GCO Technologies Centre Private Ltd. Vs ITO (ITAT Mumbai)
We have deliberated at length on the aforesaid issue under consideration and are unable to persuade ourselves to subscribe to the projection of the aforesaid comparable company viz. M/s Cather Consultancy Services Pvt. Ltd by the assessee as a profit making company during the financial year 2009-10. As observed by us hereinabove, the assessee had tried to wriggle out of the fact that the aforesaid comparable company was a persistent loss making company by treating bad debts as a non-operational expenditure. In our considered view, the writing back of bad debts being a normal incident of a business operation which is carried everywhere in accounts to have a true picture of profits of the relevant party, thus, cannot be held to be a non-operational expenditure. Accordingly, we do not find any justification for exclusion of the bad debts written off by the aforesaid comparable company in its accounts, for the purpose of computing its margins for the aforesaid three years. To sum up, the margins of the aforesaid comparable viz. M/s Cather Consultancy Services Pvt. Ltd. after excluding the bad debts as a non-operating expenditure by the assessee cannot be accepted. Our aforesaid view is fortified by the order of the ITAT, Hyderabad in Hyudai Motor India Engineers Pvt. Ltd. Vs. DCIT [ITA No. 87/Hyd/2017, dated 08.06.2018] and M/s Kenexa Technologies Pvt. Ltd. Vs. DCIT [ITA No.243/Hyd/2014, dated 14.11.2014]. In the backdrop of the aforesaid facts, we are of a strong conviction that as the aforesaid comparable company, viz. M/s Cather Consultancy Services Pvt. Ltd. can safely be held to be a persistent loss making company for three years, therefore, the A.O had rightly excluded it from the final list of comparables for the purpose of benchmarking the international transactions of the assesee for the year under consideration. Accordingly, finding no infirmity in the view taken by the A.O, we uphold his order to the said extent. The Ground of appeal No. 3 raised by the assessee is dismissed.
As regards the claim of the assessee that the CIT(A) ought to have excluded M/s En Pointe Technologies India Pvt. Ltd., for the reason, that it had a high profit margin of 31.18%, we are afraid that the same does not find favour with us. We may herein observe that the aforesaid comparable company i.e M/s En Pointe Technologies India Pvt. Ltd. was selected by the assessee as a comparable in its TP study report for the year under consideration. Apart from that, the said comparable i.e M/s En Pointe Technologies India Pvt. Ltd, cannot be excluded from the final list of comparables on the standalone basis that of its high margin. Admittedly, in case the assessee is able to demonstrate that the higher margin of a company was backed by certain extraordinary events, then, there would be a basis for rejecting the same as a comparable for the purpose of benchmarking the international transactions of the assessee. However, as it is not the case of the assessee that the higher margin of the aforementioned company was due to certain extraordinary circumstances prevailing in its case, therefore, we are unable to concur with the seeking of the exclusion of the said company from the final list of comparables. The Ground of appeal No. 4 is dismissed.
We shall now advert to the claim of the assessee that the lower authorities had erred in not making risk adjustment of 2% while computing the ALP under Sec. 92C of the Act. It is the claim of the assessee, that as it is a captive unit of its parent company viz. M/s Global Conference Organizers, B.V, Netherland, therefore, it operates in an environment which is free of risk, and thus, the resultant margin of profit is also on the lower side. In the backdrop of its aforesaid contention, it is the claim of the assessee that the lower authorities had erred in not making a risk adjustment of 2% while computing the ALP under Sec. 92C of the Act. On the contrary, it was observed by the A.O that as the assessee had not quantified the risk adjustment either in the TP study report or in its submissions, therefore, its plea of risk adjustment was liable to be rejected. We have deliberated at length on the aforesaid issue under consideration and find substantial force in the claim of the assessee. Admittedly, the assessee being captive unit of its parent company viz. Global Conference Organizers, B.V, Netherland, therein operates in an environment which is free of risk, and resultantly, its margin of profit for the said reason is on the lower side. In our considered view, the claim of the assessee for the risk adjustment while benchmarking its international transactions in the backdrop of the financial of the comparables companies merits acceptance. Accordingly, we herein restore the issue to the file of the A.O, with a direction to consider the assessee’s claim for risk adjustment for benchmarking its international transactions. The Ground of appeal No. 5 is allowed for statistical purposes.
We shall now take up the claim of the assessee that the AO had erred in calculating the adjustment under Sec. 92C at 13.15% of the sale turnover i.e Rs.94,87,509/- instead of 13.15% of cost i.e Rs.90,48,051/-. Admittedly, the ALP of the international transactions of the assessee had been worked out by the A.O at 13.15%. In our considered view, the arm’s length profit in the hands of the assessee was to be worked out on its cost and not on its sale turnover of Rs.94,87,509/-. Accordingly, in terms of our aforesaid observations, we herein restore the matter to the file of the A.O, who is directed to rework out the adjustment by applying the average PLI of the comparables to the cost of the international transactions carried out by the assessee during the year under consideration, and not on its sale turnover of Rs.94,87,508/-. The Ground of appeal No. 6 is allowed for statistical purpose.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-15, Mumbai, dated 14.07.2014, which in turn arises from the assessment order passed by the A.O under Sec.143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 04.03.2013 for A.Y. 2010-11. The assessee has assailed the impugned order on the following effective grounds of appeal before us:
“1. On facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the disallowance of expenditures amounting to Rs.12,26,063/-incurred during the period from 20/04/2009 to 31/07/2009 by treating them as pre commencement expenditure and in the nature of Capital Expenditure.
2. Without prejudice to ground no. 1, the Ld. CIT(A) has erred in allowing the above mentioned expense of Rs.12,26,063/- as deduction u/s 35D as 1/10th of the expense over a period of 10 years instead of 1/5th of the expenses over 5 years.
3. On facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the addition u/s 92C of The Income Tax Act, 1961 of Rs. 8,10,171/- by taxing the margin © 13.15% of total cost in relation to transactions with M/s Global Conference Organisers B.V, Netherlands without considering our contention of not to exclude the comparable company Cethar Consultancy Services Pvt. Ltd. while calculating the arm’s length price.
4. Without prejudice to above, the Ld. CIT(A) has erred in not excluding the comparable company M/s. En Pointe Technologies India Pvt. Ltd. while calculating the arm’s length price.
5. On facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not making risk adjustment of 2% while computing the arm’s length price u/s 92C.
6. Without prejudice to the ground no 3,4 and 5 the Ld. AO has erred in calculating adjustment u/s 92C at 13.15% of the sale turnover i.e. Rs. 94,87,509/- instead of 13.15% of cost i.e. Rs. 90,48,051/-
7. Without prejudice to ground no. 1 and ground no. 2, in calculating the operating profit, the Ld. AO has erred in not excluding Rs. 12,26,063/-from the total cost of Rs. 90,48,051/- which has been held as capital expenditure.”
2. Briefly stated, the assessee company which is engaged in the business of providing software outsourcing services exclusively to its parent company viz. M/s Global Conference Organizers, B.V, Netherland, had filed its return of income on 05.10.2010, declaring its income at Rs. Nil. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently, the assessee filed its revised return of income on 24.03.2011, which was processed under Sec. 143(1) on 30.03.2012, determining its loss at Rs.1,09,393/-, as returned. Thereafter, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. During the course of the assessment proceedings, it was observed by the A.O that the assessee company had entered into a service agreement with its parent company viz. M/s Global Conference Organizers, B.V, Netherland on 01.08.2009. However, as observed by the A.O, the assessee in its profit and loss account had booked expenses for the period prior to 01.08.2009 i.e for the period of 20.04.2009 to 30.07.2009, aggregating to an amount of Rs.19,78,700/-. On a perusal of the records, it was gathered by the A.O that the aforesaid expenses included an amount of Rs.7,52,637/- that was reimbursed by the parent company i.e M/s Global Conference Organizers, B.V, Netherland, on the basis of the invoices which were raised by the assessee company. In the backdrop of the aforesaid facts, the A.O called upon the assessee to explain as to why the expenses made prior to the commencement of its business amounting to Rs.12,26,063/- [Rs.1,78,700/- (-) Rs.7,52,637/-] may not be disallowed being in the nature of pre-commencement expenses. In reply, it was submitted by the assessee that as the infrastructural facilities were set up, business assignments were explored/negotiated and manpower was recruited by 02.05.2009, therefore, its aforesaid claim of expenses incurred during the period 20.04.2009 to 30.07.2009 was in order and allowable as deduction u/s 37(1) of the Act. However, the A.O not finding favour the aforesaid claim of the assessee disallowed the aforesaid expenses of Rs. 12,26,063/-(net of reimbursement), by treating them as pre-commencement expenses within the meaning of Sec.35D of the Act. Apart from that, it was observed by the A.O that the assessee during the year under consideration had entered into an international transaction with its Associated Enterprise (AE), viz. M/s Global Conference Organizers, B.V, Netherland, in respect of the I.T services rendered to its AE. On a perusal of „Form 3CEB‟ filed by the assessee company, it was noticed by the A.O that the assessee had provided software outsourcing services exclusively to its parent company viz. M/s Global Conference Organizers, B.V, Netherland, aggregating to Rs.94,87,508/-. The assessee had benchmarked the aforesaid services under the Transactional Net Margin Method (TNMM). Adopting OP/Sales as the Profit Level Indicator (PLI), the assessee had shown a mark up of 4.85% in respect of the I.T. Services rendered to its AE. For the purpose of benchmarking its international transactions the assessee had adopted 6 comparable companies whose arithmetic mean margin worked out at 7.88%, as under:
