Appeal Details
Counselvise Citation
[2016] 123 COUNSELVISE.COM (IT) 2470 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 4 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
26-10-2016
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
A
Next Hearing Date
08-09-2016
Assessment Year
2010-2011
Appeal Filed On
19-06-2015
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) NO. 346 / BANG/20 1 5 (ASSESSMENT YEAR: 20 10 - 11 ) ACIT, CIRCLE -2(1)(1), 5 TH FLOOR, NO. 14/7, R. P . BHAVAN, NRUPATHUNGA ROAD, BANGALORE APPELLANT VS. M/S. CGI INFORMATION SYSTEM & MANAGEMENT CONSULTANT PVT. LTD., 95/1, 95/2, ELECTRONIC CITY, PHASE -I(WEST), BANGALORE 560 100. PAN : AAACI1994C RESPONDENT C.O. NO. 110/B/2015 [IN IT(TP) NO.346/BANG/2015] (ASSESSMENT YEAR: 2010 - 11 ) M/S. CGI INFORMATION SYSTEM & MANAGEMENT CONSULTANT PVT. LTD., 95/1, 95/2, ELECTRONIC CITY, PHASE -I(WEST), BANGALORE 560 100. PAN : AAACI1994C CROSS OBJECTOR VS. ACIT, CIRCLE -2(1)(1), 5 TH FLOOR, NO. 14/7, R. P. BHAVAN, NRUPATHUNGA ROAD, BANGALORE RESPONDENT REVENUE BY : SHRI. G. R. REDDY, CIT (DR) - I . ASSESSEE BY : SHRI. T. SURYANARAYANA, ADVOCATE . DATE OF HEARING : 08 /0 9 /2016 DATE OF PRONOUNCEMENT : 26 / 10 /2016 IT(TP)A NO.346/BANG/2015 PAGE 2 OF 29 O R D E R PER INTURI RAMA RAO, AM : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ASSESSMENT ORDER DATED 23/01/2015 PASSED U/S 143(3) R.W.S.144C(13) OF THE INCOME-TAX ACT,1961 [ FOR SHO RT THE ACT] BY THE ACIT, BANGALORE [FOR SHORT AO] FOR THE ASSESSMENT YEAR 2006-07. 2. THE REVENUE RAISED THE FOLLOWING GROUNDS OF APP EAL: THE GROUNDS STATED HERE UNDER ARE INDEPENDENT OF, A ND WITHOUT PREJUDICE TO ONE ANOTHER: 1. THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL A RE OPPOSED TO L AW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE DISPUTE RESOLUTION PANEL ERRED IN LAW IN DIRECTING THE AO TO EXCLUDE THE EXPENDITURE INCURRED IN FOREIGN CURR ENCY BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10A , WITHOUT APPRECIATING THE FACT THAT THE STATUTE ALLO WS EXCLUSION OF SUCH EXPENDITURE ONLY FROM EXPORT TURN OVER BY WAY OF SPECIFIC DEFINITION OF EXPORT TURNOVER AS EN VISAGED BY SUB-CLAUSE (4) OF EXPLANATION 2 BELOW SUB - SECTION (8) OF SECTION 10A AND THE TOTAL TURNOVER HAS NOT BEEN DEFINED IN THIS SECTION . 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTING THE AO TO COMPUTE DEDUCTION U/S 10A IN THE ABOVE MANNER BY PLACING RELIANCE ON THE DECISION OF HON'BLE HIGH CO URT OF KARNATAKA IN THE CASE OF M/S TATA ELXSI LTD., WHICH HAS NOT BECOME FINAL SINCE THE SAME HAS NOT BEEN ACCEPTED B Y THE DEPARTMENT AND SLPS ARE PENDING BEFORE THE HON'BLE SUPREME COURT. IT(TP)A NO.346/BANG/2015 PAGE 3 OF 29 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL CAN MAKE ADJUSTMENT ON THE BASIS OF ADVANCE RECEIVED FROM AE S IN ABSENCE OF DEBTORS AND INVENTORY IN THE CASE OF ASS ESSEE FOR CALCULATING THE COST OF WORKING CAPITAL BUILT I N THE PROFIT MARGIN. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL WERE JUSTIFIED IN DIRECTING THE TPO TO ADJUST THE PROFIT MARGIN OF TH E ASSESSEE FOR THE ENTIRE AMOUNT OF ADVANCES RECEIVED FROM AE ON THE GROUND THAT THERE IS TIME VALUE OF MONEY. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE HON'BLE DISPUTE RESOLUTION PANEL ERRED BY NOT UPHOL DING THE APPROACH OF THE TPO IN ITS ORDER. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN EXCLUDING M/S. ICRA TECHNO ANALYTICS LTD AND M/S. PERSISTENT SYSTEMS LTD WHILE THE COMPARABLES A RE QUALIFYING ALL THE QUALITATIVE AND QUANTITATIVE FIL TERS APPLIED BY THE TPO . 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN EXCLUDING INFOSY LTD ON THE BASIS OF DECISION IN A DIFFERENT CASE FOR A DIFFERENT FY WHILE THE COMPARA BLE IS QUALIFYING ALL THE QUALITATIVE AND QUANTITATIVE FIL TERS APPLIED BY THE TPO. 9. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL IN SO FAR AS IT RELATES TO THE ABO VE GROUNDS MAY BE REVERSED. 10. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND I OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 3. BRIEFLY, FACTS OF THE CASE ARE THAT THE ASSES SEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS A WHOLLY OWNED SUBSIDIARY OF M/S.CGI TECHNOLOGY AND SOLUTIONS IT(TP)A NO.346/BANG/2015 PAGE 4 OF 29 INC., USA. THE ASSESSEE-COMPANY IS ENGAGED IN PROV IDING SOFTWARE DEVELOPMENT SERVICES ONLY TO ITS AES. BEI NG A CAPTIVE SERVICE CENTRE PROVIDING CONTACT SERVICES TO ITS AE S, ASSUMES LESS THAN NORMAL RISKS AND ALL THE SIGNIFICANT BUSINESS AND ENTREPRENEURIAL RISKS ARE BORNE BY THE OVERSEAS AFF ILIATES. [ 4. RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010-11 WAS FILED ON 13/10/2010 DECLARING A TOTAL INCOME OF RS. 39,87,07,403/- THE ASSESSEE-COMPANY ALSO REPORTED THE FOLLOWING IN TERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AE): PARTICULARS AMOUNT IN RS. OUTCOME OF TP ORDER PROVISION OF SOFTWARE DEVELOPMENT AND SUPPORT SERVICES 357,45,58,538/- ADJUSTMENT OF RS.21,42,63,159/ - REIMBURSEMENT OF EXPENSES 56,78,41,835/- ACCEPTED TO BE AT ARMS LENGTH PURCHASE OF CAPITAL GOODS 7,84,793/- ACCEPTED TO BE AT ARMS LENGTH RECOVERY OF EXPENSES 10,24,08,932/- ACCEPTED TO BE AT ARMS LENGTH PAYMENT OF TECHNICAL SERVICE FEES 2,21,10,725/ - ACCEPTED TO BE AT ARMS LENGTH 5. THE ASSESSEE-COMPANY SOUGHT TO JUSTIFY THE CONSI DERATION RECEIVED FOR THE INTERNATIONAL TRANSACTION ENTERED WITH ITS AE TO BE AT ARMS LENGTH PRICE [ALP]. THE ASSESSEE-COMPANY HAD ALSO SUBMITTED TRANSFER PRICING STUDY REPORT ADOPTING TN MM AS MOST APPROPRIATE METHOD AND OPERATING PROFIT BY TOTAL CO ST AS A PROFIT IT(TP)A NO.346/BANG/2015 PAGE 5 OF 29 LEVEL INDICATOR FOR THE TRANSFERRING PRICING STUDY. THE ASSESSEE- COMPANY APPLIED TRANSACTIONAL NET MARGIN METHOD [TN MM] WHICH WAS CONSIDERED TO BE THE MOST APPROPRIATE METHOD FO R PURPOSES OF BENCH MARKING THE INTERNATIONAL TRANSACTIONS. THE ASSESSEE- COMPANYS PROFIT MARGIN WAS COMPUTED AT 14.41% IN R ESPECT OF SOFTWARE SERVICES SEGMENT. THE ASSESSEE-COMPANY CL AIMED THAT THE SAME WAS COMPARABLE WITH OTHER COMPANIES RENDER ING SOFTWARE DEVELOPMENT SERVICES. FOR THE PURPOSE OF TRANSFER PRICING STUDY, THE ASSESSEE-COMPANY HAD CHOSEN 16 C OMPANIES AS COMPARABLE ENTITIES IN RESPECT OF SOFTWARE DEVEL OPMENT SERVICES AND ARITHMETIC AVERAGE OF OPERATING PROFIT MARGINS OF SAID COMPARABLES WAS COMPUTED AT 13.25% IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. ACCORDING TO THE ASSESSEE-CO MPANY, ITS PLI WAS MUCH HIGHER THAN THE ARITHMETIC MEAN OF THE COMPARABLE ENTITIES. HENCE, IT WAS CLAIMED THAT THE TRANSACTIO NS WITH ITS AE ARE AT ARMS LENGTH. 6. THE ASSESSING OFFICER (AO) REFERRED THE MATTER T O THE TRANSFER PRICING OFFICER (TPO). THE TPO, BY AN ORD ER DATED 24/02/2014 PASSED U/S 92CA OF THE IT ACT, 1961 COMP UTED THE TRANSFER PRICING ADJUSTMENT AT RS.21,25,70,985/- IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES AND ACCEPTED THAT OTH ER INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH. THE TPO ACCEPTED TNMM ADOPTED BY THE ASSESSEE-COMPANY AS WELL AS COS T + MARGIN AS A PROFIT LEVEL INDICATOR BUT REJECTED THE TRANSFER PRICING IT(TP)A NO.346/BANG/2015 PAGE 6 OF 29 STUDY REPORT. THE TPO PROCEEDED TO IDENTIFY A DIFFE RENT SET OF COMPARABLE ENTITIES FOR THE PURPOSE OF DETERMINING THE ALP. WHILE DOING SO, THE LD. TPO HAD APPLIED THE FOLLOWI NG FILTERS: STEP DESCRIPTION 1 COMPANIES WHOSE DATA FOR FY 2009 - 10 IS NOT AVAILABLE-EXCLUDED 2 COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE REVENUE
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