Proseed India Limited (Formerly Green Fire Agri Commodities Limited ), Hyderabad V. ACIT, Circle-2(2), , Hyderabad

ITA 206/Hyd/2015

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 4525 (ITAT-HYDERABAD)
• Duration Of Justice: 7 year(s) 4 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Assessment Year: 2010-2011
• Appeal Filed On: 02-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y.V.S.T. SAI
• Keywords: Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 92; 64

Judgement Text

आयकर अपीलीय अिधकरण, हैदराबाद पीठ म IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”, HYDERABAD BEFORE SHRI RAMA KANTA PANDA, ACCOUNTANT MEMBER & SHRI K.NARASIMHA CHARY, JUDICIAL MEMBER आ.अपी.सं / ITA No. 206/Hyd/2015 (िनधा रण वष / Assessment Year: 2010-11) M/s.Proseed India Limited, (Formerly Green Fire Agri Commodities Limited), Hyderabad [PAN No. AABCN7753P] Vs. Asst. Commissioner of Income Tax, Circle-2(2), Hyderabad अपीलाथ / Appellant यथ / Respondent िनधा रती ारा / Assessee by: Shri P.V.S.S.Prasad, AR राज व ारा / Revenue by: Shri Y.V.S.T.Sai, CIT-DR सुनवाई की तारीख/Date of hearing: 20/06/2022 घोषणा की तारीख/Pronouncement on: 22/07/2022 आदेश / ORDER PER K. NARASIMHA CHARY, JM: Aggrieved by the order dated 27/01/2015, passed by the Learned Asst. Commissioner of Income Tax, Circle-2(2), Hyderabad (“Ld. AO”) in the case of M/s. Green Fire Agri Commodities Ltd., (now, M/s.Proseed India Limited) (“the assessee”) for the AY.2010-11, under section 143(3) r.w.s.92CA(4) r.w.s. 144C(13) of the Income Tax Act, 1961 (for short “the ITA No. 206/Hyd/2015 Page 2 of 11 Act”), consequent to the directions of Hon'ble Dispute Resolution Panel, Hyderabad (“DRP”), assessee filed this appeal. 2. Brief facts of the case are that the assessee is a company engaged in the business of export of Information Technology enabled Services (ITeS) for the assessment year 2010-11 they have filed the return of income on 14/10/2010 declaring loss of Rs. 8,55,534/-. Learned Assessing Officer noticed that during the year the assessee entered into international transactions with the Associate Enterprises (AEs), the value of which is more than Rs. 15 Crores and, therefore, the determination of the Arms Length Price (“ALP”) was referred to the Ld. Transfer Pricing Officer (Ld. TPO) and the Ld. TPO by order dated 30/04/2013 suggested an adjustment of Rs. 3,57,66,546/- on account of provision of ITES and a sum of Rs. 1,02,02,815/- on account of receivables. Pursuant to such report of the Ld. TPO under section 92 CA(3) of the Act, learned Assessing Officer passed draft assessment order dated 12/03/2014 determining the income of the assessee at Rs. 5,18,48,281/- and in the process apart from the adjustment suggested by the Ld. TPO, learned Assessing Officer also added a sum of Rs. 77,16,500/- on account of disallowance of interest on unsecured loan and Rs. 92,20,769/- by considering the foreign exchange loss as non- operational expenditure. 3. Assessee filed objections before the Ld. DRP. Ld. DRP issued directions to the learned Assessing Officer/Ld. TPO to delete three of the comparables chosen by the Ld. TPO, upholding the addition made by the Ld. TPO/learned Assessing Officer in respect of interest on unsecured loans to the tune of Rs. 77,16,500/- and also to consider the foreign exchange loss as operating cost for the purpose of TP study and the determination ITA No. 206/Hyd/2015 Page 3 of 11 of ALP. Pursuant to these directions Ld. TPO computed the TP adjustment at Rs. 2,25,24,829/- as against the original TP adjustment of Rs. 3,57,66,546/-. Learned Assessing Officer passed the final assessment order on 27/01/2015 under section 143(3) read with section 92CA(4) and section 144C(13) of the Act determining the income of the assessee at Rs. 2,93,85,795/- under normal provisions of the Act and at Rs. 4,59,53,890/- under section 115 JB of the Act. 4. Assessee is, therefore, before us in this appeal seeking exclusion of the comparables, namely, M/s Accentia Technologies Limited, TCS e-Serve International Ltd and Acropetal Tech (Seg) on the ground of functional comparability, extraordinary events, super profit and high turnover. By way of additional grounds, assessee sought the exclusion of Cosmic Global Ltd., and Crossdomain Solutions Ltd., also on the ground that the said comparable for failing to meet the filters of comparability. Apart from this the other challenge in the appeal by the assessee is towards the disallowance of interest of Rs. 77,16,500/- on unsecured loans taken from M/s. Social Media India Ltd., which happens to be its hundred percent subsidiary, the addition made on account of treating the foreign exchange loss as operating in the nature for transfer pricing purposes, and also the trade receivables arising in the course of business. 5. We have gone through the record. It could be seen there from that to benchmark the international transaction of IT Enables Services (ITES) the assessee had adopted TNMM method as the most appropriate method with OP/OC as the Profit Level Indicator (PLI). The assessee selected ten comparables and arrived at a margin of 15.85%. Ld. TPO, however, selected 11 comparables and there are at a margin of 34.94% including ITA No. 206/Hyd/2015 Page 4 of 11 working capital adjustment of 7.04%. The assessee challenged before the Ld. DRP six comparables, namely, Accentia Technologies Limited, Acropetal Tech (Seg), Eclerx Services Ltd, Infosys BPO Ltd., TCS e-Serve International Ltd., and TCS e-Serve Limited on the grounds of high profit, high turnover and not to be found in the data base. After considering the contentions of the assessee, Ld. DRP directed the learned Assessing Officer to exclude M/s Infosys BPO Limited and TCS e-Serve Limited from the list of comparables due to high turnover of these companies. Ld. DRP directed the exclusion of Eclerx Services Ltd also on the ground of such company being a KPO company. 6. Insofar as this segment of ITES, assessee is challenging before us the inclusion of Accentia Technologies Ltd., Acropetal Tech (Seg) and TCS e- Serve International Ltd., as retained by the Ld. DRP. Further the assessee is also challenging the inclusion of cosmic global limited and Crossdomain Solutions Ltd, before us, though not challenge before the Ld. DRP. 7. Insofar as the entities Accentia Technologies Ltd., and TCS e-Serve International Ltd., are concerned, in this appeal assessee is challenging the inclusion of only Accentia technologies limited and TCS e-Serve international Ltd. In respect of these two entities, it was contended before the Ld. TPO by the assessee that this entity is having huge turnover and high profit margins and, therefore, the same may not be accepted. Learned Assessing Officer held that no economic rational was given by the taxpayer as to why the high turnover company is be excluded for the comparison. According to him there is no linkage whatsoever between the profits and turnover and the scale has no influence on the profitability of the company in the ITeS industry. On this ground, Ld. TPO rejected the contention of the ITA No. 206/Hyd/2015 Page 5 of 11 assessee and retain these two Companies. Though the same contention was revised before the Ld. DRP, Ld. DRP did not exclude these two Companies. Order of Ld. DRP does not throw any light as to why the contentions of the assessee was rejected to retain these two companies. The assessee is, therefore, disputing the inclusion of four comparables in all, namely, Accentia Technologies Ltd., TCS e-Serve International Ltd., Cosmic Global Limited and Crossdomain Solutions Ltd. 8. Coming to the Accentia Technologies Limited, it is the submission on behalf of the assessee that this company deserves to be rejected in view of an extraordinary event in the current year, namely, amalgamation of Assent Infoserve Pvt. Ltd with the company having an impact on the profit of the company. Further Accentia Technologies Ltd. is into diversified knowledge process outsourcing activities and the company is involved in healthcare documentation as well as receivables, management services including installation and maintenance of all software, hardware and bandwidth infrastructure required for the same, deployment of manpower and service delivery in all these areas, apart from the earning in the legal process outsourcing. 9. Further, Ld. AR submitted that in assessee’s own case for the assessment year 2011-12 in ITA No. 209/Hyd/ 2016 a coordinate Bench of this Tribunal deleted this company from the list of comparables. There is no contradiction to this fact. Having gone to the facts and circumstances of the case, while respectfully following the view taken by a coordinate Bench of this Tribunal in assessee’s own case for the assessment year 2011-12, we direct the learned Assessing Officer to delete this company from the list of comparables. ITA No. 206/Hyd/2015 Page 6 of 11 10. Coming to TCS e-Serve International Ltd. and Cosmic Global Limited, it is submitted before us that TCS e-Serves International has a high turnover and is a super profit making company, operating revenue during the year of this company is Rs. 149,29,56,000/- and operating profit earned is Rs. 50,75,60,000/- and OP by overseas 51.51%. On this ground it is submitted that this company is not at all comparable to the assessee. For the same assessment year as that of the assessment year in the case on hand, namely, assessment year 2010-11, Ld. AR placed reliance on the decision reported in Cognizant Technology Services (P) Ltd vs. DCIT (2016) 67 taxmann.com 99 (Hyderabad-Trib), ACIT vs. Hyundai Motors India Engineering (P) Ltd (2015) 64 taxmann.com 442 (Hyderabad-Trib) wherein it was held that during the relevant financial year, the TCS e-Serve international Ltd had acquired the Citi group India-based captive business processing outsourcing (BPO) arm for an all cash consideration and in return had acquired the business of an aggregate amount of $2.5 billion over a period of 90.5 years, this definitely is an exceptional circumstance etc., 11. In these decisions, namely, Cognizant Technology Services (P) Ltd vs. DCIT (2016) 67 taxmann.com 99 (Hyderabad-Trib), ACIT vs. Hyundai Motors India Engineering (P) Ltd (2015) 64 taxmann.com 442 (Hyderabad- Trib) it is further held that Cosmic Global Limited has outsourced major of its activities, the entire outsourcing is confined to translation charges paid at Rs. 3 crores which is strictly in the realm of translation segment revenue is from which are to the tune of Rs. 6.9 crores and if this segment of translation is not under consideration for deciding as to whether this case is comparable or not, there is no need to take recourse to the figures which ITA No. 206/Hyd/2015 Page 7 of 11 are relevant for the segments other than accounts BPO. On this score it was held that Cosmic Global Limited is not a comparable to the BPO rendering ITeS services. 12. No doubt, acquisition of a new type of business during the year is an exceptional event and renders the comparability of this entity which the assessee, who has no such event. So also the comparability depends upon the segment which forms the predominant activities of the entity and on this score, the Cosmic Global Limited does not pass the test of comparability. Having regard to these we are of the considered opinion that there are sufficient reasons to exclude these companies from the list of comparables and on that premise, we direct the learned Assessing Officer/Ld. TPO to exclude these companies from the final list of comparables. 13. Lastly coming to the Crossdomain Solutions P. Ltd, the objection of the assessee is that this entity is into outsourcing, consulting and IT services, though the company specifies that it is into business processing, upon detailed analysis of services provided, the company is more than just a business processing organisation but into diversified outsourcing services into many industries in assessee’s own case for the assessment year 2011-12, a coordinate Bench of this Tribunal considered the issue of comparability of Crossdomain Solutions P. Ltd with the assessee and held that inasmuch as this entity is into outsourcing and consulting and IT services including services in market research, outsourcing services in diversified industries this company is not a good comparable to the assessee. Respectfully following the view taken by a coordinate Bench of this Tribunal basing on the functional comparison, we direct the learned ITA No. 206/Hyd/2015 Page 8 of 11 Assessing Officer/Ld. TPO to exclude this company from the list of comparables. 14. In respect of additional ground No. 1 relating to the foreign exchange loss and said treatment as operating in nature for transfer pricing purpose, Ld. AR placed reliance on the decision in the DHL Express (India) (P) Ltd. vs. ACIT (2011) 11 taxmann.com 40 (Mumbai), DCIT vs. Hanil Tube India (P) Ltd. (2017) 81 taxmann.com 69 (Chennai-Trib) and the safe harbour rules as not filed by the CBDT vide notification No. 73/2013 on 18/09/2013 to submit that operating expense means cost incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including depreciation and amortisation expenses relating to the assets used by the assessee, but not include certain expenses like interest expense, provision for an unascertained liabilities, P operating expenses, loss arising on account of foreign currency fluctuations, extraordinary expenses, loss on transfer of assets or investments, expenses on account of Income Tax and other expenses not relating to normal operations of the assessee. 15. In DHL Express (India) (P) Ltd. vs. ACIT (supra) and DCIT vs. Hanil Tube India (P) Ltd. (supra) it is held that foreign exchange fluctuations and profit on sale of assets do not form part of the operational income because these items have nothing to do with the main operations of the assessee. In these circumstances, we are of the considered opinion that the foreign exchange loss should not have been treated as operational expense and we direct the learned Assessing Officer/Ld. TPO to treat the foreign exchange fluctuation loss as non-operating in nature for calculation of margins. ITA No. 206/Hyd/2015 Page 9 of 11 16. The other ground of appeal is, Ld. AR submits that, in respect of the disallowance of interest of Rs. 77,16,500/- on unsecured loan taken from M/s. Social Media India Ltd., which is 100% subsidiary of the assessee on the ground that the same was not incurred for the purpose of assessee’s business though the said borrowings were utilised for investments in subsidiaries which is part of business purpose of the assessee company. He further submitted that in assessee’s own case for the assessment year 2011-12 in ITA No. 209/Hyd/2016 a coordinate Bench of this Tribunal held that as the assessee has borrowed from the Indian sister concern and invested in foreign sister concern as in share capital and the share application money, the money invested in the sister concern has to be considered to be for the purpose of business as per the ratio laid down by the Hon’ble Supreme Court in the case of SA Builders Ltd. vs. CIT (2007) 158 Taxman 74 (SC), because the holding company has a deep interest in the subsidiary company, and hence, borrowed funds invested by the assessee in the sister concern or to be for the purpose of business and allowable on the ground. 17. We have gone through the order dated 31/07/2017 in ITA No. 209/Hyd/2016 in assessee’s own case for the assessment year 2011-12 wherein it is clearly held that the interest on unsecured loan taken from M/s. Social Media India Ltd., is an allowable expenditure. Respectfully following the view taken by a coordinate Bench of this Tribunal in assessee’s own case, we allow this ground and direct the learned Assessing Officer to delete this addition. 18. Now coming to the last contention of the assessee in respect of the trade receivables, which according to the assessee arise in the course of ITA No. 206/Hyd/2015 Page 10 of 11 business and not to be treated as loans for the levy of interest, beyond the credit period of 30 days as against the normal credit period of 90 days, Ld. TPO suggested an addition of Rs. 7,95,64,094/- as receivables at the end of the year observing that the payments against the invoice price of had not been received within the credit period. Ld. DRP however adopted interest rates prevailing in the international market, namely, LIBOR +2% and computed the interest amount to Rs. 24,74,182/-. 19. Though this ground has been raised, at the time of arguments Ld. AR submitted that the assessee does not insist the same. Recording the concession, we dismiss this ground. 20. In the result, appeal of the assessee is treated as allowed for statistical purpose. Order pronounced in the open court on this the 22 nd day of July, 2022 Sd/- Sd/- (RAMA KANTA PANDA) (K. NARASIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 22/07/2022 TNMM ITA No. 206/Hyd/2015 Page 11 of 11 Copy forwarded to: 1. M/s.Proseed India Limited (formerly Green Fire Agri Commodities Limited), C/o.Prasad & Prasad Chartered Accountants, Flat No.301, MJ Towers, 8-2-698, Road No.12, Banjara Hills, Hyderabad. 2. Asst.Commissioner Income Tax, Circle-2(2), Hyderabad. 3. The Dispute Resolution Panel (DRP), Hyderabad. 4. The Director of Income Tax (IT & TP), Hyderabad. 5. The Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad. 6. DR, ITAT, Hyderabad. 7. GUARD FILE TRUE COPY ASSISTANT REGISTRAR ITAT, HYDERABAD