DCIT, Circle-17(2), Hyderabad, Hyderabad V. Zavata India Pvt.Ltd., Hyd, R.R.Dist

ITA 473/HYD/2015

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0320 (ITAT-HYDERABAD)
• Duration Of Justice: 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 21-07-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 27-04-2015
• Court: TRIBUNAL
• Department Lawyers: MOHAN SINGHANIA
• Assessee Lawyers: RAVI BHARDWAJ
• Keywords: Transfer pricing
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER I.T.A. NO. 473/HYD/2015 ASSESSMENT YEAR: 2010-11 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-17(2) HYDERABAD VS M/S. ZAVATA INDIA PVT. LTD., HYDERABAD [PAN: AAFCS9954D] (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI MOHAN SINGHANI A, CIT - DR FOR A SSESSEE : S HRI RAVI BHARDWAJ, AR DATE OF HEARING : 21 - 0 7 - 201 5 DATE OF PRONOUNCEMENT : 29 - 0 7 - 2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY REVENUE AGAINST THE DIRECTION S OF DISPUTE RESOLUTION PANEL [DRP], HYDERABAD DATED 24-12-2014. ASSESSING OFFICER (AO) HAS RAISED THE FOLLOWING GROUNDS: '2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE HON'BLE DRP IS JUSTIFIED IN REJECTING THE COMP ARABLE COMPANIES M/S. INFOSYS BPO LTD AND M/S. TCS E-SERVE LIMITED ON THE GROUND OF EXCEPTIONALLY LARGE SCALE OF OPERATIONS AND THE REBY IGNORING THE FACT THAT HIGH OR LOW TURNOVER DO NOT INFLUENCE TH E MARGINS OF THE COMPARABLES? I.T.A. NO. 473/HYD/2015 M/S. ZAVATA INDIA PVT. LTD., :- 2 -: 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP IS JUSTIFIED IN DELETING M/S E-CLERX S ERVICES LTD REGARDED AS KPO BY ITAT IGNORING THE FACT THAT SUC H A MINUTE COMPARISON REDUCES TRANSFER PRICING STUDY TO COMPA RISON BETWEEN REPLICAS OF COMPANIES? 4. WHETHER ON THE FACT AND CIRCUMSTANCES OF THE C ASE, THE HON'BLE DRP IS JUSTIFIED IN DELETING COMPARABLE M/ S ACCENTIA TECHNOLOGIES LTD FOR EXTRAORDINARY EVEN ON THE GRO UNDS OF EXTRAORDINARY EVENTS LIKE MERGERS, ACQUISITIONS IG NORING THE FACT THAT TURNOVER IS NOT THE CRITERIA IN IT INDUSTRY AND IT IS THE QUALITY OF SERVICES THAT MATTER? 5. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP IS CORRECT IN LAW IN HOLDING THAT THE TELECOMMUNICATION CHARGES AND OTHER EXPENDITURE SHOULD BE EXCLUDED F ROM THE 'TOTAL TURNOVER' FOR THE PURPOSE OF COMPUTATION OF ALLOWA BLE DEDUCTION UNDER SECTION 10A OF THE INCOME TAX ACT, 1961 WHEN THERE IS NO SUCH SPECIFIC PROVISION UNDER THE ACT TO REDUCE TH E 'TOTAL TURNOVER'? 6. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP IS CORRECT IN LAW IN DIRECTING THE ASS ESSING OFFICER TO REDUCE RS. 39,22,626/- ONLY INSTEAD OF THE ENTIRE COMMUNICATION CHARGES OF RS. 51,89,321/-'. 2. BRIEFLY STATED, ASSESSEE-COMPANY IS ENGAGED IN T HE BUSINESS OF PROVIDING HEALTHCARE ADMINISTRATIVE BACK OFFICE SER VICES TO ITS ASSOCIATED ENTERPRISE [AE] AND WORKS ON COST + 15% BASIS. ASS ESSEE-COMPANY FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 3,38 ,503/-. AS ASSESSEE'S TRANSACTIONS ARE WITH AE, THE MATTER WAS REFERRED T O TRANSFER PRICING OFFICER [TPO], WHO AFTER REJECTING ASSESSEE'S TRANS FER PRICING STUDY, SELECTED SOME COMPARABLES AND PROPOSED ADJUSTMENT F OR THE PURPOSE OF ARMS LENGTH PRICE [ALP] AT RS. 4,31,61,106/-. ON THE DRAFT ORDER PROPOSED BY THE AO DT. 27-03-2014, ASSESSEE PREFERR ED OBJECTIONS BEFORE THE DRP. DRP WHILE CONSIDERING SOME OF THE OBJECTI ONS PASSED THE FOLLOWING ORDER ON WHICH REVENUE IS AGGRIEVED ON GR OUND NOS. 2, 3 AND 4. I.T.A. NO. 473/HYD/2015 M/S. ZAVATA INDIA PVT. LTD., :- 3 -: 'DECISION: WE HAVE GONE THROUGH THE ORDER OF THE TP O. THE OBJECTIONS RAISED BY THE ASSESSEE HAVE BEEN VERIFI ED WITH THE TPO ORDER. THE TPO HAS NOT APPLIED ANY UPPER TURNOVER FILTER AND HAS NOT GONE INTO VERTICALS/HORIZONTALS AND HIGH END O R LOW END DISTINCTION OF THE COMPARABLE COMPANIES. THE PANE L IS OF THE OPINION THAT M/S. INFOSYS BPO AND TCS E SERVE LTD. SHOULD NOT BE INCLUDED AS COMPARABLE IN VIEW OF THE ADVANTAGEOUS BRAND VA LUE ALONG WITH HIGH TURNOVER OF RS. 1000 CRORES AND ABOVE. SIMIL ARLY, M/S. ACCENTIA TECHNOLOGIES LTD., SHOULD BE EXCLUDED FRO M EXTRAORDINARY EVENT, AFTER VERIFICATION OF THE FACT AND EXTRAORD INARY EVENT AND INFACT ON FINACIALS. E CLERIX SERVICES LTD. SHOUL D BE EXCLUDED AS IN ASSESSEE'S OWN CASE, THE HON'BLE ITAT 'B' BENCH, H YDERABAD VIDE ITS ORDER IN ITA NO. 1781/HYD/2011, DT. 7.6.2013 F OR THE A.Y. 2007- 08, HELD AS UNDER: 'WE HAVE HEARD RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IT IS SEEN THAT IN CASE O F CAPITAL IQ INFORMATION SYSTEMS (SUPRA), THE CO-ORDINATE BENCH ACCEPTED THE OBJECTION OF THE ASSESSEE WITH REGARD TO THE AFORE SAID COMPANY BEING TREATED AS A COMPARABLE BY HOLDING THAT NOT ONLY T HE SAID COMPANY IS FUNCTIONALLY DIFFERENT BEING ENGAGED IN PROVIDING KPO SERVICES BUT IT HAS ALSO SHOWN EXTRAORDINARY HIGH PROFITS. FOLLOW ING THE AFORESAID DECISION OF CO-ORDINATE BENCH OF TRIBUNAL IN CASE OF CAPITAL IQ INFORMATION SYSTEMS, WE HOLD THAT THIS COMPANY CAN NOT BE TREATED AS COMPARABLE'. HOWEVER, THE OBJECTIONS OF THE ASSESSEE FOR EXCLU SION OF TCS E SERVE INTERNATIONAL LTD. ARE REJECTED AS THE COMPA NY HAS PASSED ALL THE FILTERS AND IT IS TRUE COMPARABLE TO THE ASSES SEE. THE PANEL IS ON THE OPINION THAT THE TPO HAS GIVEN VALID REASONS F OR REJECTING THE COMPARABLES SELECTED BY THE ASSESSEE. ACCORDINGLY, THE TPO/ASSESSING OFFICER IS DIRECTED TO REWORK THE AL P BY EXCLUDING THE ABOVE 4 COMPANIES FROM THE ALP ADJUSTMENT'. 3. LD. DR DRAWING OUR ATTENTION TO THE DECISION OF DRP AND THE ORDER OF TPO SUBMITTED THAT AS FAR AS INFOSYS BPO AND TC S E-SERVE LTD., ARE CONCERNED, THE TURNOVER FILTER HAS NOT BEEN APPLIED BY THE TPO AND HIGHER TURNOVER DOES NOT RESULT IN HIGHER PROFITS. THERE IS NO CO-RELATION BETWEEN EARNING OF PROFITS AND THE TURNOVER IN THE BPO BUSINESS. IT WAS FURTHER SUBMITTED THAT DRP WHILE REJECTING INFOSYS BPO AND TCS E-SERVE LTD., HOWEVER, REJECTED THE OBJECTIONS OF ASSESSEE WITH REFERENCE TO TCS I.T.A. NO. 473/HYD/2015 M/S. ZAVATA INDIA PVT. LTD., :- 4 -: E-SERVE INTERNATIONAL LTD, WHICH IS ALSO SIMILARLY PLACED. AS FAR AS TPO IS CONCERNED, ALL THE THREE COMPANIES ARE SELECTED AFTER DUE ANALYSIS AND REFERRED TO THE RELEVANT FINDINGS OF THE TPO IN THI S REGARD. 4. COMING TO THE OBSERVATION OF DRP ABOUT THE EXTRA ORDINARY EVENT IN THE CASE OF ACCENTIA TECHNOLOGIES LTD., IT WAS THE SUBMISSION OF THE DR THAT EVEN AFTER MERGER OF ANOTHER SISTER CONCERN WH ICH IS ALSO A BPO, THERE IS NO IMPACT ON FINANCIALS AS THE PROFIT MARG IN HAS SLIGHTLY COME DOWN OVER THE PROFITS IN EARLIER YEARS. THEREFORE, TPO'S OBSERVATIONS SHOULD HAVE BEEN UPHELD BY THE DRP. WITH REFERENC E TO THE EXCLUSION OF ECLERX SERVICES LTD., IT WAS SUBMITTED THAT THE SAI D COMPANY IS HELD TO BE A KPO, BUT ASSESSEE'S BUSINESS IS ALSO IN THE NA TURE OF KPO SERVICES AND NOT BPO SERVICES. ACCORDINGLY, IT WAS SUBMITTE D THAT DRP WRONGLY EXCLUDED THE ABOVE FOUR COMPANIES. IT WAS SUBMITTE D THAT THE ORDER OF TPO MAY BE RESTORED. 5. LD. COUNSEL, HOWEVER, IN REPLY SUBMITTED THAT IN FOSYS BPO AND TCS E-SERVE LTD., HAVE MORE THAN RS. 1,000 CRORES B USINESS AS OBSERVED BY THE DRP, WHEREAS ASSESSEE'S TURNOVER WAS ONLY RS . 27 CRORES. EVEN THOUGH, TPO DID NOT KEEP ANY HIGHER TURNOVER FILTER , IT WAS ALREADY HELD BY VARIOUS HIGH COURT JUDGMENTS THAT HIGHER TURNOVE R COMPANIES CANNOT BE CONSIDERED AS COMPARABLE COMPANIES TO THE COMPAN IES LIKE ASSESSEE. HE RELIED ON THE ORDERS OF DELHI HIGH COURT IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD . IT WAS FURTHER SUBMITTED THAT THESE COMPANIES ARE HAVING BIG BRAND VALUE AND ACCORDINGLY CANNOT BE CO NSIDERED AS COMPARABLE TO ASSESSEE'S BUSINESS PROFILE. WITH RE FERENCE TO ACCENTIA TECHNOLOGIES LTD. , IT WAS SUBMITTED THAT DRP DIRECTED THE AO TO VERIF Y WHETHER THERE IS ANY EXTRAORDINARY EVENT WHICH HAD AN EFFECT ON FINANCIALS. AO AFTER DUE VERIFICATION ONLY EXCLUDE D THE COMPANY. HE SUBMITTED THAT DRP'S DIRECTION TO THE AO WAS TO VER IFY BUT IT DID NOT I.T.A. NO. 473/HYD/2015 M/S. ZAVATA INDIA PVT. LTD., :- 5 -: EXCLUDE DIRECTLY IN THEIR ORDER. AS FAR AS ECLERX SERVICES LTD. IS CONCERNED, THE DRP HAS RIGHTLY RELIED ON ASSESSEE'S OWN CASE FOR 2007- 08 AND EXCLUDED THE COMPANY, AS IT WAS PROVIDING KP O SERVICES WHEREAS ASSESSEE IS PROVIDING SIMPLE BPO SERVICES, BEING BA CK OFFICE SERVICES. HE ALSO REFERRED TO THE TPO'S ORDER TO SUBMIT THAT ASS ESSEE'S SERVICES ARE NOT KPO SERVICES AS CONTENDED BY THE DR. 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PER USED THE ORDERS OF THE TPO AND DRP ON THE ISSUE. AS FAR AS ACCENTI A TECHNOLOGIES LTD., IS CONCERNED, THE DRP DID NOT DIRECT TO EXCLUDE THE COMPARABLE BUT DIRECTED THE AO TO VERIFY WHETHER THERE IS ANY EXTR AORDINARY EVENT WHICH HAD AN EFFECT ON FINANCIALS. SINCE IT IS AO WHO ON VERIFICATION EXCLUDED THE COMPARABLE, WE DO NOT SEE ANY REASON TO INTERFE RE WITH THE DIRECTION OF THE DRP. AS FAR AS ECLERX SERVICES LTD., IS CON CERNED, DRP HAS GIVEN A CLEAR FINDING BASED ON CO-ORDINATE BENCH DECISION T HAT THE SAID COMPANY WAS PROVIDING KPO SERVICES WHICH ARE NOT COMPARABLE TO ASSESSEE'S BPO SERVICES. SINCE THE DECISION OF THE DRP IS CONSIST ENT WITH THE DECISION OF THE CO-ORDINATE BENCH, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE SAME. NEXT TO BE CONSIDERED IS WHETHER DRP IS CORR ECT IN EXCLUDING THE INFOSYS BPO AND TCS E-SERVE LTD., WHILE THERE SHOU LD NOT BE ANY OBJECTION FOR EXCLUDING HIGH TURNOVER COMPANIES, WE ARE UNABLE TO UNDERSTAND HOW DRP COULD EXCLUDE INFOSYS BPO AND TC S E-SERVE LTD., WHILE ACCEPTING TCS E-SERVE INTERNATIONAL LTD. AS FAR AS BRAND VALUE IS CONCERNED, TCS E-SERVE LTD., AND TCS E-SERVE INTERN ATIONAL LTD STAND ON THE SAME FOOTING. AS SEEN FROM THE ORDER OF THE PA NEL ABOUT INFOSYS BPO AND TCS E-SERVE LTD., THEY HAVE CONSIDERED TWIN CO NDITIONS OF ADVANTAGEOUS BRAND VALUE ALONG WITH HIGH TURNOVER O F RS. 1,000 CRORES AND ABOVE. ASSESSEE HAS OBJECTED ON THE SAME TWIN CONDITIONS AS FAR AS TCS E-SERVE INTERNATIONAL LTD., ALSO. THERE IS CON TRADICTION IN THE FINDINGS OF THE DRP IN EXCLUDING TWO COMPANIES WHIL E REJECTING I.T.A. NO. 473/HYD/2015 M/S. ZAVATA INDIA PVT. LTD., :- 6 -: ASSESSEE'S OBJECTIONS IN TCS E-SERVE INTERNATIONAL LTD. DRP ALSO DID NOT GIVE ANY FINDING WHETHER THERE IS ANY INFLUENCE ON THE MARGINS OF THE COMPARABLES AS THERE IS NO HIGHER TURNOVER FILTER A DOPTED BY THE AO WHILE SELECTING THE COMPARABLES. AS WE SEE FROM TH E LIST OF FINAL COMPARABLES EVEN A COMPANY WITH RS. 1.74 CRORES WAS SELECTED AS COMPARABLE COMPANY [JEEVAN SOFTECH LTD., (SEG)]. T HEREFORE, THERE SEEMS TO BE SOME MERIT IN REVENUE'S GROUNDS. SINCE THE DRP DID NOT GIVE ANY DETAILED REASONING AND DID NOT CONSIDER TH E TPO'S ORDER IN ITS CORRECT PROSPECTIVE, WE ARE OF THE OPINION THAT AS FAR AS EXCLUSION OF THESE TWO COMPANIES ARE CONCERNED, DRP SHOULD HAVE GIVEN A DETAILED ORDER. FOR THIS PURPOSE, WE REMIT THE MATTER TO TH E DRP FOR LIMITED PURPOSE OF GIVING DETAILED ORDER ON THE CONTENTIONS RAISED BY REVENUE IN GROUND NO. 2. THIS GROUND IS CONSIDERED ALLOWED FO R STATISTICAL PURPOSES. AS STATED ABOVE, GROUND NO. 3 AND 4 ARE REJECTED. 