Williams Lea India Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 1002/CHNY/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8113 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-11-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 24-08-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 05-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANURAG SAHAY
• Assessee Lawyers: T G SURESH
• Keywords: Transfer pricing; Bad and doubtful debts

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , , ! ' BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ ITA NO.1002/MDS/2015 # $# /ASSESSMENT YEAR : 2010-11 WILLIAMS LEA INDIA PRIVATE LIMITED, MODULE NO.0308, D BLOCK, THIRD FLOOR, TIDEL PARK, TARAMANI, CHENNAI 600 113. PAN : AAACW 5477 G V. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 3 (2), AAYAKAR BHAVAN, MAHATMA GANDHI ROAD, CHENNAI 600 034. ( %& /APPELLANT) ( '(%& /RESPONDENT) %& ) * /APPELLANT BY : SHRI T.G.SURESH, C.A. '(%&)* /RESPONDENT BY : SHRI ANURAG SAHAY, CIT-DR + ),! /DATE OF HEARING : 24.08.2016 -.$ ),! /DATE OF PRONOUNCEMENT : 03.11.2016 /O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE ASSESSING OFFICER CONSEQUENT TO THE ORDER OF THE DI SPUTE RESOLUTION PANEL DATED 17.12.2014 AND PERTAINS TO ASSESSMENT YEAR 2010-11. 2 I.T.A. NO.1002/MDS/2015 2. SHRI T.G.SURESH, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE COMPANY IS ENGAGED IN THE BUSINESS OF PROV IDING CORPORATE INFORMATION SERVICES. ACCORDING TO THE LEARNED REPRESENTATIVE, CORPORATE INFORMATION SERVICES INCLUDES CREATIVE DEVELOPMENT, DOCUMENT PR OCESSING, BUSINESS INFORMATION SERVICES, ETC. FOR THE PURPOSE OF DETER MINING THE ARMS LENGTH PRICE, THE ASSESSEE ADOPTED THE TRANSACTION NET MAR GIN METHOD AS MOST APPROPRIATE METHOD. THE ASSESSEE SELECTED SEVEN COM PARABLES FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE WHOSE PROFIT LEVEL INDICATOR COMES TO NEARLY 16.08%. HOWEVER, THE TRANSFER PRICING OFFICE R REJECTED ALL THE SEVEN COMPARABLES SELECTED BY THE ASSESSEE. ACCORDING TO THE LEARNED REPRESENTATIVE, THE TPO CONDUCTED A FRESH SEARCH AND SELECTED FIVE COMPARABLE WHOSE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATOR COMES TO NEARLY 27.21%. AFTER MAKING NECESSARY CAPITAL ADJUSTMENTS, THE TPO DETER MINED THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATOR AT 27.43%. ACCOR DINGLY, THE TPO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS AT RS.32.29 CRORES DISCLOSED BY THE ASSESSEE. ACCORDINGLY, THE TPO MAD E AN UPWARD ADJUSTMENT TO THE EXTENT OF RS.2.17 CRORES. 3. THE FIRST ISSUE RAISED BY THE ASSESSEE IS WITH R EGARD TO SELECTION OF COSMIC GLOBAL LIMITED AS ONE OF THE COMPARABLE FOR MAKING ADJUSTMENT. ACCORDING TO THE LEARNED REPRESENTATIVE, THE PROFIT LEVEL INDICATOR OF COSMIC GLOBAL LIMITED WAS 18.62% AND THE ADJUSTED PROFIT L EVEL INDICATOR WAS 19.16%. ACCORDING TO THE LEARNED REPRESENTATIVE, COSMIC GLO BAL LIMITED IS NOT THE SAME OF BUSINESS. THEREFORE, IT CANNOT BE TAKEN AS COMPA RABLE WHILE DETERMINING THE 3 I.T.A. NO.1002/MDS/2015 ARMS LENGTH PRICE. REFERRING TO THE COMPARABLE SEL ECTED BY THE TPO, NAMELY, M/S.NITTANY OUTSOURCING SERVICES PVT.LTD., THE TPO EXCLUDED THE PROVISION FOR BAD AND DOUBTFUL DEBT AND ASSET WRITTEN OFF FROM TH E OPERATING COST. ACCORDING TO THE LEARNED REPRESENTATIVE, THE PROVISION FOR BA D AND DOUBTFUL DEBT AND ASSET WRITTEN OFF CANNOT BE EXCLUDED FROM THE OPERA TING COST. ACCORDING TO THE LEARNED REPRESENTATIVE, IN THE NEXT FINANCIAL YEAR, BAD DEBT HAS BEEN CHARGED TO PROFIT AND LOSS ACCOUNT NET OF PROVISION. THEREF ORE, THE SAME NEED NOT BE REDUCED FOR THE PURPOSE OF ARRIVING THE OPERATING C OST. REFERRING THE COMPARABLES SELECTED BY THE TPO, NAMELY, INFORMED T ECHNOLOGY INDIA LTD., THE TPO ERRED IN EXCLUDING THE ELECTRICITY COST OF RS.7 ,00,000/- AS NON OPERATING COST. ACCORDING TO THE LEARNED REPRESENTATIVE, THE EXCLUSION OF RS.7,00,000/- FROM THE OPERATING COST IS NOT WARRANTED. THE LEARN ED REPRESENTATIVE FURTHER SUBMITTED THAT THE EMPLOYEES COST FILTER WAS NOT TA KEN IN TO CONSIDERATION BY THE TPO AND DRP. REFERRING TO THE DECISION OF THE M UMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF NESS TECHNOLOGIES (INDIA) P RIVATE LTD. IN ITA NO.7016/MUM/2012 DATED 24.09.2014, THE LEARNED REPR ESENTATIVE FOR THE ASSESSEE SUBMITTED THAT BY APPLYING THE FILTER OF E MPLOYEES COST, THE APPEAL WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER F OR APPLYING THE EMPLOYEES FILTER COST TO ALL COMPARABLE COMPANIES SELECTED BY THE TPO. THE LEARNED REPRESENTATIVE PLACED HIS RELIANCE ON THE FOLLOWING DECISIONS OF THE TRIBUNAL: (A) BRIGADE GLOBAL SERVICES PRIVATE LTD. IN ITA NO .1494/HYD/2010 (B) AVAYA INDIA (P) LTD. [TS-89-ITAT-2011(DEL) TP ] (C) MARKET TOOLS RESEARCH PVT.LTD. [TS-30-ITAT-201 4 (HYD) TP] 4 I.T.A. NO.1002/MDS/2015 (D) BA CONTINUUM INDIA PVT.LTD. [TS-490-HC-2014 (T EL & AP) TP] (E) MOTOROLA SOLUTIONS INDIA PVT.LTD. [TS-240 ITA T-2014 (BANG)-TP] (F) CISCO SYSTEMS (INDIA) PVT.LTD. [TS-246-ITAT-20 14 (BANG)-TP] (G) INTEGRATED DECISIONS AND SYSTEMS (INDIA) PRIV ATE LIMITED [TS-281 ITAT -2015 (JPR) TP] (H) AROWANA CONSULTING LTD. [TS -353-ITAT-2015 (BA NG)-TP] (I) ACI WORLDWIDE SOLUTIONS PVT.LTD. [TS-494-ITAT- 2015 (BANG)-TP] 4. ON THE CONTRARY, SHRI ANURAG SAHAY, THE LEARNED REPRESENTATIVE FOR THE DEPARTMENT SUBMITTED THAT THE TPO CONCEDED ALL THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE - COMPANY AS WELL AS TPO A ND FOUND THAT THE TPO SELECTED ALL THE FIVE COMPANIES WHICH ARE FUNCTIONA LLY SIMILAR WITH THAT OF THE ASSESSEE COMPANY. THEREFORE, THERE IS NO JUSTIFICAT ION IN THE OBJECTION RAISED BY THE ASSESSEE. REFERRING TO THE PROFIT LEVEL INDI CATOR, THE LEARNED REPRESENTATIVE FOR THE REVENUE SUBMITTED THAT THE O PERATING INCOME MEANS, THE REVENUE RECOGNISED DURING THE YEAR FROM THE RES PECTIVE BUSINESS ON ACCOUNT OF TRANSACTION CARRIED ON BY THE ASSESSEE D URING THE RELEVANT YEAR. ANY INCOME WHICH IS NOT DIRECTLY LINKED TO THE BUSI NESS OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION SHOULD NOT BE CONSIDER ED AS OPERATING INCOME OF THE YEAR. SIMILARLY, THE OPERATING EXPENSES SHALL B E THE EXPENSES INCURRED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION FO R EARNING THE OPERATING INCOME. ALL OTHER EXPENSES, THOUGH ALLOWABLE FOR TH E PURPOSE OF COMPUTING THE TOTAL INCOME OF THE ASSESSEE, SHALL NOT BE CONS IDERED AS OPERATING EXPENSES. THE PROVISION FOR BAD AND DOUBTFUL DEBTS, ASSETS WRITTEN OFF ARE ON 5 I.T.A. NO.1002/MDS/2015 ACCOUNT OF TRANSACTIONS MADE IN THE EARLIER ASSESSM ENT YEARS. THIS PROVISION FOR BAD AND DOUBTFUL DEBTS AND ASSETS WRITTEN OFF H AS NO RELATION TO THE CURRENT YEAR INCOME. THEREFORE, IT HAS TO BE EXCLUD ED FROM THE OPERATING EXPENSES. REFERRING TO THE EMPLOYEES COST FILTER, T HE LEARNED DEPARTMENT REPRESENTATIVE SUBMITTED THAT THE ASSESSEE DID CLAI M BEFORE THE DRP SUITABLE FILTER ON THE EMPLOYEES COST. THE DRP AFTER CONSIDE RING THE CLAIM OF THE ASSESSEE FOUND THAT THERE ARE MANY COMPANIES WHICH OUTSOURCE THE PROCUREMENT OF THE MAN POWER. IN SUCH CASE, THE EXP ENDITURE WILL BE UNDER A DIFFERENT HEAD INSTEAD OF EMPLOYEES COST. MOREOVER, WHERE THE EMPLOYEES ARE OUTSOURCED, THE OPERATING COST WILL GET INCREASED. THE OVERALL PROFIT MARGINS IN SUCH CASE WILL COME DOWN AND THE SITUATION WILL BE MORE BENEFICIAL TO THE ASSESSEE WHEN SUCH COMPANY WITH OUTSOURCED MANPOWER IS SELECTED AS A COMPARABLE. THEREFORE, ACCORDING TO THE DEPARTMENT REPRESENTATIVE, IT IS NOT REQUIRED TO EXCLUDE THE COMPANY ON ACCOUNT OF EMPLO YEES COST FILTER. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE METHO D SELECTED BY THE ASSESSEE AS MOST APPROPRIATE METHOD IS NOT IN DISPU TE. THE DISPUTE IS ONLY WITH REGARD TO SELECTION OF COMPARABLE COMPANIES FO R THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE. THE ASSESSEE OB JECTING INCLUSION OF COSMIC GLOBAL LTD. AS ONE OF THE COMPARABLE COMPANI ES BY THE TPO AND DRP. THE ASSESSEE IS ALSO OBJECTING EXCLUDES OF PROVISIO N OF BAD AND DOUBTFUL DEBTS AND ASSET WRITTEN OFF FROM THE OPERATING COST. THE ASSESSEE ALSO CLAIMS BEFORE 6 I.T.A. NO.1002/MDS/2015 THIS TRIBUNAL THAT EMPLOYEES COST FILTER SHALL BE O BTAINED FOR DETERMINING THE ARMS LENGTH PRICE. 6. WE HAVE CAREFULLY GONE THROUGH THE DECISION OF M UMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF NESS TECHNOLOGIES (INDIA) P RIVATE LTD. (SUPRA). THE MUMBAI BENCH OF THIS TRIBUNAL HAS OBSERVED AS FOLLO WS: 8. FROM THE TPO REPORT, WE FOUND THAT FOR THE PURP OSE OF SELECTION OF COMPARABLES, THE TPO HAD APPLIED A FILTER OF REJ ECTING COMPANIES HAVING EMPLOYEE COSTS LESS THAN 25% OF REVENUES. HO WEVER, THE FOUR COMPANIES AS PART OF COMPARABLES SELECTED BY TPO FA ILS THE FILTER OF 25% EMPLOYEE COST TO THE REVENUE. SINCE THE EMPLOYE E COST TO REVENUE RATIO IN CASE OF THIS COMPANY IS LESS THAN 25% OF REVENUE, WE RESTORE THE APPEAL BACK TO THE FILE AO/TPO/DRP FOR CONSIDERING AFRESH AND APPLYING THE FILTER PROPERLY TO THE ALL COMPARA BLES SELECTED BY TPO, KEEPING IN VIEW OF OUR ABOVE OBSERVATION. 7. IN VIEW OF THE DECISION OF THE MUMBAI BENCH OF T HIS TRIBUNAL, EMPLOYEES COST FILTER IS ALSO ONE OF THE FACTORS TO BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRI CE. AS RIGHTLY SUBMITTED BY THE LEARNED DEPARTMENT REPRESENTATIVE, THE EMPLOYEE S COST MAY VARY WHEREVER THE MAN POWER WAS OUTSOURCED. THEREFORE, T HE ASSESSING OFFICER HAS TO TAKE INTO CONSIDERATION WHETHER THE ASSESSEE HAS EMPLOYED ITS EMPLOYEES DIRECTLY OR OUTSOURCED ITS MAN POWER. SIN CE THESE FACTORS ARE NOT AVAILABLE ON RECORD WITH REGARD TO COMPARABLE COMPA NIES AND THAT OF THE 7 I.T.A. NO.1002/MDS/2015 ASSESSEE COMPANY, THIS TRIBUNAL IS OF THE CONSIDERE D OPINION THAT THE MATTER NEEDS TO BE RECONSIDERED BY THE ASSESSING OFFICER. BY FOLLOWING THE ORDER OF THE MUMBAI BENCH OF THIS TRIBUNAL IN NESS TECHNOLOG IES (INDIA) PRIVATE LTD. (SUPRA), THE ORDER OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ENTIRE ISSUE IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL RE-EXAMINE THE ISSUE AFRESH IN THE LIGHT OF THE OBJ ECTIONS RAISED BY THE ASSESSEE AND IN THE LIGHT OF THE DECISION REFERRED TO BY THE LEARNED REPRESENTATIVE FOR THE ASSESSEE BEFORE THIS TRIBUNA L AND THEREAFTER DECIDE THE SAME IN ACCORDANCE WITH LAW. IT IS NEEDLESS TO MENT ION THAT IT IS OPEN TO THE ASSESSING OFFICER TO ONCE AGAIN REFER THE MATTER TO THE DRP FOR CONSIDERING ALL THE OBJECTIONS RAISED BY THE ASSESSEE INCLUDING THE EMPLOYEES COST FILTER AND THEREAFTER DECIDE THE MATTER IN ACCORDANCE WITH LAW . 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 3 RD NOVEMBER, 2016 AT CHENNAI. SD/- SD/- ( ) ( . . . ) (S. JAYARAMAN) (N.R.S. GANESAN) ! /ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, / /DATED, THE 03 RD NOVEMBER, 2016. SP. 8 I.T.A. NO.1002/MDS/2015 ) ',01 21$, /COPY TO: 1. %& /APPELLANT 2. '(%& /RESPONDENT 3. + 3, ( )/CIT(A) 4. + 3, /CIT, 5. 14 ', /DR 6. # 5 /GF.