Appeal details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 87411 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 3 month(s) 8 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
20-03-2015
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
18-02-2015
Assessment Year
2008-2009
Appeal Filed On
12-12-2012
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1795/HYD/2012 ASSESSMENT YEAR: 2008-09 BROADRIDGE FINANCIAL SOLUTIONS (INDIA) PVT. LTD., HYDERABAD. PAN AADCB 0321R 15676 H VS. DY.COMMISSIONER OF INCOME- TAX, CIRCLE 1(3), HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAGHUNATHAN S. REVENUE BY : SHRI D. SUDHAKAR RAO DATE OF HEARING 18-02-2015 DATE OF PRONOUNCEMENT 20-03-2015 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL OF ASSESSEE IS BEING REHEARD IN PURSU ANCE TO THE DIRECTIONS OF THE HONBLE HIGH COURT OF JUDICATOR A T HYDERABAD FOR THE STATE OF TELENGANA AND THE STATE OF ANDHRA PRADESH. THE DIRECTIONS OF THE HONBLE HIGH COURT AS CONTAINED IN ORDER DAT ED 05/09/2014 IN ITTA NO. 405 OF 2014, IS AS UNDER: WE HAVE HEARD THE LEARNED COUNSEL FOR THE APPELLANT AND ISSUED PRE-ADMISSION NOTICE ON 24/07/2014. AFTER HEARING BOTH THE LEARNED COUNSEL, WE ADMIT TH E APPEAL ON THE FOLLOWING SUBSTANTIAL QUESTION OF LAW. WHETHER THE LEARNED TRIBUNAL IS JUSTIFIED IN DECID ING THE MATTER ON MERIT ON ONE POINT WHILE REFUSING TO DECI DE THE MATTER ON MERIT ON ANOTHER POINT.? IT WAS RECORDED BY THE LEARNED TRIBUNAL THAT THE AS SESSEE HAS NOT RAISED ANY SPECIFIC OBJECTION WITH REGARD TO TH E FOLLOWING ISSUE. 2 ITA NO. 1795/HYD/2012 BROADRIDGE FINANCIAL SOLUTIONS (INDIA) P. LTD. WHETHER FINDINGS OF DISPUTE RESOLUTION PANEL ON ALL OWABILITY OF DEDUCTION OF EXPENDITURE INCURRED FOR SETTING UP CO ST ON THE NEW PREMISES ARE SUSTAINABLE OR NOT? ACTUALLY, THIS ISSUE WAS RAISED BEFORE THE TRIBUNAL BY THE APPELLANT. HOWEVER, IT HAS BEEN ERRONEOUSLY RECORDE D THAT THERE IS NO FINDING BY THE DRP ON THE SAID ISSUE. WHILE O BSERVING THIS, THE TRIBUNAL DECIDED THE MATTER ON ANOTHER PO INT ON MERIT, IN THE MANNER AS FOLLOWS. THE RECORD SHOWS THAT THE ASSESSEE WAS INCORPORATED AS A COMPANY ON 17/01/2007 AND AS PER THE NOTE NO. 14 OF THE ANNUAL REPORT OF THE COMPANY IT HAS BEEN CLEARLY ME NTIONED THAT THE ASSESSEE COMPANY HAS COMMENCED ITS OPERATIONS F ROM 1 ST APRIL, 2007. HENCE, THE ASSESSEE CANNOT CLAIM ANY E XEMPTION FOR PRIOR PERIOD EXPENSES. WE THINK THAT THE LEARNED TRIBUNAL SHOULD NOT HAVE DONE SO. WE THEREFORE SET ASIDE THIS ORDER. WE REMAND THE MATTE R ON THE LIMITED ISSUE AS MENTIONED IN PARAGRAPH 11 OF THE J UDGMENT OF THE TRIBUNAL AND IT SHALL BE DECIDED IN ACCORDANCE WITH LAW ON MERIT WITHIN A PERIOD OF TWO MONTHS FROM THE DATE O F COMMUNICATION OF THIS ORDER. 2. AS CAN BE SEEN FROM THE OPERATIVE PORTION, THE D IRECTION OF THE HONBLE HIGH COURT IS IN RELATION TO GROUND NO. 11 RAISED BY ASSESSEE BEFORE THE ITAT, WHICH READS AS UNDER: THE LD. TPO ERRED IN INCLUDING NON-OPERATING EXPENS ES IN THE COST BASE OF THE APPELLANT FOR THE PURPOSE OF COMPU TING THE PROFIT LEVEL INDICATOR (PLI) FOR DETERMINING THE AR MS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF THE APPELLANT U NDER TRANSACTION NET MARGIN METHOD, WHICH OUGHT NOT BE I NCLUDED CONSIDERING THE PRINCIPLES OF ECONOMICS AND BASIC T RANSFER PRICING PRINCIPLES AND COMMERCIAL REALITIES. FURTHE R, LD. TPO VIOLATED THE PRINCIPLES OF NATURAL JUSTICE BY NOT A PPROPRIATELY COMMUNICATING THE COMPUTATION OF THE COST BASE USED BY THE LD. TPO IN COMPUTING THE PLI OF THE APPELLANT. 3. NARRATING THE FACTS LD. AR SUBMITTED BEFORE US, ASSESSEE WAS INCORPORATED AS A COMPANY ON 17/01/07 AND COMMENCED ITS OPERATIONS WITH EFFECT FROM 01/04/07. HOWEVER, AS A SSESSEE WAS IN POSSESSION OF SETTING UP ITS OWN PREMISES, IT WAS R ENDERING SERVICES FROM THE PREMISES OF ADP LTD. IT WAS SUBMITTED, DUR ING THE GESTATION PERIOD FOR ESTABLISHMENT OF NEW PREMISES WHICH CONT INUED TILL 3 ITA NO. 1795/HYD/2012 BROADRIDGE FINANCIAL SOLUTIONS (INDIA) P. LTD. OCTOBER07, ASSESSEE IN ADDITION TO REGULAR OPERATI NG EXPENDITURE HAS ALSO INCURRED ADDITIONAL EXPENDITURE ON THE NEW PRE MISES, THOUGH NOT OCCUPIED, TOWARDS RENTALS, ELECTRICITY AND MAINTENA NCE ETC TILL THE TIME THE INFRASTRUCTURE WAS BUILT. LD. AR SUBMITTED, THE SAID EXPENDITURE INCLUDING THE STAMP DUTY PAID ON LEASE DEED BEING I N THE NATURE OF SETTING UP COST HAS BEEN CONSIDERED AS NON-OPERATI NG EXPENDITURE BY THE COMPANY. IT WAS SUBMITTED, THE COMPANY HAS ALSO OBTAINED ACTUARIAL CERTIFICATE FOR ASCERTAINING THE LIABILIT Y ON ACCOUNT OF GRATUITY AND PRIVILEGE LEAVE AND ACCORDINGLY REVISITED THE O PENING FIGURES. THE DETAILS OF NON-OPERATING EXPENDITURE AS REFLECTED I N THE AUDITED ACCOUNTS UNDER THE HEAD OTHER EXPENDITURE ARE AS UN DER: S.NO. DESCRIPTION AMOUNT REMARKS 1. RENTALS 3,67,96,864 RENT PAID TILL OCCUPATION OF NEW PREMISES I.E. OCTOBER, 2007. 2. STAMP DUTY 1,00,91,180 STAMP DUTY PAID FOR ENTERING INTO A LEASE DEED FOR THE NEW PREMISES. 3. CONSULTANCY FEE 38,79,260 FEE PAID TO CONSULTANT FOR FINDING A NEW OFFICE PREMISES. 4. POWER CHARGES 4,56,357 POWER CHARGES INCURRED TILL OCCUPATION OF NEW PREMISES I.E. OCTOBER, 2007. 5. MAINTENANCE 17,02,338 MAINTENANCE CHARGES PAID TILL OCCUPATION OF NEW PREMISES I.E. OCTOBER, 2007. 6. INCREASE IN LIABILITY FOR EMPLOYEE BENEFITS 1,03,39,935 REVISITING THE OPENING GRATUITY AND PRIVILEGED LEAVES FIGURES IN ACCORDANCE WITH AS 15. TOTAL 6,32,65,934 LD. AR SUBMITTED, THE EXPENDITURE THOUGH, INCURRED AFTER COMMENCEMENT OF THE BUSINESS BUT SINCE IT IS NON-OP ERATING, ASSESSEE COULD NOT HAVE RECOVERED IT AS SERVICE CHA RGES FROM ITS AE, HENCE, THE SAME WAS TREATED AS NON-OPERATING. LD. A R REFERRING TO THE SERVICE AGREEMENT WITH AE, SUBMITTED THAT AS PER CL AUSE 5.1 OF THE SERVICE AGREEMENT, AE WILL ONLY REIMBURSE THE OPERA TING COST WITH MARK UP OF 11% AND NOT NON-OPERATING COST. THUS, IT WAS SUBMITTED BY LD. AR, THE EXPENDITURE INCURRED BEING NON-OPERATIN G IN NATURE SHOULD 4 ITA NO. 1795/HYD/2012 BROADRIDGE FINANCIAL SOLUTIONS (INDIA) P. LTD. NOT HAVE BEEN CONSIDERED AS PART OF THE OPERATING C OST WHILE COMPUTING THE MARGIN. 4. THE LD. DR, ON THE OTHER HAND, SUBMITTED, THERE IS NO ERROR IN THE COMPUTATION OF MARGIN AS CLAIMED BY ASSESSEE. 5. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERI ALS ON RECORD. AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE AND G OING THROUGH THE AUDITED FINANCIAL STATEMENT AS WELL AS TP STUDY, WE ARE CONVINCED THAT THE EXPENDITURE OF RS. 6,32,65,934.00 LAKH WAS INCURRED AFTER COMMENCEMENT OF OPERATIONS BY ASSESSEE AND RELATES TO THE FY RELEVANT TO AY UNDER DISPUTE. IT IS FURTHER TO BE N OTED THAT IT IS THE CLAIM OF ASSESSEE THAT THE EXPENDITURE SINCE WAS IN CURRED DURING THE GESTATION PERIOD WHEN THE COMPANY WAS UNDER PROCESS OF ESTABLISHING ITS OWN PREMISES, IT IS NON-OPERATING IN NATURE AS NO CLIENT WOULD BE EXPECTED TO PAY THE SET UP COST. ON EXAMINATION OF THE SERVICE AGREEMENT ENTERED INTO BETWEEN ASSESSEE WITH ITS AE ON 1 ST JULY, 2008, IT IS SEEN THAT AS PER THE TERMS OF THE AGREE MENT, ASSESSEE IS ENTITLED TO RECEIVE OPERATING COST/EXPENSES WITH A MARK UP OF 11%. HOWEVER, AS CAN BE SEEN, THE EXPENDITURE RELATING T O SET UP OF NEW PREMISES IS NOT TOWARDS SERVICES RENDERED BY ASSESS EE TO ITS AE. THEREFORE, IT CANNOT BE CONSIDERED TO BE OF OPERAT ING NATURE. THAT BEING THE CASE, SUCH EXPENDITURE CANNOT BE CONSIDER ED AS PART OF THE OPERATING COST WHILE COMPUTING MARGIN OF ASSESSEE. THE COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF M/S MARKET TOOLS RESEARCH PVT. LTD. VS. DCIT IN ITA NO. 1150/HYD/2011 DATED 05/02/2014, WHILE CONSIDERING SIMILAR ISSUE HAS HELD AS UNDER: 25. GROUND NO. 6 READS AS UNDER: THE LEARNED CIT(A) ERRED IN CONSIDERING THE PRE-O PERATIVE EXPENSES OF RS.44.00,457/- AS A COMPONENT OF THE OP ERATING COSTS FOR THE DETERMINATION OF ARMS LENGTH REMUNER ATION. 26. THE SOLE GRIEVANCE OF THE ASSESSEE IS THAT THE TPO SHOULD NOT HAVE CONSIDERED PRE-OPERATIVE EXPENSES OF RS.44,00,457 A S OPERATING COST 5 ITA NO. 1795/HYD/2012 BROADRIDGE FINANCIAL SOLUTIONS (INDIA) P. LTD. WHILE COMPUTING THE ALP OF THE INTERNATIONAL TRANSA CTION. AS CAN BE SEEN FROM THE FACTS ON RECORD IN THE ORDER PASSED U/S 92 CA OF THE ACT, THE TPO HAD ADOPTED THE OPERATING COST AT RS.4,87,43,70 2/-. SUBSEQUENTLY, HOWEVER HE PASSED AN ORDER U/S 154 OF THE ACT BY AD OPTING THE OPERATING COST AT RS.4,89,62,580/- WHICH INCLUDED THE PRE-OPE RATIVE EXPENSES OF RS.44,00,457/-. THOUGH THE ASSESSEE TOOK UP THE ISS UE BEFORE THE CIT(A), HE HOWEVER DID NOT INTERFERE BY REJECTING A LL THE CONTENTIONS OF THE ASSESSEE. HE HELD THAT AS PER CLAUSE 2.4 OF ART ICLE 2 OF THE AGREEMENT BETWEEN THE ASSESSEE WITH ITS AE IT BECOM ES CLEAR THAT THE ASSESSEE HAS CHARGED ITS AE FOR ALL SUCH COST INCUR RED BY IT PRIOR TO ENTERING INTO SUCH AGREEMENT WITH THE AE. HE HELD T HAT IN ABSENCE OF ANY SPECIFIC DENIAL FROM THE ASSESSEE REGARDING NOT CHARGING AE FOR SUCH COSTS INCURRED UP TO 31-3-2004 , IT HAS TO BE HELD THAT THE ASSESSEE HAS CHARGED AND RECOVERED SUCH COSTS INCURRED BY IT DURING THAT PERIOD. 27. THE LEARNED AR BY REFERRING TO THE AGREEMENT EN TERED WITH THE AE, WHICH IS AT PAGE 1 OF THE PAPER BOOK, SUBMITTED THA T THE ASSESSEE WAS INCORPORATED ON 4-6-2004. THE AGREEMENT WAS ENTERED WITH ITS AE ON 1ST SEPT. 2004. THEREFORE, THERE IS NO QUESTION OF ASSE SSEE HAVING CHARGED PREOPERATIVE EXPENSES FROM ITS AE PRIOR TO THE DATE OF THE AGREEMENT. THE LEARNED AR IN THIS CONTEXT REFERRED TO THE FINA NCIAL INFORMATION AS ON 31-3- 2005 PLACED IN THE PAPER BOOK WHEREIN PRE-OPE RATIVE EXPENSES HAS BEEN EXCLUDED WHILE ARRIVING AT THE TOTAL COST. THE LEARNED AR SUBMITTED, EVEN AS PER CLAUSE 2.4 OF ARTICLE 2 OF T HE AGREEMENT, THE COST INCLUDES ALL OPERATING EXPENSES ONLY AND NOT PRE-OP ERATIVE EXPENSES. THE LEARNED AR SUBMITTED THAT PRE-OPERATIVE EXPENSE S CANNOT BE INCLUDED IN THE OPERATING COST WHEN THERE IS NO MAT ERIAL BEFORE THE DEPARTMENTAL AUTHORITIES TO PROVE THAT THE ITA NO.1 150 OF 2011 M/S. MARKET TOOLS RESEARCH PVT. LTD., HYDERABAD. 14 ASSE SSEE HAS RECOVERED SUCH COST FROM THE AE. IN THIS CONTEXT, T HE LEARNED AR REFERRED TO A DECISION OF THE CO-ORDINATE BENCH IN CASE OF D CIT V/S. CONVERGYS INFORMATION MANAGEMENT INDIA PVT. LTD. (ITA 229/HYD /09 DATED 30-1- 2011 WHEREIN IT WAS HELD AS UNDER: 10. THE CIT (A) NOTED THAT THE ASSESSEE HAS INCURR ED EXPENDITURE FROM 1-1-2004 TO 14-3-2004 I.E., AFTER ENTERING INTO AGREEMENT WITH AE ON 1-1-2004 AT RS.2,54,17,576/- A ND THIS AMOUNT IS LIABLE FOR MARK UP AT 10% BECAUSE NO CUST OMER WOULD PAY MARK UP BEFORE ENTERING INTO AGREEMENT AND THE EXPENDITURE INCURRED IS ONLY AFTER AGREEMENT HAS TO BE MARK UP. ACCORDINGLY, THE CIT (A) IS JUSTIFIED IN CONSIDERING THE EXPENDI TURE INCURRED AFTER 1-1-2004 TO 14-3-2004 TO MAKE ADJUSTMENTS AT 10% OF THESE EXPENSES AT RS.24,41,757/- THE REVENUE HAS NOT BROU GHT ANY MATERIAL ON RECORD TO SHOW THAT THE ASSESSEE HAS IN CURRED ANY EXPENDITURE BEFORE ENTERING INTO SERVICE AGREEMENT ON THE IMPUGNED ISSUE. ACCORDINGLY, WE CONFIRM THE ORDER O F THE CIT (A) ON THIS ISSUE AND DISMISS THE GROUND TAKEN BY THE R EVENUE. 6 ITA NO. 1795/HYD/2012 BROADRIDGE FINANCIAL SOLUTIONS (INDIA) P. LTD. 28. ON A PERUSAL OF THE ORDERS OF THE TPO AS WELL A S CIT(A), IT COULD NOT BE KNOWN ON THE BASIS OF WHICH MATERIAL THEY HAVE C OME TO THE CONCLUSION THAT THE ASSESSEE HAS RECOVERED THE PRE- OPERATIVE EXPENSES OF RS.44,00,547. IN ABSENCE OF ANY MATERIAL TO PROV E THAT IT HAS RECOVERED THE PRE-OPERATIVE EXPENSES FROM ITS AE, T HE CONCLUSION ARRIVED AT BY THE DEPARTMENTAL AUTHORITIES IS MERELY ON PRE SUMPTION AND SURMISES. ADMITTEDLY, THE AGREEMENT, BETWEEN THE AS SESSEE AND ITS AE WAS ENTERED ON 1ST SEPT. 2004. THEREFORE, IT CANNOT BE CONCEIVED THAT THE AE WILL BEAR COST OF EXPENSES PRIOR TO THE DATE OF AGREEMENT. WHEN THE ASSESSEE HAS DENIED OF HAVING BEEN REIMBURSED T HE PRE-OPERATIVE EXPENSES THEN THE ONUS IS ON THE DEPARTMENT TO PROV E THE CONTRARY BY BRINGING COGENT MATERIAL ON RECORD. THE ASSESSEE CE RTAINLY CANNOT BE ASKED TO PROVE THE NEGATIVE. THAT APART, THIS SORT OF EXERCISE, IN OUR VIEW, CANNOT BE TAKEN UP IN A PROCEEDING U/S 154 OF THE A CT. IN THESE CIRCUMSTANCES, FOLLOWING THE DECISION OF THE CO-ORD INATE BENCH IN CASE OF CONVERGYS MANAGEMENT (SUPRA) AND CONSIDERING THE FA CT THAT THERE IS NO MATERIAL TO SHOW THAT THE ASSESSEE HAS RECOVERED TH E PRE-OPERATIVE EXPENSES FROM ITS AE, THE AMOUNT OF RS.44,00,457/- CANNOT BE CONSIDERED AS PART OF THE OPERATING COST. ACCORDING LY, WE DIRECT THE ASSESSING OFFICER/ TPO TO EXCLUDE IT FROM OPERATING COST WHILE COMPUTING THE ALP. HENCE, THIS GROUND OF THE ASSESSEE IS ALLO WED. FOLLOWING THE RATIO LAID DOWN AS AFORESAID BY THE C OORDINATE BENCH, WE HOLD THAT THE EXPENDITURE INCURRED BY ASSESSEE C OMPANY BEING NON-OPERATING IN NATURE, CANNOT BE CONSIDERED AS PA RT OF OPERATING COST FOR COMPUTING THE MARGIN. ACCORDINGLY, WE DIRE CT THE AO/TPO TO MAKE NECESSARY ADJUSTMENT WHILE COMPUTING ALP. ASES SSEES GROUND IS ALLOWED. 6. IN THE RESULT, APPEAL OF ASSESSEE IS CONSIDERED TO BE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 20 TH MARCH, 2015. SD/- SD/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 20 TH MARCH, 2015 KV 7 ITA NO. 1795/HYD/2012 BROADRIDGE FINANCIAL SOLUTIONS (INDIA) P. LTD. COPY TO:- 1) BROADRIDGE FINANCIAL SOLUTIONS (INDIA) P. LTD., SURVEY NO. 64, HI TECH CITY, SERILINGAMPALLY, RANGAREDDY DT., HYD. 500 081. 2) DCIT, CIRCLE 1(3), AAYAKAR BHAVAN, HYDERABAD 3) DIT (IT & TP), HYDERABAD 4) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S. 2. DRAFT PLACED BEFORE AUTHOR SR.P.S 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER VP 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P S. 7. FILE SENT TO THE BENCH CLERK SR.P.S. 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER
