JCIT, Noida V. M/s Colwell & Salmon Communication (India) Ltd., Noida

ITA 3054/DEL/2011

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4225 (ITAT-DELHI)
• Duration Of Justice: 9 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Assessment Year: 2004-2005
• Appeal Filed On: 09-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKHILESH KUMAR YADAVDR
• Keywords: Transfer pricing; Business expenditure; International transaction; Wholly owned subsidiary
• Section: 13; 153; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI [THROUGH VIDEO CONFERENCE] BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI K. N CHARY, JUDICIAL MEMBER ITA NO. 3054/DEL/2011 [A.Y 2004-05] ITA NO. 1117/DEL/2012 [A.Y 2005-06] THE J.C.I.T VS. COLWELL & SALMON COMMUNICATIONS [ I] LTD NOIDA RANGE C 39, SECTOR, 58, NOIDA NOIDA PAN: AACCC 0322 Q [APPELLANT] [RESPONDENT] ASSESSEE BY : SHRI AJAY VOHRA, SR DR, SHRI NEERAJ JAIN, ADV SHRI ABHISHEK AGGARWAL, ADV REVENUE BY : SHRI AKHILESH KUMAR YADAV-DR DATE OF HEARING : 20.10.2020 DATE OF PRONOUNCEMENT : 28.10.2020 2 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, BOTH THESE APPEALS BY THE REVENUEARE PREFERRED AGAI NST THE ORDER OF THE LD. CIT(A), GHAZIABAD DATED 15.03.2011 PERTAINING TO A.Y 2004-05 AND 2005-06. SINCE COMMON ISSUES ARE INVOL VED IN BOTH THE APPEALS, THESE ARE BEING DISPOSED OF TOGETHER FOR T HE SAKE OF CONVENIENCE AND BREVITY. ITA NO. 3054/DEL/2011 [A.Y 2004-05] 2. GRIEVANCES OF THE REVENUE READ AS UNDER: (I) THAT THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS BY ALLOWING RELIEF OF RS. 20,91,000/ ON ACCOUNT OF DOM ESTIC SALES WITHOUT APPRECIATING THAT EXEMPTION UNDER SECTION 1 0A IS ALLOWABLE FOR EXPORTS SALES ONLY AND THE FACTS MENT IONED ELABORATELY IN THE ASSESSMENT. (II) THAT THE LD. CIT (A) HAS ERRED IN LAW AND O N FACTS BY ALLOWING RELIEF OF RS. 30,04,822/- ON ACCOUNT OF FO REIGN TRAVELING EXPENSES WITHOUT APPRECIATING THE FACTS M ENTIONED 3 ELABORATELY IN THE ASSESSMENT ORDER THAT THE TRAVEL WAS NOT UNDERTAKEN BY THE EMPLOYEES OF THE COMPANY AND THAT THE EXPENSES RELATED TO FINDING BUSINESS FOR THE HOLDIN G COMPANY AND NOT FOR THE ASSESSEE COMPANY. (III) THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS BY ALLOWING RELIEF OF RS. 1,11,15,572/- ON ACCOUNT OF LEGAL & PROFESSIONAL EXPENSES WITHOUT APPRECIATING THE FACT S MENTIONED ELABORATELY IN THE ASSESSMENT ORDER AND I GNORING THAT THERE WAS NO COMPANY THAT WAS MERGED OR ACQUIR ED BY THE ASSESSEE COMPANY, HENCE EXPENSES WERE MADE FOR HOLDING COMPANY AND NOT ALLOWABLE. (IV) THAT THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS BY ALLOWING RELIEF OF RS. 2,89,59,306 /- ON ACCOUNT OF ADDITION MADE BY THE ASSESSING OFFICER RELYING THE ORDER OF TPO U/S 92CA(3) WITHOUT APPRECIATING THE FACTS MENTIONED EL ABORATELY IN THE ASSESSMENT ORDER. (V) ON FACT AND CIRCUMSTANCES OF THE CASE AND I N LAW, LD. CIT(A) VIOLATED PROVISIONS OF RULE 46A BY NOT GIVIN G OPPORTUNITY TO THE AO/TPO. 4 (VI) THUS, LD. CIT(A) VIOLATED PRINCIPLES OF NA TURAL JUSTICE. (VII) THE APPELLANT CRAVES TO BE ALLOWED TO ADD ANY FRESH GROUND(S) OF APPEAL AND/OR DELETE OR AMEND ANY OF T HE GROUND(S) OF APPEALS. 3. THE UNDERLYING FACTS IN ISSUE ARE THAT THE APPEL LANT COMPANY IS A 100% SUBSIDIARY COMPANY OF GUJRAT HEAVY CHEMICALS L IMITED (GHCL) AND IS ENGAGED IN THE BUSINESS OF INFORMATION TECHNOLOGY SERVICES [ITES] AND PROVIDES CALL CENTRE SERVICES TO GHCLS SUBSIDIARY IN THE US, I.E. COLLWELL AND SALMON COMMUNICATIONS INC., USA. 4. IT HAS ENTERED INTO SUB-CONTRACTING ARRANGEMENT WITH USA FOR PROVIDING BACK OFFICE TELE-CALLING SERVICES FOR LEA D GENERATION, MARKET RESEARCH, AND TELE- SALES. THE APPELLANT COMPANY WA S INCORPORATED IN DECEMBER, 2002, BUT COMMENCED OPERATIONS FROM JULY 2003 AND THIS IS THE FIRST YEAR OF OPERATION. THE APPELLANT HAS ESTA BLISHED A STP 100% EOU AT NOIDA FOR PROVIDING ITES AND ELIGIBLE FOR DE DUCTION U/S 10A OF THE ACT. 5 5. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEED INGS, THE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM OF DEDUCTIO N U/S 10A OF THE ACT. THE ASSESSEE EXPLAINED THAT IT HAS ENTERED INTO A M ASTER OUTSOURCING AGREEMENT WITH C&S, USA TO PROVIDE ITES AND ALSO EN TERED INTO AN AGREEMENT CALLED MASTER OUTSOURCING AGREEMENT WITH GHCL. IN VIEW OF THE SAID AGREEMENT, THE ASSESSEE HAS RECEIVED EXPOR T SERVICES AT RS. 4.94 CRORES AND DOMESTIC RECEIPT AT RS. 1.68 CRORES TOTALLING TO RS.6.62 AGAINST WHICH NET LOSS OF RS.4.73 CRORES HAS BEEN D ISCLOSED. 6. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS BIFURCATED THE EXPENDITURE AGAINST THE DOMESTIC INCOME AS WELL AS EXPORT INCOME. THE ASSESSING OFFICER WAS OF THE FIRM BELIEF THAT P ROFIT FROM DOMESTIC SALE AT RS.20.91 LAKHS DOES NOT QUALIFY EITHER ADJU STMENT OF LOSS FROM EXPORT BUSINESS U/S 10A OF THE ACT AND ACCORDINGLY, DISALLOWED BENEFIT OF SECTION 10A OF THE ACT ON DOMESTIC PROFIT OF RS. 20.91 LAKHS. 7. WHEN THE MATTER WAS AGITATED BEFORE THE CIT(A), THE ASSESSEE JUSTIFIED ITS CLAIM OF DEDUCTION AND IT WAS STRONGL Y CONTENDED THAT SECTION 10A OF THE ACT IS NOT AN EXEMPTION, BUT IT IS A DEDUCTION SECTION, AND THERE IS A WELL-DEFINED FORMULA GIVEN IN SECTION 10A(4) OF THE ACT FOR CALCULATING DEDUCTION U/S 10A OF THE AC T IN RESPECT OF THE 6 UNDERTAKING REGISTERED WITH STPI. IT WAS FURTHER EX PLAINED THAT THERE IS NO PROVISION IN SECTION 10A OF THE ACT FOR SEPARATE LY CALCULATING PROFIT IN RESPECT OF DOMESTIC SALES AND EXPORT SALES EVEN IF SEGMENTAL ACCOUNTS ARE AVAILABLE. 8. AFTER CONSIDERING THE FACTS AND SUBMISSIONS, THE CIT(A) FOUND THAT U/S 10A(4) OF THE ACT, A FORMULA HAS BEEN GIV EN, WHEREIN THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS O R COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF T HE BUSINESS OF THE UNDERTAKING THE SAME PROPORTION AS THE EXPORT TURNO VER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. 9. AFTER ANALYSING THE FORMULA GIVEN THE CIT(A) OBS ERVED THAT : IF WE GO WITH THE REASONING OF THE ASSESSING OFFICE R, THEN IN THE CASE OF LOSS IN DOMESTIC SALES AND PROFIT I N EXPORT SALES ON THE BASIS OF SEGMENTAL ACCOUNT OF THE UNDE RTAKING, THEN LOSS OF THE DOMESTIC SALES NEED TO BE CARRIED FURTHER AND 100% DEDUCTION ON PROFIT OF THE EXPORT SALES TO BE ALLOWED WHICH IS NOT AS PER THE PROVISIONS OF THE AC T . 7 10. THE CIT(A) ACCORDINGLY ALLOWED THE APPEAL OF TH E ASSESSEE AND DIRECTED THE ASSESSING OFFICER TO ALLOW THE DEDUCTI ON U/S 10A OF THE ACT. 11. BEFORE US THE LD. DR STRONGLY SUPPORTED THE FIN DINGS OF THE ASSESSING OFFICER. 12. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE RE ITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. 13. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUT HORITIES BELOW. PROVISIONS OF SECTION 10A(4) OF THE ACT HAVE BEEN E XPLAINED ELSEWHERE. IN OUR UNDERSTANDING OF THE PRESENT FACT S AND LAW, AS BOTH THE EXPORT SALES AND DOMESTIC SALES WERE DONE BY THE SAME UNDERTAKING, THEREFORE, PROFIT OR LOSS OF THE UNDER TAKING NEEDS TO BE CALCULATED AS A WHOLE AND PROFIT FROM DOMESTIC SALE S CANNOT BE CHARGED SEPARATELY TO TAX AND ADJUSTED AGAINST LOSS FROM EXPORT BUSINESS IN THE PRESENT CASE. WE, THEREFORE, DO NOT FIND ANY ERROR OR INFIRMITY IN THE FINDINGS OF THE CIT(A). GROUND NO. 1 S ACCORDINGLY, DISMISSED. 8 GROUND NO. 2 14. WHILE SCRUTINISING THE RETURN OF INCOME AND ON PERUSAL OF THE DETAILS OF TRAVELLING AND CONVEYANCE EXPENSES OF RS . 70.45 LAKHS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS INC URRED STAFF TRAVEL FOREIGN EXPENSES AT RS.46.81 LAKHS BESIDES FOREIGN TRAVELLING OTHER EXPENSES OF RS. 88.35 LAKHS. THE ASSESSEE WAS REQUI RED TO GIVE NEXUS BETWEEN TRAVELLING EXPENSES INCURRED AND BUSINESS R ECEIPTS AS A WHOLE AND THE DESIGNATION OF THE EMPLOYEES WHO MADE THE TRAVELLING. 15. THE ASSESSEE FURNISHED THE REQUISITE DETAILS AN D ON PERUSAL OF THE SAME, THE ASSESSING OFFICER WAS OF THE OPINION THAT THE ASSESSEE HAS INCURRED EXPENSES ON BEHALF OF OTHER PERSONS WH O COME TO INDIA AND WENT OUTSIDE, THOUGH THERE WAS NO BUSINESS NEXU S FOR THE SAME. THE ASSESSING OFFICER DISALLOWED 50% OF RS. 46.81 L AKHS AND MADE FURTHER DISALLOWANCE IN RESPECT OF EXPENSES INCURRE D FOR BRIAN W SMITH OF RS.4.07 LAKHS AND NIKHEL SEN OF RS. 2.56 L AKHS AND MADE TOTAL DISALLOWANCE OF RS.30.04 LAKHS. 9 16. THE ASSESSEE STRONGLY AGITATED THE MATTER BEFOR E THE CIT(A). IT WAS EXPLAINED THAT THE EXPENSES WERE INCURRED BY TH E EMPLOYEES OF THE APPELLANT COMPANY AND WERE INCURRED TOWARDS BUS INESS OBJECTIVES OF THE ASSESSEE. IT WAS EXPLAINED THAT T HE EXPENDITURE WAS INCURRED FOR TRAINING TO REMAIN IN COMPETITIVE BUSINESS. 17. AFTER CONSIDERING THE FACTS AND SUBMISSIONS, TH E CIT(A) OBSERVED THAT THE ASSESSING OFFICER DID NOT QUESTIO N THE GENUINENESS OF THESE TRANSACTIONS AND AS THE EXPENSES WERE INCU RRED BY THE ASSESSEE FOR BUSINESS DEVELOPMENT AND TRAINING OF E MPLOYEES FOR CALL CENTRE BUSINESS, EXPENSES WERE ALLOWABLE AND ACCORD INGLY, DIRECTED THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE. 18. BEFORE US, THE LD. DR STRONGLY SUPPORTED THE FI NDINGS OF THE ASSESSING OFFICER. 19. PER CONTRA, THE LEARNED COUNSEL FOR THE ASSESSE E REITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. 10 20. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUT HORITIES BELOW. WE FIND THAT THE FOREIGN TRAVEL EXPENSES RELATED TO EMPLOYEES OF THE APPELLANT COMPANY, WHICH INCLUDE CFO, CEO, CCES HEA D TECHNOLOGY, TEAM LEADERS AND MANAGER, BUSINESS DEVELOPMENT AND PLACES VISITED LIKE USA, UK AND THAILAND FOR THE PURPOSES OF BUSIN ESS DEVELOPMENT, BUSINESS MEETINGS, FOR ATTENDING SEMINARS AND TRAIN ING. 21. IN OUR CONSIDERED OPINION, AS THE COMPANY IS IN EXPORT OF CALL CENTRE SERVICES, SETTING UP A SUCCESSFUL INTERNATIO NAL CALL CENTRE REQUIRES UP-TO-DATE TECHNOLOGY, QUALITY ASSURANCE, DATA ANALYSIS AND CONTINUOUS TRAINING OF EMPLOYEES, INTERNATIONAL LEV EL OF COMMUNICATION, SKILLS, CONTINUOUS BUSINESS DEVELOPM ENT AND FOR THIS PURPOSE, THE TOP MANAGEMENT AND THE OTHER RELATED E MPLOYEES WENT ABROAD TO GAIN KNOWLEDGE OF THE CALL CENTRES TO HAV E INTERNATIONAL STANDARDS. AS MENTIONED ELSEWHERE, THIS IS THE FIRS T YEAR OF THE BUSINESS. THEREFORE, IT IS MORE IMPORTANT FOR THE A PPELLANT COMPANY TO UPDATE ITS KEY EMPLOYEES WITH ADVANCED TECHNOLOGY. 11 22. AS THE GENUINENESS OF THE EXPENSES HAVE NOT BEE N QUESTIONED AND THE ASSESSING OFFICER HAS MERELY QUESTIONED THE LEGITIMACY OF THE EXPENSES WHICH, IN OUR OPINION, IS NOT CORRECT. IT IS FOR THE BUSINESS- MAN TO DECIDE WHICH EXPENSES ARE NECESSARY TO FURTH ER ITS BUSINESS. CONSIDERING THE FACTS IN TOTALITY, WE DO NOT FIND A NY ERROR IN THE INFIRMITY IN THE FINDINGS OF THE CITA. THUS, GROUND NO. 2 IS DISMISSED. GROUND NO. 3 23. WHILE SCRUTINISING THE RETURN, THE ASSESSING OF FICER FOUND THAT UNDER THE HEAD LEGAL AND PROFESSIONAL EXPENSES TH E ASSESSEE HAS CLAIMED EXPENSES OF RS. 1.36 CRORES. ON PERUSAL OF THE DETAILS, THE ASSESSING OFFICER FORMED A BELIEF THAT THE ASSESSEE HAS CLAIMED EXPENDITURE UNDER THIS HEAD, WHICH DOES NOT HAVE AN Y BUSINESS NEXUS, AND PURPOSE FOR PAYMENT OF LEGAL AND PROFESSIONAL E XPENSES ARE NOT JUSTIFIED AND ACCORDINGLY, MADE DISALLOWANCE OF RS. 1.11 CRORE. 24. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT( A) AND FILED DETAILS OF EXPENSES INCURRED UNDER THE LEGAL AND P ROFESSIONAL EXPENSES HEAD. THE CIT(A) ACCORDINGLY EXAMINED EAC H AND EVERY 12 PAYMENT AND FINALLY CAME TO THE CONCLUSION THAT DIS ALLOWANCE IS NOT JUSTIFIED AND DIRECTED THE ASSESSING OFFICER TO DEL ETE THE ADDITION. 25. BEFORE US, THE LD. DR STRONGLY SUPPORTED THE FI NDINGS OF THE ASSESSING OFFICER AND THE LEARNED COUNSEL FOR THE A SSESSEE REITERATED WHAT HAS BEEN STATED BEFORE THE CIT(A). 26. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUT HORITIES BELOW. ONCE AGAIN, THE ASSESSING OFFICER FELL INTO ERROR I N HOLDING THAT THE EXPENDITURE UNDER THIS HEAD DOES NOT HAVE ANY BUSIN ESS NEXUS. AS MENTIONED IN THE EARLIER GROUND THAT THE ASSESSING OFFICER SHOULD NOT DECIDE WHICH EXPENSES ARE NECESSARY FOR THE PURPOSE OF CARRYING ON THE BUSINESS AND IT IS FOR THE BUSINESS-MAN TO DECIDE. MOREOVER, LEGAL AND PROFESSIONAL EXPENSES ARE PAID TO PROFESSIONALS FOR THEIR LEGAL AND COMMERCIAL ADVICE WHICH ARE NECESSARY FOR CARRYING ON BUSINESS. WE FIND THAT THE CIT(A) HAS ANALYSED EACH AND EVERY IT EM FROM PARA 6.3 TO THE FINDINGS. 13 27. WE HAVE ALSO GONE THROUGH THE DETAILS WHICH ARE AS UNDER: AVENDUS ADVISOR S PVT LTD. MUMBAI THE ASSESSEE ENGAGED AVENDUS TO IDENTIFY PROSPECTS IN OVERSEAS MARKET WHICH SUIT THE STRATEGIC GROWTH OBJECTIVES OF COLWELL. THE OBJECTIVE IS CLEAR FROM THE AGREEMENT ATTACHED AT PAGE NO. 148 OF PAPER BOOK (PB)- I. THUS THIS EXPENDITURE IS FOR DEVELOPMENT OF BUSINESS OF THE COMPANY AND NOT FOR MERGER OR ACQUISITION AS SUCH. AS COLWELL IS ENGAGED IN THE SERVICE SECTOR I.E. PROVIDING VOICE BASED BPO THEREFORE THE PURPOSE OF ACQUIRING ANY BUSINESS IS TO INCREASE THE CLIENT BASE AND THE COMPANY IS NOT INTERESTED IN SETTING UP AND INFRASTRUCTURE OF THE ACQUIRE COMPANY. AS IN SERVICE SECTOR THERE IS NO BIG BUSINESS SET UP OR INFRASTRUCTURE BUT THE CLIENT BASE WHICH IS IMPORTANT FOR ANY COMPANY WHO IS ACQUIRING THE BUSINESS. THUS THE SAID EXPENDITURE IS NORMAL MARKETING BUSINESS EXPENDITURE INCURRED FOR DEVELOPMENT OF THE BUSINESS OF THE COMPANY AND ALLOWABLE AS SUCH. THE AO HAS FULLY VERIFIED THIS EXPENDITURE AND THE SAME IS FULLY AS PER AUDITED ACCOUNTS BUT THE AO HAS ONLY ISSUE REGARDING THE NATURE OF THE SAME. 6,76,510 14 C. COLWELL % SALMON COMMUICA- TIONS INC., USA THESE EXPENSES ARE TOWARDS DEPUTATION CHARGES OF BRIAN W SMITH WHO WAS ACTING AS COO OF THE COMPANY AND LOOKING AFTER THE OPERATIONS OF THE COMPANY AND HIS RECRUITMENT CHARGES. PLEASE REFER PAGE NO. 151 TO 153 OF THE PAPER BOOK- I. THESE EXPENSES ARE NORMAL BUSINESS EXPENSES, DULY VERIFIABLE AND AUDITED AND ALLOWABLE IN TOTO. 42,33,244 D. DLA, UK THE ASSESSEE ENGAGED THE SERVICES OF DLA FOR THE ESTABLISHMENT T>F COMPANY CORPORATE PRESENCE IN UK AS IT IS CLEAR FROM THE COPY OF AGREEMENT AT PAGE NO. 155 OF THE PAPER BOOK- I. THIS EXPENDITURE IS FOR DEVELOPMENT OF THE ASSESSEE'S BUSINESS IN UK. THE ASSESSEE HAS ONE CLIENT OF UK DURING THE YEAR AND THESE CLIENTS HAVE INCREASED TO 6 CLIENTS IN FUTURE YEARS. ALSO THE COMPANY ESTABLISHED ITS BRANCH OFFI CE IN UK DURING THE YEAR, THE PROOF OF THE SAME IS IN THE PAPER BOOK. SO THIS EXPENDITURE IS SOLELY INCURRED FOR THE PURPOSE OF THE BUSINESS AND FOR BUSINESS DEVELOPMENT THEREFORE ALLOWABLE AS SUCH. 8,90,618 18. G 4H LIMITED, UK PLEASE REFER TO THE AGREEMENT AT PAGE 174 IN PAPER BOOK- I. THE SERVICES OF G4H WAS TAKEN TO CARRY OUT A VALUE CHAIN ANALYSIS FOR THE COLWELL'S PRODUCT OFFERINGS IN UK AND FOR TEST MARKETING OF THE COLWELL'S EXISTING BUSINESS PROPOSITIONS IN FIVE SECTORS OF THE UK MARKET PLACE . IT IS CLEAR FROM IT THAT THE EXPENDITURE IS PURELY MARKETING IN NATURE AND INCURRED FOR THE DEVELOPMENT OF ASSESSEE'S BUSINESS IN UK. THE ASSESSEE WOULD ABLE TO CAPTURE 6- 7 CLIENTS IN NEXT YEARS BECAUSE OF THESE INITIAL MARKETING EFFORTS. SO AS THE SAID EXPENDITURE IS ALLOWABLE AS A BUSINESS EXPENSE. 11,42,687 15 19. MERCHANT CAPITAL, UK THE SERVICES OF MERCHANT CAPITAL PIC WAS HIRED BY THE ASSESSEE ONLY FOR THE PURPOSE OF DEVELOPMENT OF THE ASSESSEE BUSINESS AS IS CLEAR FROM THE COPY OF AGREEMENT AT PAGE NO. 164 OF THE PAPER BOOK- I. THE EXPENDITURE IS TOWARDS IDENTIFYING THE BUSINESS FOR THE ASSESSEE AND ASSESSING THEIR FINANCIALS AND CREDIT WORTHINESS AND RISK ETC. THEREFORE, THIS EXPENDITURE IS WHOLLY AND EXCLUSIVELY FOR THE BUSINESS OF THE ASSESSEE AND ALLOWABLE. 8,32,500 20. AVISTA ADVISORY ASSOCIATES* PVT LTD, MUMBAI THE ASSESSEE ENGAGED AVISTA TO IDENTIFY PROSPECTS IN OVERSEAS MARKET WHICH SUIT THE STRATEGIC GROWTH OBJECTIVES OF COLWELL. THE OBJECTIVE IS CLEAR FROM THE AGREEMENT ATTACHED AT PAGE NO. 144 OF PAPER BOOK (PB)- I. THUS THIS EXPENDITURE IS FOR DEVELOPMENT OF BUSINESS OF THE COMPANY AND NOT FOR MERGER OR ACQUISITION AS SUCH. AS COLWELL IS ENGAGED INTHE SERV ICE SECTOR I.E. PROVIDING VOICE BASED BPO THEREFORE THE PURPOSE OF ACQUIRING ANY BUSINESS IS TO INCREASE THE CLIENT BASE AND THE COMPANY IS NOT INTERESTED IN SETTING UP AND INFRASTRUCTURE OF THE ACQUIREE COMPANY. AS IN SERVICE SECTOR THERE IS NO BIG BUSINE SS SET UP OR INFRASTRUCTURE BUT THE CLIENT BASE WHICH IS IMPORTANT FOR ANY COMPANY WHO IS ACQUIRING THE BUSINESS. THUS THE SAID EXPENDITURE IS NORMAL MARKETING BUSINESS EXPENDITURE INCURRED FOR DEVELOPMENT OF THE BUSINESS OF THE COMPANY AND ALLOWABLE AS SU CH. THE AO HAS FULLY VERIFIED THIS EXPENDITURE AND THE SAME IS FULLY AS PER AUDITED ACCOUNTS BUT THE AO HAS ONLY ISSUE REGARDING THE NATURE OF THE SAME. 7,70,000 16 7. O.P. KAHAITAN & CO., DELHI O.P. KAHAITAN & CO. IS A FIRM OF SOLICITORS & ADVOCATES AND THEIR SERVICES WERE HIRED BY THE ASSESSEE TO FINALISE VARIOUS AGREEMENTS IN UK IN RESPECT OF SERVICES HIRED BY THE ASSESSEE OF VARIOUS CONSULTANTS AND AGREEMENTS WITH CUSTOMERS OF THE COMPANY. PLEASE REFER PAGE NO. 177 OF PAPER BOOK-I 5,27,540 8. THE 1 GROUP PIC, UK PROFESSIONAL CHARGES FOR UK OFFICE SET UP & OTHER SERVICES AND DURING THE YEAR THE ASSESSEE SET UP A BRANCH IN UK, COPY OF THE PROOF OF THE SAME IS IN PAPER BOOK. THE SAME IS NORMAL BUSINESS EXPENDITURE AND ALLOWABLE AS SUCH. 19,42,473 ' 9. TRENDSETTER COMPUTER SOFTWARE PVT LTD, DELHI THE ASSESSEE ENGAGED TRENDSETTER TO IDENTIFY PROSPECTS IN OVERSEAS MARKET WHICH SUIT THE STRATEGIC GROWTH OBJECTIVES OF COLWELL. AS COLWELL IS ENGAGED IN THE SERVICE SECTOR I.E. PROVIDING VOICE BASED BPO THE REFORE THE PURPOSE OF ACQUIRING ANY BUSINESS IS TO INCREASE THE CLIENT BASE AND THE COMPANY IS NOT INTERESTED IN SETTING UP AND INFRASTRUCTURE OF THE ACQUIREE COMPANY. AS IN SERVICE SECTOR THERE IS NO BIG BUSINESS SET UP OR INFRASTRUCTURE BUT THE CLIENT BA SE WHICH IS IMPORTANT FOR ANY COMPANY WHO IS ACQUIRING THE BUSINESS. THUS THE SAID EXPENDITURE IS NORMAL MARKETING BUSINESS EXPENDITURE INCURRED FOR DEVELOPMENT OF THE BUSINESS OF THE COMPANY AND ALLOWABLE AS SUCH. THE AO HAS FULLY VERIFIED THIS EXPENDITUR E AND THE SAME IS FULLY AS PER AUDITED ACCOUNTS BUT THE AO HAS ONLY ISSUE REGARDING THE NATURE OF THE SAME. 1,00,000 TOTAL DISALLOWANCE BY AO 1,11,15,574 17 28. ON A BARE PERUSAL OF THE AFORESTATED DETAILS, I T CAN BE FOUND THAT THESE ARE SELF-EXPLANATORY. NO ERROR OR INFIRMITY H AS BEEN BROUGHT ON RECORD BY THE REVENUE. WE, THEREFORE, DECLINE TO IN TERFERE WITH THE FINDINGS OF THE CIT(A). GROUND NO. 3 IS DISMISSED. GROUND NO. 4 29. THE UNDERLYING FACTS SHOW THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS UNDERTAKEN INTERNAT IONAL TRANSACTIONS OF PROVISION OF VOICE BASED CALL CENTRE SERVICES AM OUNTING TO RS. 461.92 LAKHS WITH C&S, USA. FOR BENCHMARKING THE INTERNATI ONAL TRANSACTIONS OF PROVISION OF VOICE-BASED CALL CENTRE SERVICES, T HE ASSESSEE APPLIED TNMM AND CONSIDERED THE ASSOCIATED ENTERPRISES, THA T IS, C & S, USA AS TESTED PARTY. AS THE AE WAS LESS COMPLEX ENTITY IN THE TRANSACTION, RESULTS OF BENCHMARKING ANALYSIS WAS AS UNDER: PARTICULARS OP/OC% OP/OC OF C&S USA 2.17% AVERAGE OP/OC OF 6 COMPARABLE COMPANIES 2.85% 18 30. DURING THE TP ASSESSMENT PROCEEDINGS, THE ASSES SING OFFICER QUESTIONED THE SELECTION OF THE TESTED PARTY AND WA S OF THE FIRM BELIEF THAT THE ASSESSEE SHOULD BE TESTED PARTY FOR THE PU RPOSE OF BENCHMARKING ANALYSIS AND ACCORDINGLY, UNDERTOOK FR ESH SEARCH OF COMPARABLE COMPANIES AND ARRIVED AT A SET OF 12 COM PANIES WITH OPERATING PROFIT TO COST RATIO OF 9.52% AND ACCORDI NGLY, AN ADJUSTMENT OF RS. 3.64, CRORES TOWARDS THE DIFFERENCE IN ALP W AS MADE. 31. BEFORE THE CIT(A), THE ASSESSEE JUSTIFIED THE A LP OF THE INTERNATIONAL TRANSACTION WITH MULTIPLE POSSIBILITI ES. FIRSTLY, THE ASSESSEE JUSTIFIED ITS AE AS TESTED PARTY. SECONDLY , THE ASSESSEE JUSTIFIED ITS INTERNATIONAL TRANSACTION TO BE AT AL P ON THE BASIS OF UNDER-UTILISATION OF THE CAPACITY AND FURTHER JUSTI FIED WITH INTERNAL COMPARABLES. THOUGH THE CIT(A) CONSIDERED THE SUBMI SSIONS MADE BY THE ASSESSEE, BUT FINALLY ADJUDICATED UPON UNDER-UT ILISATION OF CAPACITY. 32. WHILE COMING TO HIS CONCLUSION, THE CIT(A) FORW ARDED THE REPLY OF THE ASSESSEE TO THE ASSESSING OFFICER AND THE ASSES SING OFFICER WAS ASKED TO FILE HIS REPLY ON THE SUBMISSIONS MADE BY THE ASSESSEE IN THE PAPER BOOK. 19 33. WE FIND THAT MULTIPLE OPPORTUNITIES WERE GIVEN BY THE CIT(A) BUT IN SPITE OF MORE THAN SUFFICIENT TIME, NO RESPONSE WAS RECEIVED FROM THE ASSESSING OFFICER. AS MENTIONED ELSEWHERE, THE CITA FINALLY ADJUDICATED ON THE ALTERNATIVE TP STUDY RELATING TO ADJUSTMENT OF UNUTILISED CAPACITY AND ALLOWED THE APPEAL OF THE A SSESSEE. 34. BEFORE US, IN ADDITION TO SUPPORTING THE FINDIN GS OF THE TPO/ASSESSING OFFICER, THE DR HAS ALSO FILED WRITTE N SUBMISSIONS WHICH HAVE BEEN DULY CONSIDERED BY US. 35. IN THE WRITTEN SUBMISSIONS, THE LD. DR MAINLY A DDRESSED TO THE SELECTION OF THE TESTED PARTY. IT HAS BEEN CONTENDE D BY THE REVENUE THAT THE FAR ANALYSIS MENTIONED IN THE TP DOCUMENTA TION HAS BEEN ALTERED TO SUIT THE REQUIREMENT OF THE ASSESSEE SO THE AE CAN BE SELECTED AS TESTED PARTY AND THEREFORE, THE AE OF A SSESSEE SHOULD NOT BE SELECTED AS TESTED PARTY AND INSTEAD THE ASSESSE E SHOULD BE SELECTED AS TESTED PARTY AS RIGHTLY DONE BY THE TPO . 36. ON CAPACITY UTILISATION, THE LD. DR SUBMITTED T HAT THE TPO DID NOT DISCUSS THE IMPACT OF CONSIDERING THE CAPACITY UTIL ISATION IN ALTERNATIVE TP STUDY. IT HAS BEEN CONTENDED THAT THE ASSESSEE H AS UNDERTAKEN 20 CAPACITY UTILISATION ON ITS OWN FINANCIAL RESULTS R ATHER THAN THOSE OF COMPARABLE FINANCIAL RESULTS. RELIANCE HAS BEEN MAD E IN THE DECISION OF THE TRIBUNAL IN THE CASE OF CLAAS INDIA LTD ITA 1783/DL/2011. 37. ON INTERNAL CUP, THE REVENUE CONTENDS THAT COMP ARABILITY CRITERIA LAID DOWN UNDER CUP IS VERY STRICT AND THE RE HAS TO BE EXACT COMPARABILITY IN TERMS OF THE NATURE ETC. ANY VARIA TION IN NATURE OF SERVICES SHOULD RENDER SUCH ANALYSIS USELESS. 38. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE RE ITERATED WHAT HAS BEEN STATED BEFORE THE CIT(A). IT IS THE SAY OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN TERMS OF RULE 27A THE ASSESSEE IS ENTITLED TO DEFEND THE ORDER OF THE CIT(A) ON ALL GROUNDS INCLUDING TH E GROUNDS WHICH HAVE EITHER NOT BEEN DECIDED BY THE CIT(A) OR HAVE BEEN DECIDED AGAINST THE ASSESSEE. FOR THIS PROPOSITION, RELIANCE WAS PL ACED ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF SANJ AY SAWHNEY 273 TAXMAN 332 THE HON'BLE BOMBAY HIGH COURT IN THE CAS E OF B.R. BHAMASI 83 ITR 233. 21 39. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE R IVAL SUBMISSIONS AND HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHOR ITIES BELOW. IT IS TRUE THAT THE ASSESSEE HAS JUSTIFIED ITS INTERNATIO NAL TRANSACTION TO BE AT ALP FROM MULTIPLE ANGLES BEFORE THE CIT(A). IT I S EQUALLY TRUE THAT THOUGH THE CITA HAS CONSIDERED ALL THE ALTERNATIVE SUBMISSIONS MADE BY THE ASSESSEE, BUT HAS FINALLY ADJUDICATED UPON THE UNDER-UTILISATION OF THE CAPACITY. AS MENTIONED ELSEWHERE, THIS BEING TH E FIRST YEAR OF BUSINESS AND THE BUSINESS WAS RUN ONLY FOR 9 MONTHS IN THE F.Y. UNDER CONSIDERATION, OBVIOUSLY THE ASSESSEE HAS NOT ACHIE VED OPTIMUM LEVEL OF CAPACITY UTILISATION. 40. MOREOVER, THE ASSESSEE HAS TO ABSORB CERTAIN ST ART UP COSTS AND FIXED OPERATING COSTS. IN THE ABSENCE OF OPTIMUM UT ILISATION OF ITS CAPACITY IT HAS SUFFERED AVERAGE LOSS DURING THE YE AR. ON THE OTHER HAND, THE NET PROFIT MARGIN OF THE COMPARABLE CASES WHO ARE ALREADY INTO BUSINESS FROM PAST MANY YEARS UNUTILISED CAPAC ITY CAN BE UNDERSTOOD FROM THE FOLLOWING CHART: 22 PARTICULARS YEAR ENDED MARCH 31, 2004 EXPORT SALES DOMESTIC SALES UNUTILIZE D TOTAL CSU OTHERS SALES / OPERATING INCOME 461.92 32.62 168.30 662.84 PERSONNEL EXPENSES 147.12 35.50 126.50 164.22 473.35 COMMISSION ON EXPORTS - 0.37 - 0.37 LEAD LIST DATA - 7.47 - 7.47 EXCHANGE RATE FLUCTUATION 7.49 (0.23) - 7.26 OTHER OPERA/ AND ADMINISTRATIVE EXPENSES 260.78 62.93 20.90 291.10 635.71 TOTA L COST 415.40 106.03 147.40 459.40 1128.23 OPERATING PROFIT BEFORE INTER EST 46.51 (73*41) 20.91 (459.40) (465.39) OP E RATING P ROFIT / TOTAL COST 11.20% (69.23%) 14.18% (41.25%) TOTA L BILLED HOURS 82051 19800 101851 REVENUE RATE IN USD PER HOUR 13.48 3.48 T OTAL MAN HOURS AVAILABLE OF STAFF AT OPERATION LEVE L 1,93,440 TOTAL BILLED HOURS 1,01,851 UTILIZED CAPACITY 52.65% UNUTILIZED CAPACITY 47.35% ..... 41. FROM THE ABOVE CHART, IT CAN BE SEEN THAT TOTAL AVAILABLE MAN HOURS FOR CALLING DURING THE YEAR WAS 1,93,440 AND TOTAL BILLED HOURS WERE 1,01,851/-. THUS, THE IDLE HOURS OF CALLS 91,5 89 WHICH MAKES UNUTILISED CAPACITY AT 47.35%. IN THE SUBSEQUENT YE ARS, CAPACITY 23 UTILISATION HAS BEEN INCREASED FROM 50% TO 100%. WE , THEREFORE, DO NOT FIND ANY INFIRMITY IN DECIDING THIS ISSUE ON UNUTIL ISED CAPACITY BY THE CIT(A). 42. WE ARE OF THE OPINION THAT THE ALTERNATIVE TP S TUDY DONE BY THE ASSESSEE FULFILS THE REQUIREMENTS OF TP REGULATIONS AND IS FOUND TO BE CORRECT. OP/TC WITH C&S USA IS 11.20% WHICH IS MORE THAN THE AVERAGE OP/TP OF THE COMPARABLE COMPANIES AT MINUS 6.89%. A SSUMING THAT THE OP/TC OF THE COMPARABLE COMPANIES AS PER THE TPO IS CORRECT, WHICH IS AT 9.52%, THE ASSESSEES OP/TC BEING 11.20%, WE ARE OF THE CONSIDERED VIEW THAT THE INTERNATIONAL TRANSACTION IS AT ALP AND NEEDS NO FURTHER ADJUSTMENT AND ACCORDINGLY, NO INTERFERE NCE IS CALLED FOR IN THE FINDINGS OF THE CIT(A). GROUND NO. 4 IS DISMISS ED. 43. IN THE RESULT APPEAL FILED BY THE REVENUE IS DI SMISSED. 24 ITA NO. 1117/DEL/2012 44. T HE GROUNDS OF APPEAL IN ASSESSMENT YEAR 2005-06 ARE IDENTICAL TO GROUNDS IN ASSESSMENT YEAR 2004-05, THOUGH THE Q UANTUM MAY DIFFER. FOR OUR DETAILED DISCUSSION GIVEN HEREINAB OVE, THIS APPEAL OF THE REVENUE IS ALSO DISMISSED. 44. IN THE RESULT, THE APPEALS OF THE REVENUE IN IT A NO. 3054/DEL/2011AND 1117/DEL/2012 ARE DISMISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 28.10. 2020. SD/- SD/- [ K. N. CHARY ] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28 TH OCTOBER, 2020 VL/ 25 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE DATE ON WHICH THE APPROVED DRAFT COMES TO DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE DATE ON WHICH THE FAIR ORDER COMES BACK TO .10.2020 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON .10.2020 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .10.2020 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE DATE OF DISPATCH OF THE ORDER