ACIT, Gurgaon V. M/s. Comverse Networks System India Pvt. Ltd., Gurgaon

ITA 3680/DEL/2013

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 2073 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 11-07-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 07-06-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SAWETA NAKRA
• Keywords: Related party transaction; Transfer pricing; Principle of natural justice; International transaction; Additional evidence; Bad and doubtful debts; Tax effect; Revenue expenditure
• Section: 92C; 115JB

Judgement Text

ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO 3680/DEL/2013 AY: 2004-05 ACIT, VS M/S COMVERSE NETWORK SYSTEMS INDIA PVT. LTD., CIRCLE-1(1), 6 TH FLOOR, VATIKA TRIANGLE, BLOCK-A, GURGAON. SUSHANT LOK, PHASE-I, GURGAON. (PAN: AABCC3425B) (APPELLANT) (RESPONDENT) C.O. NO. 94/DEL/2016 (IN ITA NO. 3680/DEL/2013) AY: 2004-05 M/S COMVERSE NETWORK SYSTEMS INDIA PVT. LTD., VS ACIT, DLF BUILDING NO. 14, TOWER D, CIRCLE 1(1), 18 TH FLOOR, SECTOR-25 & 25A, GURGAON. DLF CYBER CITY, GURGAON-122002 ASSESSEE BY : SHRI G.C. SRIVASTAVA, ADV. SHR I PARICHAY SOLANKI, ADV. RESPONDENT BY : MS SAWETA NAKRA, SR. DR DATE OF HEARING : 14.06.2019 DATE OF PRONOUNCEMENT : 19.06.2019 O R D E R PER SUDHANSHU SRIVASTAVA, JM THIS APPEAL BY THE REVENUE IS PREFERRED AGAINST TH E ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), ROHTA K {CIT (A)} DATED 28.3.2013 AND PERTAINS TO ASSESSMENT YEAR 200 4-05 AND THE C.O. HAS BEEN PREFERRED BY THE ASSESSEE. ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 2 2.0 BRIEF FACTS OF THE CASE ARE THAT, AS PER THE A SSESSMENT RECORDS, COMVERSE TECHNOLOGY INC., WHICH IS THE ULT IMATE HOLDING COMPANY OF THE GROUP, WAS INCORPORATED IN THE YEAR 1984 AND IS ENGAGED IN DESIGNING, DEVELOPING, MANUFACTURING, MA RKETING AND SUPPORTING TELECOMMUNICATION SYSTEMS AND SOFTWARE F OR MULTIMEDIA, COMMUNICATIONS AND INFORMATION PROCESSI NG APPLICATIONS. THE HOLDING COMPANY THROUGH ITS VARI OUS SUBSIDIARIES PRIMARILY MAKES COMMUNICATION SYSTEMS AND SOFTWARE THAT TELECOM COMPANIES USE TO OFFER CALL A NSWERING, VOICE/FAX MAIL, COMMUNICATIONS SURVEILLANCE AND REC ORDING ETC. THE ASSESSEE I.E. COMVERSE NETWORK SYSTEMS INDIA (P ) LTD. IS A SUBSIDIARY OF COMVERSE TECHNOLOGY INC. USA WHICH HO LDS 99.90% OF THE CAPITAL. THE ASSESSEE WAS INCORPORATED IN T HE YEAR 1999 TO PROVIDE PRE-SALES SUPPORT AND POST-SALES SUPPORT SE RVICES PRIMARILY TO THE CUSTOMERS OF COMVERSE NETWORK SYST EMS LTD., TEL AVIV AND ALSO TO THE INDIAN CUSTOMERS OF VERINT SYSTEMS INC (ANOTHER SUBSIDIARY OF THE HOLDING COMPANY) WHICH A RE THE ASSOCIATED ENTERPRISES (AE). 2.1 DURING THE CAPTIONED YEAR, THE RETURN OF INCOM E WAS WAS FILED DECLARING INCOME OF RS. 61,18,410/-. SUB SEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY. DURING THE YEAR UN DER ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 3 CONSIDERATION, THE ASSESSEE HAD SHOWN TOTAL SERVICE INCOME OF RS. 9,88,99,921/-. IN VIEW OF THE INTERNATIONAL TRANSA CTIONS ENTERED INTO BY THE ASSESSEE DURING THE YEAR UNDER CONSIDER ATION, THE ASSESSING OFFICER (AO) MADE A REFERENCE TO THE TRAN SFER PRICING OFFICER (TPO) U/S 92CA(3) OF THE INCOME TAX ACT, 19 61 (HEREINAFTER CALLED 'THE ACT') TO DETERMINE THE ARM S LENGTH PRICE (ALP) WITH RESPECT TO THE TWO TRANSACTIONS AS UNDER :- I) SALES AND POST SALES SUPPORT RS. 9,00,08,187/- II) PAYMENT OF MEDICAL INSURANCE FEE RS. 1,63,705/- 2.2 THE ASSESSEE HAD ADOPTED TRANSACTIONAL NET MAR GIN METHOD (TNMM) TO COMPUTE THE PROFIT LEVEL INDICATOR (PLI). THE ASSESSEE COMPUTED ITS OPERATING PROFIT MARGIN AT 6. 58% WHEREAS THE MEAN NET OPERATING PROFIT OF THE FOUR COMPARABL ES SELECTED BY THE ASSESSEE WAS COMPUTED AT 3.08%. HOWEVER, TH E TRANSFER PRICING OFFICER (TPO) DETERMINED THE ARMS LENGTH P RICE (ALP) OF THE INTERNATIONAL TRANSACTIONS RELATED TO PROVIDING SERVICES TO THE AES AT RS. 10,86,91,099/- AND PROPOSED AN ADDITION OF RS. 18,682,912/- AS TRANSFER PRICING ADJUSTMENT IN TERM S OF THE PROVISIONS OF SECTION 92CA(4) OF THE ACT. APART FR OM THIS, THE ASSESSING OFFICER ALSO MADE ADDITION OF RS. 8,55,13 6/- ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR GRATUITY A ND A FURTHER ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 4 DISALLOWANCE OF RS. 40,500/- BEING DISALLOWANCE OF PAYMENT MADE TO GOLF CLUB. THE TOTAL INCOME OF THE ASSESSE E WAS COMPUTED AT RS. 2,56,96,958/-. 2.3 AGGRIEVED, THE ASSESSEE APPROACHED THE LD. FIR ST APPELLATE AUTHORITY. THE LD. COMMISSIONER OF INCOM E TAX (APPEALS) PARTLY ALLOWED THE ASSESSEES APPEAL BY D ELETING FIVE OUT OF THE SIX COMPARABLES INTRODUCED BY THE TPO FOR DE TERMINING THE ALP. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ALSO DELETED THE PARTIAL DISALLOWANCE OF THE GOLF CLUB EXPENSES AND ALSO GAVE RELIEF TO THE ASSESSEE WITH RESPECT TO THE DISALLOW ANCE OF THE PROVISION FOR GRATUITY. 2.4 AGGRIEVED BY THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), THE DEPARTMENT IS NOW IN APPE AL BEFORE THIS TRIBUNAL (ITAT) AND HAS RAISED THE FOLLOWING G ROUNDS OF APPEAL:- 1. WHETHER THE LD. CIT HAS ERRED IN REJECTING 5 OF THE 6 COMPARABLES TAKEN BY THE AO/TPO FOR DETERMINING ARM S LENGTH PRICE. 2. WHETHER THE LD CIT HAS ERRED IN DELETING THE PA RT DISALLOWANCE OF CLUB EXPENSES, DESPITE THE FACT THA T THE ASSESSEE COULD NOT SUBMIT ANY EVIDENCE EITHER DURIN G ASSESSMENT PROCEEDINGS OR DURING APPELLATE PROCEEDINGS IN FAVOUR OF THESE EXPENSES BEING 'WHOL LY AND EXCLUSIVELY' FOR THE PURPOSE OF BUSINESS. ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 5 3. WHETHER THE LD CIT (A) ERRED IN ADMITTING ADDI TIONAL EVIDENCE PERTAINING TO APPROVAL STATUS OF THE ASSES SEE'S GRATUITY FUND WITHOUT CALLING FOR THE REMAND REPORT FROM THE AO. 4. WHETHER THE LD CIT (A) ERRED IN TREATING THE P ROVISION FOR GRATUITY AND PROVISION FOR LEAVE ENCASHMENT AS ASCERTAINED LIABILITIES FOR THE PURPOSE OF BOOK PRO FIT CALCULATION U/S 115JB WITHOUT ANY BASIS. KEEPING IN VIEW THE ABOVE FACTS & THE TAX EFFECT I. E. 62,18,019/- WHICH IS MORE THAN THE PRESCRIBED MONET ARY LIMIT OF RS. 3,00,000/- FOR APPEAL BEFORE THE HON'B LE ITAT & AS ALSO SUGGESTED BY THE RANGE HEAD, FURTHER APPE AL TO THE ITAT IS RECOMMENDED IN THIS CASE ON THE BELO W MENTIONED ISSUES. 2.5 THE ASSESSEE IS ALSO BEFORE THE ITAT BY MEANS OF A CROSS OBJECTION (CO) AND THE GROUNDS RAISED IN THE CO ARE AS UNDER:- 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX [APPEALS], ROHTAK (CIT-A) ERRED IN NOT HOLDING TH E ORDER PASSED BY THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1), GURGAON (AO) AND THE LEA RNED ASSISTANT COMMISSIONER OF INCOME TAX, TRANSFER PRIC ING OFFICER - IV, NEW DELHI (TPO) AS BEING CONTRARY T O THE FACTS, LAW AND THE PRINCIPLES OF NATURAL JUSTICE. 2. THAT THE LEARNED CIT-A ERRED IN LAW IN NOT HOL DING THAT THE LEARNED AO DID NOT MEET THE PRECONDITIONS FOR MAKING REFERENCE TO THE LEARNED TPO UNDER SECTION 92CA(1) OF THE ACT AND ERRED IN NOT PROVIDING AN OPPORTUNITY OF 'BEING HEARD TO THE RESPONDENT BEFO RE REFERRING THE TRANSFER PRICING ISSUES TO THE LEARNE D TPO. 3. THAT THE CIT-A ERRED IN LAW INNOT HOLDING THA T THE ORDER OF THE LEARNED TPO IS BAD IN LAW AND CONTRARY TO T HE ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 6 PRINCIPLES OF NATURAL JUSTICE SINCE NO SUFFICIENT OPPORTUNITY WAS PROVIDED TO THE RESPONDENT WHILE CONCLUDING THE ASSESSMENT UNDER SECTION 92CA(3) OF THE ACT IN RESPECT OF DETERMINATION OF ARMS LENGTH PRI CE. 4. THE LEARNED CIT-A ERRED IN LAW AND IN FACTS BY UPHOLDING THE FOLLOWING ERRONEOUS APPROACH TAKEN BY THE LEARNED AO AND THE LEARNED TPO: 4.1 REJECTING 3 OUT OF 4 COMPARABLES SELECTED BY T HE RESPONDENT AT THE TIME OF MAINTAINING TP DOCUMENTATION AND NOT ACCEPTING THE ECONOMIC ANALYS IS UNDERTAKEN BY THE RESPONDENT. 4.2 FAILING TO MAKE APPROPRIATE ADJUSTMENTS AS PRESCRIBED UNDER THE RULES FOR DIFFERENCES IN THE FUNCTIONS PERFORMED, RISKS UNDERTAKEN AND ASSETS EMPLOYED BY THE RESPONDENT VIS-A-VIS THE COMPARABLE S. 4.3 ADOPTING A FLAWED APPROACH BY USING SINGLE YEAR DATAAS AGAINST THE MULTIPLE YEAR DATA USED BY THE RESPONDENT IN ACCORDANCE WITH LAW, TO COMPUTE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION S ENTERED BY THE RESPONDENT, USING TRANSACTION NET MARGIN METHOD (TNMM). 5. WITHOUT PREJUDICE TO ABOVE, THE LEARNED CIT-A H AS ERRED IN HOLDING THAT THE BENEFITS GIVEN BY PROVISO TO SECTION 92C OF THE ACT IS NOT AVAILABLE TO THE RESPONDENT. 3.0 THE LD. SENIOR DEPARTMENTAL REPRESENTATIVE (SR . DR) SUBMITTED THAT THE ASSESSEE HAD SELECTED FOUR COMPA RABLES IN THE TRANSFER PRICING STUDY VIZ. ENVIRO TECHNOLOGIES LTD ., INTELLIGENT COMMUNICATION SYSTEM (INDIA) LIMITED, YASHMUN ENGIN EERS LIMITED AND VAIBHAV HEAVY VEHICLES LIMITED. THE LD . SR. DR ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 7 SUBMITTED THAT WITH RESPECT TO ALL THESE COMPARABLE S THE TPO HAD MADE OBSERVATIONS IN HIS ORDER. IT WAS SUBMITTED TH AT THE TPO OBSERVED THAT NO DATA ABOUT PRODUCT OR SERVICES BEI NG PROVIDED BY M/S VAIBHAV HEAVY VEHICLES LIMITED WAS AVAILABLE. SIMILARLY, NO DATA FOR THE PRODUCTS OR SERVICES BEING PROVIDED BY M/S YASHMUN ENGINEERS LTD. WAS AVAILABLE. IT WAS FURTHER SUBMI TTED THAT AS PER THE TPO, INTELLIGENT COMMUNICATION SYSTEM (INDI A) LIMITED WAS ENGAGED IN DIVERSE ACTIVITIES RANGING FROM SALE OF CABLES, COMPUTER ACCESSORIES, PERSONAL COMPUTERS AND PRINTE RS ETC AND REPAIR AND AMC WAS ONLY ONE OF THE ACTIVITIES OF TH E COMPANY AND NO SEGMENTAL DATA WAS AVAILABLE WITH RESPECT TO THE SERVICE ACTIVITY. IT WAS SUBMITTED THAT THE TPO HAD NO OTH ER OPTION BUT TO SELECT SEVEN COMPARABLES WHICH WAS BASED ON THE TRANSFER PRICING STUDY REPORT IN ASSESSMENT YEAR 2002-03. T HESE COMPARABLES WERE HINDUSTAN HOUSING CO. LTD., SCAL S ERVICES LTD., WARTSILA OPERATIONS & MAINTENANCE INDIA LTD., CHOKSI LABORATORIES LTD., ARTSON ENGINEERING LTD., ISGEC C OVERMA LTD., ENVIRO TECHNOLOGY LTD. AND VIMTA LABS LTD. IT WAS SUBMITTED BY THE LD. SR. DR THAT THE FINAL SET OF COMPARABLES SE LECTED BY THE TPO HAD AN AVERAGE PLI OF 17.2%. THE LD. SR. DR DR EW OUR ATTENTION TO THE OBSERVATIONS AND COMMENTS OF THE T PO WITH ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 8 RESPECT TO EACH OF THE COMPARABLES SELECTED BY THE TPO AND SUBMITTED THAT ALL THESE COMPARABLES WERE FUNCTIONA LLY COMPARABLE TO THE ASSESSEE COMPANY AND HAD BEEN RIG HTLY SELECTED. 3.1 THE LD. SR. DR DREW OUR ATTENTION TO THE IMPUG NED ORDER AND SUBMITTED THAT THE LD. COMMISSIONER OF IN COME TAX (APPEALS) HAD REJECTED FIVE OUT OF THE SIX COMPARAB LES SELECTED BY THE TPO WHICH WAS INCORRECT INASMUCH AS THE FIVE CO MPARABLES VIZ. HINDUSTAN HOUSING CO. LTD., SCAL SERVICES LTD. , CHOKSI LABORATORIES LTD., ISGEC COVERMA LTD. AND VIMTA LAB S LTD. WERE ASSESSEES OWN COMPARABLES IN ASSESSMENT YEAR 2002- 03 AND, THEREFORE, THEY COULD NOT BE TAKEN AS BEING FUNCTIO NALLY DIFFERENT IN THE YEAR UNDER CONSIDERATION WHEN THE NATURE OF ASSESSEES BUSINESS HAS REMAINED THE SAME. IT WAS SUBMITTED T HAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAD COMPLETELY DISREGARDED THE REASONS RECORDED BY THE TRANSFER PR ICING OFFICER FOR INCLUSION OF THESE COMPARABLES. IT WAS VEHEMEN TLY ARGUED THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) H AD ERRED GREATLY IN REJECTING THESE FIVE COMPARABLES. ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 9 3.2 WITH RESPECT TO GROUND NO. 2 RELATING TO DISAL LOWANCE PERTAINING TO GOLF CLUB EXPENSES, IT WAS SUBMITTED THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS. 81,000/- IN T HE PROFIT AND LOSS ACCOUNT BEING PAYMENT MADE TO DLF GOLF RESORT LTD. AND SINCE PERSONAL ELEMENT COULD NOT BE RULED OUT IN TH E EXPENDITURE OF THIS NATURE, 50% OF THE EXPENDITURE HAD RIGHTLY BEEN DISALLOWED BY THE ASSESSING OFFICER BUT THE LD. COMMISSIONER O F INCOME TAX (APPEALS) HAD ERRED IN DELETING THE DISALLOWANCE. 3.3 WITH RESPECT TO GROUND NO. 3 PERTAINING TO THE RELIEF GRANTED TO THE ASSESSEE WITH RESPECT TO THE DISALLO WANCE PERTAINING TO PROVISION OF GRATUITY, IT WAS SUBMITT ED THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAD ERRED IN A DMITTING ADDITIONAL EVIDENCE PERTAINING TO THE APPROVAL OF T HE GRATUITY FUND WITHOUT CALLING FOR A REMAND REPORT FROM THE ASSESS ING OFFICER. 3.4 WITH RESPECT TO GROUND NO. 4 PERTAINING TO THE ADJUSTMENT OF BOOK PROFITS U/S 115JB OF THE ACT WIT H RESPECT TO PROVISION OF GRATUITY AND PROVISION FOR LEAVE ENCAS HMENT, THE LD. SR. DR SUBMITTED THAT THE LD. COMMISSIONER OF INCOM E TAX (APPEALS) HAD ERRED IN TREATING THESE TWO PROVISION S AS ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 10 ASCERTAINED LIABILITY WHEREAS THESE TWO PROVISIONS WERE BASED ON ASSUMPTIONS AND WERE NOT BASED ON ANY ACTUARIAL VAL UATION. 4.0 IN RESPONSE, THE LD. AUTHORISED REPRESENTATIVE (AR) PUT FORTH HIS ARGUMENTS ON THE ISSUE OF VARIOUS COM PARABLES AS UNDER: (I) M/S HINDUSTAN HOUSING CO. LTD. THE LD. AR SUBMITTED THAT HINDUSTAN HOUSING CO. LTD . DID NOT EXIST IN THE DATA BASE LIST GENERATED USING THE COM PREHENSIVE SEARCH PROCESS GENERATED THROUGH COMPREHENSIVE SEAR CH PROCESS ADOPTED BY THE ASSESSEE AT THE TIME OF UNDERTAKING THE ECONOMIC ANALYSIS AND HENCE WAS NOT ACCEPTED BY THE ASSESSEE AS A COMPARABLE. IT WAS FURTHER SUBMITTED THAT THIS COM PANY WAS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY AS IT WAS PRIMARILY ENGAGED IN PROVIDING AIR CONDITIONING, LI FT AND INTERCOM SERVICES WHICH TYPICALLY INCLUDED OPERATING AND SER VICE MAINTENANCE SERVICES THEREOF. THE LD. AR FURTHER S UBMITTED THAT THERE WERE CERTAIN RELATED PARTY TRANSACTIONS UNDER TAKEN BY THIS COMPANY DURING THE YEAR UNDER CONSIDERATION AND WHI CH CONSTITUTED 38.86% OF ITS OPERATING REVENUE. FOR T HIS, A REFERENCE WAS MADE TO THE ANNUAL REPORT OF THIS COMPANY (WHIC H WAS PLACED ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 11 AT PAGES 263-267 OF THE PAPER BOOK FILED BY THE ASS ESSEE COMPANY). THE LD. AR ARGUED THAT THIS COMPANY COUL D NOT BE COMPARED TO THE ASSESSEE COMPANY FOR THE ABOVE REAS ONS. (II) M/S CHOKSI LABORATORIES LTD. WITH RESPECT TO THIS COMPANY, THE LD. AR SUBMITTED THAT THIS COMPANY WAS ALSO NOT FUNCTIONALLY COMPARABLE AS THI S IS A COMMERCIAL TESTING AND ANALYSIS LABORATORY ENGAGED IN TESTING OF VARIOUS PRODUCTS WHICH INCLUDED FOOD AND AGRICULTUR AL PRODUCTS, CEMENT AND BUILDING MATERIALS, CHEMICALS, DRUGS AND PAINTS. IT WAS SUBMITTED THAT THE OTHER SERVICES RENDERED BY T HE COMPANY ARE CALIBRATION SERVICES, CONSULTANCY AND POLLUTION CONTROL. OUR ATTENTION WAS DRAWN TO PAGE 9 OF THE TPOS ORDER WH EREIN THE TPO HIMSELF HAS OBSERVED THAT THE CORE ACTIVITY OF THIS COMPANY WAS PROVIDING ANALYTICAL AND TESTING SERVICES. IT WAS FURTHER SUBMITTED THAT THIS COMPANY HAD A SIGNIFICANTLY HIG H PROPORTION OF TESTING INSTRUMENTS WHICH WAS APPROXIMATELY 58% OF ITS TOTAL NET ASSETS WHICH IMPLIED THAT THE FUNCTIONS PERFORM ED BY THE COMPANY WERE MORE CAPITAL INTENSIVE THAN THE FUNCTI ONS OF A SERVICE PROVIDER. OUR ATTENTION WAS DRAWN TO PAGE 315 OF THE PAPER BOOK OF THE ASSESSEE WHICH CONTAINED THE ANNU AL REPORT TO ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 12 HIGHLIGHT THIS FACT. IT WAS SUBMITTED THAT THE HIG H PROPORTION OF INVESTMENT OF THIS COMPANY WOULD SUGGEST THAT THIS COMPANY WAS ENGAGED IN A SIGNIFICANTLY DIFFERENT BUSINESS FUNCT ION THAN THAT OF THE ASSESSEE WHICH WAS ONLY A SALES SUPPORT AND POS T SALES SUPPORT SERVICE PROVIDER. (III) VIMTA LABS LTD. WITH RESPECT TO THIS COMPANY, THE LD. AR SUBMITTED THAT THIS COMPANY WAS A LEADING PROVIDER OF MULTI-DISCIPLINAR Y CONTRACT- RESEARCH AND TESTING SERVICES IN INDIA. IT WAS SUB MITTED THAT THIS COMPANY IS MAINLY ENGAGED IN PROVIDING TESTING SERV ICES IN INDIA IN AREAS OF CLINICAL RESEARCH, ENVIRONMENTAL ASSESS MENTS, PRE- CLINICAL ANIMAL STUDIES, CLINICAL REFERENCE LAB SER VICES AND ANALYTICAL TESTING OF A WIDE VARIETY OF PRODUCTS. OUR ATTENTION WAS DRAWN TO PAGE 340 OF THE PAPER BOOK CONTAINING THE ANNUAL REPORT OF THIS COMPANY WHEREIN THESE FUNCTIONS WERE MENTIO NED. IT WAS ALSO HIGHLIGHTED THAT THIS COMPANY HAD INCURRED HUG E EXPENDITURE ON TESTING AND ANALYSIS WHEREAS THE ASS ESSEE COMPANY DID NOT INCUR ANY EXPENDITURE ON TESTING SE RVICES. IT WAS ALSO SUBMITTED THAT THE ASSETS EMPLOYED BY THE ASSESSEE IN TERMS OF PLANT AND MACHINERY WERE APPROXIMATELY 70% OF ITS TOTAL ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 13 NET ASSETS WHICH IMPLIED THAT THE FUNCTIONS PERFORM ED BY THIS COMPANY WERE MORE CAPITAL INTENSIVE THAN THE ASSESS EE COMPANY WHICH WAS A MERE SERVICE PROVIDER AND, THEREFORE, T HIS COMPANY WAS ALSO NOT COMPARABLE TO THE ASSESSEE COMPANY. 4.0.1 WITH RESPECT TO THE OTHER TWO COMPARABLES VI Z. SCAL SERVICES LTD. AND ISGEC COVERMA LTD., WHOSE EXCLUSI ON BY THE LD. CIT (A) WAS BEING CHALLENGED, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD NO OBJECTION IF THESE TWO COMPARABLES WERE INCLUDED IN THE FINAL SET OF COMPARABLES. 4.1 WITH RESPECT TO THE DISALLOWANCE DELETED BY TH E LD. COMMISSIONER OF INCOME TAX (APPEALS) WITH RESPECT T O THE GOLF CLUB EXPENSES, THE LD. AR DREW OUR ATTENTION TO THE NATURE OF THE EXPENDITURE WHICH WAS DULY REFLECTED IN PAGE 371 OF THE PAPER BOOK AND IT WAS SUBMITTED THAT THE NATURE OF EXPEND ITURE WAS MEMBERSHIP FEE WHICH WAS AN ALLOWABLE EXPENDITURE. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HONBLE BOMBAY HI GH COURT IN THE CASE OF C.I.T. (LARGE TAX PAYER UNIT, MUMBAI) V S. LUBRIZOL INDIA LTD. REPORTED IN (2013) 37 TAXMANN.COM 294 (B OMBAY) WHEREIN IT HAD BEEN HELD THAT ENTRANCE FEE FOR MEMB ERSHIP OF A CLUB WOULD BE CONSIDERED AS REVENUE EXPENDITURE. I T WAS ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 14 SUBMITTED THAT THE LD. CIT (A) HAD RIGHTLY DELETED THE DISALLOWANCE. 4.2 WITH RESPECT TO GROUND NO. 3 PERTAINING TO THE CONTENTION OF THE DEPARTMENT THAT THE LD. COMMISSIO NER OF INCOME TAX (APPEALS) HAD ERRED IN ADMITTING ADDITIO NAL EVIDENCE PERTAINING TO THE APPROVAL OF THE ASSESSEES GRATUI TY FUND WITHOUT CALLING FOR THE REMAND REPORT FROM THE ASSESSING OF FICER, THE LD. AR SUBMITTED THAT NO FRESH EVIDENCE HAD BEEN ADMITT ED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IN THIS RE SPECT AND THE APPROVAL OF THE GRATUITY FUND W.E.F. 29.03.2004 WAS A MATTER OF RECORD. 