M/s.Momentive Performance Materials (India) Private Limited, Bangalore V. Asst. Commissioner of Income Tax, Bangalore

CO 10/BANG/2017

• Counselvise Citation: [2017] 123 COUNSELVISE.COM (IT) 3326 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 1 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 08-12-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 30-08-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 06-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 43B; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER A ND SHRI LALIT KUMAR, JUDICIAL MEMBER IT(TP)A NO. 385 /BANG/201 6 ASSESSMENT YEAR : 20 11 - 12 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4 (1) (2), BANGALORE. VS. M/S. MOMENTIVE PERFORMANCE MATERIALS (INDIA) PVT. LTD., SURVEY NO. 9, ELECTRONIC CITY (WEST), HOSUR ROAD, BANGALORE 560 100. PAN: AAACG 9931F APPELLANT RESPONDENT C.O. NO. 10/BANG/2017 (IN IT(TP)A NO. 385/BANG/2016) ASSESSMENT YEAR :2011 - 12 M/S. MOMENTIVE PERFORMANCE MATERIALS (INDIA) PVT. LTD., SURVEY NO. 9, ELECTRONIC CITY (WEST), HOSUR ROAD, BANGALORE 560 100. PAN: AAACG 9931F VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4 (1) (2), BANGALORE. APPELLANT RESPONDENT ASSESSEE BY : SHRI T. SURYANARAYANA, ADVOCATE REVENUE BY : MS. NEERA MALHOTRA, CIT (DR) DATE OF HEARING : 05 .1 2 .2017 DATE OF PRONOUNCEMENT : 08 .12.2017 O R D E R PER SHRI A.K. GARODIA, ACCOUNTANT MEMBER; THIS APPEAL IS FILED BY THE REVENUE AND THE CO IS F ILED BY THE ASSESSEE AND THESE ARE DIRECTED AGAINST THE ASSESSMENT ORDER DAT ED 19.01.2016 FOR ASSESSMENT YEAR 2011-12 PASSED BY THE AO U/S. 143(3 ) R.W.S. 144C(13) OF THE IT ACT, 1961 AS PER THE DIRECTIONS OF THE DRP. IT (TP) A NO. 385/BANG/2016 & C.O. NO. 10/BANG/2017 PAGE 2 OF 7 2. THE GROUNDS RAISED BY THE REVENUE IN ITS APPEAL ARE AS UNDER. 1. THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL A RE OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE HON'BLE DRP ERRED IN DIRECTING THE AO TO DEL ETE THE ADDITION MADE ON PRIOR PERIOD EXPENSES STATING THAT THE AMOUNT BEING CLAIMED IN CURRENT YEAR ON PAYMENT BASIS AS P ER SECTION 43B OF THE IT ACT. , SINCE ASSESSEE IN THE AY-2011- 12 REVISED THE COMPANY POLICY TO PAY THE BONUS TO ITS EMPLOYEES BA SED ON CALENDAR YEAR. HENCE, THE CHANGE IN COMPANY POLICY IN LATER YEAR CANNOT BE THE REASON TO CLAIM THE EXPENSES OF EARLI ER ASST. YEARS. 3. THE HON'BLE DRP ERRED IN GRANTING 1% RISK ADJUST MENT ARBITRARILY WITHOUT APPRECIATING THE FACTS OF THE CASE AND ITS COMPARABLES. 4. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 3. SIMILARLY, THE GROUNDS RAISED BY THE ASSESSEE IN ITS CO BEING REVISED SPECIFIC GROUNDS ARE AS UNDER. THE GROUNDS MENTIONED HEREIN BY THE RESPONDENT- CRO SS OBJECTOR ARE WITHOUT PREJUDICE TO ONE ANOTHER. 1. THAT THE ORDER OF THE LEARNED ASSISTANT COMMISSI ONER OF INCOME TAX, CIRCLE 4 (1) (2), BANGALORE ('ASSESSING OFFI CER' OR AO') TO THE EXTENT PREJUDICIAL TO THE RESPONDENT- CROSS OBJ ECTOR, IS BAD IN LAW AND LIABLE TO BE QUASHED. 2. THAT THE LEARNED DISPUTE RESOLUTION PANEL II, BANGALORE ('PANEL') ERRED BOTH IN FACTS AND LAW IN CONFIRMING THE ACTION OF THE LEARNED AO/ADDITIONAL COMMISSIONER OF INCOME TAX (T RANSFER PRICING) 2(1), BANGALORE ('LEARNED TRANSFER PRICI NG OFFICER OR 'LEARNED TPO') OF MAKING AN ADJUSTMENT TO THE TRANS FER PRICE OF THE RESPONDENT- CROSS OBJECTOR IN RESPECT OF IT ENABLED SERVICES ('IT ENABLED SERVICES') SEGMENT AMOUNTING TO RS. 4,051,2 77, HOLDING THAT THE INTERNATIONAL TRANSACTIONS DO NOT SATISFY THE A RM'S LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME TAX ACT, 1961 (THE 'ACT' ). 3. THAT THE LEARNED PANEL ERRED IN UPHOLDING THE LE ARNED TPO'S APPROACH OF REJECTING THE TRANSFER PRICING ('TP') D OCUMENTATION MAINTAINED BY THE RESPONDENT- CROSS OBJECTOR, IN RE SPECT OF IT ENABLED SERVICES SEGMENT, CONTENDING THAT THE INFOR MATION OR DATA USED IN THE COMPUTATION OF THE ARM'S LENGTH PRICE I S NOT RELIABLE OR CORRECT.; 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE LEARNED PANEL ERRED IN: A) UPHOLDING THE LEARNED AO/LEARNED TPO'S APPROACH IN PARTIALLY REJECTING THE COMPARABILITY ANALYSIS UNDE RTAKEN BY THE IT (TP) A NO. 385/BANG/2016 & C.O. NO. 10/BANG/2017 PAGE 3 OF 7 RESPONDENT- CROSS OBJECTOR IN ACCORDANCE WITH THE P ROVISIONS OF THE ACT READ WITH THE RULES AND MODIFICATION / APPL ICATION OF CERTAIN ARBITRARY FILTERS IN DETERMINING THE ARM'S LENGTH PRICE WITH RESPECT TO IT ENABLED SERVICES SEGMENT AND HOL DING THAT THE CROSS OBJECTOR'S INTERNATIONAL TRANSACTIONS WITHIN IT ENABLED SERVICES WERE NOT AT ARM'S LENGTH. B) UPHOLDING THE LEARNED AO/LEARNED TPO'S APPROACH IN DISREGARDING THE APPLICATION OF MULTIPLE YEAR/PRIOR YEAR DATA AS USED BY THE RESPONDENT- CROSS OBJECTOR IN THE TP DO CUMENTATION AND HOLDING THE CURRENT YEAR (I.E. FINANCIAL YEAR 2 010-11) DATA FOR COMPANIES SHOULD BE USED FOR COMPARABILITY. C) UPHOLDING THE LEARNED AO/LEARNED TPO'S APPROACH OF USING DATA AS AT THE TIME OF ASSESSMENT PROCEEDINGS INSTE AD OF THE DATA THAT WAS AVAILABLE AS ON DATE OF PREPARING THE TP D OCUMENTATION FOR COMPARABLE COMPANIES WHILE DETERMINING THE ARM' S LENGTH PRICE. D) UPHOLDING THE LEARNED AO/LEARNED TPO'S APPROACH OF REJECTION OF CERTAIN COMPANIES SIMILAR TO THE RESPONDENT- CRO SS OBJECTOR WHILE PERFORMING THE COMPARABILITY ANALYSIS WITH RE SPECT TO THE CROSS OBJECTOR'S IT ENABLED SERVICES SEGMENT. E) THAT, WITHOUT PREJUDICE AND IN ANY EVENT, UPHOLD ING THE LEARNED AO/TPO'S APPROACH IN REJECTING MICROLAND LTD AND IN FORMED TECHNOLOGIES INDIA PVT. LTD., AS COMPARABLE TO THE RESPONDENT- CROSS OBJECTOR, DESPITE THE SAID COMPANIES BEING FU NCTIONALLY SIMILAR TO THE RESPONDENT AND PASSING ALL FILTERS A PPLIED BY THE TPO. F) UPHOLDING THE LEARNED AO/LEARNED TPO'S APPROACH OF INCLUSION OF CERTAIN COMPANIES IN THE COMPARABILITY ANALYSIS WITH RESPECT TO THE RESPONDENT- CROSS OBJECTORS IT ENABLED SERVICE S SEGMENT WHICH DO NOT SATISFY THE TEST OF COMPARABILITY. G) THAT, WITHOUT PREJUDICE AND IN ANY EVENT, UPHOLD ING THE LEARNED AO/TPO'S APPROACH IN INCLUDING ACCENTIA TECHNOLOGIE S LTD. AND JEEVAN SCIENTIFIC TECHNOLOGY LTD. IN THE LIST OF CO MPARABLES DESPITE THEY BEING FUNCTIONALLY DISSIMILAR TO THE RESPONDEN T AND FAILING THE TEST OF COMPARABILITY IN TERMS OF FUNCTIONS PERFORM ED, ASSETS USED AND RISKS UNDERTAKEN. H) THAT, WITHOUT PREJUDICE AND IN ANY EVENT, JEEVAN SCIENTIFIC TECHNOLOGY LTD. FAILS THE TPO'S OWN FILTERS OF REJE CTING COMPANIES HAVING IT ENABLED SERVICES INCOME LESSER THAN RS. 1 CR AND REJECTING COMPANIES HAVING IT ENABLED SERVICES AND RELATED SERVICES INCOME LESSER THAN 75% OF THE TOTAL OPERAT ING REVENUES AND THUS OUGHT TO BE REJECTED AS A COMPARABLE. 5. THAT THE LEARNED AO ERRED IN DISREGARDING THE SP ECIFIC DIRECTIONS ISSUED BY THE LEARNED DISPUTE RESOLUTION PANEL II , BANGALORE ('PANEL'), WITH RESPECT TO THE CORRECTION OF THE AR ITHMETIC INACCURACIES IN THE COMPUTATION OF OPERATING MARK UP ON COST FOR CERTAIN COMPANIES WHILE PERFORMING THE COMPARABILITY ANALYS IS IN RELATION TO THE IT ENABLED SERVICES SEGMENT OF THE RESPONDENT- CROSS OBJECTOR. IT (TP) A NO. 385/BANG/2016 & C.O. NO. 10/BANG/2017 PAGE 4 OF 7 A) THAT SPECIFICALLY, WITHOUT PREJUDICE, THE ERRORS IN COMPUTATION OF MARGINS OF E4E HEALTHCARE BUSINESS SERVICES PRIVATE LIMITED, ICRA ONLINE LTD., JEEVAN SCIENTIFIC TECHNOLOGY LTD. , MINDTREE LTD. AND IGATE GLOBAL SOLUTIONS LTD OUGHT TO HAVE BEEN R ECTIFIED BY THE LEARNED AO/TPO IN LINE WITH THE DIRECTIONS OF THE D RP. 6. THAT THE LEARNED PANEL ERRED IN UPHOLDING THE LE ARNED AO/LEARNED TPO'S ERRORS IN COMPUTATION OF WORKING CAPITAL OF T HE ASSESSEE AND THE COMPARABLE COMPANIES. 7. THAT THE LEARNED PANEL ERRED IN UPHOLDING THE LE ARNED AO/LEARNED TPO'S APPROACH IN LIMITING THE WORKING CAPITAL ADJU STMENT AND NOT PROVIDING THE WORKING CAPITAL ADJUSTMENT AT ACTUALS WHILE DETERMINING THE ARM'S LENGTH PRICE. 8. THAT THE LEARNED AO ERRED IN CHARGING INTEREST U NDER SECTION 234B AND 234C OF THE ACT. THAT THE RESPONDENT- CROSS OBJECTOR CRAVES LEAVE TO ADD TO AND/OR TO ALTER, AMEND, RESCIND, MODIFY THE GROUNDS HEREIN BE LOW OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. 4. WE FIRST TAKE UP THE APPEAL OF THE REVENUE. IT W AS SUBMITTED BY LD. DR OF REVENUE THAT GROUND NO. 1 IS GENERAL. REGARDING GR OUND NO. 2, IT WAS SUBMITTED THAT SINCE NO CLAIM WAS MADE IN THE PRECEDING YEAR, NO DEDUCTION CAN BE ALLOWED IN THE PRESENT YEAR EVEN U/S. 43B OF THE IT ACT. AS AGAINST THIS, IT WAS SUBMITTED BY LD. AR OF ASSESSEE THAT ON PAGE NO. 78 8 OF THE PAPER BOOK, THE DETAILS OF PAYMENT OF BONUS IN THE PRESENT YEAR IS AVAILABLE. HE SUBMITTED THAT MOST OF THE PAYMENTS WERE MADE AFTER NOVEMBER 2010 I.E. AFTER THE DUE DATE FOR FILING THE RETURN OF INCOME FOR A. Y. 2010 11 AND THEREFORE, EVEN IF THE CLAIM IS MADE IN THE PRECEDING YEAR I.E. ASSESSMENT YEAR 2010-11, THEN ALSO, DEDUCTION CANNOT BE ALLOWED IN THAT YEAR BECAUSE U/ S. 43B OF IT ACT, DEDUCTION IS ALLOWABLE ON PAYMENT BASIS AND IF THE PAYMENT IS MADE AFTER THE DUE DATE FOR FILING THE RETURN OF INCOME THEN IT HAS TO BE ALLOW ED IN THE YEAR OF PAYMENT ONLY. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND IN OUR CONSIDERED OPINION, IN THE FACTS OF THE PRESENT CASE, THERE IS NO INFIRMITY IN THE ORDER OF DRP ON THIS ISSUE AND THEREFORE, GROUND NO. 2 OF THE REVENUES APPEAL IS REJECTED. 6. REGARDING GROUND NO. 3 OF THE REVENUES APPEAL, IT WAS SUBMITTED BY LD. DR OF REVENUE THAT THERE IS NO CALCULATION OF RISK ADJUST MENT FILED BY THE ASSESSEE BEFORE THE DRP AND AS PER THE DRP ORDER ON THIS ISS UE AT PAGE NOS. 11 AND 12 IT (TP) A NO. 385/BANG/2016 & C.O. NO. 10/BANG/2017 PAGE 5 OF 7 OF DRP ORDER, IT CAN BE SEEN THAT DRP HAS SIMPLY FO LLOWED A TRIBUNAL ORDER RENDERED IN THE CASE OF INTELLINET TECHNOLOGIES IND IA PVT. LTD. VS. ITO IN ITA NO. 1237/BANG/2010 AND ANOTHER TRIBUNAL ORDER RENDERED IN THE CASE OF DCIT VS. HELLO SOFT PVT. LTD. AS REPORTED IN 32 TAXMANN.COM 101 (ITAT, HYDERABAD) AND HELD THAT 1% ADJUSTMENT TO THE AVERAGE MARGIN WAS T O BE ALLOWED TOWARDS RISK DIFFERENTIAL BECAUSE THE FACTS OF THE PRESENT CASE ARE SAME AS IN THOSE TWO CASES. SHE SUBMITTED THAT THIS DIRECTION IS WITHOU T ANY DISCUSSION IN RESPECT OF FACTS OF THE PRESENT CASE AND OF THOSE TWO CASES. SHE SUBMITTED THAT UNDER THESE FACTS, THE ISSUE SHOULD GO BACK TO THE FILE O F DRP FOR FRESH DECISION BY WAY OF A SPEAKING AND REASONED ORDER. THE LD. AR O F THE ASSESSEE SUPPORTED THE ORDER OF DRP. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN VI EW OF THIS FACT THAT NO WORKING OF RISK ADJUSTMENT WAS PROVIDED BY THE ASSESSEE BEF ORE THE DRP AND IN VIEW OF THIS FACT ALSO THAT THE ORDER OF DRP IS CRYPTIC IN RESPECT OF THE FACTS OF THE PRESENT CASE AND FACTS OF THOSE TWO CASES WHICH WER E FOLLOWED BY DRP, WE FEEL IT PROPER TO RESTORE THIS MATTER BACK TO THE F ILE OF DRP FOR FRESH DECISION BY WAY OF A SPEAKING AND REASONED ORDER. GROUND NO. 3 OF THE REVENUES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S PARTLY ALLOWED FOR STATISTICAL PURPOSES. 9. NOW WE TAKE UP THE CO FILED BY THE ASSESSEE. IT WAS SUBMITTED BY LD. AR OF ASSESSEE THAT OUT OF VARIOUS GROUNDS RAISED BY THE ASSESSEE IN CO, THE GROUND NOS. 4E, 4G, AND 4H ALONG WITH GROUND NOS. 5, 6 AND 7 ARE PRESSED AND THE REMAINING GROUNDS ARE NOT PRESSED. ACCORDINGLY THE REMAINING GROUNDS EXCEPT 4E, 4G, 4H, 5, 6 AND 7 ARE REJECTED AS NOT PRESSED. 10. REGARDING THE ISSUE RAISED IN RESPECT OF GROUND NO. 4E, LD. AR OF ASSESSEE DRAWN OUR ATTENTION TO PAGE NO. 8 OF THE ORDER OF D RP AND POINTED OUT THAT IT IS HELD BY DRP THAT THE ASSESSEE HAS RAISED THIS ISSUE THAT THERE IS MISTAKE IN COMPUTATIONS MADE AT CERTAIN POINTS IN CERTAIN COMP ARABLES AND IT WAS HELD BY THE DRP THAT REGARDING THIS FACTUAL ERROR IN COMPUT ATION OF SOME COMPARABLES, IT (TP) A NO. 385/BANG/2016 & C.O. NO. 10/BANG/2017 PAGE 6 OF 7 AO / TPO IS DIRECTED TO VERIFY THE SAME AND CORRECT IT IF THERE IS ANY INACCURACY IN THE SAME. THE TPO WAS DIRECTED TO LOOK INTO THE REVISED CALCULATION OF PROFIT MARGINS GIVEN BY THE ASSESSEE. HE FURTHER POINTED OUT THAT IT IS ALSO HELD BY DRP IN ITS ORDER THAT WHILE REVIEWING PROFIT MARGIN S ONLY THOSE ARITHMETICAL MISTAKES THAT MAY HAVE CREPT IN THE CALCULATION OF PROFIT MARGIN / OTHER CALCULATIONS SHOULD BE ENTERTAINED AND NO FRESH ADJ USTMENT IN PROFIT MARGIN CALCULATIONS BE ENTERTAINED. HE SUBMITTED THAT IN RESPECT OF THIS DIRECTION OF DRP, THE AO HAS NOT CARRIED OUT THE NECESSARY CORRE CTIONS. HE ALSO SUBMITTED THAT REGARDING THE OTHER ISSUES BEING PRESSED BY TH E ASSESSEE AS PER GROUND NOS. 4G, 4H, 5, 6 AND 7 ALSO, THE DRP ORDER IS VERY CRYPTIC. AT THIS JUNCTURE, THIS PROPOSITION WAS PUT FORWARD BY THE BENCH THAT UNDER THESE FACTS, IT WILL BE PROPER UNDER THESE FACTS THAT THE ISSUES RAISED AS PER THESE SIX GROUNDS I.E.4E, 4G, 4H, 5, 6 AND 7 ARE RESTORED BACK TO THE FILE OF DRP FOR FRESH DECISION BY WAY OF A SPEAKING AND REASONED ORDER. BOTH SIDES AGREE D TO THIS PROPOSITION PUT FORWARD BY THE BENCH. ACCORDINGLY, THE ISSUES RAIS ED BY THE ASSESSEE IN GROUND NOS. 4E, 4G, 4H, 5, 6 AND 7 ARE RESTORED BAC K TO THE FILE OF DRP WITH THE DIRECTION THAT THE DRP SHOULD PASS A SPEAKING AND R EASONED ORDER AFTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO BO TH SIDES. 11. IN THE RESULT, THE CO FILED BY THE ASSESSEE STA NDS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 12. IN THE COMBINED RESULT, THE APPEAL FILED BY THE REVENUE AND THE CO FILED BY THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE S. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. SD/- SD/- (LALIT KUMAR) (ARUN KUMAR GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 08 TH DECEMBER, 2017. /MS/ IT (TP) A NO. 385/BANG/2016 & C.O. NO. 10/BANG/2017 PAGE 7 OF 7 COPY TO: 1. APP ELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.