ACIT, CHENNAI V. Brigade Corporation India Pvt. Ltd., Hyderabad

ITA 358/CHNY/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77378 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 05-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 27-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHAJI P JACOB ADDITIONAL
• Assessee Lawyers: N QUADIR HOSEYN; L NATARAJAN
• Keywords: Capital asset
• Section: 143(3); 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . , . !' , # $ BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ./ I.T.A.NO.358/MDS/2013 ( / ASSESSMENT YEAR : 2007-08) THE ASST. COMMISSIONER OF INCOME TAX , COMPANY CIRCLE I(2), CHENNAI 600 034. VS. M/S.BRIGAE CORPORATION INDIA PVT. LTD, PLOT NO.30 & 31,BRIGADE TOWERS, FINANCIAL DISTRICT, NANKRAMGUDA, GACHIBOWLI, HYDERABAD -32.. PAN AAACB 8785 G ( %& / APPELLANT ) ( '(%& / RESPONDENT ) / APPELLANT BY : SHAJI P JACOB, ADDITIONAL CIT DR / RESPONDENT BY : SHRI N.QUADIR HOSEYN, ADVOCATE AND SHRI L NATARAJAN C.A. / DATE OF HEARING : 05.06.2014 ! /DATE OF PRONOUNCEMENT : 04.07.2014 ITA NO. 358/MDS/13 2 ) / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE REVENUE, AGGRIEVED B Y THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-IX, CHENN AI DATED 22.11.2012 IN ITA NO.48/11-12/A.IX, PASSED UNDER SECTION143(3) READ WITH SECTIONS 92CA & 250 OF THE ACT. 2. THE REVENUE HAS RAISED FOUR ARGUMENTATIVE & ELA BORATE A GROUND IN ITS APPEAL, HOWEVER, THE CRUX OF THE ISSU E IS THAT:- (1) THE LD.CIT (A) HAD ERRED IN DIRECTING THE AO TO REC OMPUTE THE DEDUCTION U/S. 10A BY EXCLUDING FREIGHT, TELECOMMUN ICATION CHARGES ETC., INCURRED IN FOREIGN CURRENCY BOTH FROM THE EX PORT TURNOVER AND FROM THE TOTAL TURNOVER FOR ARRIVING AT THE DEDUCTI ON U/S. 10A OF THE ACT. (2) THE LD. CIT (A) HAD ERRED IN DELETING THE ADDIT ION MADE BY THE TPO ON ACCOUNT OF ADJUSTMENT TO THE ARMS LENGTH PR ICE (ALP) BY EXCLUDING M/S.ECLERX SERVICES LTD., ON THE BASIS OF ABNORMAL PROFITS. ITA NO. 358/MDS/13 3 3. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINES S OF PROVIDING CUSTOMER SUPPORTING SERVICES IN THE FORM OF EMAIL SUPPORT, VOICE SUPPORT & CHATTING AND FINANCIAL INFORMATION SUPPORT FOR CUSTOMERS INDENTIFIED BY THE ASSOCIATE ENTERPRISES. THE ASSESSEE COMPANY IS A SUBSIDIARY OF M/S.BRIGADE CORPORATION USA. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 11.0 9.2007 FOR THE ASSESSMENT YEAR 2007-08 ADMITTING THE INCOME OF ` 35,460/-. THE CASE WAS TAKEN UNDER CASS AND ASSESSMENT WAS COMPLE TED U/S. 143(3) R.W.S 92CA OF THE ACT ON 25.02.2011 WHEREIN THE LD. ASSESSING OFFICER EXCLUDING TELECOMMUNICATION SERVI CES FROM EXPORT TURNOVER FOR COMPUTATION OF DEDUCTION U/S. 10A & 1 0B OF THE ACT AND FURTHER MADE UPWARD ADJUSTMENT AS PER THE ORDER OF THE LD. TPO FOR ` 2,01,34,947/-. ON APPEAL THE LD. CIT (A) DELETED TH E ADDITION MADE BY THE A.O AGAINST WHICH THE REVENUE IS IN APPEAL B EFORE US. 4. GROUND NO.1 EXCLUSION OF TELECOMMUNICATION CHARGE S FROM EXPORT TURNOVER FOR COMPUTATION OF DEDUCTION U /S. 10A / 10B OF THE ACT:- ITA NO. 358/MDS/13 4 DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS T HE LD. ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD IN CURRED AN AMOUNT OF ` 63,82,818/- TOWARDS TELECOMMUNICATION (INTERNET ACC ESS CHARGES) WHICH HAS NOT BEEN EXCLUDED FROM EXPORT TU RNOVER FOR THE PURPOSE FOR COMPUTATION OF DEDUCTION U/S. 10A /10B OF THE ACT. THE LD. ASSESSING OFFICER PLACING RELIANCE ON THE DECIS ION OF TRIBUNAL IN THE CASE OF M/S.ISOFT PVT LTD. IN ITA NO.465/MDS./2 007 RECOMPUTED THE DEDUCTION U/S.10A/10B BY EXCLUDING 50% OF INTER NET ACCESS CHARGES BEING 31,91,409/- FROM THE EXPORT TURNOVER WITHOUT SIMULTANEOUSLY REDUCING THE SAME FROM TOTAL TURNOVE R. ON APPEAL THE LD. CIT (A) DIRECTED THE LD. ASSESSING OFFICER TO RECOMPUTE THE DEDUCTION U/S 10A BY EXCLUDING TELECOMMUNICATION CH ARGES OF ` 31,91,406/- FROM BOTH EXPORT TURNOVER IN THE NUMERA TOR AND TOTAL TURNOVER FROM THE DENOMINATOR WHILE APPLYING THE RE LEVANT FORMULA, BY FOLLOWING THE DECISION OF THE CASES CITED HEREIN B ELOW:- (I) M/S.SAK SOFT LTD. SPECIAL BENCH OF THE CHENNAI TRIBUNAL IN ITA NOS. 691 & 1953/MDS,/2007. (II) CIT VS. SITEL OPERATING CORPORATION INDIA LT D. (KAR.)(MAG) 204 TAXMAN 56 (2012) ITA NO. 358/MDS/13 5 (III) CIT VS. FLOWSERVE MICROFINISH VALVES (P.) L TD. 17 TAXMANN.COM 167 (IV) CIT VS.HIMATSINGKA SEIDE & CO. LTD. (KAR.)(M AG) 204 TAXMAN 153 (2012) (V) CIT VS. KHODAY INDIA LTD. (KAR.)(MAG) 204 TAX MAN 153 (2012) (VI) CIT VS. SAMSUNG ELECTRONICS CO. LTD. (KAR.)( MAG) 204 TAXMAN 166 (2012) 4.1. BEFORE US, THE LD. A.R. ARGUED BY STATING T HAT THE LD. CIT (A) HAD DECIDED THE ISSUE FOLLOWING THE DECISION OF THE HIGHER JUDICIARY AND THEREFORE REQUESTED THE SAME MAY BE UPHELD. ON THE OTHER HAND LD. D.R COULD CITE ANY FAVORABLE DECISION TO SUPPOR T THE CLAIM OF THE REVENUE. THEREFORE, AFTER HEARING BOTHER SIDES AND PERUSING THE DECISION OF THE VARIOUS HIGHER FORUMS, WE DO NOT FI ND ANY INFIRMITY IN THE ORDER OF THE LD. CIT (A) ON THIS ISSUE. HENCE T HE ORDER OF THE LD. CIT (A) STANDS CONFIRMED AND THE GROUND RAISED BY T HE REVENUE ON THIS ISSUE IS DISMISSED. ITA NO. 358/MDS/13 6 5.1. GROUND NO.2 DELETION OF THE ADDITION MADE BY THE LD. ASSESSING OFFICER BY ARRIVING AT ALP BY EXCLUDING M/S.ECLERX SERVICES LTD:- IN THE RELEVANT CASE BEFORE US THE TPO HAD DETERM INED THE PROFIT LEVEL INDICATOR AT 22.67% AS AGAINST 15.34% ADOPTED BY THE ASSESSEE AND THEREBY ENHANCED THE ALP BY ` 2,01,34,947/-. WHILE DOING SO, HE HAS SELECTED TEN COMPANIES AND WORKED OUT THE ARITHMETIC MEAN AS FOLLOWS:- S.NO. NAME OF THE COMPANY OPERATING PROFIT/COST 1 APOLLO HEALTH STREET LTD. -13.13 2 M/S.ECLERX SERVICES LTD., 89.36 3 EUREKA OUTSOURCING SOLUTIONS PVT LTD -2.36 4 ICRA ONLINE LTD. 32.15 5 INFOSYS BPO LTD 28.80 6 INFOWAVZ INTERNTIONAL PVT LTD. 19.00 7 MAPLE ESOLUTIONS LTD 34.32 8 TRICORN INFOTECH SOLUTIONS LTD. -9.44 9 TRITORN CORP LTD. 32.36 ITA NO. 358/MDS/13 7 5.2. THE ASSESSEE COMPANY HAD CONTESTED BEFORE TH E TPO THAT OUT OF THE TEN COMPARABLE COMPANIES SELECTED BY THE TPO , M/S.ECLERX SERVICES LTD. HAS TO BE EXCLUDED BECAUSE OF THE FOLLOWING REASON S:- (I) THE SHARE HOLDING PATTERN OF M/S.ECLERX SERVI CES LTD., IS WIDELY DIFFERENT FROM THAT OF THE ASSESSEE COMPANY. (II) 20% OF THE SHARES OF M/S.ECLERX SERVICES LTD. , HELD BY FOREIGN ENTERPRISES AND 80% BY LOCAL BUSINESS MAGNETS OF GR EAT RENOWN DUE TO WHICH THE COMPANY ENJOYS A DECISIVE E DGE OVER THE OTHER COMPANIES. (III) THE TURNOVER OF THE ASSESSEE COMPANY IS ONE THIRD (1/3 RD) TURNOVER OF M/S.ECLERX SERVICES LTD., (IV) M/S.ECLERX SERVICES LTD., HAS SEVERAL REGULAR CONTRACTS BOTH LOCAL AS WELL AS ABROAD AND IS A PREMIUM AND BRANDE D COMPANY, WHILE AS THE ASSESSEE COMPANY HAS A SINGLE CUSTOMER. 10 MPHASIS LTD. 15.66 ARITHMETIC MEAN 22.67 ITA NO. 358/MDS/13 8 (V) M/S.ECLERX SERVICES LTD., IMPORT HUGE CAPITAL ASSETS AND DERIVE BENEFIT FROM THE SAME WHILE AS THE ASSESSEE COMPANY DO NOT HAVE SIMILAR CAPITAL ASSETS. (VI) THERE IS FUNCTIONAL DISSIMILARITIES BETWEEN TH E ASSESSEE COMPANY AND M/S.ECLERX SERVICES LTD. (VII) THE APPELLANT COMPANYS PROFIT IS BASED ON TH E AGREEMENT WITH ITS SINGLE CLIENT ON A MARK-UP PRICE WHILE AS THE PRICING PATTERN OF M/S.ECLERX SERVICES LTD., IS ENTIRELY DI FFERENT. (VIII) THE METHOD AND POLICY OF REVENUE RECOGNITION AND CAPITALIZATION OF ASSET ARE DIFFERENT IN BOTH THE A SSESSEE COMPANY AND M/S.ECLERX SERVICES LTD. 5.3. HOWEVER, THE LD. TPO DID NOT ACCEPT TO THE SU BMISSIONS OF THE ASSESSEE AND HELD AS FOLLOWS:- I. THAT THE SOURCE OF INVESTMENT OR SHARE HOLDING PATTERN HAS NOTHING TO DO WITH OPERATIONS AND RESULTING OPERATING PROFIT OF T HE BUSINESS. II. THE APPELLANT HAS ALSO COMMENTED THAT M/S.ECLERX HAS REGULAR CONTRACTS BOTH LOCAL AS WELL AS FOREIGN, THE PROFIT ELEMENT A TTRIBUTABLE TO ANY SINGLE CONTRACT COULD NOT BE GAUGED WITH CERTAINTY SO MUCH SO THE RESULTS ARE REQUIRED TO BE IGNORED WHEN COMPARING WITH A COMPAN Y OF OUR SIZE WHICH IS DOING BUSINESS ONLY FOR A SINGLE CUSTOMER WHO HA S TO SATISFY THE NEEDS OF ULTIMATE CLIENTS. THIS VIEW IS NOT ACCEPTABLE BE CAUSE UNDER TNMM ITA NO. 358/MDS/13 9 ONLY NET MARGIN IS COMPARED AND THERE IS NO NEED TO STUDY THE IMPACT OF EACH AND EVERY CONTRACT INDIVIDUALLY. III. IT WAS ALSO SUBMITTED THAT THE COMPANY HAD V ARIED TRANSACTIONS LIKE IMPORTING OF CAPITAL ASSET AND THESE DO NOT FIND A PLACE IN OUR COMPANY WITH THE RESULT THE BENEFIT OF CONTRACTS COULD NOT BE ASCERTAINED WITH PRECISION. HAVING NUMBER OF TRANSACTION LIKE IMPOR T CAPITAL ASSET DOES NOT HAVE IMPACT ON THE OPERATING PROFIT-RATIO OF A COMPANY. IV. THE APPELLANT HAS STATED THAT THE PRICING PATT ERN OF THE COMPARABLE COMPANIES HAS ENABLED IT TO HAVE BETTER MARGIN UNLI KE THE APPELLANT COMPANYS CASE. UNLIKE THE APPELLANT COMPANY THE CO MPARABLE DO NOT HAVE ANY AE SALE TO BE INFLUENCED ON ACCOUNT OF THE RELATIONSHIP. NO OUTSIDE PARTY SHALL PAY FOR MORE THAN REQUIRED IN L IEU OF THE SERVICE PROVIDED SO THE PRICING MODEL OF A COMPANY WOULD NE VER BE A FACTOR FOR HIGHER RETURN. THEREFORE, THE APPELLANT S SUBMISSI ON THAT BECAUSE OF PRICING MODEL COMPANY IS MAKING BETTER MARGIN IS NO T ACCEPTABLE. 6. ON APPEAL, THE LD. CIT (A) DELETED THE ADDITION MADE BY THE LD. ASSESSING OFFICER BASED ON THE REPORT OF TPO BY OBS ERVING AS FOLLOWS:- 6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE AND THE SUBMISSIONS OF THE LD. A.R. AFTER HAVING GONE THROU GH THE ABOVE, I AM OF THE CONSIDERED OPINION THAT NO UPWARD REVISION IS REQUIRED TO THE ALP REPORTED BY THE APPELLANT. IT IS SEEN FROM THE LIS T OF COMPARABLES SELECTED BY TPO THAT ONE COMPANY VIX. M/S.ECLERX SERVICES LTD., SHOWING PROFIT MARGIN OF 89.36, WHICH IS NOT NORMAL IN THIS LINE O F ACTIVITY. THEREFORE, COMPANIES WHICH HAVE ABNORMAL PROFIT MARGIN CANNOT BE CONSIDERED AS COMPARABLES. FURTHER, M/S.ECLERX SERVICES LTD., HAS GOT DISSIMILARITIES ITA NO. 358/MDS/13 10 WITH REGARD TO FUNCTIONAL, ASSET-BASE, WORKING CAPI TAL ETC VIS--VIS THE APPELLANT COMPANY, WHICH WILL PLAY A MAJOR ROLE IN INFLUENCING THE PROFIT MARGINS FO THE ENTITIES THEREFORE, I AM UNABLE TO SUPPORT THE STAND TAKEN BY THE TPO FOR INCLUSION OF M/S.ECLERX SERVICES LTD ., AS COMPARABLE. FURTHER, THE AR OF THE APPELLANT HAS ELABORATELY DI FFERENTIATED NOW M/S.ECLERX SERVICES LTD., CANNOT BE TAKEN AS COMPAR ABLE. IT IS ALSO SEEN FROM THE LIST OF COMPARABLE SELECTED BY TPO, THE AV ERAGE PERFORMANCE OF 9 COMPANIES (EXCLUDING M/S.ECLERX SERVICES LTD.) I. E. ARITHMETIC MEAN OF PROFIT MARGIN IS ONLY 15.26% WHEREAS THE APPELLANT COMPANY IS SHOWING 16.85% PROFIT MARGIN. THE DETAILS ARE AS UNDER: S.NO. NAME OF THE COMPANY OPERATING PROFIT/COST 1 APOLLO HEALTH STREET LTD. -13.13 2 EUREKA OUTSOURCING SOLUTIONS PVT LTD -2.36 3 ICRA ONLINE LTD. 32.15 4 INFOSYS BPO LTD 28.80 5 INFOWAVZ INTERNTIONAL PVT LTD. 19.00 6 MAPLE ESOLUTIONS LTD 34.32 7 TRICORN INFOTECH SOLUTIONS LTD. -9.44 8 TRITORN CORP LTD. 32.36 9 MPHASIS LTD. 15.66 TOTAL 137.36 ARITHMETIC MEAN 15.26 PERFORMANCE OF BRIGADE CORPORATION ( AS WORKED BY TPO ) OPERATING COST OF THE ASSESSEE COMPANY ` ITA NO. 358/MDS/13 11 AS ADOPTED BY YOU 274703547 INCOME RETURNED BY THE COMPANY 46276273 PERCENTAGE OF INCOME ON COST 16.85% IN VIEW OF THE ABOVE, NO ADJUSTMENT WAS CONSIDERED NEC ESSARY TO THE ALP REPORTED BY THE APPELLANT AND AO IS DIRECTED TO DELETE THE ADDITION OF RS.2,01,34,947/- MADE IN THIS REGARD. ACCORDINGLY, THE GROUND OF APPEAL IS ALLOWED. 7. LD. D.R VEHEMENTLY ARGUED IN SUPPORT OF THE OR DER OF LD. TPO AND LD. ASSESSING OFFICER BY. ON THE OTHER HAND L D. A.R. RELIED ON THE ORDER OF LD. CIT (A) AND FURTHER REITERATED THE SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES ON THE EARLIER OCCAS ION. 8. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS AVAILABLE ON RECORD. ON PERUSING THE COMP ARABLES SELECTED BY THE LD.TPO, IT IS APPARENT THAT M/S.ECLERX SERVI CES LTD., HAS AN OPERATING PROFIT OF 89.36% WHICH IS ABNORMAL COMPAR ING TO THE OPERATING PROFIT OF OTHER COMPANIES. THE HIGHEST O PERATING PROFIT OF THE OTHER COMPANIES IS ONLY APPROXIMATELY 33% WHICH IS ALMOST 1/3 RD THE PROFIT OF M/S.ECLERX SERVICES LTD., THE ASSESS EE HAS ALSO BROUGHT ITA NO. 358/MDS/13 12 OUT THE REASONS AS TO WHY M/S.ECLERX SERVICES LTD., ENJOY HIGHER PROFIT WHEN COMPARED WITH THE ASSESSEE COMPANY. TH E LD. TPO HAS NOT DEALT WITH THESE FACTORS IN A REASONED MANNER B UT REJECTED THE SAME ABRUPTLY. THE SHARE HOLDING PATTERN OF THE CO MPANY IS A DECISIVE FACTOR TO DETERMINE THE GOODWILL EARNED BY THE COMPANY WHICH WILL DIRECTLY ATTRIBUTE TO THE PROFIT OF THE COMPANY. WHEN THE MAJORITY OF THE SHARES ARE HELD BY RENOWNED PERSONA LITIES IN THE FIELD OF BUSINESS IT WILL DEFINITELY INFLUENCE THE PROFIT ABILITY OF THE COMPANY. THE FACT THAT 80% OF THE SHARES OF M/S.ECLERX SERVI CES LTD., IS HELD BY LOCAL BUSINESS MAGNETS OF GREAT PROMINENCE IS NOT D ISPUTED. MOREOVER, THE TURNOVER OF THE COMPANY WILL ALSO DET ERMINE THE STRENGTH OF THE COMPANY TO EARN MORE PROFIT. FURTHE R, IT IS A KNOWN FACT THAT WHEN A BUSINESS ENTITY IS TOTALLY DEPENDE D ON A SINGLE CLIENT, THE BARGAINING POWER OF THE COMPANY WILL BE VERY LI MITED TO SECURE HIGHER RATES FOR SERVICES RENDERED. THE CAPITAL IN FRASTRUCTURE OF THE COMPANY WILL ALSO INFLUENCE THE PROFITABILITY OF TH E COMPANY. HIGHER THE CAPITAL INFRASTRUCTURE, HIGHER WILL BE THE PROF ITABILITY. THESE FACTORS ARE SIMPLY BRUSHED ASIDE BY THE LD. TPO, WHICH IF D ULY CONSIDERED WOULD RESULT IN EXCLUDING M/S.ECLERX SERVICES LTD., FOR DETERMINING THE ITA NO. 358/MDS/13 13 COMPARABLE COMPANIES. THE LD. CIT (A) AFTER ANALYZI NG THESE ISSUES HAS RIGHTLY ARRIVED AT THE DECISION WHICH IS EXTRAC TED HEREIN ABOVE. CONSIDERING THESE FACTS AND CIRCUMSTANCES OF THE CA SE, WE ARE OF THE VIEW THAT THE LD. CIT (A) IS JUSTIFIED IN DELETING THE ADDITION OF ` 2,01,34,947/- MADE BY THE LD. ASSESSING OFFICER BAS ED ON THE ORDER OF THE LD. TPO. ACCORDINGLY, THIS GROUND RAISED BY THE REVENUE ALSO FAILS. 9. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISSE D. ORDER PRONOUNCED ON 4 TH JULY, 2014. SD/- SD/- (V. DURGA RAO) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 4 TH JULY, 2014. K S SUNDARAM. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE