MPS Limited, CHENNAI V. DCIT, CHENNAI

ITA 963/CHNY/2015

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 4897 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-04-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 24-05-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 28-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M SRINIVASA RAO
• Keywords: Earning of tax free income; Wholly owned subsidiary
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , , $ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NO. 963/CHNY/2015 / ASSESSMENT YEAR : 2010-11 M/S. MPS LIMITED, RR TOWER IV SUPER A, 16/17 THIRUVIKA INDUSTRIAL ESTATE, GUINDY, CHENNAI 600 032. [PAN: AAACM 2423L] VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 4, NUNGAMBAKKAM, CHENNAI 600 034. ( / APPELLANT) ( / RESPONDENT) &' / APPELLANT BY : SHRI. VIKRAM VIJAYARAGHAVAN, ADVOCATE *+&' / RESPONDENT BY : SHRI. M. SRINIVASA RAO, CIT ' /DATE OF HEARING : 04.01.2018 ' /DATE OF PRONOUNCEMENT : 03.04.2018 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE ASSESSEE FILED THIS APPEAL AGAINST THE ORDER PA SSED BY THE DCIT (OSD) , CORPORATE CIRCLE -4, CHENNAI DATED 23.02.20 15 IN PURSUANCE OF THE DIRECTIONS OF THE DRP , CHENNAI FOR AY 2010-11. :-2-: ITA NO. 963/CHNY/2015 2. MPS PVT. LTD., THE ASSESSEE, IS A 100% SUBSIDIAR Y OF MACMILLAN PUBLISHERS LIMITED, U.K. AND OWNS 100% EXPORT ORIEN TED UNIT. IT IS OPERATING PREDOMINANTLY IN THE DPO SEGMENT. IT OPERATED IN A SINGLE BUSINESS SEGMENT I.E., OUTSOURCED PUBLISHING SERVICES AND BROADLY CL ASSIFIED INTO INFORMATION PROCESSING (TYPESETTING) AND E-BUSINESS. THE ASSES SEE ADOPTED INTERNAL TNMM FOR ALP DETERMINATION WITH RESPECT TO SERVICES RENDERED TO THE AE. THE TPO FOUND THAT THE INTERNAL SEGMENT WAS NOT COMPARA BLE AND CHOSE EXTERNAL TNMM AND HENCE MADE AN UPWARD ADJUSTMENT IN HIS TP STUDY. AGGRIEVED, THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP AN D THE DRP DISPOSED ITS OBJECTIONS GIVING PART RELIEF. AGAINST THE ORDER P ASSED BY THE DCIT IN PURSUANCE OF THE DRP DIRECTIONS, THE ASSESSEE FILED THIS APPEAL PRIMARILY CHALLENGING INCLUSION OF CERTAIN COMPARABLES, EXCLU SION OF CERTAIN COMPARABLES CHOSEN BY IT AND AGAINST THE DISALLOWANCES MADE U/S . 14A. 3. THE AR SUBMITTED THAT THE OPERATIONS OF COSMIC G LOBAL LIMITED ARE MORE IN THE NATURE OF OUTSOURCING ITS ACTIVITIES TO THIRD PARTIES AND NOT OF RENDERING ITES SERVICES. THE 'TRANSLATION CHARGES' PAID COMPRISES OF 40% OF THE TRANSLATION INCOME OF INR.5,45,41,023 WHICH REP RESENTED OUTSOURCED ACTIVITY. THEREFORE, COSMIC GLOBAL IS FUNCTIONALLY DIFFERENT AND THIS ASPECT HAS NOT BEEN ADJUDICATED BY THE DRP. HE SUBMITTED THAT THIS COMPARABLE WAS EXCLUDED AS A COMPARABLE FOR ITES COMPANIES IN THE FOLLOWING RULINGS OWING TO DIFFERENT FUNCTIONAL PROFILE AND BUSINESS MODEL: :-3-: ITA NO. 963/CHNY/2015 A. XCHANGING TECHNOLOGY SERVICES INDIA (P) LTD VS D CIT [2015] 57 TAXMANN.COM 437 - DELHI ITAT CONFIRMED BY THE HIGH COURT OF DELHI IN ITA NO. 813/2015 ON 20.10.2015; B. XCHANGING TECHNOLOGY SERVICES INDIA (P) LTD VS D CIT [2015] 60 TAXMANN.COM 389 - DELHI ITAT - CONFIRMED BY THE HIG H COURT OF DELHI IN ITA NO. 36/2016 ON 19.01.2016 C. RAMPGREEN SOLUTIONS PVT. LTD. - [2015] 60 TAXMAN N.COM 355 (DELHI) - DELHI HIGH COURT D. PAREXEL INTERNATIONAL (INDIA) (P) LTD [2014] 51 TAXMANN.COM 238 - HYDERABAD ITAT E. CUMMINS TURBO TECHNOLOGIES LTD. [2016] 68 TAXMAN N.COM 273 - PUNE ITAT AND HENCE PLEADED TO EXCLUDE THE SAME . 3.1 ON FORTUNE INFOTECH LIMITED, THE AR SUBMITTED THAT THIS COMPANY WAS SUBJECT TO EXTRAORDINARY EVENTS; 2 CONSISTENTLY FAI LS RPT FILTER;&3. DEVELOPS AND OWNS UNIQUE WEB BASED SOFTWARE FOR NICHE SERVIC ES. (A) ON EXTRAORDINARY EVENT, THE AR SUBMITTED THAT DURING THE FY 2009-10, FORTUNE HAD MERGED WITH OTHER ENTITIES AND ALSO SOL D ITS ENTIRE INVESTMENT IN ITS WHOLLY OWNED SUBSIDIARY FORTUNE INFOTECH USA, INC. IN THIS REGARD , THE AR PLACED RELIANCE IN THE FOLLOWING CASES WHEREIN THIS COMPANY HAS BEEN REJECTED ON THE GROUND OF EXTRA ORDINARY EVENTS: A. M/S. SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. ( PRESENTLY MERGED WITH GENPACT INDIA), (ITA NO 1316/BANG/2012) B. CAPITAL IQ INFORMATION SYSTEMS INDIA PVT LTD V DCIT [2013] 32 TAXMAN.COM 21 (HYD. TRIB) :-4-: ITA NO. 963/CHNY/2015 (B) ON USE OF UNIQUE SOFTWARE, THE AR SUBMITTED THA T THIS COMPANY HAS DEVELOPED AND OWNS ITS UNIQUE WEB BASED SOFTWARE BY WHICH IT PROVIDES NICHE SERVICES TO ITS CUSTOMERS. THEREFORE, THIS COMPANY CANNOT BE TAKEN AS COMPARABLE WITH ITES ENTITIES HAVING LITTLE OR NO I NTANGIBLES OF THEIR OWN AND PLACED RELIANCE ON THE FOLLOWING DECISIONS: A. RR DONELLEY INDIA OUTSOURCE PVT LTD S. DCIT (ITA NO . 678/CHNY/2015); B. 24/7 CUSTOMER.COM PRIVATE LIMITED VS DCIT (ITA NO. 227BANG/2010) C. EQUANT SOLUTIONS INDIA PVT LTD VS DCIT (ITA NO. 120 2/DEL/2015). (C) ON CONSISTENTLY FAILING RPT TO SALES FILTER, T HE AR SUBMITTED THAT THIS COMPANY DERIVES ITS INCOME MAINLY FROM ITS RELATED PARTIES AND FURNISHED A SNAPSHOT OF THE RPT TO SALES AS UNDER : YEAR ON YEAR ANALYSIS OF RPT RATIO PARTICULARS FY 2007 - 08 FY 2008 - 09 FY 2009 - 10 FY 2010 - 11 SALES (IN INR) 37,07,24,095 21,43,70,565 9,74,95,149 11,56,11,146 INCOME FROM RPT (IN INR) 37,07,24,095 11,90,93,313 2,39,72,792, 11,40,89,195 RPT/SALES (IN %) 100.00% 55.55% 24.59% 98.68% THE AR SUBMITTED THE IMPACT ON PROFITS ON ACCOUNT O F MERGER AS UNDER: PARTICULARS FY 2007 - 08 FY 2008 - 09 FY 2009 - 10 FY 2010 - 11 FY 2011 - 12 OPERATING INCOME (A) 37,07,24,095 21,43,70,565 9,74,95,149 11,56,11,146 12,43,12,692 PROFIT BEFORE TAXES (B) 72,92,243 2,37,75,610 3,13,43,736 4,29,81,241 5,34,90,919 OPERATING MARGIN (B/A) 1.97% 11.09% 32.15% 37.18% 43.03% :-5-: ITA NO. 963/CHNY/2015 FOR THE AFOREMENTIONED REASONS, THE AR PLEADED THAT FORTUNE INFOTECH LIMITED IS NOT COMPARABLE TO THE BUSINESS OF THE ASSESSEE. 3.2 IN RESPECT OF JEEVAN SCIENTIFIC TECHNOLOGIES LIMITE D, THE AR SUBMITTED THAT THE SEGMENTAL DATA HAS BEEN CONSIDERED INCORRE CTLY. HE SUBMITTED THAT THE LEARNED TPO HAS ERRED IN SELECTING ONLY 'BPO OP ERATIONS' AS RELATING TO IT ENABLED SERVICES, WITHOUT APPRECIATING THAT THE COM PANY THEMSELVES HAVE CLASSIFIED 'ENTERPRISE SOLUTIONS' AS IT ENABLED SER VICES. HENCE, HE SUBMITTED THAT FOR THE COMPUTATION OF PLI , THE ENTIRE IT ENA BLED SERVICES AS CLASSIFIED IN THE SCHEDULES TO PROFIT & LOSS ACCOUNT SHOULD BE CO NSIDERED. IN THIS REGARD , HE PLACED RELIANCE IN THE CASE OF AMTEL R&D INDIA PRIV ATE LIMITED VS. DCIT (ITA NO. 812/MAD/2015). 4. FURTHER , THE AR SUBMITTED THAT THE LEARNED TPO HAS REJECTED ITS COMPARABLES VIZ CALIBER POINT BUSINESS SOLUTIONS L IMITED & R SYSTEMS INTERNATIONAL LIMITED HOLDING THAT THESE COMPANI ES HAVE ADOPTED DIFFERENT FINANCIAL PERIOD FROM THE FINANCIAL PERIOD OF THE A SSESSEE . IN THIS REGARD, HE RELIED ON THE FOLLOWING TRIBUNAL DECISIONS, WHEREIN THESE COMPANIES WERE INCLUDED AS A COMPARABLES AND THE RESPECTIVE APPELL ANTS WERE DIRECTED TO FURNISH COMPARABLES DATA FOR TPO VERIFICATION: A. XCHANGING TECHNOLOGY SERVICES PVT. LTD. IN ITA NO. 1222/DEL/2015; B. MERCER CONSULTING (INDIA) PVT. LTD IN ITA NO. 966/D EL/2014; :-6-: ITA NO. 963/CHNY/2015 5. PER CONTRA, THE DR SUBMITTED THAT THE DETAILS FU RNISHED BY THE ASSESSEE WERE NOT NEITHER BEFORE THE TPO/AO NOR BEF ORE THE DRP. THE DR SUBMITTED THAT WHEREVER INFORMATION WAS FURNISHED, THE DRP HAS DIRECTED THE TPO TO EXAMINE AND PASS NECESSARY ORDERS. HE INVIT ED OUR ATTENTION TO THE DRPS DIRECTION WITH REGARD TO THE COMPARABLE JEEVA N SCIENTIFIC TECHNOLOGIES LIMITED, WHEREIN, THE DRP DIRECTED THE TPO TO EXAMI NE THE SEGMENTAL DATA AND PASS NECESSARY ORDERS. THUS, HE SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 6. WE HEARD THE RIVAL SUBMISSIONS. SINCE THE ASSESS EE HAS FURNISHED THE REQUIRED PARTICULARS AND RELYING ON THE DECISIONS O F TRIBUNAL / HIGH COURT, WE REMIT THE ISSUES IN CONNECTION WITH THE ABOVE COMPA RABLES TO THE TPO/A O FOR A FRESH EXAMINATION. IN RESPECT OF THE COMPARABLES, CALIBER POINT BUSINESS SOLUTIONS LIMITED & R SYSTEMS INTERNATIONAL LIMITED , THE ASSESSEE SHALL FURNISH COMPARABLES DATA FOR THE VERIFICATION OF THE TPO. THE TPO SHALL DECIDE AS TO WHETHER THE ABOVE COMPARABLES ARE TO BE INCLUDED OR TO BE EXCLUDED, AS THE CASE MAY BE, IN ACCORDANCE WITH LAW, AFTER AFFORDIN G ADEQUATE OPPORTUNITY TO THE ASSESSEE. THE ASSESSEES CORRESPONDING GROUNDS ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. :-7-: ITA NO. 963/CHNY/2015 7. WITH REGARD TO THE DISALLOWANCE MADE U/S. 14A, T HE AR SUBMITTED THAT, THE DRP ERRED IN CONFIRMING THE DISALLOWANCE MADE B Y AO AT RS.17,20,802 UNDER SECTION 14A AS EXPENSES INCURRED FOR EARNING THE EXEMPT DIVIDEND INCOME. THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME DURING THE YEAR FROM ITS INVESTMENTS IN SUBSIDIARY COMPANIES NAMELY MPS TECHNOLOGIES LTD AND MPS CONTENT SERVICES INC., USA HELD DURING THE SAID ASSESSMENT YEAR. THE AO OUGHT TO HAVE APPRECIATED THAT THE ASSESSEE HAD TAKEN A BUSINESS DECISION TO INVEST IN SUBSIDIARY COMPANIES AND IT D ID NOT MAKE THE INVESTMENTS WITH A VIEW TO EARN EXEMPT INCOME. THEREFORE, NOTIO NAL ATTRIBUTION OF EXPENSES IS UNSUSTAINABLE. THE DRP AND AO OUGHT TO HAVE APPRECIATED THAT THE INVESTMENTS MADE BY THE ASSESSEE WERE PURCHASED OUT OF THE SURPLUS FUNDS BY SELF AND NO ADMINISTRATIVE OVERHEADS WERE ATTRIBUTABLE TO THE INVESTMENTS MADE IN SUBSIDIARY COMPANIES. WITHOUT P REJUDICE TO THE ABOVE, IT IS SUBMITTED THAT THE DIVIDEND INCOME, IF ANY RECEI VED FROM MPS CONTENT SERVICES INC, USA IS A TAXABLE INCOME AND HENCE CAN NOT BE INCLUDED IN THE COMPUTATION OF AVERAGE INVESTMENTS. WITHOUT PREJUDI CE TO THE ABOVE, THE AO OUGHT NOT TO HAVE CONSIDERED THAT THE INVESTMENTS W HICH DID NOT YIELD DIVIDEND INCOME DURING THE PREVIOUS YEAR WHILE COMP UTING THE QUANTUM OF DISALLOWANCE UNDER RULE 8D(2)(II) AND (III) OF THE RULES. 8. PER CONTRA, THE DR SUPPORTED THE ORDER OF THE DR P. HE INVITED OUR ATTENTION TO THE DRP ORDER AND SUBMITTED THAT THE D RP RELIED ON THE :-8-: ITA NO. 963/CHNY/2015 JURISDICTIONAL BENCH OF ITAT, CHENNAI IN THE CASE O F SOUTHERN PETRO CHEMICAL INDUSTRIES VS DCIT 93 TTJ 161, WHICH HAS APPROVED T HE DISALLOWANCE OF PROPORTIONATE MANAGEMENT EXPENSES WHILE COMPUTING T HE DIVIDEND INCOME. THE SPECIAL BENCH DECISION OF ITAT IN THE CASE OF C HEMINVEST LTD. VS ITO [2009] 121 ITD 318 (DEL) (SB). THE AO HAS RELIED O N THE DECISION OF THE DELHI ITAT IN THE CASE OF ESCORTS LTD., VS ACIT 102 TTJ 5 22 ETC. 9. WE HEARD THE RIVAL SUBMISSIONS. SINCE, THE ASSE SSEE HAS NOT EARNED ANY DIVIDEND (EXEMPT) INCOME DURING THE YEAR, FOLLOWING THE JURISDICTIONAL HIGH COURT DECISIONS IN THE CASES OF REDINGTON (INDIA) L IMITED VS ACIT, CHENNAI [2017] 77 TAXMANN.COM 257 AND CIT, CENTRAL(1), CHEN NAI VS CHETTINAD LOGISTICS PVT. LTD., [2017] 80 TAXMANN.COM 221, THE ADDITION MADE BY THE AO IS DELETED AND THE ASSESSEES GROUNDS IN THIS REGAR D IS ALLOWED. 10. IN THE RESULT, THE ASSESSEES APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON TUESDAY, THE 03 RD DAY OF APRIL, 2018 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) !' /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) ' /ACCOUNTANT MEMBER :-9-: ITA NO. 963/CHNY/2015 /CHENNAI, 1 /DATED: 03 RD APRIL, 2018 JPV '*2343 /COPY TO: 1. &/ APPELLANT 2. *+& /RESPONDENT 3. 5 ) (/CIT(A) 4. 5 /CIT 5. 3* /DR 6. 7 /GF