT IN THE RELEVANT ASSESSMENT YEAR THE RESPONDENT WAS ENTITLED TO A TA X HOLIDAY ON ITS PROFITS FROM PROVISION OF IT ENABLED SERVICES AND THEREFORE DID NOT HAVE ANY MOTIVE OF DERIVING A NY TAX ADVANTAGE BY MANIPULATING THE TRANSFER PRICES OF IT S INTERNATIONAL RELATED PARTY TRANSACTIONS; 4.10 WITHOUT PREJUDICE TO THE ABOVE, NOT APPRECIATING THAT IN THE INSTANT CASE THE PROFITS ALREADY BOOKED BY THE RESPONDENT AT CONSOLIDATED LEVEL (INCLUDING ITS SUBSIDIARIES IN INDIA) ARE IN EFFECT MORE THAN LOSS EARNED BY THE ASSOCIATED ENTERPRISES (AES) AND ANY ADJUS TMENT WOULD LEAD TO AN INCREASE IN LOSSES ON A WORLDWIDE BASIS; 5. THE LD. DRP/LD. AO ERRED IN DISREGARDING THE JUDIC IAL PRECEDENCE; ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 7 6. THE LD. DRP /AO HAS ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE BY IGNORING DETAILED SUBMISSION FILED BY THE RESPONDENT AND MAKING AN ADDITION OF RS. 14,34,861, BEING 0.5% OF THE AVERAG E INVESTMENT, PER PROVISIONS OF SECTION 14A OF THE AC T READ WITH RULE 8D OF THE RULES. 6.1 THE LD. AO HAS ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE WHILE MENTIONING THAT THE RESPONDENT HAS NOT KEPT SEPARATE BOOKS OF ACCOUNTS IN RESPECT OF EXPENDITURE INCURRED FOR EARNING THE EXE MPT INCOME; ALTHOUGH THERE IS NO REQUIREMENT AS SUCH IN THE ACT FOR THE SAME. 6.2 THE LD. DRP / AO HAS ERRED IN LAW' AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN IGNORING THE FACT THAT SUBSTANTIAL DIVIDEND INCOME IS EARNED FROM INVESTME NT IN SUBSIDIARIES FOR WHICH NO FUNDS HAS BEEN BORROWED B Y THE COMPANY AND FURTHER NO MANAGEMENT OR ADMINISTRATION COST IS INCURRED TO MONITOR THE SAME . 6.3 WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO HAS ERRE D IN DISREGARDING THE FACT THAT THE DISALLOWANCE OF RS 14,34,861 PERTAINS TO THE STPI / EOU UNITS OF THE RESPONDENT AND ADDITION MADE TO THE INCOME OF THE RESPONDENT OF RS. 14,34,861 SHOULD BE ENTITLED FOR ENHANCED DEDUCTION UNDER SECTION 10A /1OB OF THE AC T. 7. THE LD. AO HAS ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN ADDING NOTIONAL EXPEND ITURE OF RS. 14,34,861 PER PROVISIONS OF SECTION 14A OF T HE ACT WHILE CALCULATING BOOK PROFIT PER SECTION 115JB OF THE ACT AND THE DRP FAILED TO GIVE DIRECTIONS TO THE LD. AO IN THIS REGARD. 8. THE LD. AO HAS ERRED IN LAW AND ON THE FACTS OF THE CASE BY CHARGING AND COMPUTING INTEREST UNDER SECTI ON 234B, 234C AND 234D OF THE INCOME TAX ACT, 1961. 9. THE LD. AO HAS GROSSLY ERRED BY INITIATING PENA LTY UNDER SECTION 271 (1 )(C) OF THE ACT MECHANICALLY A ND WITHOUT RECORDING ANY SATISFACTION FOR ITS INITIATI ON. ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 8 THE RESPONDENT CRAVES LEAVE TO ADD, AMEND, ALTER, D ELETE, RESCIND, FORGO OR WITHDRAW ANY OF THE ABOVE GROUNDS OF CROSS-OBJECTIONS EITHER BEFORE OR DURING THE HEARIN G BEFORE THE HONBLE TRIBUNAL. THE AFORESAID CROSS-OBJECTIONS ARE MUTUALLY EXCLUSI VE AND WITHOUT PREJUDICE TO EACH OTHER. 3. THE LD. CIT DR SUBMITTED THAT THE DEPARTMENT WAS CHALLENGING EXCLUSION OF ONE COMPARABLE I.E. GENESY S INTERNATIONAL CORPORATION LTD. BY THE LD. DRP. THE LD. CIT DR SUBMITTED THAT FROM THE PROFILE OF THE ASSESSEE, IT WAS EVIDENT THAT THE ASSESSEE WAS ALSO AN IT ENABLED SERVICE PR OVIDER COMPANY. IT WAS FURTHER SUBMITTED THAT THIS COMPAN Y WAS SELECTED AS A COMPARABLE INITIALLY BY THE ASSESSEE ITSELF AND, SUBSEQUENTLY, THE ASSESSEE HAD PLEADED FOR EXCLUSIO N OF THIS COMPARABLE. IT WAS ALSO SUBMITTED THAT THE ASSESSE E HAD NOT OBJECTED TO INCLUSION OF THIS COMPANY BEFORE THE TP O AS THIS COMPANY FELL SQUARELY WITHIN THE PARAMETERS/FILTERS BEING APPLIED BY THE TPO AND NOW THE ASSESSEE SHOULD NOT BE ALLOW ED TO PLEAD EXCLUSION OF THIS COMPANY. IT WAS ALSO SUBMITTED T HAT THERE CANNOT BE AN EXACT REPLICA OF A COMPARABLE UNDER TH E TNMM AND WHAT WAS REQUIRED UNDER THE STATUTE WAS A GENERAL C OMPARABILITY. RELIANCE WAS PLACED ON THE FINDINGS OF THE TPO IN T HIS REGARD. ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 9 4. IN RESPONSE, THE LD. AR SUBMITTED THAT GENESYS INTERNATIONAL CORPORATION LTD. IS ENGAGED IN DIVERS IFIED OPERATIONS PROVIDING HIGH-END AND COMPLEX SERVICES SUCH AS GIS CONSULTING, 3D MAPPING, NAVIGATION MAPS, LIDAR, PHOTOGRAMMETRY, REMOTE SENSORING SERVICES, IMAGE PR OCESSING, UTILITY SERVICES, BUSINESS GEOGRAPHICS AND LOGISTIC S, SURVEYING ETC. OUR ATTENTION WAS DRAWN TO THE ANNUAL REPORT OF THI S COMPANY WHEREIN THESE ACTIVITIES HAD BEEN ENUMERATED. IT W AS FURTHER SUBMITTED THAT THE ASSESSEE, ON THE OTHER HAND, IS ENGAGED IN PROVIDING BACK OFFICE IT ENABLED SERVICES TO ITS AE AND IS ALSO ENGAGED IN RENDERING TRANSACTION PROCESSING SERVICE S, INTERNET, CONSULTING AND VOICE BASED CUSTOMER CARE SERVICES A ND, THEREFORE, GENESYS CANNOT BE CANNOT BE TAKEN AS A C OMPARABLE TO THE ASSESSEE COMPANY. IT WAS ALSO SUBMITTED THAT G ENESYS WAS ENGAGED IN DOING PIONEERING RESEARCH IN THE AREA OF IMAGE INTELLIGENCE AND RECOGNITION, MOBILE MAPPING AS WEL L AS LIDAR WHEREAS THE ASSESSEE WAS NOT INVOLVED IN ANY RESEAR CH AND DEVELOPMENT ACTIVITY. THE LD. AR ALSO SUBMITTED TH AT GENESYS OPERATED AS A FULL-FLEDGED RISK TAKING ENTREPRENEUR WHEREAS THE ASSESSEE WAS A LIMITED RISK PROVIDER AS IT RENDERED SERVICES TO THE CUSTOMERS OF THE EXL GROUP ONLY AND IS ASSURED OF A SPECIFIED ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 10 RETURN ON ITS COSTS. THE LD. AR ALSO SUBMITTED THA T GENESYS HAD A SUPER NORMAL GROWTH OF 77% IN TERMS OF TOTAL INCO ME BY SALES AND 107% IN TERMS OF NET PROFIT WITH RESPECT TO THE PRECEDING ASSESSMENT YEAR WHICH WAS EVIDENT FROM THE ANNUAL R EPORT WHEREAS THE ASSESSEE HAD ONLY A NORMAL YEAR OF OPER ATION. IT WAS FURTHER SUBMITTED THAT GENESYS HAD SIGNIFICANT INTA NGIBLES IN THE FORM OF COMPUTER SOFTWARE AND GIS DATA BASE WHICH W AS EVIDENT FROM THE ANNUAL REPORT WHEREAS THE ASSESSEE DID NOT OWN ANY SIGNIFICANT INTANGIBLES AND PLACED LEVERAGE ONLY ON THE VALUABLE INTELLECTUAL PROPERTY RIGHTS OWNED BY THE HOLDING C OMPANY. IT WAS ALSO SUBMITTED THAT GENESYS STAFF CONSISTED OF SPECIALIZED PERSONNEL INCLUDING ROCKET SCIENTISTS WHEREAS THE A SSESSEE DID NOT HAVE SPECIALIZED SKILL TASK FORCE. THE LD. AR ALSO SUBMITTED THAT THIS COMPANY WAS NOT INCLUDED AS A COMPARABLE IN THE SUBSEQUENT ASSESSMENT YEAR 2010-11. IT WAS SUBMITT ED THAT THIS COMPARABLE HAD BEEN RIGHTLY EXCLUDED BY THE LD. DRP . 5. COMING TO THE ASSESSEES C.O. CHALLENGING THE UP HOLDING OF DISALLOWANCE U/S 14A OF THE ACT, IT WAS SUBMITTED T HAT DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE HAD EARNED D IVIDEND INCOME OF RS. 32,61,15,948/- FROM INVESTMENTS HELD IN THE MUTUAL FUNDS AND SUBSIDIARY AND THE SAME HAD BEEN C LAIMED AS ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 11 EXEMPT U/S 10(35)/10(34) OF THE ACT. IT WAS FURTHE R SUBMITTED THAT THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE IN RELATION TO THE EARNING OF THIS EXEMPT INCOME. IT WAS FURTHER SUBMITTED THAT INVESTMENT MADE IN MUTUAL FUNDS LIKE ICICI PRUDENTI AL INSTITUTIONAL LIQUID PLAN AND BIRLA SUNLIFE CASH PL US INSTITUTIONAL PLAN HANDED OUT DIVIDENDS ON A DAILY BASIS AND SINC E THESE WERE DIVIDEND PLANS, THE AMOUNT OF DIVIDEND WAS AUTOMATI CALLY REINVESTED IN THE SAME MUTUAL FUNDS AND HENCE NO EX PENSE CAN BE SAID TO HAVE BEEN INCURRED FOR EARNING DIVIDEND INCOME. IT WAS ALSO SUBMITTED THAT THE PROVISION OF SECTION 14 A READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 WAS ARBITRARI LY INVOKED AS THE PROVISION REQUIRES INCURRENCE OF EXPENDITURE HA VING A PROXIMATE NEXUS WITH THE INCOME EARNED AND NOT SOME NOTIONAL EXPENDITURE FOR THE PURPOSE OF DISALLOWANCE. IT WA S ALSO SUBMITTED THAT THE DISALLOWANCE MADE U/S 14A HAD BE EN MADE IN A MECHANICAL MANNER BY APPLYING THE FORMULA WITHOUT BRINGING OUT ANY ACTUAL INCURRENCE OF EXPENDITURE. IT WAS F URTHER SUBMITTED THAT THE ASSESSEE HAD INCURRED AN EXPENDI TURE OF RS. 1,049,687/- BY WAY OF INTEREST ON LOAN TAKEN FROM M /S ORIX AUTO INFRASTRUCTURE SERVICES LIMITED WHICH WAS SPECIFICA LLY TAKEN FOR THE PURPOSE OF FINANCING THE VEHICLES AND, THEREFOR E, THE ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 12 DISALLOWANCE WITH RESPECT TO THIS INTEREST UNDER RU LE 8D(2)(II) COULD NOT BE INVOKED. IT WAS ALSO SUBMITTED THAT T HE LONG TERM INVESTMENTS OF THE ASSESSEE WERE IN THE WHOLLY OWNE D SUBSIDIARIES WHICH WERE OLD INVESTMENTS EXISTING FR OM EARLIER YEARS AND, THEREFORE, DISALLOWANCE COULD NOT BE MAD E IN RESPECT OF THESE INVESTMENTS ALSO. IT WAS ALSO SUBMITTED T HAT THE LD. DRP HAD DELETED A SIMILAR DISALLOWANCE IN ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2006-07 AND 2007-08 AND THE ISS UE HAD BEEN RESTORED TO THE FILE OF THE TPO/ASSESSING OFFI CER FOR FRESH ADJUDICATION BY THE ITAT IN ASSESSMENT YEAR 2010-11 . 5.1 IT WAS ALSO SUBMITTED THAT DEDUCTION U/S 10A/10 B OF THE ACT SHOULD BE ALLOWED ON RECOMPUTED PROFITS AND GAI NS FROM BUSINESS AND PROFESSION IF DISALLOWANCE U/S 14A IS UPHELD. 5.2 THE LD. AR ALSO SUBMITTED THAT IN THE FINAL ASS ESSMENT ORDER, THE ASSESSING OFFICER, WHILE COMPUTING BOOK PROFITS U/S 115JB OF THE ACT, HAD MADE AN ADJUSTMENT OF RS. 14, 34,861/- COMPUTED U/S 14A OF THE ACT WHICH WAS NOT LEGALLY T ENABLE. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF PR. CIT VS. BHUSHAN STEEL LTD. IN ITA NO. 593/2015 DATED 29.09.2015 WHEREIN THE HONBLE DELHI HIGH ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 13 COURT HAD HELD THAT DISALLOWANCE U/S 14A R/W RULE 8 D CANNOT BE ADDED WHILE COMPUTING BOOK PROFITS U/S 115JB OF THE ACT. 5.3 LD. AR ALSO SUBMITTED THAT IN CASE THE DEPARTME NTS GROUND CHALLENGING EXCLUSION OF GENESYS INTERNATIONAL CORP ORATION LTD. WAS DISMISSED, GROUND NOS. 1 TO 5 OF THE ASSESSEES C.O. WILL BECOME ACADEMIC IN NATURE AND NEED NOT BE ADJUDICAT ED UPON. 6. IN RESPONSE, THE LD. CIT DR PLACED RELIANCE ON T HE FINDINGS OF THE TPO AND THE DIRECTIONS OF THE LD. DRP WITH R ESPECT TO DISALLOWANCE U/S 14A OF ACT. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE ALS O PERUSED THE MATERIAL ON RECORD. AS FAR AS THE DEPARTMENTS APPEAL CHALLENGING THE EXCLUSION OF GENESYS INTERNATIONAL CORPORATION LTD. IS CONCERNED, WE HAVE PERUSED THE ANNUAL REPOR T OF GENESYS INTERNATIONAL CORPORATION LTD. (GENESYS) AND WE NOT E THAT THIS COMPANY IS ENGAGED IN DIVERSIFIED OPERATIONS PROVID ING HIGH-END AND COMPLEX SERVICES SUCH AS GIS CONSULTING, 3D MAP PING, NAVIGATION MAPS, LIDAR, PHOTOGRAMMETRY, REMOTE SENS ORING SERVICES, IMAGE PROCESSING, UTILITY SERVICES, BUSIN ESS GEOGRAPHICS AND LOGISTICS, SURVEYING ETC. THE ASSESSEE, ON THE OTHER HAND, IS ONLY ENGAGED IN PROVIDING BACK OFFICE IT ENABLED SE RVICES TO ITS AE AND IS ALSO ENGAGED IN RENDERING TRANSACTION PROCES SING SERVICES, ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 14 INTERNET, CONSULTING AND VOICE BASED CUSTOMER CARE SERVICES AND, THEREFORE, ON FUNCTIONAL DISSIMILARITY ITSELF, GEN ESYS CANNOT BE CANNOT BE TAKEN AS A COMPARABLE TO THE ASSESSEE COM PANY. 7.1 WE ALSO NOTE THAT GENESYS IS ENGAGED IN DOING P IONEERING RESEARCH IN THE AREA OF IMAGE INTELLIGENCE AND RECO GNITION, MOBILE MAPPING AS WELL AS LIDAR WHEREAS THE ASSESSEE IS NO T INVOLVED IN ANY RESEARCH AND DEVELOPMENT ACTIVITY AND, THEREFOR E, THIS COMPANY CANNOT BE CONSIDERED A COMPARABLE ON THIS A CCOUNT ALSO. 7.2 WE FURTHER NOTE THAT GENESYS OPERATES AS A FULL -FLEDGED RISK TAKING ENTREPRENEUR WHEREAS THE ASSESSEE IS A LIMIT ED RISK PROVIDER AS IT RENDERS SERVICES TO THE CUSTOMERS OF THE EXL GROUP ONLY AND IS ASSURED OF A SPECIFIED RETURN ON ITS CO STS. THE COMPARABILITY FAILS ON THIS COUNT ALSO. FURTHER, FR OM THE ANNUAL REPORT, IT IS ALSO SEEN THAT GENESYS HAS SIGNIFICAN T INTANGIBLES IN THE FORM OF COMPUTER SOFTWARE AND GIS DATA BASE WHE REAS THE ASSESSEE DOES NOT OWN ANY SIGNIFICANT INTANGIBLES A ND BANKS ONLY ON THE VALUABLE INTELLECTUAL PROPERTY RIGHTS OWNED BY THE HOLDING COMPANY. THEREFORE, THE COMPARABILITY CANNOT BE MA DE FOR THIS REASON ALSO. WE ALSO NOTE THAT THIS COMPANY WAS NOT INCLUDED AS A COMPARABLE IN THE SUBSEQUENT ASSESSMENT YEAR 2010 -11. ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 15 7.3 THEREFORE, IN VIEW OF OUR ABOVE OBSERVATIONS WE FIND NO REASON TO INTERFERE WITH THE DIRECTIONS OF THE LD. DRP IN DIRECTING EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COM PARABLES AND WE UPHOLD THE SAME. 8. IN THE RESULT, THE APPEAL OF THE DEPARTMENT STAN DS DISMISSED. 9. AS FAR AS THE CO OF THE ASSESSEE IS CONCERNED, S INCE WE HAVE ALREADY UPHELD THE EXCLUSION OF GENESYS INTERNATION AL CORPORATION LTD., IN VIEW OF THE SUBMISSIONS MADE B Y THE LD. AR, GROUND NOS. 1 TO 5 OF THE CO BECOME ACADEMIC IN NAT URE AND, THEREFORE, THEY ARE NOT BEING ADJUDICATED UPON. 9.1 GROUND NOS. 6, 7 AND 8 CHALLENGE THE DISALLOWAN CE U/S 14A OF THE ACT AND ALSO THE ADDITION OF DISALLOWANCE U/ S 14A WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT. IN THE APPEAL BEFORE US IT IS NOT CLEAR AS TO WHETHER THE AO HAS CONSIDERED ONLY THE INVESTMENT WHICH YIELDED THE EXEMPT INCOME OR T HE ENTIRE INVESTMENT MADE BY THE ASSESSEE WHILE COMPUTING THE DISALLOWANCE. IT HAS ALSO BEEN SUBMITTED THAT THE ASSESSEE HAD INCURRED AN EXPENDITURE OF RS. 1,049,687/- BY WAY O F INTEREST ON LOAN TAKEN FROM M/S ORIX AUTO INFRASTRUCTURE SERVIC ES LIMITED WHICH WAS SPECIFICALLY TAKEN FOR THE PURPOSE OF FIN ANCING THE ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 16 VEHICLES AND, THEREFORE, THE DISALLOWANCE WITH RESP ECT TO THIS INTEREST UNDER RULE 8D(2)(II) COULD NOT BE INVOKED. WE FIND THAT THIS ASPECT HAS NOT BEEN CONSIDERED BY THE AO. IT I S ALSO NOT CLEAR AS TO WHETHER THE INVESTMENT IN SHARES OF THE SUBSI DIARY COMPANY WAS OUT OF COMMERCIAL EXPEDIENCY OR FOR SOM E OTHER REASON. THEREFORE, IN ABSENCE OF A CLEAR FINDING BY THE AO, IT IS OUR CONSIDERED OPINION THAT THIS ISSUE NEEDS TO BE ADJUDICATED AFRESH BY THE AO/TPO IN ACCORDANCE WITH LAW AFTER P ROVIDING DUE OPPORTUNITY TO THE ASSESSEE. IT IS DIRECTED SO ACCO RDINGLY. 9.2 AS FAR AS THE ASSESSEES GROUND RELATING TO THE ADDITION OF DISALLOWANCE U/S 14A TO THE BOOK PROFITS U/S 115JB IS CONCERNED, THIS ISSUE IS COVERED IN FAVOUR OF THE A SSESSEE BY THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF PR. CIT VS. BHUSHAN STEEL LTD. (SUPRA) WHEREIN IT WAS HELD THAT DISALLOWANCE U/S 14A R/W RULE 8D CANNOT BE ADDED WH ILE COMPUTING BOOK PROFITS U/S 115JB OF THE ACT. RESPE CTFULLY FOLLOWING THE SAME, WE DIRECT THE AO/TPO TO EXCLUDE THE AMOUNT OF DISALLOWANCE MADE U/S 14A WHILE COMPUTING THE BO OK PROFITS U/S 115JB OF THE ACT. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE STAND S PARTLY ALLOWED. ITA NO. 2559/D/2014 C.O. NO. 165/D/2014 17 11. IN THE FINAL RESULT, THE APPEAL OF THE DEPARTME NT IS DISMISSED AND THE ASSESSEES APPEAL IS PARTLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 18 TH JUNE, 2018. SD/- SD/- (R.K. PANDA ) (SUDHANSHU SRIVASTAVA ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 18 TH JUNE, 2018 GS COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER ASSISTANT REGISTRAR