4.3.0 WITH RESPECT TO GROUND NO. 4, WHEREIN THE DE PARTMENT HAS CHALLENGED THE ACTION OF THE LD. COMMISSIONER O F INCOME TAX (APPEALS) IN TREATING THE PROVISIONS OF GRATUITY AN D PROVISION FOR LEAVE ENCASHMENT AS ASCERTAINED LIABILITIES FOR THE PURPOSE OF BOOK PROFIT CALCULATION U/S 115JB OF THE ACT, THE L D. AR SUBMITTED THAT AS FAR AS PROVISION FOR GRATUITY WAS CONCERNED, A PROVISION OF RS. 5,13,162/- HAD BEEN MADE FOR THE Y EAR UNDER CONSIDERATION WHEREAS THE CORRESPONDING PROVISION W AS OF RS. 3,41,974/- IN THE IMMEDIATELY PRECEDING YEAR AND TH E ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 15 ACCUMULATED PROVISION AS ON 29.03.2004 WAS OF RS. 8 ,55,136/-. THE LD. AR FURTHER SUBMITTED THAT AGAINST THIS ACCU MULATED PROVISION, A PAYMENT OF RS. 8,50,000/- WAS MADE BY THE ASSESSEE COMPANY DURING THE YEAR UNDER CONSIDERATION AND, TH US, IT WAS NOT A PROVISION SINCE THE PAYMENT AGAINST THE SAME HAD BEEN MADE DURING THE YEAR. OUR ATTENTION WAS DRAWN TO P AGES 373- 374 OF THE PAPER BOOK CONTAINING THE CHART PERTAINI NG TO GRATUITY AND NOTES ON ACCOUNT WHEREIN THESE FIGURES HAD BEEN DULY MENTIONED. 4.3.1 WITH RESPECT TO PROVISION OF LEAVE ENCASHMEN T AMOUNTING TO RS. 4,21,697/- OUR ATTENTION WAS DRAWN TO THE NOTES ON ACCOUNT WHEREIN IN PARA (E) IT HAD BEEN ME NTIONED THAT THIS PROVISION WAS BASED ON ACTUARIAL VALUATION OF ASSESSEES LIABILITY. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF C.I.T. VS. ECHJAY FORGINGS (P) LTD. REPORTED IN (2001) 116 TAXMANN 322 (BOMBAY) WH EREIN IT HAS BEEN HELD THAT WHERE THE ASSESSEE HAD MADE A PR OVISION FOR DOUBTFUL DEBTS, GRATUITY ETC. ON THE BASIS OF ACTUA RIAL VALUATION, SUCH PROVISIONS WOULD HAVE TO BE EXCLUDED FROM NET PROFIT FOR WORKING OUT THE BOOK PROFIT U/S 115J OF THE ACT. ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 16 5.0 THE LD. AR SUBMITTED THAT THE C.O. OF THE ASSE SSEE WAS NOT BEING PRESSED. 6.0 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. WE TAKE UP THE ISSUE RELATING TO THE COMPARABLES FIRST. OUR ADJUDICATION ON THE COMPARA BLES IS AS UNDER:- (I) HINDUSTAN HOUSING CO. LTD. IT HAS BEEN SUBMITTED THAT THIS COMPANY WAS NOT FUN CTIONALLY COMPARABLE TO THE ASSESSEE COMPANY AS IT WAS PRIMAR ILY ENGAGED IN PROVIDING AIR CONDITIONING, LIFT AND INTERCOM SE RVICES WHICH TYPICALLY INCLUDED OPERATING AND SERVICE MAINTENANC E SERVICES THEREOF. IT HAS ALSO BEEN SUBMITTED THAT THERE WER E CERTAIN RELATED PARTY TRANSACTIONS UNDERTAKEN BY THIS COMPA NY DURING THE YEAR UNDER CONSIDERATION AND WHICH CONSTITUTED 38.86% OF ITS OPERATING REVENUE. A PERUSAL OF THE DIRECTORS REPO RT AND THE ANNUAL FINANCIAL STATEMENTS SHOWS THAT THE CONTENTI ONS OF THE LD. AR ARE CORRECT ON BOTH THE COUNTS. UNDISPUTEDLY , THE ASSESSEE COMPANY IS ENGAGED IN PROVIDING PRE-SALES SUPPORT AND POST-SALES SUPPORT SERVICES PRIMARILY TO THE CUSTOM ERS OF COMVERSE NETWORK SYSTEMS LTD., TEL AVIV AND ALSO TO THE INDIAN ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 17 CUSTOMERS OF VERINT SYSTEMS INC (ANOTHER SUBSIDIARY OF THE HOLDING COMPANY) WHICH ARE THE ASSOCIATED ENTERPRIS ES (AE). ON THE OTHER HAND, HINDUSTAN HOUSING CO. LTD. UNDERTAK ES A WIDER VARIETY OF ACTIVITIES LIKE PROVIDING AIR CONDITIONI NG, LIFT AND INTERCOM SERVICES WHICH TYPICALLY INCLUDED OPERATIN G AND SERVICE MAINTENANCE SERVICES THEREOF. THUS, ALTHOUGH PROVID ING POST SALES SERVICES IS A PART OF THE ACTIVITIES OF HINDU STAN HOUSING CO. LTD., ITS SPECTRUM INCLUDES PROVIDING AIR CONDITION ING, LIFTS AND INTERCOMS ALSO. THUS, IT CANNOT BE CONSIDERED AS A COMPANY WHICH IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE CO MPANY. ALSO, THE COMPANY FAILS THE RELATED PARTY TRANSACTION FIL TER. THEREFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT (A ) DIRECTING THE EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COM PARABLES. (II) CHOKSI LABORATORIES LTD. WITH RESPECT TO THIS COMPANY, IT HAS BEEN SUBMITTED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE AS THIS IS A COMMERCIAL TESTING AND ANALYSIS LABORATORY ENGAGED IN TESTING OF VARIOUS PRODUCTS WHICH INCLUDED FOOD AND AGRICULTURAL PRODU CTS, CEMENT AND BUILDING MATERIALS, CHEMICALS, DRUGS AND PAINTS . IT HAS ALSO BEEN SUBMITTED THAT THE OTHER SERVICES RENDERED BY THE COMPANY ARE CALIBRATION SERVICES, CONSULTANCY AND POLLUTION CONTROL. A ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 18 PERUSAL OF THE DIRECTORS REPORT AND THE ANNUAL FIN ANCIAL STATEMENTS SHOWS THAT THE CONTENTIONS OF THE LD. AR ARE CORRECT ON BOTH THE COUNTS. WE ALSO NOTE THAT THE TPO HIMS ELF HAS OBSERVED IN PAGE 9 OF HIS ORDER THAT THE CORE ACTIV ITY OF THIS COMPANY WAS PROVIDING ANALYTICAL AND TESTING SERVIC ES. WE ALSO NOTE THAT THIS COMPANY HAD A SIGNIFICANTLY HIGH PRO PORTION OF TESTING INSTRUMENTS WHICH WAS APPROXIMATELY 58% OF ITS TOTAL NET ASSETS WHICH IMPLIES THAT THE FUNCTIONS PERFORMED B Y THE COMPANY ARE CAPITAL INTENSIVE IN NATURE AND THERE I S NO SIMILARITY WITH THE FUNCTIONS OF A SERVICE PROVIDER. THEREFOR E, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT (A) DIRECTING THE EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. (III) VIMTA LABS LTD. WITH RESPECT TO THIS COMPANY, IT HAS BEEN SUBMITTED THAT THIS COMPANY IS A LEADING PROVIDER OF MULTI-DISCIPLINARY CONTRACT- RESEARCH AND TESTING SERVICES IN INDIA. IT HAS ALS O BEEN SUBMITTED THAT THIS COMPANY IS MAINLY ENGAGED IN PR OVIDING TESTING SERVICES IN INDIA IN AREAS OF CLINICAL RESE ARCH, ENVIRONMENTAL ASSESSMENTS, PRE-CLINICAL ANIMAL STUD IES, CLINICAL REFERENCE LAB SERVICES AND ANALYTICAL TESTING OF A WIDE VARIETY OF PRODUCTS. A PERUSAL OF THE DIRECTORS REPORT AND TH E ANNUAL ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 19 FINANCIAL STATEMENTS SHOWS THAT THE CONTENTIONS OF THE LD. AR ARE CORRECT ON BOTH THE COUNTS. WE ALSO NOTE THAT THIS COMPANY HAD INCURRED HUGE EXPENDITURE ON TESTING AND ANALYS IS WHEREAS THE ASSESSEE COMPANY DID NOT INCUR ANY EXPENDITURE ON TESTING SERVICES. WE ALSO NOTE THAT THE ASSETS EMPLOYED BY THE ASSESSEE IN TERMS OF PLANT AND MACHINERY WERE APPROXIMATELY 70% OF ITS TOTAL NET ASSETS WHICH IMPLIES THAT THE FUNCTIONS P ERFORMED BY THIS COMPANY WERE MORE CAPITAL INTENSIVE THAN THE A SSESSEE COMPANY WHICH WAS A MERE SERVICE PROVIDER. THUS, IT CAN BE SAFELY CONCLUDED THAT THIS COMPANY IS NOT A GOOD CO MPARABLE TO THE ASSESSEE COMPANY. THEREFORE, WE FIND NO INFIRMI TY IN THE ORDER OF THE LD. CIT (A) DIRECTING THE EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. 6.0.1 WITH RESPECT TO THE OTHER TWO COMPARABLES VI Z. SCAL SERVICES LTD. AND ISGEC COVERMA LTD., WHOSE EXCLUSI ON BY THE LD. CIT (A) WAS BEING CHALLENGED, THE LD. AR HAS SUBMIT TED THAT THE ASSESSEE HAD NO OBJECTION IF THESE TWO COMPARABLES WERE INCLUDED IN THE FINAL SET OF COMPARABLES. ACCORDINGLY, WE D IRECT THE TPO/AO TO INCLUDE THESE TWO COMPANIES IN THE FINAL SET OF COMPARABLES. ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 20 6.1 AS FAR AS THE DISALLOWANCE OF CLUB EXPENSES IS CONCERNED, THE LD. COMMISSIONER OF INCOME TAX (APPE ALS) HAS DELETED THE DISALLOWANCE BY OBSERVING THAT THE ASSE SSING OFFICER HAS MADE THE DISALLOWANCE ON AD HOC BASIS WITHOUT BRINGING ANY FACT ON RECORD TO PROVE THAT SOME KIND OF PERSONAL ELEMENT WAS INVOLVED. WE FURTHER NOTE THAT THE HONBLE BOMBAY HIGH COURT IN THE CASE OF C.I.T. (LARGE TAX PAYER UNIT) VS. LUBRI ZOL INDIA LTD. (SUPRA) HAS HELD THAT ENTRANCE FEE FOR MEMBERSHIP O F A CLUB IS TO BE CONSIDERED AS REVENUE EXPENDITURE. ALTHOUGH ENT RANCE FEE DOES HAVE AN ENDURING BENEFIT, IT WAS NOT CONSIDERE D TO BE CAPITAL IN NATURE BY THE HONBLE BOMBAY HIGH COURT AS NO AS SET WAS CREATED. APPLYING THE SAME ANALOGY, MEMBERSHIP FEE WOULD ALSO NECESSARILY HAVE TO BE REGARDED AS REVENUE IN NATUR E. THE NATURE OF EXPENDITURE IS NOT IN DOUBT HERE. THE ASSESSING OFFICER ALSO HAS NOT BROUGHT OUT ANY FACT WHICH WOULD JUSTIFY TH E DISALLOWANCE. THEREFORE, WE ARE UNABLE TO DIFFER W ITH THE FINDINGS OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE AND WE DISMISS GROUND NO. 2 OF THE DEPARTMENTS APP EAL. 6.3 AS FAR AS GROUND NO. 3 CHALLENGING THE ACTION OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IN ALLEGEDLY A DMITTING ADDITIONAL EVIDENCE WITH RESPECT TO APPROVAL OF GRA TUITY FUND IS ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 21 CONCERNED, A PERUSAL OF THE IMPUGNED ORDER SHOWS TH AT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT ADMITT ED ANY EVIDENCE WHICH COULD BE TAKEN AS BEING IN THE NATUR E OF ADDITIONAL EVIDENCE. THE APPROVAL LETTER PERTAININ G TO THE GRATUITY FUND IS A MATTER OF RECORD AND WE FIND NO INFIRMITY IN THE ACTION OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IN TAK ING COGNIZANCE OF THIS APPROVAL LETTER WHILE DELETING T HE RELATED DISALLOWANCE. THUS, GROUND NO. 3 ALSO STANDS DISMI SSED. 6.4 AS FAR AS GROUND NO. 4 IS CONCERNED WHEREIN TH E DEPARTMENT HAS CONTESTED THE ACTION OF THE LD. COMM ISSIONER OF INCOME TAX(A) IN TREATING THE PROVISION OF GRATUITY AND THE PROVISION FOR LEAVE ENCASHMENT AS ASCERTAINED LIABI LITY FOR THE PURPOSE OF CALCULATION OF BOOK PROFIT U/S 115JB OF THE ACT, IT IS UNDISPUTED FROM THE DISCLOSURE MADE BY THE ASSESSEE IN ITS NOTES ON ACCOUNT THAT AS AGAINST ACCUMULATED PROVISION OF RS. 8,55,136/-, A PAYMENT OF RS. 8,50,000/- HAS BEEN MA DE AGAINST THE GRATUITY AND, THUS IT IS NOT AN ESTIMATE AS INF ERRED BY THE ASSESSING OFFICER BUT IS BASED ON ACTUAL PAYMENT. AS FAR AS THE PROVISION FOR LEAVE ENCASHMENT IS CONCERNED, IT IS UNDISPUTED THAT IT IS BASED ON ACTUARIAL VALUATION OF THE ASSESSEE S LIABILITY IN THIS REGARD. THE SAME HAS BEEN DULY DISCLOSED BY WAY OF A NOTE IN THE ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 22 NOTES ON ACCOUNTS ANNEXED TO THE ANNUAL FINANCIAL STATEMENT OF THE ASSESSEE COMPANY. WE ALSO FIND SUPPORT FROM THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF C.I.T. VS. ECHJAY FORGINGS (P) LTD. WHEREIN THE HONBLE BOMBAY HIGH C OURT HAD HELD THAT PROVISION FOR DOUBTFUL DEBTS, GRATUITY ET C. ON THE BASIS OF ACTUARIAL VALUATION WOULD HAVE TO BE EXCLUDED FROM THE NET PROFIT FOR COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT. THEREFORE DRAWING ANALOGY FROM THIS JUDGEMENT AND RESPECTFULL Y FOLLOWING THE RATIO OF THE JUDGMENT OF THE HONBLE BOMBAY HIG H COURT AS AFORESAID, WE DISMISS GROUND NO. 4 OF THE DEPARTMEN TS APPEAL. 6.5 GROUND NO. 5 IS GENERAL IN NATURE AND NEEDS NO SEPARATE ADJUDICATION. 7.0 IN THE RESULT, THE APPEAL OF THE REVENUE STAND S PARTLY ALLOWED. 8.0 SINCE THE ASSESSEE HAS NOT PRESSED ITS CROSS O BJECTION, THE SAME STANDS DISMISSED. 9.0 IN THE FINAL RESULT THE APPEAL OF THE DEPARTME NT STANDS PARTLY ALLOWED AND THE ASSESSEES C.O. STANDS DISM ISSED. ITA NO. 3680/D/2013 C.O. NO. 94/D/2016 23 ORDER PRONOUNCED IN THE OPEN COURT ON 19.06.2019. SD/- SD/- (N.S. SAINI) (SUDHAN SHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBE R DATED: 19 TH JUNE, 2019 GS COPY FORWARDED TO: - 1) APPELLANT 2) RESPONDENT 3) CIT(A) 4) CIT 5) DR BY ORDER ASSTT. REGISTRAR DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P S/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER