It was not a case where no exempted income is earned and AO applied rule 8D for as rule 8D of Income Tax Rules takes care of all aspects of interest bearing funds and interest free funds and expenditure incurred in management of portfolios, etc., once it is decided that section 14A is to be invoked, disallowances are to made as per rule 8D. Accordingly, there was no infirmity in the order of AO.
We find that the assessee has made substantial investments of 8,73,53,000/- and has earned the dividend income of Rs.23,53,000/-. Mutual fund is exempt under section 10(34) of the Act. The AO having examined the contentions of the assesse has made the additions after applying the Rule 8D of the Rules. It is not a case where no exempted income is earned. Assessee has earned the exempted income and the AO has invoked the provisions of section 14A and applied Rule 8D for determining the disallowances. Since rule 8D takes care of all aspects of interest bearing funds and interest free funds and expenditure incurred in management of portfolios etc., we are of the view, that once it is decided that provisions of section 14A is to be invoked, disallowances are to made as per Rule 8D of the Rules. A
FULL TEXT OF THE ITAT JUDGMENT
These cross appeals are preferred by the assessee as well as the revenue against the respective orders of the AO passed consequent to the directions of DRP. Since all these appeals were heard together, these are being disposed off through this consolidated order. We however we prefer to adjudicate them one after the other.
2. IT(TP)A No. 443/Bang/2016
This appeal is preferred by the assessee against the assessment order passed consequent to the directions of DRP, inter alia, on following grounds:
1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer (“AO”) is bad in law.
2. The Ld. Dispute Resolution Panel (“DRP”) erred in confirming the AO! Ld. Transfer Pricing Officer’s (“TPO”) approach of enhancing the income of the Appellant by Rs.15,39,24,517!- holding that the international transactions pertaining to provision of Information Technology enabled services (“ITeS”) do not satisfy the arm’s length principle envisaged under the Act. In doing so, the Ld. AO! Ld. TPO have grossly erred in;
2.1. rejecting the Transfer Pricing (“TP”) documentation maintained by the Appellant under section 92D of the Act and Rule 10D of the Income-tax Rules, 1962 (“Rules”) and in doing so not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case;
2.2. ignoring the fact that the Appellant is entitled to tax holiday under section 10A and 10AA of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions;
2.3. disregarding the Arm’s Length Price (“ALP”) as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules as well as the fresh search and in particular modifying! rejecting the filters applied by the Appellant;
2.4. disregarding multiple year! prior years’ data as used by the Appellant in the TP documentation and holding that current year [(i.e. Financial Year (“FY”) 2010-1 1] data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation:
2.5. rejecting the economic and comparability analysis in the TP documentation! fresh search and in conducting a revised comparability analysis based on application of the following additional! revised filters in determining the ALP:
2.5.1. exclusion of companies whose data for FY 2010-11 was not available;
2.5.2 exclusion of companies having different financial year ending (i.e., not March 31, 2011) (i.e., Caliber Point Business Solutions Ltd and R Systems International Limited);
2.6. not appropriately considering the functions, assets and risk profile of the companies used forcomparison with the Appellant, thereby including in the final comparable set certain companies with completely different functional profile (i.e., Accentia Technologies Ltd, Acropetal Technologies Limited. ICRA Online Limited, Jeevan Scientific Technology Ltd);,
2.7. excluding certain companies on arbitrary/frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed;
2.8. excluding provision for doubtful debts from the cost base in the
computation of markup of certain comparable companies;
2.9. rejecting Appellant’s claim of adjustment on account of accelerated depreciation (i.e. higher rate of depreciation charged vis-а-vis those of comparables) while computing Margin of comparables;
2.10. committing factual errors in the computation of working capital
2.11. including companies having high margins/ volatile operating margins in the final comparables’ set, that signify high element of entrepreneurial risk, thereby not appreciating the risk profile of the services rendered by the Appellant and restricting risk adjustment to 1% without giving appropriate/ due regard to economic considerations applicable in the instant case;
3. The Ld. AO/ Ld. TPO erred in not sharing the basis of arriving at the revised TP adjustment while passing the final TP order
4. The reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was ‘necessary or expedient’ to refer the matter to the Ld. TPO for computation of the ALP, as is required under section 92 CA (1 ) of the Act.
5. The Ld. AO/ Ld. TPO has grossly erred on facts and in law by disregarding judicial pronouncements in India in undertaking the TP
6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act mechanically without recording any adequate satisfaction for such initiation.
7. The Ld. AO has erred in law and on the facts of the case by charging and computing interest under section 234B of the Income tax Act, 1961.
The above grounds of appeal are mutually exclusive and without prejudice to each other.
The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other.
3. During the course of assessment proceedings, the AO has noted that assessee had international transactions with its Associated Enterprises of more than Rs.15 Accordingly, it was referred to TPO for determination of ALP. The TPO vide order dated 27.01.2015 determined the adjustment to ALP to the tune of Rs.12,09,08,993/- and the same was adopted in the draft assessment order dated 26.03.2015. Aggrieved with the said adjustment, the assessee approached the DRP and DRP vide its direction had directed the TPO to verify certain objections and recompute the ALP. The TPO vide its report dated 25.01.2016 had determined the ALP adjustment at Rs.15,39,24,517/- and the same was adopted by the AO and assessed the total income at Rs.20,07,42,914/-. Against the TP adjustment, assessee has filed this appeal before the Tribunal.
4. Assessee has also filed the brief synopsis along with the chart for inclusion/exclusion of certain comparables. According to the brief synopsis and the orders of the authorities below, the assessee is engaged in the business of providing business process outsourcing to its clients and its Service Provider is willing to provide the business process outsourcing services for appropriate consideration. The services that are provided by the service provider includes remote data entry services like general accounting, accounts payable and receivable, billing, banking reconciliation, financial reporting, documentary compliance and remote tax processing services like indexing of tax working documents, preparation of tax returns, quality checks on the returns prepared etc. The assessee is a part of BPO Group, Business Process Outsourcing Inc., Cayman Islands, which is a leading offshore business process outsourcing service provider and headquartered in USA. In order to determine the ALP of the international transactions, the assessee has prepared the Transfer Pricing study and has taken 8 comparables whereas the TPO has finally taken 10 comparables for determining the ALP. The list of 10 comparables are as under:
1. Accentia Technologies Ltd.,
2. Acropetal Technologies Ltd.,
3. Cosmic Global Ltd.,
4. e4e Healthcare
5. ICRA Online Ltd.,
6. Jeevan Scientific Technology Ltd.,
7. Infosys BPO Ltd.,
8. Jindal Intellicom
9. Mindtree Ltd.,
10. iGate Global Solutions Ltd.,
5. On the basis of TPO’s report, the draft order was prepared by the AO against which assessee has filed the objections before the DRP. DRP has re-examined the claim of the assessee and has finally taken 7 comparables after rejecting 3 comparables i.e., Infosys BPO Ltd., Mindtree Limited and iGate Global Solutions Limited.
6. Aggrieved with the findings of the DRP, assessee has preferred an appeal before the Tribunal and sought the exclusion of Accentia Technologies Ltd., Acropetal Technologies Ltd., ICRA Online Ltd., and Jeevan Scientific Technology During the course of hearing, the learned counsel for the assessee, through the chart did not raise any objection with regard to the inclusion of ICRA Online Ltd. Therefore, we find no justification to exclude this comparable from the list of comparables. So far as exclusion of Accentia Technologies Ltd., Acropetal Ltd., and Jeevan Scientific Technology Ltd., are concerned, the learned counsel for the assessee has contended that these comparables are functionally different and no segmental information is available with regard to Accentia Technology Ltd., and Jeevan Scientific Technology Ltd. The learned counsel for the assessee further contended that the issues of exclusion of these comparables are covered by the judgment of the Tribunal in the case of Swiss Re Shares Services (India) Pvt. Ltd., Vs. ACIT in IT(TP) A No.380/Bang/2016 reported at (2016) 76 taxmann.com 22 (Bangalore Trib.) for the assessment year 2011-12 in which the assessee is also engaged in the business of export of customized electronic data in the field of insurance. The learned counsel for the assessee further contended that exclusion of these 3 comparables were examined by the Tribunal in detail in its order. Therefore, for the same reasons, these comparables should be excluded from the list of comparables. The learned DR on the other hand has placed reliance upon the orders of the DRP.
7. Having carefully considered the orders of the authorities below and judgments referred to by the assessee, we find that exclusion of these 3 comparables were examined by the Tribunal in the case of Swiss Re Shares Services (India) Pvt. Ltd., where the assessee was also engaged in the similar type of activities. The Tribunal has held that all these 3 comparables are functionally different, therefore they are to be excluded from the list of comparables. For the sake of reference, we extract the relevant portion of the order of the Tribunal as under:
“Accentia Technologies Limited
12. As regards the selection of Accentia Technologies Limited as comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (India) Pvt. Ltd. v. Addl./Dy. Commissioner of Income-tax, Circle 1(2), Hyderabad and vice versa (ITA No.124 and 170/Hyd/2014 dated 31.7.2014); Excellence Data Research Pvt. Ltd., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No.159/Hyd/2014 dated 31.7.2014); and Hyundai Motors India Engineering P. Ltd., Hyderabad v. DCIT, Circle 2(2), Hyderabad (ITA NHo.255/Hyd/2014 dated 31.7.2014), wherein M/s. Accentia Technologies Limited(Seg) was excluded by the Tribunal from the list of comparables on the ground that it was a case of mergers and acquisition, and the company was also found to be functionally different. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad (supra), being relevant in this case, are reproduced below-
“19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of IT(TP)A No.146/Bang/2015 Page 42 of 52 the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) (P.) Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected.” 13. As pointed out by the learned counsel for the assessee, there was acquisition of a company by M/s. Accentia Technologies Limited during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter alia in the case of Excellence Data Research (P.) Ltd. (supra). Although the learned Departmental Representative has sought to contend that the acquisition of a company by M/s. Accentia Technologies Ltd. took place at the fag end of the year under consideration, the learned counsel for the assessee has pointed out that the process of acquisition had started on 15.5.2008 itself, i.e. in the earlier part of the year under consideration. We, therefore, follow the decision of the coordinate bench of this Tribunal in the case of Excellence Data Research Services Pvt. Ltd. (supra) and direct the AO/TPO to exclude the Accentia Technologies Limited from the list of comparables.
21. Arguing for exclusion of Acropetal Technologies Ltd, (seg), Ld. AR submitted that Acropetal Technologies Ltd, was rendering service in the field of engineering design for health-care enterprise solutions and IT infrastructure solutions. As per the Ld. AR, AO took the engineering design services done by Acropetal Technologies Ltd, as a comparable segment with ITES services of the assessee. Ld. AR pointed out that engineering design services rendered by M/s. Acropetal was entirely different from the type of services done by the assessee. Further according to him Hyderabad bench of the Tribunal in the case of Excellence Data Research (P.) Ltd. v. ITO  66 SOT 15/49 taxmann.com409 (Hyd. – Trib.) had held that Acropetal Technologies Ltd, was not a good comparable in the BPO segment. As per the Ld. AR M/s. Excellence Data Research P. Ltd, was rendering back office data creation, content development and support services which were not comparable to what assessee was doing. Though the decision of the Hyderabad Bench was for A. V. 2009-1 0, as per the Ld. AR, M/s. Acropetal Technologies Ltd, was doing the very same business during the relevant previous year also and therefore it could be considered as a good precedent.
22. Per contra, Ld. DR submitted that TPO had considered the argument of the assessee that BPO and KPO had to be distinguished. According to him, Acropetal Technologies Ltd, was giving engineering design services and the assessee was rendering insurance support services. Though these services did not fit in the same mould, the level of expertise required stood more or less on the same pedestal. According to him, applying the yardsticks laid down by Hon’ble Delhi High Court in the judgment of Rampgreen Solutions (P.) Ltd. (supra), Acropetal Technologies Ltd, could be taken as a good comparable.
23. We have perused the orders and heard the rival contentions. There is no dispute that M/s. Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Services that were being rendered by Acropetal Technologies Ltd, appears at page 8 of its annual report. It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural healthcare, engineering design and enterprise solutions. In our opinion, the type of services that was being provided by Acropetal Technologies Ltd, was not at all comparable with the type of services that the assessee was providing. It is also mentioned in the annual report of the said company that it was providing high end services in the engineering design services. No doubt as mentioned by the Ld. DR, it may not be feasible to have comparables which fit in the exact mould as that of an assessee in TP analysis. However, when one company is giving sophisticated set of services which involves higher level of skill sets, and the other is doing it on a lower level, we cannot say that the former should be considered as a comparable to the latter. Though for a different year, comparability of Acropetal Technologies Ltd, (seg) had come up before Hyderabad bench of the Tribunal in the case of Excellence Data Research (P.) Ltd. (supra). Observations of the Tribunal as it appears at para 18.1 reads as under :
“18.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end, by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company.”
24. Considering all these, we are constrained to take a view that engineering design services segment of M/s. Acropetal Technologies Ltd, (seg), cannot be considered as a proper comparable for the TP study of the assessee.
29. Seeking exclusion of Jeevan Scientific Technologies Ltd, (seg), Ld. AR submitted that the turnover of the said company was less than Rs. 1 crore. As per the Ld. AR, TPO himself had excluded companies having turnover below Rs. 1 Relying on paper book, page 719, which is a part of the annual report of Jeevan Scientific Technologies Ltd, (seg), Ld. AR submitted that the revenues from BPO operations of the said company came to only Rs. 79.21 lakhs. As per the Ld. AR, the total operating revenue of the said company for the relevant previous year was only Rs.2.49 crores of which substantial part was from other streams of operation.
30. Per contra, Ld. DR submitted that the segment considered by the TPO had a turnover of Rs.246,75,00,000/-. Thus according to him Jeevan Scientific Technologies Ltd, (seg), was a good comparable.
31. We have heard the rival contentions. Audited balance sheet and financial statement of Jeevan Scientific Technologies Ltd, (seg), taken from capitaline data base has been filed before us by the assessee at paper book page.677 to Netrevenue of the said company for the relevant previous year from its operation was Rs.2,45,39,231/-, as per its income statement at paper book page 725. TPO had considered the revenue as Rs.2,46,75,000/-. However segmental revenue of the said company, as it appear at paper book page 719 show its earnings from BPO operations is Rs. 71 .219 lakhs. Thus TPO had considered the total revenue instead of the segmental revenue. The turnover of the segment which was being compared was less than Rs. 1 crore and by the yardstick applied by the TPO himself, the company ought have been excluded from the list of comparables. Whether the segmental information of the said company given by the assessee at paper book page 719, nevertheless requires a verification. We therefore set aside the comparability of Jeevan Scientific Technologies Ltd, (seg), back to the file of the AO/TPO for consideration afresh. In case the earning of the said company from its BPO operations is less than Rs. 1 crore it has to be excluded from the list of comparables.
32. In the result, we direct exclusion of Accentia Technologies Ltd, Acropetal Technologies Ltd, (seg) from the list of comparables, whereas we uphold the inclusion of ICRA Online Ltd, (seg) in the list of comparables. However, viz., Jeevan Scientific Technologies Ltd, (seg), we are remitting the issue of its fitness for comparison back to the AO/TPO for considering the turnover of the BPO segment of the said company. Ordered accordingly.”
8. Since the exclusion of these 3 comparables were examined by the Tribunal in the foregoing case, where the assessee is engaged in similar activities, we find no justification to take a contrary view in this appeal. We, accordingly, following the same, exclude 2 comparables i.e., Accentia Technologies Ltd., and Acropetal Technologies Ltd., from the finalist of comparables and for Jeevan Scientific, we restore the matter to the AO/TPO to re-examine in the light of other comparables as in the case of Swiss Re Shares Services (India) Pvt. Ltd., wherein the Tribunal has directed for reconsideration on the basis of turnover filter. Whereas, after judgment of Chryscapital Investment Vs. DCIT (2015) 56 Taxmann.com 417, the turnover filter cannot be held to be a good filter unless it affects the profitability of the comparables. Therefore, Jeevan Scientific Technology Ltd., be re-examined by the TPO in the light of other filters.
9. The assessee has also sought the inclusion of the R System International , on the ground that TPO has excluded it on account of different financial year. The learned counsel for the assessee further contended that the data for the relevant financial year i.e., April to March can be derived from the quarterly data available on the website of the company, therefore this comparable should be included in the list of comparables. In support of his contention that where the data can be available for the relevant financial year, the comparable should be included in the list of comparables, the learned counsel for the assessee has relied upon the order of the Tribunal in the case of Business Process Outsourcing Pvt. Ltd., Vs. ACIT in IT(TP)No.238/Bang/2016, M/s. Mercer Consulting India Pvt. Ltd., Vs. DCIT in ITA No.101/2015 (Punjab & Haryana High Court) and Mckinsey Knowledge Centre India Pvt. Ltd., in ITA No.217/2014 (Delhi High Court). Copy of these orders are placed on record.
The learned DR placed reliance upon the order of the DRP.
10. Having carefully examined the orders of the lower authorities in the light of rival submissions, we find that it has been repeatedly held through various orders by the Tribunal that wherever the data for the relevant financial year can be derived from the data available on the website and that comparables stands on other filters, the same should be included in the list of comparables. In the instant case, assessee has tried to demonstrate that data for the relevant financial year (April to March) can be derived from the data available on website. Therefore, we are of the opinion that this comparable should be included in the