Broadridge Financial Solutions ... vs Assessee

Broadridge Financial Solutions vs. Dy.Commissioner of Income- (India) Pvt. Ltd., Hyderabad. tax, Circle - 1(3), Hyderabad

PAN - AADCB 0321R 15676 H (Appellant) (Respondent)

Assessee by : Shri Raghunathan S. Revenue by : Shri D. Sudhakar Rao

Date of hearing 18-02-2015 Date of pronouncement 20-03-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal of assessee is being reheard in pursuance to the directions of the Hon'ble High Court of Judicator at Hyderabad for the State of Telengana and the state of Andhra Pradesh. The directions of the Hon'ble High Court as contained in order dated 05/09/2014 in ITTA No. 405 of 2014, is as under:

"We have heard the learned counsel for the appellant and issued pre-admission notice on 24/07/2014.

After hearing both the learned counsel, we admit the appeal on the following substantial question of law.

"Whether the learned Tribunal is justified in deciding the matter on merit on one point while refusing to decide the matter on merit on another point.?

It was recorded by the learned Tribunal that the assessee has not raised any specific objection with regard to the following issue.

2 ITA No. 1795/Hyd/2012 Broadridge Financial Solutions (India) P. Ltd.

Whether findings of Dispute Resolution Panel on allowability of deduction of expenditure incurred for setting up cost on the new premises are sustainable or not?

Actually, this issue was raised before the Tribunal by the appellant. However, it has been erroneously recorded that there is no finding by the DRP on the said issue. While observing this, the Tribunal decided the matter on another point on merit, in the manner as follows.

The record shows that the assessee was incorporated as a company on 17/01/2007 and as per the note No. 14 of the annual report of the company it has been clearly mentioned that the assessee company has commenced its operations from 1 st April, 2007. Hence, the assessee cannot claim any exemption for prior period expenses.

We think that the learned Tribunal should not have done so. We therefore set aside this order. We remand the matter on the limited issue as mentioned in paragraph 11 of the judgment of the Tribunal and it shall be decided in accordance with law on merit within a period of two months from the date of communication of this order."

2. As can be seen from the operative portion, the direction of the Hon'ble High Court is in relation to ground No. 11 raised by assessee before the ITAT, which reads as under:

"The ld. TPO erred in including non-operating expenses in the cost base of the appellant for the purpose of computing the profit level indicator (PLI) for determining the Arm's length price of the international transaction of the appellant under transaction net margin method, which ought not be included considering the principles of economics and basic transfer pricing principles and commercial realities. Further, ld. TPO violated the principles of natural justice by not appropriately communicating the computation of the cost base used by the ld. TPO in computing the PLI of the appellant."

3. Narrating the facts ld. AR submitted before us, assessee was incorporated as a company on 17/01/07 and commenced its operations with effect from 01/04/07. However, as assessee was in possession of setting up its own premises, it was rendering services from the premises of ADP Ltd. It was submitted, during the gestation period for establishment of new premises which continued till 3 ITA No. 1795/Hyd/2012 Broadridge Financial Solutions (India) P. Ltd.

October'07, assessee in addition to regular operating expenditure has also incurred additional expenditure on the new premises, though not occupied, towards rentals, electricity and maintenance etc till the time the infrastructure was built. Ld. AR submitted, the said expenditure including the stamp duty paid on lease deed being in the nature of setting up cost has been considered as non-operating expenditure by the company. It was submitted, the company has also obtained actuarial certificate for ascertaining the liability on account of gratuity and privilege leave and accordingly revisited the opening figures. The details of non-operating expenditure as reflected in the audited accounts under the head other expenditure are as under:

S.No. Description Amount Remarks 1. Rentals 3,67,96,864 Rent paid till occupation of new premises i.e. October, 2007. 2. Stamp duty 1,00,91,180 Stamp duty paid for entering into a lease deed for the new premises. 3. Consultancy 38,79,260 Fee paid to consultant for Fee finding a new office premises. 4. Power 4,56,357 Power charges incurred till charges occupation of new premises i.e. October, 2007. 5. Maintenance 17,02,338 Maintenance charges paid till occupation of new premises i.e. October, 2007. 6. Increase in 1,03,39,935 Revisiting the opening gratuity liability for and privileged leaves figures employee in accordance with AS 15. benefits Total 6,32,65,934 Ld. AR submitted, the expenditure though, incurred after commencement of the business but since it is non-operating,

assessee could not have recovered it as service charges from its AE, hence, the same was treated as non-operating. Ld. AR referring to the service agreement with AE, submitted that as per clause 5.1 of the service agreement, AE will only reimburse the operating cost with mark up of 11% and not non-operating cost. Thus, it was submitted by ld. AR, the expenditure incurred being non-operating in nature should 4 ITA No. 1795/Hyd/2012 Broadridge Financial Solutions (India) P. Ltd.

not have been considered as part of the operating cost while computing the margin.

4. The ld. DR, on the other hand, submitted, there is no error in the computation of margin as claimed by assessee.

5. We have heard the parties and perused the materials on record. After considering the submissions of assessee and going through the audited financial statement as well as TP study, we are convinced that the expenditure of Rs. 6,32,65,934.00 lakh was incurred after commencement of operations by assessee and relates to the FY relevant to AY under dispute. It is further to be noted that it is the claim of assessee that the expenditure since was incurred during the gestation period when the company was under process of establishing its own premises, it is non-operating in nature as no client would be expected to pay the set up cost. On examination of the service agreement entered into between assessee with its AE on 1 st July, 2008, it is seen that as per the terms of the agreement, assessee is entitled to receive operating cost/expenses with a mark up of 11%. However, as can be seen, the expenditure relating to set up of new premises is not towards services rendered by assessee to its AE. Therefore, it cannot be considered to be of operating nature. That being the case, such expenditure cannot be considered as part of the operating cost while computing margin of assessee. The coordinate bench of this Tribunal in case of M/s Market Tools Research Pvt. Ltd. Vs. DCIT in ITA No. 1150/hyd/2011 dated 05/02/2014, while considering similar issue has held as under:

"25. Ground No. 6 reads as under:

" The learned CIT(A) erred in considering the pre-operative expenses of Rs.44.00,457/- as a component of the operating costs for the determination of arm's length remuneration."

26. The sole grievance of the assessee is that the TPO should not have considered pre-operative expenses of Rs.44,00,457 as operating cost 5 ITA No. 1795/Hyd/2012 Broadridge Financial Solutions (India) P. Ltd.

while computing the ALP of the international transaction. As can be seen from the facts on record in the order passed u/s 92CA of the Act, the TPO had adopted the operating cost at Rs.4,87,43,702/-. Subsequently, however he passed an order u/s 154 of the Act by adopting the operating cost at Rs.4,89,62,580/- which included the pre-operative expenses of Rs.44,00,457/-. Though the assessee took up the issue before the CIT(A), he however did not interfere by rejecting all the contentions of the assessee. He held that as per clause 2.4 of article 2 of the agreement between the assessee with its AE it becomes clear that the assessee has charged its AE for all such cost incurred by it prior to entering into such agreement with the AE. He held that in absence of any specific denial from the assessee regarding not charging AE for such costs incurred up to 31-3-2004 , it has to be held that the assessee has charged and recovered such costs incurred by it during that period.

27. The learned AR by referring to the agreement entered with the AE, which is at page 1 of the paper book, submitted that the assessee was incorporated on 4-6-2004. The agreement was entered with its AE on 1st Sept. 2004. Therefore, there is no question of assessee having charged preoperative expenses from its AE prior to the date of the agreement. The learned AR in this context referred to the financial information as on 31-3- 2005 placed in the paper book wherein pre-operative expenses has been excluded while arriving at the total cost. The learned AR submitted, even as per clause 2.4 of Article 2 of the agreement, the cost includes all operating expenses only and not pre-operative expenses. The learned AR submitted that pre-operative expenses cannot be included in the operating cost when there is no material before the departmental authorities to prove that the ITA No.1150 of 2011 M/s. Market Tools Research Pvt. Ltd., Hyderabad. 14 assessee has recovered such cost from the AE. In this context, the learned AR referred to a decision of the co-ordinate bench in case of DCIT V/s. Convergys Information Management India Pvt. Ltd. (ITA 229/Hyd/09 dated 30-1- 2011 wherein it was held as under:

"10. The CIT (A) noted that the assessee has incurred expenditure from 1-1-2004 to 14-3-2004 i.e., after entering into agreement with AE on 1-1-2004 at Rs.2,54,17,576/- and this amount is liable for mark up at 10% because no customer would pay mark up before entering into agreement and the expenditure incurred is only after agreement has to be mark up. Accordingly, the CIT (A) is justified in considering the expenditure incurred after 1-1-2004 to 14-3-2004 to make adjustments at 10% of these expenses at Rs.24,41,757/- The revenue has not brought any material on record to show that the assessee has incurred any expenditure before entering into service agreement on the impugned issue. Accordingly, we confirm the order of the CIT (A) on this issue and dismiss the ground taken by the revenue."

6 ITA No. 1795/Hyd/2012 Broadridge Financial Solutions (India) P. Ltd.

28. On a perusal of the orders of the TPO as well as CIT(A), it could not be known on the basis of which material they have come to the conclusion that the assessee has recovered the pre-operative expenses of Rs.44,00,547. In absence of any material to prove that it has recovered the pre-operative expenses from its AE, the conclusion arrived at by the departmental authorities is merely on presumption and surmises. Admittedly, the agreement, between the assessee and its AE was entered on 1st Sept. 2004. Therefore, it cannot be conceived that the AE will bear cost of expenses prior to the date of agreement. When the assessee has denied of having been reimbursed the pre-operative expenses then the onus is on the department to prove the contrary by bringing cogent material on record. The assessee certainly cannot be asked to prove the negative. That apart, this sort of exercise, in our view, cannot be taken up in a proceeding u/s 154 of the Act. In these circumstances, following the decision of the co-ordinate bench in case of Convergys Management (supra) and considering the fact that there is no material to show that the assessee has recovered the pre-operative expenses from its AE, the amount of Rs.44,00,457/- cannot be considered as part of the operating cost. Accordingly, we direct the Assessing Officer/ TPO to exclude it from operating cost while computing the ALP. Hence, this ground of the assessee is allowed."

Following the ratio laid down as aforesaid by the coordinate bench, we hold that the expenditure incurred by assessee company being non-operating in nature, cannot be considered as part of operating cost for computing the margin. Accordingly, we direct the AO/TPO to make necessary adjustment while computing ALP. Asesssee's ground is allowed.

6. In the result, appeal of assessee is considered to be partly allowed.

Pronounced in the open court on 20 th March, 2015.

Sd/- Sd/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 20 th March, 2015 kv 7 ITA No. 1795/Hyd/2012

Broadridge Financial Solutions (India) P. Ltd.

Copy to:-

1) Broadridge Financial Solutions (India) P. Ltd., Survey No. 64, Hi Tech City, Serilingampally, Rangareddy Dt., Hyd. - 500 081.

2) DCIT, Circle - 1(3), Aayakar Bhavan, Hyderabad

3) DIT (IT & TP), Hyderabad

4) The Departmental Representative, I.T.A.T., Hyderabad.

Description Date Intls 1. Draft dictated on Sr.P.S. 2. Draft placed befor e auth or Sr.P.S Draft pr opose d & placed bef ore the secon d AM 3 Mem ber 4 Draft discussed/appr oved b y second Mem ber VP 5 Appro ved Draft com es to the Sr.P.S./PS Sr.P.S. 6. Kept for pro nou ncem ent on Sr.P S. 7. File sent to the Bench Clerk Sr.P.S. 8 Date on which file go es to the Head Cle rk 9 Date of Dispatch of or der