AON Specialist Services Ptrivate Limited, Bangalore V. Asst. Commissioner of Income Tax, Bangalore

CO 32/BANG/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 4300 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 7 month(s) 9 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 20-02-2020
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: misc
• Appeal Filed On: 11-07-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Question of law; Wholly owned subsidiary; TDS
• Section: 143(3); 40(a)(ia); 194C; 195; 192; 40a(ia); 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI N.V VASUDEVAN, VICE - PRESIDENT AND SHRI B.R.BASKARAN, ACCOUNTANT MEMBER IT (TP) A NO. 4 40 /BANG/2016 (ASS ESSMENT YEAR : 2011 - 12) THE ASST. COMMISSIONER OF INCOME - TAX, CIRCLE - 1 (1)( 1 ), BENG ALURU - 560095. . APPELLANT VS. M/S AON SPECIALIST SERVICES PVT.LTD., 4 TH FLOOR, EXCHANGING TOWER, PLOT NO.13/14/15 SIR I PARK, EPIIP INDUSTRIAL AREA, WHITEFILED, BANGALORE - 560 0 66 . PAN NO. AA FCA9306H .. RESPONDENT C . O NO. 32 /BANG/20 16 (ASSESSMENT YEAR : 2011 - 12) (BY ASSESSEE) RE VENUE BY : SHRI .MUZAFFAR HUSSAIN, CIT (DR) ASSESSEE BY : MS. TANMAYEE RAJKUMAR, ADVOCATE DATE OF HEARING : 1 8 - 0 2 - 20 20 DATE OF PRONOUNCEMENT : 20 - 0 2 - 20 20 O R D E R PER SHRI N.V VASUDEVAN, VICE - PRESIDENT : THIS IS AN APPEAL BY THE R E VENUE AGAINST THE FINAL ORDER O F ASSESSMENT DATED 18 - 01 - 2 016 PASSED BY THE ACIT, CIRCLE - 1(1)(1), BANGALORE U /S 143(3) R.W.S 144C(13) OF THE INCOME TAX ACT, 1961 (ACT) RELATING TO ASSESSMENT YEAR 2011 - 12 . THE ASSESSEE HAS ALSO FILED A CROSS OBJECTION AGAINST THE VERY SAME ORDER OF ASSESSING OFFICER . WE SHALL FIRST TAKE UP FOR CONSIDERATION THE APPEAL B Y THE REVENUE. IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 2 3. THE A SSESSEE IS A WHOLLY OWNED SUBSIDIARY OF AON MAURITIUS HOLDINGS (AON MAURITIUS) WITH THE EXCEPTION OF ONE SHARE WHICH IS OWNED BY AON GROUP INTERNATIONAL B.V, THE NETHERLANDS. THE ASSESSEE IS ENGAGED IN PROVIDING INFORMATION TECHNOLOGY ENABLED ANALYTICAL, R ESEARCH AND SUPPORT SERVICES ('ITES') TO ITS ASSOCIATED ENTERPRISES ('AES') THROUGH A MASTER SERVICES AGREEMENT WITH AON SERVICES CORPORATION, USA ('AON SERVICE CORP.) FOR WHICH IT IS REMUNERATED ON A COST PLUS BASIS. 5. DURING THE RELEVANT PREVIOUS YEAR, THE INTERNATIONAL TRANSACTION THAT TOOK PLACE BETWEEN THE ASSESSEE AND ITS AES WAS THE PROVISION OF IT ES TO THEM AT A PRICE OF RS. 44,92,78,673/ - , FOR WHICH A TP ADJUSTMENT OF RS. 2,60,45,974/ - WAS MADE BY THE TPO IN THE TRANSFER PRICING ORDER DATED 14.01. 2015('TP ORDER'). INITIALLY, A DRAFT ASSESSMENT ORDER DATED 27.03.2015 WAS PASSED BY THE AO IN WHICH THE AFORESAID TP ADJUSTMENT MADE BY THE TPO WAS INCORPORATED. FURTHER, IN THE SAID DRAFT ASSESSMENT ORDER. THE AO MADE A DISALLOWANCE UNDER S ECTION 40A(I) OF THE ACT OF RS. 73,45,331/ - BEING THE AMOUNT REIMBURSED BY THE ASSESSEE TO ITS AES, ON THE GROUND THAT THE ASSESSEE HAD FAILED TO DEDUCT APPLICABLE TAXES AT SOURCE ON THE SAME. FURTHER, THE ELIGIBLE DEDUCTION UNDER SECTION 10A OF THE ACT , WAS RECOMPUTED BY THE AO BY REDUCING AN AMOUNT OF RS. 1,15,02,332/ - BEING EXPENSES INCURRED IN FOREIGN CURRENCY FOR COM MUNICATION AND AN AMOUNT OF RS. 1,03.03,615/ - BEING EXPENSES INCURRED IN FOREIGN CURRENCY FOR TRAVEL FOR DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA, ONL Y FROM THE EXPORT TURNOVER AND NOT FROM THE TOTAL TURNOVER. AGGRIEVED, THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP WHICH, VIDE ITS DIRECTIONS DATED 28.12.2015, PARTLY ALLOWED THE OBJECTIONS RAISED BY THE ASSESSEE BY DIRECTING THE DELETION OF DISALLOW ANCE MADE UNDER SECTION 40(A)(I) OF THE ACT, RECOMPUTATION DEDUCTION UNDER SECTION 10A OF THE ACT BY REDUCING THE EXPENSES FROM BOTH EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER AND DIRECTING THE AO/TPO TO REWORK THE TP ADJUSTMENT UPON REJECTING CERTAIN IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 3 C OMPARABLES. PURSUANT TO THE DIRECTIONS OF THE DRP. THE AO PASSED THE FINAL ASSESSMENT ORDER DATED 18.01.2016 ('FINAL ASSESSMENT ORDER') IN WHICH THE TP ADJUSTMENT WAS REWORKED TO 'NIL' UPON GIVING EFFECT TO THE DIRECTIONS OF THE DRP, AND THE DISALLOWANCE MADE UNDER SECTION 40(A)(I) OF THE ACT STOOD DELETED. THE ELIGIBLE DEDUCTION UNDER SECTION 10A OF THE ACT WAS RECOMPUTED UPON REDUCING THE EXPENSES INCURRED IN FOREIGN CURRENCY FROM THE EXPORT AS WELL AS THE TOTAL TURNOVER. 6. TO THE EXTENT THE DRP GRANTE D RELIEF TO THE ASSESSEE, THE REVENUE HAS FILED THE ABOVE APPEAL BEFORE THIS HON'BLE TRIBUNAL AND TO THE EXTENT THE ORDER OF THE DRP IS UNFAVOURABLE, THE ASSESSEE HAS FILED CROSS - OBJECTIONS TO THE REVENUE'S APPEAL, BEFORE THIS HON'BLE TRIBUNAL. 7. GROUNDS 1 TO 4 RAISED BY THE REVENUE ARE IN RELATION TO DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF AN INTERNATIONAL TRANSACTION FOR RENDERING INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE (AE). DETAILS O F INTERNATIONAL TRANSACTIONS IN DISPUTE : PARTICULARS AMOUNT IN RS. PROVISION OF ITES 44,92,78,673/ - NET MARGIN ON COST EARNED BY THE ASSESSEE AS COMPUTED BY THE TPO IN THE TP ORDER: OPERATING INCOME RS.44,92,78,673/ - OPERATING COST RS.38 ,45,04,649/ - OPERATING PROFIT (OP. INCOME OP. COST) RS.6,47,74,024/ - OPERATING/NET MARGIN (OP/OC) 16.84% THERE IS NO DISPUTE THAT THE TRANSACTION NET MARGIN METHOD (TNMM) WAS THE MOST APPROPRIATE METHOD (MAM) FOR DETERMINATION OF ALP AND THE PROFIT LEVEL INDICATOR (PLI) CHOSEN FOR THE COMPARISON OF ASSESSEES PROFIT MARGIN WITH THAT OF THE COMPARABLE COMPANIES WAS OPERATING PROFIT ON OPERTING COST (OP/OC). IN ITS IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 4 TRANSFER PRICING (TP) STUDY, THE ASSESSEE HAD CHOSEN 14 COMPARABLE COMPANIES AND THE AVE RAGE ARITHMETIC MEAN PROFIT MARGIN OF THOSE COMPANIES WAS 14.96%. SINCE THE ASSESSEES PROFIT MARGIN WAS MORE THAN THAT OF THE AVERAGE PROFIT MARGIN OF COMPARABLE COMPANIES, THE ASSESSEE CLAIMED THAT THE PRICE RECEIVED IN THE INTERNATIONAL TRANSACTION SHO ULD BE ACCEPTED AS AT ARMS LENGTH. 8. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE QUESTION OF DETERMINATION WAS REFERRED TO BY THE AO, ACCEPTED ONLY 5 VIZ., ACCENTIA TECHNOLOGIES LTD., COSMIC GLOBAL LTD., ICRA ONLINE LTD., INFOSYS BPO LTD. AND JEEVA N SOFTECH LTD. OUT OF THE 14 COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE AND REJECTED THE OTHER 09. IN CHOOSING THE ABOVE COMPARABLE COMPARABLE COMPANIES, THE TPO APPLIED THE FOLLOWING FILTERS : STEP DESCRIPTION 1 COMPANIES WHOSE DATA FOR FY 2010 - 11 IS N OT AVAILABLE EXCLUDED 2 COMPANIES WHOSE ITES REVENUE < RS.1 CR EXCLUDED 3 COMPANIES WHOSE ITES AND RELATED SERVICES REVENUE IS < 75% OF THE TOTAL OPERATING REVENUES EXCLUDED 4 COMPANIES WHICH HAVE MORE THAN 25% RELATED PARTY TRANSACTIONS OF THE SA LES EXCLUDED 5 COMPANIES WHICH HAVE LESS THAN 25% OF THE REVENUES AS EXPORT SALES EXCLUDED 7 COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING EXCLUDED 8 COMPANIES WHICH HAVE PERSISTENT LOSSES FOR PREVIOUS 3 YEARS UPTO THE PERIOD UNDER CONSIDERATIO N EXCLUDED 9 COMPANIES HAVING PECULIAR ECONOMIC CIRCUMSTANCES EXCLUDED 10 COMPANIES THAT ARE FUNCTIONALLY DIFFERENT EXCLUDED 9. THE COMPARABLES SELECTED BY TPO AND THE ARITHMETIC MEAN PROFIT MARGIN OF THOSE COMPARABLE COMPANIES WAS AS FOLLOWS : SI. NO. NAME OF THE COMPANY MARK - UP ON TOTAL COSTS (WC UNADJ) (IN %) MARK - UP ON TOTAL COSTS (WC ADJ) (IN ` ) /0) 1 ACCENTIA TECHNOLOGIES LTD. 28.89 25.94 2 ACROPETAL TECHNOLOGIES 26.86 22.59 3 COSMIC GLOBAL LTD. . 9.81 10.18 IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 5 4 E4E HEALTHCARE 12.38 13.64 5 ICRA ONLINE LTD. (SEG.) 34.21 32.78 6 JEEVAN SCIENTIFIC TECHNOLOGY LTD. 70.66 71.14 7 INFOSYS BPO LTD. 17.89 15.72 8 JINDAL INTELLICOM .11.13 11.37 9 MINDTREE LTD. (SEG.) 10.76 8.59 10 IGATE GLOBAL SOLUTIONS LTD. 25.07 24.26 AVERAGE MARGIN 24.77 23.62 10. THE TPO COMPUT ED ARM'S LENGTH PRICE AND ADDITION TO THE TOTAL INCOME CONSEQUENT TO THE DETERMINATION OF ALP AS FOLLOWS: ARM'S LENGTH MEAN MARGIN 24.77% LESS: WORKING CAPITAL ADJUSTMENT 1.15% ADJUSTED MEAN MARGIN OF THE COMPARABLES 23.6 2% OPERATING COST (`OC') RS. 38,45,04,649/ - ARM'S LENGTH PRICE (ALP') = 123.62% OF OC RS. 47,53,24,647/ - PRICE RECEIVED RS. 44,92,78,673/ - SHORT FALL BEING ADJUSTMENT U/S. 92CA RS. 2,60,45,9741 - 11. AGGRIEVED BY THE DRAFT ORDER OF THE ASSESSMEN T IN WHICH THE ADDITION SUGGESTED BY THE TPO WAS INCORPORATED BY THE AO, THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE DISPUTES RESOLUTION PANEL (DRP). ON OBJECTIONS BY THE ASSESSEE, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE THAT FOLLOWING COMPANIES WERE NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND DIRECTED THEIR EXCLUSION: A. ACROPETAL TECHNOLOGIES, B. JEEVAN SCIENTIFIC TECHNOLOGY LTD. C.. MINDTREE LTD. (SEG.) D. IGATE GLOBAL SOLUTIONS LTD. THE DRP SUO MOTO DIRECTED THE EXC LUSION OF COSMIC GLOBAL LTD. AND E4E HEALTHCARE ALTHOUGH THE ASSESSEE HAD ONLY PRAYED FOR THE MARGINS COMPUTATIONS OF THE COMPANIES TO BE RECTIFIED. IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 6 12. ON GIVING EFFECT TO THE DIRECTIONS ISSUED BY THE DRP, THE TP ADJUSTMENT STOOD AT 'NIL'. THE COMPARABL ES THAT REMAINED UPON GIVING EFFECT TO THE DRP'S DIRECTIONS WERE AS FOLLOWS: SL NO. NO. NAME OF THE COMPANY 1 ACCENTIA TECHNOLOGIES LTD. 2 ICRA ONLINE LTD. (SEG.) 3 INFOSYS BPO LTD. 4 JINDAL INTELLICOM THE GROUNDS OF APPEAL IN THE REVENUE'S APPE AL ARE: (I) THAT THE DRP ERRED IN DIRECTING THE EXCLUSION OF ACROPETAL TECHNOLOGIES LTD. ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT (GROUND NO. 2) (II) THAT THE DRP ERRED IN DIRECTING THE EXCLUSION OF JEEVAN SCIENTIFIC TECHNOLOGIES LTD. ON THE GROUND THAT IT F AILED THE SERVICE INCOME FILTER OF GREATER THAN 75% OF TOTAL REVENUE . (GROUND NO. 3) (III) THAT THE DRP ERRED IN DIRECTING THE EXCLUSION OF IGATE GLOBAL SOLUTIONS LTD. ON THE GROUND THAT ITS SEGMENTAL RESULTS WERE NOT AVAILABLE (GROUND NO. 4) 13. AS FAR AS GROUND NO. 2 IN THE REVENUE'S APPEAL REGARDING EXCLUSION OF ACROPETAL TECHNOLOGIES LTD . (`ACROPETAL - ) BY THE DRP IS CONCERNED, THE LEARNED DR REITERATED THE STAND OF THE REVENUE AS REFLECTED IN THE ORDER OF THE TPO AND IN THE GROUNDS OF APPEAL WHICH IS TO THE EFFECT THAT THERE CANNOT BE ANY DIFFERENCE BETWEEN KNOWLEDGE PROCESS OUTSOURCING (KPO) AND BUSINESS PROCESS OUTSOURCING (BPO). THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THIS HON'BLE TRIBUNAL IN SWISS RE SHARED SERVICES (INDIA) PVT. LTD. V. ACTT (ORDER DATED 08.07.2016 IN IT(TP)A NO. 380/BANG/2016) AND E4E BUSINESS SOLUTIONS IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 7 INDIA P. LTD V. DCIT [ORDER DATED 13.01.2017 IN IT(TP)A NO.1397/BANG/2016] WHERE, IN THE CASE OF ASSESSEES SIMILAR TO THE ASSESSEE HEREIN FOR THE SA ME ASSESSMENT YEAR, THE COMPANY WAS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT AS PER THE ANNUAL REPORT OF THE COMPANY FOR THE YEAR ENDING 31 ST MARCH 2010, THE COMPANY IS ENGAGED IN P ROVISION OF A VARIETY OF IT ENABLED SERVICES COMPRISING OF ENTERPRISE SOLUTIONS, IT INFRASTRUCTURE MANAGEMENT SERVICES, CLOUD SERVICES, GREENHOUSE GAS MANAGEMENT, UNLIKE THE ASSESSEE WHO IS A PROVIDER OF ROUTINE IT ENABLED SERVICES. FURTHER, THE COMPANY IS ENGAGED IN PROVISION OF ENGINEERING DESIGN SERVICES WHICH ARE IN THE NATURE OF HIGH END IT ENABLED SERVICES WHICH ARE IN THE NATURE OF KNOWLEDGE PROCESS OUTSOURCING ('KPO'), WHICH IS NOT COMPARABLE TO THE ASSESSEE'S ITES. IN THIS REGARD WE FIND SUBMISSIO NS WERE MADE BEFORE THE TPO COPY OF WHICH IS AT PAGE NOS. 234 - 238 OF THE PAPER BOOK AND BEFORE THE DRP COPY OF WHICH ARE AT PAGES 123 - 128 OF THE PAPER BOOK. IN THE DECISION RENDERED IN THE CASE OF SWISS RESHARED SERVICES (I) PVT.LTD. (SUPRA) VIDE PARAGRAPH 23 & 24 OF THE ORDER HELD THAT ACROPETAL TECHNOLOGIES LTD., WAS RENDERING HIGH END SERVICES IN THE ENGINEERING DESIGN SERVICES WHICH CANNOT BE COMPARED TO THE LOW END BPO SERVICES RENDERED BY ACROPETAL TECHNOLOGIES LTD., AND THEREFORE THIS COMPANY WAS NOT COMPARABLE TO THE ASSESSEE AND THE DRP'S FINDINGS ON EXCLUSION OF ACROPETAL IS THEREFORE UPHELD. 15. AS FAR AS EXCLUSION OF THE COMPARABLE COMPANY JEEVAN SCIENTIFIC TECHNOLOGIES LTD. ('JEEVAN') IS C ONCERNED, WE FIND THAT TH IS COMPANY WAS EXCLUDED BY THE DRP FOR THE REASONS THAT (A) THE ERP SEGMENT OF THE COMPANY IS NOT COMPARABLE TO THE ASSESSEE, (B) THE BPO SEGMENT OF THE COMPANY, ALTHOUGH IS COMPARABLE TO THE ASSESSEE FUNCTIONALLY, FAILS THE FILTER OF SERVICE INCOME BEING GREATER THAN 75% OF TOTAL IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 8 REVE NUE, AND (C) THE COMPANY SUFFERS FROM HUGE FLUCTUATIONS WHICH INDICATE THAT CERTAIN PECULIAR CIRCUMSTANCES INFLUENCING THE PROFIT MARGIN OF THE COMPANY EXIST, FOR WHICH APPROPRIATE ADJUSTMENTS CANNOT BE MADE TO BALANCE THE EFFECT. THE REVENUE IS IN APPEAL BEFORE THIS TRIBUNAL ONLY INSOFAR AS (B) ABOVE IS CONCERNED, WHICH IS THE REJECTION OF THE COMPANY ON FAILURE TO SATISFY THE SERVICE INCOME FILTER, AND THEREFORE, THE OTHER GROUNDS ON WHICH THE DRP EXCLUDED THE COMPANY HAVE ATTAINED FINALITY. WE FURTHER FI ND THAT THE TOTAL REVENUE OF THIS COMPANY FROM 5 DIFFERENT SEGMENTS OF THE ASSESSEE WAS RS.246.75 LAKHS AND THE SEGMENTAL REVENUE FROM BPO SEGMENT WAS LESS THAN RS.1 CRORE. THE TPO CONSIDERED THE ERP SERVICE AS ALSO BPO SERVICE WHICH IS INCORRECT SINCE ER P IMPLEMENTATION SERVICES ARE NOT IN THE NATURE OF IT ENABLED SERVICES WHICH WERE NOTIFIED BY CBDT VIDE NOTIFICATION NO. SO 890(E) DATED 26.09.2000. IF THE SERVICE INCOME FROM THE BPO SEGMENT ALONE IS CONSIDERED, THE COMPONENT OF SERVICE INCOME TO THE TOTA L REVENUE OF THIS COMPANY IS LESS THAN 75% OF TOTAL OPERATING REVENUE. IN ANY EVENT IF THE TURNOVER OF BP O SEGMENT IS CONSIDERED IT IS LESS THAN RS.1 CRORE AND THIS COMPANY FAILS TO SATISFY THE TPO'S OWN FILTER OF SERVICE REVENUE FROM THE RELEVANT SEGMENT HAVING TO BE IN EXCESS OF RS. 1 CRORE AS THE REVENUE FROM THE BP0 SEGMENT OF THE SAID COMPANY IS RS. 79 LAKHS ONLY. THE COMPANY IS THEREFORE NOT COMPARABLE TO THE ASSESSEE AND THE DRP'S FINDINGS ON EXCLUSION OF JEEVAN ARE RIGHT IN LAW AND OUGHT NOT TO BE I NTERFERED WITH. IN THIS REGARD WE FIND THAT THIS HON'BLE TRIBUNAL IN SWISS RE SHARED SERVICES (INDIA) PVT. LTD. V. ACIT (ORDER DATED 08.07.2016 IN IT(TP)A NO. 380/BANG/2016) DIRECTED THE TPO TO VERIFY AS TO WHETHER THE TPO'S FILTER OF SALES > 1 CRORE IS S ATISFIED BY THIS COMPANY. IN THE PRESENT CASE, THE DRP HAS EXAMINED THE SA ME AND HAS GIVEN A FINDING THAT THE FILTER OF SALES > RS. 1 CRORE IS NOT SATISFIED. THEREFORE THE EXCLUSION OF THIS COMPANY AS A COMPARABLE COMPANY BY THE DRP DOES NOT REQUIRE ANY I NTERFERENCE. 16. AS FAR AS EXCLUSION OF IGATE GLOBAL SOLUTIONS LTD. ('IGATE') IS CO NCERNED, THE FINDING OF THE DRP IS T HAT I - GATE IS ENGAGED IN PROVISION IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 9 OF VARIED SERVICES AND NO SEGMENTAL BREAKUP OF THE SAME IS AVAILABLE IN ITS ANNUAL REPORT. FURTHER. THE COMPANY'S' SOFTWARE SERVICES SEGMENT IS CLUBBED WITH ITS ITES SEGMENT AND THERE IS NO BREAKUP BETWEEN THE REVENUES GENERATED FROM THE TWO SEGMENTS. DURING THE YEAR UNDER CONSIDERATION, TH IS COMPANY HA D ACQUIRED MAJORITY EQUITY INTEREST IN PATNI COMPUT ER SYSTEMS LTD. RENDERING IT INCOMPARABLE DUE TO IT FAILING THE TPO'S OWN FILTER OF HAVING PECULIAR ECONOMIC CIRCUMSTANCES. IN ADDITION, THE COMPANY OWNS SIGNIFICANT INTANGIBLES IN ITS NAME, WHICH IS EVIDENT FROM THE BALANCE SHEET OF THE COMPANY FOR THE FI NANCIAL YEAR 2010 - 11 WHICH IS AVAILABLE AT PAGE NO. 276 OF THE PAPER BOOK. WE ARE OF THE VIEW THAT THE ABOVE REASONS GIVEN BY THE DRP FOR EXCLUDING THIS COMPANY AS A COMPARABLE COMPANY IS RIGHT AND DOES NOT CALL FOR ANY INTERFERENCE. 17. THE CROSS OBJE CTION OF THE A SSESSEE IS IN RELATION TO THE DETERMINATION OF ALP IN RESPECT OF THE TRANSACTION OF ITES. SINCE THE ORDER OF DRP HAS BEEN CONFIRMED BY US ON EXCLUSION OF COMPARABLES WHICH WAS DISPUTED IN THE APPEAL BY THE REVENUE, THE PRICE CHARGED BY THE A SSESSEE IN THE INTERNATIONAL TRANSACTION WOULD BE AT ARMS LENGTH AND THEREFORE, GROUND NO.1 TO 12 RAISED BY THE ASSESSEE IN THE CROSS O BJECTION DOES NOT REQUIRE ANY CONSIDERATION AND ARE DISMISSED , AS IT DOES NOT CALL FOR ANY ADJUDICATION. 18. GROUND NO .5 & 6 RAISED BY THE REVENUE CHALLENGES THE ACTION OF THE DRP IN EXCLUDING COMMUNICATION EXPENSES AND EXPENSES INCURRED IN FOREIGN CURRENCY BOTH FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT. AS REGARD S THE DEDUC TION CLAIMED BY THE ASSESSEE U/S 10 A OF THE ACT THE AO RECOM P UTED THE SAME IN THE DRAFT ASSESSMENT ORDER BY REDUCING COMMUNICATION EXPENSES OF RS.1,15,02,332/ - AND EXPENSES INCURRED IN FOREIGN CURRENCY OF RS.1,03,03,615/ - ONLY FROM ITS EXPORT T URNOVER WITHOUT MAKING A CORRESPONDING REDUCTION IN ITS TOTAL TURNOVER. IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 10 THE ASSESSEES SUBMISSION BEFORE THE DRP WAS THAT THE COMMUNICATION EXPENSES WERE NOT ATTRIBUTABLE TO THE DELIVERY OF SOFTWARE OUTSIDE INDIAN AND THAT THE FOREIGN CURRENCY EXPENSES WE RE NOT INCURRED FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THEREFORE, IT WAS CONTENDED THAT THE EXPENSES OUGHT NOT TO HAVE BEEN REDUCED FROM ITS EXPORT TURNOVER IN THE FIRST PLACE. IN THE ALTERNATIVE, IT WAS CONTENDED THAT IF THE SAME WAS TO BE REDU CED FROM THE EXPORT TURNOVER, THEN THE EXPENSES SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER. THE DRP ACCEPTED THE ASSESSEES ALTERNATE CONTENTION AND HELD THAT THE EXPENSES OUGHT TO BE REDUCED FROM ITS EXPORT AND TOTAL TURNOVER BY FOLLOWING THE JUDGMENT OF THE HONBLE HIGH COURT OF KARNATAKA IN CIT VS TATA ELXSI LTD. 349 ITR 98 (KARNATAKA). IN GROUND NO.5 & 6 IN ITS APPEAL, THE REVENUE IS CHALLENGING THE D R PS DIRECTIONS TO THE EXTENT IT DIRECTS THAT THE EXPENSES REFERRED TO ABOVE SHOULD BE EXCLUDED FRO M THE EXPORT TURNOVER AS WELL AS ITS TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION ALLOWABLE U/S 10 A . WE ARE OF THE VIEW THAT THE ORDER OF THE DRP DOES NOT CALL FOR ANY INTEREFERENCE AS IT IS IN ACCORDANCE WITH THE BINDING DECISION OF THE JURISDICTIONAL H IGH CO U RT IN CIT VS TATA ELXSI LTD., REPORTED IN (2012) 349 ITR 98 (KAR.) THEREFORE, GR.NO.5 & 6 RAISED BY THE REVENUE IS THEREFORE DISMISSED. IN VIEW OF THE ALTERNATIVE RELIEF ALLOWED AS ABOVE, WE ARE OF THE V I EW THAT GROUND NO.13 TO 15 RAIS E D BY THE ASSE SSEE IN ITS CR OSS OBJECTION IN WHICH THE ASSESSEE HAS PRAYED THAT THE SUMS EXCLUDED FROM EXPORT TURNOVER IN FACT OUGHT NOT TO HAVE BEEN SO EXCLUDED AS PER THE DEFINITION OF EXPORT TURNOVER AS DEFINED IN SEC.10A OF THE ACT, DO NOT REQUIRE AN Y ADJUDICATION A ND ARE ACCORDINGLY, DISMISSED. 19. THE ONLY OTHER GROUND S THAT REMAIN FOR ADJUDICATION IS GROU ND NO.7 TO 9 RAISED BY THE REVENUE IN ITS APPEAL WHICH READS AS FOLLOWS; 7. THE DRP ERRED IN GIVING RELIEF TO THE ASSESSEE W.R.T.DISALLOWANCE U/S 40(A)(I) BY PLACING RELIANCE ON THE DECISION OF ITAT IN THE ASSESSEES OWN CASE IN ITA NO.1640/BANG/2012 & CO NO.63(B)/2013 WITHOUT APPRECIATING THAT THE RELIED UPON CASE IS NOT ACCEPTED BY THE IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 11 DEPARTMENT AND AN APPEAL U/S 60A IS PENDING BEFORE THE HONBLE HIGH COURT OF KARNATAKA. 8. THE DRP ERRED IN GIVING RELIEF TO THE ASSESSEE FOR NON - DEDUCTION OF TDS U/S 1 95, WHICH WAS DISALLOWED U/S 40(A)(I) WITHOUT APPRECIATING THE FACT THAT THE ISSUE IS BROUGHT TO FINALITY BY THE HONBLE SUPREME COURT IN SLP ( CIVIL) NO.22295 O F 2014 DATED 10.10.2014, IN THE CAE OF M/S CENTRICA INDIA OFFSHORE (P)LTD., VS CIT - I, NEW DELHI, BY DISMISSING THE SLP FILED BY THE ASSESSEE, WHILE CONSIDERING THE SIMILAR ISSUES AS THAT OF THE ASSESSEE. 9. THE DRP ERRED IN GIVING RELIEF TO THE A SSESSEE W IT H OUT PROPERLY APPRECIATING THE NATURE AND CONTENT OF THE TRANSACTIONS WITH REFERENCE TO THE PROVISIONS OF SECTION 195 AND S ECTION 40A(I) OF THE ACT. 20. AS FAR AS THE A FO RESAID GROUNDS ARE CONCERNED, THE FACTS ARE THAT THE AO NOTICED THAT THE ASSE S SEE MADE PAYMENTS OF RS. 73,45,311/ - TO M/S AON L IMITED , UK, AS SALARY CRO SS CHARGED. THE AFORESAID SUM WAS SALARY PAID TO EMPLOYE ES OF AON LIMITED, UK IN THE FO RM OF STAFF WELFARE EXPENSES, COMMUN I CAT ION EXPENSES , TRAVELLING EXPENSES, LEGAL AND PROFESSION AL CHARGES AND OTHER MISCELLANEOUS EXPENSES. THE A SSESSEE SUBMITTED THAT THE SUM PAID WAS NOTHING BUT REIMBURSEMENT OF PAYMENTS MADE BY M/S AON LIMITED, UK. ACCORDING TO THE AO THE AFORESAID PAYMENTS WERE IN THE NATURE OF FEES FOR TECHNICAL SERVICES RE NDERED AND T HEREFORE, THE ASSESSEE OU GHT TO HAVE DEDUCTED TAX AT SOURCE ON THE A FORE SAID PAYMENT U/S 1 95 OF THE ACT . SINCE THE ASSESSEE DID NOT DEDUCT TAX A T SOURCE, THE AO WAS OF THE VIE W THAT THE AFORESAID PAYMENT HAD TO BE DISALLOWED AND THE PAYMENTS WHICH WAS CLAIMED AS DEDUCTION BY THE ASSESSEE IN COMPUTING INCOME FROM BUSINESS SHOULD BE DISALLOWED AND ADDED TO THE TOTAL INCOME U/S 40 ( A ) (I A ) OF THE ACT. IT WAS THE PLEA OF THE ASSESSEE THAT THE SUM IN QUESTION WAS NOT IN THE NATURE OF FEES FOR TECH NICAL SERVICES AND THE ASSESSEE HAD DEDUCTED TAX AT SOURCE ON THE SALARY COST U/S 192 OF THE ACT . THIS P L EA WAS REJECTED BY THE AO. THE DRP HOWE V ER, DELETED THE ADDITION MADE BY THE AO BY FOLLOWING THE DECISION OF THE HONBLE IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 12 ITAT IN ASSESSEES OWN CASE IN RESPECT OF SIMILAR PAYMENT IN ASSESSMENT YEAR 2008 - 09 IN ITA NO./1640(B)/2012 & CO NO.63(B)/2013. 21. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE HAS RAISED GROUND NO. 7 TO 9 BEFORE THE TRIBUNAL. AT THE TIME OF HEARING , IT WAS SUBMITTED BY THE LEAR NED C OUNSEL FOR THE ASSESSEE THAT PROVISION OF SEC.40(A)(I A ) OF THE ACT , CAN BE INVOKED ONLY WHEN THERE HAS BEEN NON - DEDUCTION OF TAX AT S OURCE. IT WAS SUBMITTED THAT IN THE PRESENT CASE, THERE WAS A DEDUCTION OF TAX A T SOURCE, BUT THE TAX DEDUCTION WAS A T LESSER RATE U/S 192 OF THE ACT, W H E REAS ACCORDING TO REVENUE THE TAX DEDUCTIBLE WAS AT A HIGHER RATE IN TERMS OF SEC.195 OF THE ACT . IT WAS THE PLEA OF THE ASSE S SEE THAT THERE WAS NO NON - DEDUCTION OF TAX AT SOURCE, BUT THERE WAS ONLY SHORT DEDUCTION O F TAX AT SOURCE A ND NO DISALLOWANCE U/S 40(A)(I A ) OF THE ACT CAN BE MADE FOR S HORT DEDUCTION OF TAX AT SOURCE. IN THIS REGARD LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS KISHOR E RAO & OTHERS(HUF) (2017) 79 TAXMANN.COM 357(KAR.) . THE AFORESAID DECISION OF THE HONBLE KARNATA KA HIGH COURT WAS PLACED WITH THE FOLLOWING QUESTION OF LAW ; WH ETHER, ON THE FACTS AND IN THE CIRCU M STANCES OF THE C A SE, THE TRIBUNAL IS RIGHT IN LAW IN HOL DING THAT DISALLOWANCE OF EXPENDITURE CLAIMED BY THE ASSESSEE TOWARDS PAYMENTS AMOUNTING TO RS.3,42,86,912/ - U/S 40(A)(IA) OF THE ACT IS NOT PROPER BY RELYING UPON THE DECISION WHICH IS NOT APPLICABLE TO FACTS OF THE PRESENT C A SE AND WHEN THE INGREDIENTS O F SC.194H AND 40(A)(IA) ARE SATISFIED IN THE INSTANT C A SE?. IN THE AFORESAID C ASE , T HE A S SE SSEE DEDUCTED T A X AT SOURCE AT 1% U/S 194C(2) OF THE ACT. IT WAS THE CASE OF THER EVENUE THAT THE PAYMENT IN QUESTION WAS N OT A PAYMENT FOR W ORK FALLING WITHIN T HE AMBIT OF SEC.194C(2) OF THE ACT BUT WAS IN THE NATURE OF RENT FALLING WITHIN THE AMBIT OF SEC.194 - I OF THE ACT WHICH CALLS FOR DEDUCTION OF TAX AT SOURCE AT THE RATE OF 10% OF PAYMENT AS AGAINST 1% IF THE DEDUCTION WERE T O BE MADE U/S 194C OF THE ACT. ON THE AFORESAID FACTS, THE TRIBUNAL FOLLOWING THE DECISION OF THE HONBLE CALCUTTA HIG H COURT IN THE CASE OF IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 13 CIT VS S.K.TEKRIWAL 361 ITR 432 (CAL.) TOOK THE VIEW THAT PROVISIONS OF SEC.40(A)(IA) OF THE ACT CANNOT BE INVOKED FOR S HORT DEDUCTION OF TAX AT SOURCE AND THAT THOSE PROVISIONS CAN BE INVOKED ONLY WHEN THERE IS NON - DEDUCTIO N OF TAX AT SOURCE. ON APPEAL BY THE REVENUE, T HE HONBLE KARNATAKA HIGH COURT HELD AS FOLLOWS; 6. IN OUR VIEW, AS PER THE DECISION OF THE CALCUTTA HIGH COURT, THE VIEW TAKEN BY THE TRIBUNAL IS THAT SECTION 40(A)(IA) OF THE ACT MAY BE INVOKED ONLY IN CASE OF THERE BEING AN ABSEN CE OF DEDUCTION. FURTHER, IN CASE OF BONAFIDE WRONG IMPRESSION, IF THE DEDUCTION IS AT A LESSER RATE, THE SAME CANNOT BE A GROUND FOR DISALLOWANCE BY I NVOKING THE PROVISIONS OF SECTION 40(A)(IA) 7. EXAMINING THE MATTER, WE FIND THAT THERE ARE TWO ANGLES TO THE MATTER: THE FIRST IS WHETHER IT WAS A CASE OF NO DEDUCTION OR NOT IN THE PRESENT CASE. THE ANSWER WOULD BE IN THE NEGATIVE BECAUSE, THE DEDUCTI ON WAS A LREADY MADE AT THE RATE OF 1%. THE SECOND ANGLE WOULD BE AS TO WHETHER IT WAS UNDER A BONA FIDE WRONG IMPRESSION THAT ONLY 1% WAS DEDUCTED INSTEAD OF 2%. THE CONTENTION OF THE ASSESSEE WAS THAT, HAVING REALIZED THAT DEDUCTION WAS 2% INSTEAD OF 1% THE AMOUNT OF TDS HAS BEEN PAID WITH INTEREST. IT IS ALSO A MATTER OF FACT THAT, TWO SEPARATE RATE OF DEDUCTIONS HAVE BEEN PROVIDED FOR THE SAME WORK OF CONTRACTOR , ONE IS AT THE RATE OF 1% IF THE CONTRACTOR IS INDIVI DUAL OR HUF, WHEREAS, IT IS 2% OF TH E CONTRACTOR IS OTHER THAN INDIVIDUAL OR HUF. THE TRIBUNAL, IN VIEW OF FACTS AND CIRCUMSTANCES, FOUND THAT, IT IS A BONAFIDE WRONG IMPRESSION. 8. AS SUCH, ON THE ASPECTS OF THE BONAFIDE WRONG IMPRESSION KEEPING IN VIEW THE CONTENTION OF THE ASSESSEE THA T IN THE MIDDLE OF YEAR, THERE IS CHANGE OF LAW ABOUT THE DEDUCTION, AS WELL AS ON THE NON - AVAILABILITY OF THE PROVISIONS OF SECTION 40(A)(IA), WHEN THE ISSUE IS COVERED BY THE CALCUTTA HIGH COURT JUDGMENT IN C ASE OF S.K.TEKRIWAL (SUPRA) WE DO NOT FIND ANY SUBSTANTIAL QUESTION OF LAW WOULD ARISE FOR CONSIDERATION AS SOUGHT TO BE CANVASSED. IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 14 22. THE LD. DR HOWEVER, PLACED RELIANCE ON THE ORDER OF AO AND MADE REFERENCE TO CASE LAWS FOR THE PR O POSITION THAT THE PAYMENT IN QUESTION WAS IN THE NATURE OF FEES F OR TECHNICAL SERVICES RENDERED, BUT COULD NOT ADDRESS SPECIFIC PLEA RAISED BY THE ASSESSEE BEFORE US. 23. IN THIS REGARD OUR ATTENTION WAS ALSO DRAW N TO OBJECTION NO.5 BY THE ASSESSEE BEFORE THE DRP IN FORM NO.35A OF THE ACT , IN WHICH THE FOLLOWING CO NTENTIONS WERE RAISED BY THE ASSES S EE. GROUND OF OBJECTION NO.5 THE LEARNED AO HAS ERRED IN LAW AND FACTS, IS DISALLOWING CROSS CHARGE OF SALARY OF INR 73,45,331/ - PAID BY YOUR APPLICANT TO AON SERVICES CORPORATION, USA U N DER SECTION 40(A)(I) OF THE ACT AND DISREGARDING THE FACT THAT THE SALARY COST REIMBURSED HAD ALREADY BEEN SUBJECTED TO APPLICABLE INDIAN INCOME TAX UNDER SECTION 192 OF THE ACT. 24. WE HAVE GIVEN A C AREFUL CONSIDERATION TO RIVAL SUBMISSIONS. IT IS NOT DISPUTED BY THE REVE N UE THAT IN RESPECT OF THE PAYMENTS MADE TO A ON SERVICES CORPORATION, USA TO W AR D S REIMBURSEMENT OF SALARY EXPENSES THE ASSESSEE HAS DULY DEDUCTED TAX AT SOUR C E U/S 192 OF THE ACT. IN FACT, IN THE LETTER DATED 02 - 03 - 2015 THE ASSESSEE HAS HIGHLIGHTED THIS ASPECT IN P ARA - 2 AT P A GE - 3 OF THE AFORESAID LETTER. THOUGH, THE ASSESSEE HAS NOT TAKEN A SPECIFIC PLEA THAT NO DISALLOWANC E U/S 40( A)(IA) OF THE ACT CAN BE MADE FOR SHORT DEDUCTION OF TAX AT SOURCE , Y ET THE FACT REMAINS THAT THE AFORESAID PLEA IS A LEGAL PLEA WHIC H CAN BE ADJUDICATED ON THE BASIS OF FACTS ALREADY AVAILABLE ON RECORD. AS FAR AS THE MERITS OF THE PLEA RAISED BY THE ASSESSEE IS CONCERNED, WE ARE OF THE VIEW , THAT DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF KISHOR E RAO & OTHERS (SUPRA ) CLEARLY SUPPORTS THE PLEA OF THE ASSESSEE. THE DECISION RENDERED IN CASE OF S.K.TEKRIWAL(SUPRA) BY THE HONBLE KARNATAKA HIGH COURT , TAKING A VIEW T HAT THER E CAN BE NO DIS A LLOWANCE OF EXPENSES U/S 40A(IA) OF THE ACT FOR SHORT DEDUCTION OF TAX AT SOURCE HAS BEEN FOLLOWED BY THE HONBLE KARNATAKA HIGH COURT. IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE C A SE, W E ARE OF THE VIEW THAT THE ORDER OF CIT(A) HAS TO BE UPHELD . THEREFORE, THE IT(TP)A NO. 4 40 /B/16 & C . O NO. 32 /B/1 6 15 QUESTION WHETHER THE PAYMENT IN QUESTION HAS TO BE REGARDED AS FEES FO R TECHNICAL SERVICES REN D ERED OR MERE REIMBURSEMENT O F EXPENSES DOES NOT CALL FOR ANY ADJUDICAT ION. ACCORDINGLY, GROUND NO.7 TO 9 RAISED BY THE REVE N UE ARE DISMISSED. 25. IN THE RESULT, THE APPEAL BY THE REVENUE AS WELL AS THE CROSS OBJECTION FILED BY THE AS S ES S E E ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH FEB.2020 . SD/ - SD/ - (B.R.BASKARAN) ( N.V VASUDEVAN) ACCOUNTANT MEMBER VICE - PRESIDENT BANGALORE DATED : 20 /2/2020 *AM COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF BY ORDER ASST. REGISTRAR