7. COMING TO THE ISSUE RAISED IN GROUND NO. 5 & 6, THE ISSUE OF EXCLUDING TELECOMMUNICATION CHARGES FROM THE TOTAL TURNOVER WHILE EXCLUDING THE SAME FROM THE EXPORT TURNOVER IS CON SISTENT WITH THE DECISION OF THE CO-ORDINATE BENCHES OF ITAT AS WELL AS THE ORDER OF THE HIGH COURTS. THE SPECIAL BENCH OF ITAT IN THE CASE OF ITO VS. SAK SOFT LTD., [313 ITR (AT) 353] (CHENNAI) (SPECIAL BENCH) HAS HELD THAT EXPENSES LIKE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO DELIVERY OF ARTICLES OR THINGS OUTS IDE INDIA WHICH ARE REQUIRED TO BE EXCLUDED FROM THE EXPORT TURNOVER, A S DEFINED IN EXPLANTION-2(III) BELOW SECTION 10B OF THE I.T. ACT SHOULD ALSO BE EXCLUDED FROM THE FIGURE OF THE TOTAL TURNOVER WHIL E APPLYING THE FORMULA PRESCRIBED BY SUB-SECTION 4 OF SECTION 10B OF THE I .T. ACT. THIS OPINION OF THE ITAT SPECIAL BENCH WAS UPHELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GEM PLUS JEWELLERY IND IA LTD., [330 ITR 175 (BOMBAY)]. DRP'S DECISION IS IN TUNE WITH THE JUDIC IAL INTERPRETATION OF I.T.A. NO. 473/HYD/2015 M/S. ZAVATA INDIA PVT. LTD., :- 7 -: THE PROVISIONS. THEREFORE, THERE IS NO NEED TO INT ERFERE WITH THE DIRECTION OF THE DRP. WITH REFERENCE TO GROUND NO. 6 OF AMOU NT OF COMMUNICATION CHARGES EXCLUDED, AO CONSIDERED AN AMOUNT OF RS. 51 ,89,321/- I.E., TOTAL COMMUNICATION CHARGES SPENT IN INDIA ALSO WHE REAS ASSESSEE OBJECTED BEFORE THE DRP THAT THE DATA LINK CHARGES WERE ONLY RS. 39,22,626/-, WHICH REQUIRED TO BE REDUCED FROM BOTH EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER. THE DRP, AS CAN BE SE EN FROM THE DIRECTION IN PAGE 11 OF THE ORDER HAS DIRECTED THE AO / TPO T O VERIFY THE CORRECT AMOUNT OF COMMUNICATION CHARGES AFTER GIVING DUE OP PORTUNITY TO ASSESSEE. REVENUE SHOULD NOT HAVE COME IN APPEAL O N THIS DIRECTION OF THE DRP TO VERIFY THE CORRECT AMOUNT. SINCE VERIFI CATION IS WITH THE AO ONLY, HE SHOULD EXCLUDE ONLY THE COMMUNICATION CHAR GES AS COVERED BY THE PROVISIONS OF THE I.T. ACT. THE GROUND IS NOT MAINTAINABLE. ACCORDINGLY, THE SAME IS REJECTED. GROUND NOS. 5 & 6 ARE REJECTED. 8. IN THE RESULT, APPEAL IS ALLOWED PARTLY FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JULY, 2015 SD/- SD/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUN TANT MEMBER HYDERABAD, DATED 29 TH JULY, 2015 TNMM I.T.A. NO. 473/HYD/2015 M/S. ZAVATA INDIA PVT. LTD., :- 8 -: COPY TO : 1. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-17 (2), 6 TH FLOOR, B-BLOCK, IT TOWERS, A.C. GUARDS HYDERABAD. 2. M/S. ZAVATA INDIA PVT LTD., 9 TH & 10 TH FLOOR, M/S. LANCO HILLS TECHNOLOGY PARK (P) LTD. IT/TESSEX TOWER 99L H, MANIKONDA VILLAGE, RAGENDRA NAGAR MANDAL, R.R. DIST RICT, HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. THE DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATI ON, INCOME TAX TOWERS, 10-2-3, AC GUARDS, HYDERABAD. 5. DY. COMMISSIONER OF INCOME TAX (TRANSFER PRICING )-II, HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.