LG Chemical India Pvt. Ltd., Gurgaon V. ACIT, New Delhi

ITA 1819/DEL/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7879 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 09-02-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 30-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Initiation of penalty proceedings; Wholly owned subsidiary
• Section: 143(3); 234B; 14A; 10B; 154

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 : NEW DELHI BEFORE SHRI I.C.SUDHIR , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 1819/DEL/2015 (ASSESSMENT YEAR: 2010 - 11 ) LG CHEMICAL INDIA PVT. LTD., 3 RD FLOOR, TOWER - B, DLF BUILDING NO.10, PHASE - II, DLF CYBER CITY, GURGAON, PAN:AAACL1995 - J VS. ACIT, CIRCLE - 15(1), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. MANONNEET DALAL, ADV SH. DIVESH KHANNA, ADV SH. YISHU GOEL, ADV REVENUE BY: SH. SANJAY KUMAR, SR. DR DATE OF HEARING 09/02/ 2016 DATE OF PRONOUNCEMENT 03 /05/2016 O R D E R PER PRASHANT MAHARISHI, A. M. 1. THIS IS APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER U/S 143(3) RWS 144C OF THE ACT DATED 30.01.2015 PASSED BY ACIT, CIRCLE - 15(1), NEW DELHI IN PURSUANCE OF DIRECTION OF DISPUTE RESOLUTION PANEL U/S 144C(5) DATED 12.11.2014 FOR THE ASSESSMENT YEAR 2010 - 11. PAGE 2 OF 15 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THE LEARNED ASSESSING OFFICER ('THE LD. AO')/ HON'BLE DISPUTE RESOLUTION PANEL ('DRP') HAS ERRED IN ASSESSING THE INCOME OF THE APPELLANT AT RS. 16,026,230 AS AGAINST THE RETURNED INCOME OF RS. 3,967,748. 2. THE LD. AO GROSSLY ERRED IN LAW BY REFERRING THE CASE TO THE LD. TRANSFER PRICING OFFICER ('TPO') FOR DETERMINATION OF ARM'S LENGTH PRICE CONTRARY TO THE INSTRUCTION ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES ('CBDT) AND THEREFORE THE TRANSFER PRICING ORDER IS VOID . 3. THE LD. AO/LD. TPO ERRED ON FACTS AND IN LAW BY MAKING A TRANSFER PRIC ING ADDITION OF RS. 57,41,9837 - TO THE INCOME OF THE APPELLANT AND HOLDING THAT THE INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF MARKETING SUPPORT SERVICES DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT AND IN DOING SO HAVE GROS SLY ERRED BY: 3.1. REJECTING COMPARABILITY ANALYSIS UNDERTAKEN BY THE APPELLANT IN THE TP DOCUMENTATION FOR DETERMINING THE ARM'S LENGTH PRICE ('ALP') AND MODIFYING COMPARABILITY ANALYSIS BASED ON APPLICA TION OF THE FOLLOWING ADDITIONAL REVISED FILTERS : A. EXCLUDING COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 2009 - 10; B. EXCLUDING COMPANIES WHO HAVE EMPLOYEE COST LESS THAN 25% OF THE SALES; C. EXCLUDING COMPANIES WHOSE REVENUE FROM SERVICE ACTIVITY IS LESS THAN 75% OF THE TOTAL OPERATING REVENUES; AND REJECTING, IN PARTICULAR, THE FOLLOWING FILTERS APPLIED BY THE APPELLANT: D. ACCEPTING COMPANIES HAVING RATIO OF OTHER OPERATING INCOME (I.E. INCOME OTHER THAN MANUFACTURING AND TRADING INCOME) TO SALES GREATER THAN 50%; PAGE 3 OF 15 E. ACCEPTING COMPANIES IN PROWESS HAVING DATA FOR AT LEAST TWO OUT OF THE THREE FINANCIAL YEARS UNDER CONSIDERATION 3.2. INCLUDING CERTAIN COMPANIES THAT ARE NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 3.3. EXC LUDING CERTAIN COMPANIES ON ARBITRARY/ FRIVOLOUS GROUNDS EVEN THOUGH THEY ARE COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 3.4. NOT PROVIDING APPROPRIATE ECONOMIC ADJUSTMENTS AS PROVIDED UNDER RULE 10B O F THE INCOME - TAX RULES, 1962 IN RESPECT OF THE DIFFERENCE IN THE RISK PROFILE OF THE COMPARABLE COMPANIES AND THE APPELLANT 3.5. DISREGARDING MULTIPLE YEAR/PRIOR YEARS' DATA USED BY THE APPELLANT IN THE TP DOCUMENTATION AND HOLDING THAT CURRENT YEAR (I.E. FY 2009 - 10) DATA FOR COMPARABLE COMPANIES SHOULD BE USED DESPITE THE FACT THAT THE SAME WAS NOT NECESSARILY AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION; 4. THE LD. AO/TPO HAS GROSSLY ERRED IN MAKING AN ILLUSIONARY DISALLOWANCE ON THE PRETEXT OF EXPENDITURE TO HAVE BEEN INCURRED FOR EARNING EXEMPT INCOME AND ON THE OTHER HAND CONSIDERING ALL EXPENSES TO HAVE BEEN INCURRED FOR EARNING TAXABLE INCOME WHILE DETERMINING ARM'S LENGTH PRICE O F THE INTERNATIONAL TRANSACTIONS. THE APPELLANT HAS FILED A RECTIFICATION APPLICATION U/S 154 OF THE ACT WITH THE HON'BLE DRP FOR ADJUDICATING THIS CONTENTION OF THE APPELLANT. 5. THE LD. AO HAS ERRED IN DISALLOWING RS. 6316,500 UNDER SECTION 14A OF THE AC T READ WITH RULE 8D OF INCOME TAX RULES, 1962 ('RULES') AS HE FAILED TO APPRECIATE: - (A) THAT NO INVESTMENTS HAVE BEEN MADE BY APPELLANT OUT OF BORROWED FUNDS; (B) THAT NO NEW INVESTMENTS HAVE BEEN MADE DURING THE SUBJECT YEAR; PAGE 4 OF 15 (C) THAT APPELLANT HAS NO T EARNED ANY EXEMPT INCOME ON ITS INVESTMENTS DURING THE SUBJECT YEAR; (D) THAT INVESTMENTS HAVE BEEN MADE IN THE FINANCIAL YEAR 2006 - 07 FOR CONTROLLING STAKE IN GROUP CONCERN AND NOT FOR EARNING ANY DIVIDEND INCOME; (E) THAT NO ADMINISTRATIVE COST, DIR ECTLY/INDIRECTLY HAVE BEEN INCURRED BY APPELLANT DURING THE YEAR IN CONNECTION WITH ITS INVESTMENT 3.3. EXCLUDING CERTAIN COMPANIES ON ARBITRARY/ FRIVOLOUS GROUNDS EVEN THOUGH THEY ARE COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMP LOYED AND RISKS ASSUMED; 3.4. NOT PROVIDING APPROPRIATE ECONOMIC ADJUSTMENTS AS PROVIDED UNDER RULE 10B OF THE INCOME - TAX RULES, 1962 IN RESPECT OF THE DIFFERENCE IN THE RISK PROFILE OF THE COMPARABLE COMPANIES AND THE APPELLANT 3.5. DISREGARDING MULTIPLE YEAR/PRIOR YEARS' DATA USED BY THE APPELLANT IN THE TP DOCUMENTATION AND HOLDING THAT CURRENT YEAR (I.E. FY 2009 - 10) DATA FOR COMPARABLE COMPANIES SHOULD BE USED DESPITE THE FACT THAT THE SAME WAS NOT NECESSARILY AVAILABLE T O THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION; 4. THE LD. AO/TPO HAS GROSSLY ERRED IN MAKING AN ILLUSIONARY DISALLOWANCE ON THE PRETEXT OF EXPENDITURE TO HAVE BEEN INCURRED FOR EARNING EXEMPT INCOME AND ON THE OTHER HAND CO NSIDERING ALL EXPENSES TO HAVE BEEN INCURRED FOR EARNING TAXABLE INCOME WHILE DETERMINING ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THE APPELLANT HAS FILED A RECTIFICATION APPLICATION U/S 154 OF THE ACT WITH THE HON'BLE DRP FOR ADJUDICATING THI S CONTENTION OF THE APPELLANT. 5. THE LD. AO HAS ERRED IN DISALLOWING RS. 6316,500 UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES, 1962 ('RULES') AS HE FAILED TO APPRECIATE: - PAGE 5 OF 15 (A) THAT NO INVESTMENTS HAVE BEEN MADE BY APPELLANT OUT OF BO RROWED FUNDS; (B) THAT NO NEW INVESTMENTS HAVE BEEN MADE DURING THE SUBJECT YEAR; (C) THAT APPELLANT HAS NOT EARNED ANY EXEMPT INCOME ON ITS INVESTMENTS DURING THE SUBJECT YEAR; (D) THAT INVESTMENTS HAVE BEEN MADE IN THE FINANCIAL YEAR 2006 - 07 FOR CONT ROLLING STAKE IN GROUP CONCERN AND NOT FOR EARNING ANY DIVIDEND INCOME; (E) THAT NO ADMINISTRATIVE COST, DIRECTLY/INDIRECTLY HAVE BEEN INCURRED BY APPELLANT DURING THE YEAR IN CONNECTION WITH ITS INVESTMENT . 3. THE BRIEF FACTS OF THE CASE IS THAT ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF CONSULTING, SUPPORT SERVICES, AND IS PART OF LG CHEM LTD., KOREA. LG CHEM LTD., KOREA IS THE FIRST AND LARGEST VERTICALLY INTEGRATED CHEMICAL COMPANY. THE ASSESSEE/ APPELLANT IS A WHOLLY OWNED SUBSIDIARY COMPANY OF LG CHEM LTD., KOREA AND IS PROVIDING MARKETING SUPPORT SERVICE TO IT. 4. THE ASSESSEE FILED ITS RETURN OF INCOME ON 04.11.2011 SHOWING TOTAL INCOME OF RS. 3967748/ - . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTED THAT ASSESSEE HAS ENTERED IN TO AN INTERNATIONAL TRANSACTION OF MARKETING SUPPORT SERVICE AMOUNTING TO RS. 48843515.59, THEREFORE, THE MATTER WAS REFERRED TO T RANSFER PRICING OFFICER FOR THE PURPOSE OF DETERMINING ARMS LENGTH PRICE. THE ASSESSEE HAS BENCHMARK ED THE ABOVE INTERNATION AL TRANSACTION BY ADOPTING TRANSACTION NET MARGINAL METHOD AS THE MOST APPROPRIATE METHOD AND ADOPTED PROFIT LEVEL INDICATOR OF OP/TC. IT HAS TAKEN FOUR COMPARABLES WITH AN AVERAGE MARGIN OF 7.06% AND AS THE ASSESSEE HAS WORKED OUT ITS MARGIN TO 8.14% THER EFORE USING THE MULTIPLE YEAR DATA OF COMPARABLES ASSESSEE HAS SUBMITTED THE TRANSFER PRICING STUDY REPORT CONCLUDING THAT ITS INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH. 5. THE LD TPO AFTER PERUSING THE TP STUDY REPORT OF THE ASSESSEE REJECTED THE ECONO MIC ANALYSIS OF THE ASSESSEE AND SELECTED DIFFERENT COMPARABLES AND TAKEN THE PLI AS PBIT DIVIDED BY COST AND CALCULATED THE ARMS LENGTH PRICE OF THE PAGE 6 OF 15 TRANSACTION AT RS. 51285690/ - AND PROPOSED AN ADJUSTMENT U/S 92CA OF THE ACT OF RS. 5741983/ - . THEREFORE, DRAFT ASSESSMENT ORDER WAS PASSED BY THE ASSESSING OFFICER ON 28.02.2014 MAKING AN ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING OF RS. 5741983/ - . A FURTHER DISALLOWANCE U/S 14A OF THE ACT WAS ALSO MADE OF RS. 6316500/ - , AND THEREFORE, TOTAL INCOME WAS DETERM INED AT RS. 16026631/ - . AGAINST THIS DRAFT ASSESSMENT ORDER APPELLANT FILED OBJECTION IN FORM 35A BEFORE THE DISPUTE RESOLUTION PANEL. THE LD DRP HAS PASSED DIRECTION U/S 144C OF THE ACT AND BASED ON THAT FINAL ASSESSMENT ORDER WAS PASSED ON 30.01.2015 WHE REIN THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF RS. 5741983/ - AND DISALLOWANCE U/S 14A OF RS. 6316500/ - WAS RETAINED AND TOTAL ASSESSED INCOME WAS DETERMINED AT RS. 16026231/ - . AGAINST THIS ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. TRANSFER PRICING ADJUSTMENT 6. GROUND NO 1 IS GENERAL IN NATURE AND THEREFORE SAME IS DISMISSED. 7. GROUND NO 2 IS NOT PRESSED AND HENCE DISMISSED. 8. GROUND NO 3 IS RELATED TO TRANSFER PRICING ISSUES AND LD AR OF THE ASSESSEE SUBMITTED THAT OTHER THAN GROUND NO. 3.2 OTHER GROUNDS ARE NOT PRESSED, THEREFORE GROUND NO. 3.1 AND 3.3 TO 3.5 ARE DISMISSED. 9. GROUND NO. 3.2 OF THE APPEAL IS AGAINST INCLUDING CERTAIN COMPANIES BY LD TPO AND UPHELD BY LD DRP AS COMPARABLE FOR DETERMINING ALP OF THE INTERNATIONAL TRANSAC TION OF THE APPELLANT. 10. BEFORE US, LD AR OF THE APPELLANT SUBMITTED DETAILED SYNOPSIS ON THIS ISSUE AND CONTESTED THAT ONLY GROUND NO. 3.2 MAY BE ADDRESSED AS FAR AS IT RELATES TO FUNCTIONAL DISSIMILARITY IN CASE OF TWO OF THE COMPARABLES , NAMELY TRS DARWS HWA . 11. LD DR RELIED ON THE ORDERS OF LOWER AUTHORITIES AND SUBMITTED THAT THE COMPARABLES ARE FUNCTIONALLY SIMILAR AND THEREFORE, THEY CANNOT BE EXCLUDED. HE FURTHER SUBMITTED THAT BOTH THE COMPARABLES CONTESTED BY THE ASSESSEE WERE IN THE INITIAL COMPARABLE OF THE ASSESSEE AND NOW BEING RESILED BY THE APPELLANT 12. THE FUNCTIONAL PROFILE OF THE ASSESSEE ARE AS PER TP STUDY REPORT AND NOT DISPUTED BY REVENUE AR E AS UNDER: - PAGE 7 OF 15 4.3. FUNCTIONS PERFORMED 4.3.1. FUNCTIONS PERFORMED BY LGCI AS PER THE AGREEMENT, LGCI PROVIDES THE REQUISITE MARKETING SUPPORT SERVICES TO LG CHEM, KOREA. IN THIS RESPECT, THE FUNCTIONS PERFORMED BY LGCI ARE AS FOLLOWS: A) STUDY OF PETROCH EMICAL INDUSTRY LGCI UNDERTAKES MARKET RESEARCH IN THE PETROCHEMICAL INDUSTRY IN INDIA WITH THE OBJECTIVE OF UNDERSTANDING THE PREVALENT DEMANDS, COMPETITIVE ENVIRONMENT AND TRENDS IN THE INDUSTRY. LGCI PROVIDES ADVICE TO LG CHEM, KOREA WITH RESPECT TO ECO NOMIC, FINANCIAL, POLITICAL AND BUSINESS ENVIRONMENTS AND BUSINESS PRACTICES IN THIS INDUSTRY. B) IDENTIFICATION OF NEW CUSTOMERS LGCI EXPLORES NEW MARKET OPPORTUNITIES FOR LG CHEM, KOREA BY IDENTIFYING NEW RELIABLE CUSTOMERS AND UNDERSTANDING REQUIREMEN TS OF THESE CUSTOMERS. LGCI STUDIES AND IDENTIFIES THE OPPORTUNITIES FOR SALE OF LG CHEM, KOREA'S PRODUCTS IN THE INDIAN MARKET. C) IMPARTING PRODUCT INFORMATION TO POTENTIAL CUSTOMERS LGCI PROVIDES INFORMATION ABOUT THE PRODUCT PORTFOLIO OF LG CHEM, KOR EA TO THE POTENTIAL CUSTOMERS IN INDIA. HOWEVER, THE FUNCTIONS ARE LIMITED TO PROVIDING INFORMATION. LGCI DOES NOT SECURE ORDERS, NEGOTIATE PRICES OR ENTERS INTO CONTRACT WITH THE CUSTOMERS. IN THE CASE OF ADVANCE TECHNICAL QUERIES, THESE ARE DIRECTED TO T HE AE'S TECHNICAL PEOPLE. LGCI MERELY ACTS AS A FACILITATOR FOR ITS AE WHILE PERFORMING THESE MARKETING ACTIVITIES. D) PROVIDING INFORMATION ON POTENTIAL CUSTOMERS LGCI CONDUCTS SURVEYS/STUDIES ON POTENTIAL CUSTOMERS WITH DUE CONSIDERATION TO MARKET STANDING, PAST PERFORMANCE AND PROFITABILITY, FOREIGN COLLABORATIONS, PROPOSED BUSINESS PLANS ETC. LGCI SENDS PERIODICAL REPORTS TO LG CHEM, KOREA ON ANY AVAILABLE MARKET INFORMATION WITH RESPECT TO CUSTOMERS. IT FOLLOWS UP THE CORRESPONDENCE BETWEEN THE A E AND CUSTOMERS IN THE TERRITORY. PAGE 8 OF 15 E) FORWARDING THE INQUIRIES/SALES ORDER LGCI FORWARDS THE INQUIRIES RECEIVED BY IT RELATING TO THE PRODUCTS AND ALL THE SALES ORDERS SOLICITED BY LGCI FROM IDENTIFIED CUSTOMERS TO LG CHEM, KOREA FOR ITS EVALUATION. F) CONTACTING THE CUSTOMERS TO OBTAIN FEEDBACK ON BEHALF OF AE LGCI CONTACTS THE CUSTOMERS OF ITS AE ON A REGULAR BASIS TO OBTAIN THEIR INPUTS ON THE QUALITY AND EFFICIENCY OF PRODUCTS AS SUPPLIED BY THE AE VIS - A - VIS THE COMPETITORS IN INDIA AND GIVES THE RE SULTANT FEEDBACK TO ITS AE. G) PROVIDING MARKETING ASSISTANCE 1 LGCI PROVIDES MARKETING ASSISTANCE TO LG CHEM, KOREA BASED ON THE INSTRUCTIONS RECEIVED BY THE AE. THE MARKETING ASSISTANCE IS PROVIDED WITH AN OBJECTIVE TO PROMOTE THE PRODUCTS OF LG CHEM, KOREA IN INDIA. LGCI ACTS AS A COMMUNICATION CHANNEL FOR AE'S CUSTOMERS FOR ALL COMMERCIAL AND TECHNICAL PROBLEMS AND DOES NOT CARRY OUT ANY REPAIRS OR SUPPLY OF GOODS. AS EXPLAINED ABOVE, THE MARKETING ACTIVITIES UNDERTAKEN BY LGCI FOR PROMOTING LG CHEM K OREA'S PRODUCTS ARE LIMITED TO CO - ORDINATION BETWEEN ITS AE AND THE CUSTOMERS. LGCI ACTS AS A FACILITATOR FOR ITS AE AND DOES NOT UNDERTAKE SIGNIFICANT FUNCTIONS (E.G. CONFIRMING ORDERS, NEGOTIATION OF PRICES/TERMS OF AGREEMENTS ETC.) WHILE PERFORMING THES E ACTIVITIES. 4.3.1.1. OTHER MANAGEMENT FUNCTIONS THE FUNCTIONS ADDRESSED BELOW ARE COMMON FUNCTIONS THAT ARE CARRIED OUT BY ANY BUSINESS IRRESPECTIVE OF THEIR SIZE AND TYPE. THESE FUNCTIONS ARE DRIVERS OF EVERY BUSINESS AND ARE INDISPENSABLE IN THE ECONOM IC ENVIRONMENT. A) CORPORATE STRATEGY DETERMINATION: GENERALLY, ALL POLICIES WITHIN LGCI ARE DETERMINED BY ITS OWN MANAGEMENT WHICH CONTINUOUSLY MONITORS THE ECONOMIC ENVIRONMENT SURROUNDING THE INDIAN ENTITY, ASSESSES THEIR PAGE 9 OF 15 STRATEGIC POSITION WITHIN THE INDUSTRY AND TARGETS TO ACHIEVE ITS CORPORATE OBJECTIVES WITH GUIDANCE FROM THE GROUP. B) FINANCE, ACCOUNTING, TREASURY AND LEGAL: THE MANAGEMENT IN LGCI IS RESPONSIBLE FOR MANAGING THE FINANCE, TREASURY, LEGAL AND ACCOUNTING FUNCTIONS. IN CERTAIN AREAS , WHEREVER NECESSARY, LGCI IS GUIDED BY THE GROUP. C) HUMAN RESOURCE MANAGEMENT ('HR'): THE HR FUNCTION AT LGCI IS CO - ORDINATED BY ITS MANAGEMENT WHICH IS RESPONSIBLE FOR RECRUITMENT, DEVELOPMENT AND TRAINING OF THE PERSONNEL INCLUDING THE EMOLUMENT STRU CTURE. IN THIS RESPECT, WHERE APPROPRIATE, IT IS GUIDED BY THE GROUP'S POLICIES. 13. BASED ON THE ABOVE FUNCTION S THE TP STUDY REPORT SUGGESTS THAT THE ASSESSEE HAS LIMITED MARKET RISK, BEARS THE SERVICE LIABILITY WITH RESPECT TO AE DOES NOT BEAR CREDIT RISK ETC. AS THE ASSESSEE IS REMUNERATED BASED ON COST PLUS BASIS IT DOES NOT HAVE ANY SIGNIFICANT RISK INVOLVED OF INVENTORY RISK, FOREIGN EXCHANGE RISK AND MANPOWER RISK. THEREFORE, IT IS SUBMITTED THAT IT IS A LIMITED RISK ENTITY COMPARED TO ITS AE. 14. THE ASSESSEE WAS SHOWN TO BE OWNING LIMITED TANGIBLE ASSETS AND DOES NOT HAVE ANY INTANGIBLE ASSETS OF ITS OWN. 15. BASE D ON ABOVE FAR ANALYSIS ASSESSEE WAS CHARACTERIZED AS A ROUTINE SERVICE PROVIDER EXPOSED TO LESS THAN NORMAL RISK ASSOCIATED WITH ITS BUSINESS. BASED ON THIS ASSESSEE WAS SELECTED AS A TESTED PARTY AND TRANSACTION NET MARGINAL METHOD WAS CONSIDERED AS THE MOST APPROPRIATE METHOD. IN ITS TP STUDY REPORT IT HAS SELECTED FOUR COMPARABLES AND PLI OF OP/TC. THIS STUDY REPORT WAS REJECTED BY TPO AND HE SELECTED HIS OWN COMPARABLE AND PLI OF PBIT/COST. THE BRIEF COMPARISONS OF THE COMPARABLES SELECTED BY ASSESSEE AND TPO ARE TABULATED AS UNDER: - PAGE 10 OF 15 SL. NO. COMPARABLE AS PER PLI OF ASSESSEE OF OP/TC AS PER PLI OF TPO OF PBIT/COST REMARKS 1. IDC INDIA LTD. 12.79 14.85 ASSESSEE AS WELL AS TPO BOTH ACCEPTED THIS COMPARABLE 2. HANSA VISION PVT. LTD. 3.63 NA REJECTED BY TPO 3. EMPIRE INDUSTRIES LTD. 11.60 NA REJECTED BY TPO 4. ENTERTAINMENT NETWORK INDIA LTD. 0.22 NA REJECTED BY TPO 5. CAMEO CORP. SERV. NA 8.26 INCLUDED BY TPO 6. HCCA BUSINESS SERVICES PVT. LTD. NA 20.05 INCLUDED BY TPO 7. TSR DARASHAW LTD NA 41.15 INCLUDED BY TPO AVERAGE 7.06 21.08 ASSESSEES PLI 8.14 INTERNATIONAL TRANSACTION ( INR) 48843515 48843515 ALP DETERMINED BY ASSESSEE A ND TPO (INR) 48843515 51285690 ADJUSTMENT (INR) NIL 5741983 PAGE 11 OF 15 16. BEFORE US LD AR OF THE ASSESSEE CONTESTED TWO COMPARABLES SELECTED BY TPO WHICH ARE AT SL. NOS. 6 AND 7 OF ABOVE TABLE WHICH ARE CONSIDERED AS UNDER: - A. TSR DARASHAW LTD: - THE ABOVE COMPARABLE WAS CONTESTED BY THE ASSESSEE SUBMITTING THAT IT IS FUNCTIONALLY DISSIMILAR AS IT IS ENGAGED IN THE BUSINESS OF REGISTRAR AND TRANSFER AGENT ACTIVITY, RECORD MANAGEMENT ACTIVITY AND PAY ROLL TRUST FUND ETC. IT WAS FURTHER SUBMITTED THAT IT IS BPO ORGANIZATION AND THEREFORE, IT IS NOT COMPARABLE. THE LD TPO REJECTED STATING THAT AS T HE COMPARABLE IS ALSO A SERVICE PROVIDER IT IS FUNCTIONALLY SIMILAR. REGARDING ABNORMALLY HIGH MARGINS OF THE COMPARABLE LD TPO REJECTED THIS GROUND. LD DRP CONSIDERED THE ARGUMENT OF THE ASSESSEE AND REJECTED THEM HOLDING THAT THE TPO HAS GIVEN ADEQUATE REASONS FOR SELECTING THE AFORESAID COMPARABLES AND THEY ARE FUNCTIONALLY SIMILAR. REGARDING THE CONTENTION OF THE LD DR THAT ASSESSEE HAS SELECTED THIS COMPARABLE IN ITS T P STUDY ANALYSIS. WE ARE NOT INCLINED TO UPHOLD THE OBJECTION TAKEN BY THE LD. DR O N THE INCLUSION OF THIS COMPANY AS COMPARABLE MERELY ON THE FACT THAT THE ASSESSEE TREATED IT AS COMPARABLE IN ITS TP STUDY ANALYSIS. IF THE ASSESSEE INADVERTENTLY INCLUDES A COMPANY IN ITS ACCEPT REJECT MATRIX, WHICH IS, IN FACT, NOT COMPARABLE, HE HAS A RIGHT TO AGITATE BEFORE THE AUTHORITIES THAT SUCH COMPARABLE MAY BE EXCLUDED. IT IS FOR REVENUE TO COUNTER THE CLAIM OF THE ASSESSEE AND PROVE OTHERWISE. IF, HOWEVER, THE COMPARABLE TURNS OUT TO BE FUNCTIONALLY DISSIMILAR, THEN, THERE CAN BE NO RATIONALE IN CONTINUING TO TREAT IT AS COMPARABLE DESPITE THE FUNCTIONAL DISSIMILARITIES. MATTER OF PRIME IMPORTANCE IS COMPARABILITY ANALYSIS THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. QUARK SYSTEMS (P) LTD. (2010) 132 TTJ (CHD) (SB) 1, HAS HELD THA T AN ASSESSEE IS ENTITLED TO RAISE A CLAIM FOR THE FIRST TIME BEFORE THE TRIBUNAL EVEN THROUGH AN ADDITIONAL GROUND THAT A COMPANY WAS WRONGLY INCLUDED IN THE LIST OF COMPARABLES. THEREFORE WE ARE OF THE CONSIDERED OPINION THAT THE OBJECTION TAKEN BY THE LD. DR IS UNACCEPTABLE. B EFORE US THE ASSESSEE HAS PLACED ANNUAL REPORT OF THIS COMPARABLE WHICH IS AT PAGE 57 - 98 OF THE PAPER BOOK FILED BY THE PAGE 12 OF 15 ASSESSEE. ACCORDING TO THE DIRECTORS REPORT ASSESSEE IS ENGAGED IN PAYROLL PROCESS OUTSOURCING BUSINESS AND A LSO EARNED REVENUE FROM REGISTRY BUSINESS AS WELL AS RECORD MANAGEMENT BUSINESS. AT PAGE NO. 80 WHICH PROVIDES SEGMENTAL INFORMATION IT HAS MAJOR REVENUE OF RS.1194 LACS FROM REGISTRY AND TRANSFER BUSINESS AND RS.144.18 FROM RECORD MANAGEMENT BUSINESS AND BALANCE FROM PAYROLL OUTSOURCING OUT OF TOTAL REVENUE OF RS. 2007 LACS. ASSESSEE HAS SUBMITTED THAT THIS COMPARABLE IS A BUSINESS PROCESS OUTSOURCING ORGANIZATION AND IS PRIMARILY ENGAGED IN THE HANDLING OF BPO SERVICES. WE DO NOT FIND ANY OBSERVATION OF LD TPO, LD DRP AND LD DR BEFORE US WHICH SAYS THAT BPO INDUSTRY COMPARABLE CAN BE TAKEN AS FUNCTIONALLY COMPARABLE WITH THE LIMITED RISK MARKET SUPPORT SERVICE PROVIDER. FURTHER, LD AR HAS RELIED UPON DECISION IN THE CASE OF MICROSOFT CORPORATION INDIA PVT . LTD. VS. DCIT IN ITA NO.5766/DEL/2011 FOR AY 2007 - 08 OF THE COORDINATE BENCH WHERE IT HAS BEEN HELD THAT TSR DARASHAW LTD. WAS HELD TO BE NOT COMPARABLE WITH MARKET SUPPORT SERVICE PROVIDER AS UNDER: - 18. COMING TO THE MERITS OF COMPARABILITY, WE FIND THAT THIS COMPANY HAS THREE SEGMENTS, WHICH INTER ALIA INCLUDE: 'PAY ROLL AND TRUST FUND ACTIVITY (PAY ROLL).' IT IS THIS SEGMENT WHICH HAS BEEN CONSIDERED BY THE ASSESSEE AS COMPARABLE. THIS COMPANY ON AN OVERVIEW IS A BROKING AND INVESTMENT BANKING HOUSE . ITS OTHER SEGMENTS ARE : 'REGISTRAR AND TRANSFER AGENT ACTIVITY (R&D)' AND 'RECORDS MANAGEMENT ACTIVITY (RECORDS).' THE SEGMENT OF 'PAY ROLL' WAS CONSIDERED BY THE ASSESSEE AS COMPARABLE IN ITS TP STUDY REPORT AND THE SAME IS NOW ASSAILED. UNDER THE 'PAY ROLL' SEGMENT, THIS COMPANY UNDERTAKES PAY ROLL AND EMPLOYEE TRUST FUND ADMINISTRATION AND MANAGEMENT. WHEN WE COMPARE THE NATURE OF PAY ROLL ACTIVITY UNDERTAKEN BY THIS COMPANY WITH THE MARKETING SUPPORT SERVICES RENDERED BY THE ASSESSEE TO ITS AES, WE F IND THAT BOTH ARE WAY APART FROM EACH OTHER. THERE CAN BE NO LOGICAL COMPARISON BETWEEN A SPECIFIC PAY ROLL SERVICES RENDERED BY A COMPANY TO ITS CLIENTS WITH THE MARKETING SUPPORT ITA NO.5766/DEL/2011 SERVICES RENDERED BY THE PAGE 13 OF 15 ASSESSEE TO ITS AES. THIS COM PANY IS, THEREFORE, DIRECTED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. IN VIEW OF THE ABOVE DECISION AS WELL AS OUR OWN PERUSAL OF THE BALANCE SHEET OF THE COMPARABLE WITH SPECIFIC REFERENCE TO I T S DIRECTORS REPORT AT PAGE NO. 57, SEGMENT REPOR TING AS PER ACCOUNTING STANDARD 17 AT PAGE NOS. 80 TO 82 ALSO , WE HOLD THAT THIS COMPARABLE IS FUNCTIONALLY DISSIMILAR AND THEREFORE DIRECTED TO EXCLUDED. B. HCCA BUSINESS SERVICES PVT. LTD. THE LD TPO HAS INCLUDED THIS COMPARABLE HOLDING IT FUNCTIONALLY SIMILAR. ASSESSEE OBJECTED IT THAT IT IS PART OF BPO INDUSTRY, WHICH REQUIRES SIGNIFICANT EMPLOYEE SKILL AND ALSO OWN SIGNIFICANT INTANGIBLE ASSETS WHICH CONTRIBUTES TO 52.91% OF ITS BLOCK OF ASSETS. LD TPO REJECTED HOLDING THAT THIS COMPARABLE OFFERS A WIDE RANGE OF SERVICE SUCH AS PAYROLL PROCESSING, COMPENSATION STRUCTURING ETC. AND THEREFORE IT IS COMPARABLE. REGARDING THE EMPLOYEE SKILL LD TPO WAS OF THE VIEW THAT THIS CONTENTION HAS NOT BEEN SUBSTAN TIATED AND FURTHER REGARDING INTANGIBLES HE SUBMITTED THAT IT CONSTITUTES ONLY 11.67% OF ITS SALES. LD DRP UPHELD THE CONTENTION OF THE LD TPO. BEFORE US LD AR REITERATED THE SAME CONTENTIONS RAISED BEFORE THE LOWER AUTHORITIES AND LD DR GAVE THE SAME REAS ONING WHICH WAS GIVEN BY THE LD TPO. LD. DR ALSO SUBMITTED THAT THIS COMPARABLE WAS INCLUDED BY THE ASSESSEE IN ITS INITIAL T P ANALYSIS WE REJECT THIS SUBMISSION FOR OUR REASONS GIVEN IN DISCUSSING EARLIER COMPARABLE. IT IS VERY SIGNIFICANT TO NOTE THAT AS PER THE BALANCE SHEET SUBMITTED BY THE ASSESSEE OF THE COMPARABLE AT PAGE NO.99 ONWARDS IT SHOWS THAT ACCORDING TO SCHEDULE D OF THE BALANCE SHEET THE COMPARABLE POSSES BUSINESS AND COMMERCIAL RIGHTS OF RS. 37533159/ - AND FURTHER THE NATURE OF SERVICES PRODUCED BY THE ASSESSEE BEFORE LD TPO SHOWS THAT IT IS ENGAGED IN PAY ROLL PROCESSING AND COMPENSATION STRUCTURE. IN THE DECISION CITED BEFORE US OF THE COORDINATE BENCH IN CASE OF MICROSOFT CORPORATION INDIA PVT. LTD. VS. DC IT (SUPRA) AT PARA NO. 18 IT IS HELD THAT MARKETING SUPPORT SERVICES AND PAGE 14 OF 15 PAYROLL ACTIVITY ARE WAY APART FROM EACH OTHER. IN VIEW OF THIS WE DIRECT THE EXCLUSION OF THIS COMPARABLE. 17. IN VIEW OF THE ABOVE WE ALLOW GROUND NO. 3.2 OF THE APPEAL AND DIRECT EXCLUSION OF THE ABOVE TWO COMPARABLES NAMELY TSR DARASHAW LTD. AND HCCA BUSINESS SERVICES PVT. LTD. CORPORATE TAX ISSUES 18. THE GROUND NO. 4 AND GROUND NO. 5 OF APPEAL ARE WITH RESPECT TO DISALLOWANCE U/S 14A OF RS. 6316500/ - M ADE BY THE LD ASSESSING OFFICER APPLYING THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES, 1962. 19. THE BRIEF FACTS OF THESE GROUNDS ARE THAT THE ASSESSEE HAS MADE INVESTMENT OF RS. 126 , 33 , 00 , 000/ - IN ITS SUBSIDIARY LG POLYMER INDIA PVT. LTD. ON QUERY BY TH E LD AO , ASSESSEE SUBMITTED REPLY VIDE LETTER DATED 03.10.2013 STATING THAT THE INVESTMENT IS MADE IN SUBSIDIARY AND THEREFORE, NO DISALLOWANCE ARE MADE. LD ASSESSING OFFICER APPLIED RULE 8D AND DISALLOWED 0.5% OF THIS INVESTMENT . THE ISSUE WAS CONTESTED BEFORE THE LD DRP VIDE GROUND NO.4, LD. DRP HAS DISPOSED OFF THIS OBJECTION REJECTING THE CONTENTION OF THE ASSESSEE. BEFORE US ASSESSEE HAS CONTESTED THAT NO INVESTMENT HAVE BEEN MADE BY THE APPELLANT OUT OF BORROWED FUNDS AND EXEMPT INCOME EARNED DURING THE YEAR IS NIL. LD AR SUBMITTED THAT ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE IN VIEW OF THE DECISION OF HONBLE DELHI HIGH COURT IN CHEMINVEST LTD. VS. CIT. LD DR RELIED ON THE ORDERS OF LOWER AUTHORITIES. 20. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. IT IS UNDISPUTED FACT THAT DURING THE YEAR ASSESSEE HAS NOT RECEIVED ANY DIVIDEND AND THEREFORE, NO DISALLOWANCE CAN BE MADE IN THE HANDS OF THE ASSESSEE U/S 14A OF THE INCOME TAX ACT IN ABSENCE OF ANY EXEMPT INCOME. HONBLE DELHI HIGH C OURT IN CASE CHEMINVEST VS. C IT IN ITA NO. 749/2014 [ 61 TAXMANN.COM118 (DEL) ] HAS HELD AS UNDER: - 23. IN THE CONTEST OF THE FACTS ENUMERATED HEREINBEFORE THE COURT ANSWERS THE QUESTION FRAMED BY HOLDING THAT THE EXPRESSION DOES NOT FORM PART OF THE TOTA L INCOME IN SECTION 14A OF THE ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING THE RELEVANT PREVIOUS PAGE 1 5 OF 15 YEAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME . IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DUR ING THE RELEVANT PREVIOUS YEAR. 21. IN ABSENCE OF ANY EXEMPT INCOME RECEIVED OR RECEIVABLE BY THE ASSESSEE DURING THE YEAR , RESPECTFULLY FOLLOWING THE DECISION OF H ONBLE DELHI HIGH COURT WE DELETE THE DISALLOWANCE OF RS. 6316500/ - MADE BY THE ASSESSING OFFICER U/S 14A OF THE ACT. THEREFORE, GROUND NO. 5 OF THE APPEAL IS ALLOWED. 22. AS WE HAVE ALREADY ALLOWED GROUND NO.5 OF THE APPEAL THE GROUND NO.4 AND GROUND NO.5.1 AND GROUND NO.6 WITH RESPECT DISALLOWANCE U/S 14A ARE DISMISSED. 23. GROUND NOS. 7 AND 8 OF THE APPEAL ARE WITH RESPECT TO INITIATION OF PENALTY PROCEEDINGS AND CHARGING OF INTEREST U/S 234B AND 234D OF THE ACT. GROUND AGAINST IMITATION OF PENALTY PROCEEDING S IS PREMATURE AND GROUND AGAINST CHARGING OF INTEREST IS CONSEQU EN TIAL WE DISMISS BOTH THE GROUNDS. 24. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 0 3 /05/2016. - S D / - - S D / - ( I.C.SUDHIR ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 3 /05/2016 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELH I