M/s. Ariba India (P) Ltd., New Delhi V. DCIT, New Delhi

CO 130/DEL/2010

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 0400 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 9 month(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 19-02-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 12-01-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 19-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: HIMANSHU SHEKHAR SINHA; MANONEET DALAL
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 92C

Judgement Text

T IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI I. C. SUDHIR, JUDICIAL MEMBER AND SHRI J. S. REDDY, ACCOUNTANT MEMBER I.T.A. NO. 903/DEL/2010 ASSESSMENT YEAR: 2004 - 05 DY. CIT VS. M/S ARIBA INDIA PVT. LTD. CIRCLE - 2 (1) (FORMERLY FREE MARKET NEW DELHI. SERVICES PVT. LTD.) 2 ND FLOOR, SUCHETA BHAWAN, 11 - A VISHNU DIGAMBAR MARG, NEW DELHI. PAN: AAACF4192P (APPELLANT) (RESPONDENT) C.O. NO. 130/DEL/2010 (IN I.T.A. NO. 903/DEL/2010 ) ASSESSMENT YEAR: 2004 - 05 M/S ARIBA INDIA PVT. LTD. DY. CIT VS. DY. CIT (FORMERLY FREE MARKET CIRCLE - 2 (1) SERVICES PVT. LTD.) 2 ND FLOOR, NEW DELHI. SUCHETA BHAWAN, 11 - A VISHNU DIGAMBAR MARG, NEW DELHI. PAN: AAACF4192P (APPELLANT) (RESPONDENT) REVENUE BY : SHRI. PEEYUSH JAIN , CIT .DR. ASSESSEE BY : SHRI. HIMANSHU SHEKHAR SINHA, & SH. MANONEET DALAL, ADV. ORDER PER J. S. REDDY, AM : THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED AGAINST THE ORDER OF THE CIT (APPEALS) - XX, NEW DELHI ON THE FOLLOWING GROUNDS: 2 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO REDUCE ADDITION ON ACCOUNT OF ARMS LENGTH PRICE FROM RS.65,10,452/ - TO RS.18,46,109/ - IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE. (A) BY VIOLATING THE PROVISIONS OF RULE 46A(3) OF THE IT RULES, 1962 IN NOT PROVIDING ANY OPPORTUNITY TO THE TPO BEFORE ADMITTING EVIDENCE IN THE FORM OF ANNUAL REPORT OF LAN ESADA AND ALSO IN ALLOWING THE ASSESSEE TO GO BACK ON ITS OWN STAND OF CALCULATION OF MA RGIN OF THIS COMPANY. (B) BY CALCULATING THE MARGIN OF THE COMPARABLE NAMELY LAN ESADA BY CONSIDERING ITEMS OF EXPENDITURE WHICH ARE NON - OPERATING IN NATURE. 2. CROSS - OBJECTION IS FILED BY THE ASSESSEE ON THE FOLLOWING GROUNDS: 1. THAT ON THE FACTS AND IN L AW, THE COMMISSIONER OF INCOME - TAX APPEALS ( LD. CIT(A) ERRED IN HOLDING THAT CURRENT YEAR FINANCIAL INFORMATION OF COMPARABLE COMPANIES, WHICH WAS NOT AVAILABLE TO THE ASSESSEE COMPANY AT THE TIME OF FILLING ITS RETURN OF INCOME, IS TO BE USED FOR COMPAR ABILITY ANALYSIS. 2. WITHOUT PREJUDICE TO GROUND 1 ABOVE, THE LD. CIT(A) ERRED IN DISREGARDING THE RESULTS OF THE FRESH SEARCH CARRIED OUT BY THE ASSESSEE DURING THE APPELLATE PROCEEDINGS, USING DATA FOR FY 2003 - 04. 3. THAT THE LD. CIT(A) ERRED ON FACTS A ND LAW IN NOT EXCLUDING ONE COMPANY, VIZ., KUSHAGRA SOFTWARE LIMITED, FROM THE COMPARABLE SET DESPITE THE APPELLANT S CONTENTIONS/ARGUMENTS ON THE INCONSISTENCY IN THE FINANCIAL DATA REPORTED BY THE COMPANY FOR FY 2003 - 04. 4. THAT THE LD. CIT(A) GROSSLY ER RED ON FACTS AND LAW BY INCLUDING EXTRAORDINARY EXPENSES IN THE NATURE OF PROVISION FOR DOUBTFUL DEBTS AND BAD DEBTS WRITTEN OFF IN THE COMPUTATION OF THE ASSESSEE S TOTAL COST, DESPITE THE OBJECTIONS RAISED BY THE ASSESSEE. 5. THAT THE LD. CIT(A) GROSS LY ERRED ON FACTS AND LAW BY NOT ALLOWING TO THE ASSESSEE, THE BENEFIT OF (+/ - ) 5% RANGE MENTIONED IN THE PROVISO TO SECTION 92C OF THE ACT BEFORE COMPUTING THE ADJUSTMENT. 3 3. FACTS ARE AT PARA 4.1 & 4.2 OF THE CIT(A) S ORDER , WHICH IS EXTRACTED FOR READY REFERENCE. 4.1 FREE MARKETS SERVICES PRIVATE LIMITED (NOW KNOWN AS ARIBA INDIA PRIVATE LIMITED AND HEREINAFTER REFERRED TO AS ARIBA INDIA OR APPELLANT ), IS A WHOLLY OWNED SUBSIDIARY OF FREE MARKETS INTERNATIONAL HOLDING INC. USA, WHICH IN TURN IS A S UBSIDIARY OF ARIBA INC (FORMERLY KNOWN AS FREE MARKETS INC.). 4.2 DURING THE RELEVANT FINANCIAL YEAR, THE APPELLANT IS ENGAGED IN THE BUSINESS OF SELLING ONLINE AUCTION SOLUTIONS ALONG WITH PROVISION OF RELATED SERVICES TO ITS INDIAN CLIENTS. FURTHER, THE APPELLANT ALSO PROVIDED CONTRACT SOFTWARE DEVELOPMENT SERVICES TO ARIBA INC. 4. THE LD. DR MR. PEEYUSH JAIN, REFERRED TO PARA 12.4 AT PAGE 45 OF THE LD. CIT(A) S ORDER AND SUBMITTED THAT THERE IS DIFFERENCE IN THE FINANCIAL DATA, FOR THE FINANCIAL YEAR 20 03 - 04, OF THE COMPANY M/S LAN ESADA INDUSTRIES LTD. AS THE DATA AVAILABLE IN THE PUBLIC DOMAIN WERE AT VARIANCE WITH THE DATA AVAILABLE IN THE ANNUAL REPORT. THE ASSESSEE RELIED ON THE FINANCIAL DATA AS GIVEN IN THE ANNUAL REPORT OF THE COMPANY AND SUBMITTED THAT THE FINANCIAL DATA IN THE PUBLIC DOMAIN IS WRONG. THE LD. CIT(A) AGREED WITH THE CONTENTION OF THE ASSESSEE. THE LD. DR CONTENDS THAT THE ISSUE SHOULD GO BACK, TO THE FILE OF THE TPO FOR FRESH ADJUDICATION, FOR THE REASON THAT THE ANNUA L REPORT WAS NOT AVAILABLE TO HIM A T THE TIME OF PREPARATION OF TRANSFER PRICING ORDER . O NE MORE REASON CITED BY 4 THE LD. DR FOR SEEKING REMAND IS THAT THE ASSESSEE SUBMITTED FINANCIAL DATA OF THE COMPANY FOR YEAR ENDED JUNE 2004 AND OP/SALES MARGIN FOR THE RELEVANT FINANCIA L YEAR I.E. TWELVE MONTHS, ENDING MARCH, 2004 WAS ARRIVED AT BY TAKING PRO RATA DATA . HE SUBMITTED THAT SUCH PRO RATA DATA CANNOT BE ADOPTED AS ONLY THE ACTUAL S HAVE TO BE TAKEN , A S OTHERWISE THE PURPOSE OF BENCH MARKING WOULD GET DEFEC TED. 5. THE LD. COUNSEL FOR THE ASSESSEE MR. HIMANSHU SHEKHAR ON THE OTHER HAND OPPOSED THE CONTENTIONS OF THE REVENUE AND SUBMITTED THAT SENDING BACK THE MATTER TO THE FILE OF THE TPO WOULD BE AN EMPTY FORMALITY FOR THE REASON THAT, THERE IS NO DISPUTE T HAT M/S LAN ESADA INDUSTRIES LTD. IS A COMPARABLE AND THE ONLY ISSUE I S WHETHER THE CORRECT FINANCIAL DATA , AS PER ANNUAL REPORT OF THE COMPANY IS TO BE CONSIDERED OR FINANCIAL DATA IN PUBLIC DOMAIN WHICH IS ADMITTEDLY WRONG IS TO BE CONSIDERED. HE RELIED ON CERTAIN CASE LAWS AND SUBMITTED THAT THE ANNUAL REPORTS ARE ACCURATE AND HENCE THEY SHOULD BE CONSIDERED. 6. AFTER HEARING RIVAL CONTENTIONS, WE ARE OF THE CONSIDERED OPINION THAT THE SUBMISSIONS OF THE LD. DR IS DEVOID OF MERIT . W HEN BOTH PARTIES AGRE E THAT THE COMPANY M/S LAN ESADA INDUSTRIES LTD. IS A COMPARABLE , THEN THE CORRECT FINANCIAL DATA OF THAT COMPANY AS REFLECTED BY ITS ANNUAL REPORT, WHICH WERE NOT AVAILABLE BEFORE THE TPO, HAS BEEN RIGHTLY CONSIDERED BY THE LD. CIT(A). WE 5 ALSO DO NOT FIN D ANY MERIT IN THE SUBMISSION OF THE LD. DR THAT PRO RATA DATA SHOULD NOT BE TAKEN. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. C . O. NO. 130/DEL/2010 8. COMING TO THE CROSS - OBJECTION S, THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT HE IS NOT PRESSING GROUND NO. 1. 9. IN THE RESULT, GROUND NO. 1 IS DISMISSED AS NOT PRESSED. 10. ON GROUND NO. 2 THE LD. COUNSEL , FOR THE ASSESSEE SUBMITTED THAT ADDITIONAL COMPARABLES WERE NOT LOOKED INTO B Y THE FIRST APPELLATE AUTHORITY, WHICH AS PER THE LD. COUNSEL IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE. LD. COUNSEL CONTENDED THAT TRUTH HAS TO BE FOUND OUT AND WHEN THEY ARE FRESH SET OF COMPARABLES, WITH CURRENT YEAR DATA, IT WAS THE DUTY OF THE FIRS T APPELLATE AUTHORITY TO CONSIDER THE SAME. 1 1 . AFTER CONSIDERED RIVAL SUBMISSIONS, WE ARE OF THE CONSIDERED OPINION THAT THE FRESH COMPARABLES CITED BY THE ASSESSEE BEFORE THE LD. CIT(A) WHICH HAD CURRENT YEAR DATA SHOULD HAVE BEEN ADMITTED AND ADJUDICAT ED ON MERITS. 1 2 . IN OUR VIEW, THE ISSUE SHOULD BE SET ASIDE TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW . 1 3 . IN THE RESULT, GROUND NO. 2 IS ALLOWED FOR STATISTICAL PURPOSES. 6 1 4 . ON GROUND NO. 3 THE LD. COUNSEL ARGUED THAT THE, COM PARABLES M/S KUSHAGRA SOFTWARE LIMITED WAS SOUGHT TO BE EXCLUDED BY THE ASSESSEE BEFORE THE LD. CIT(A), ON THE GROUND THAT SEGMENTAL RESULTS AND DATA OF THIS COMPANY COULD NOT BE CULLED OUT FROM THE FINANCIAL STATEMENTS. THE LD. CIT(A) REJECTED THIS CONTEN TION OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE CANNOT ASK FOR EXCLUSION OF A COMPARABLE, WHEN IT WAS THE ASSESSEE WHO HAS INCLUDED THE SAME IN THE T.P. REPORT. 1 5 . THE LD. DR OPPOSED THIS CONTENTION OF THE ASSESSEE. AFTER HEARING BOTH SIDES WE FIND THAT THIS ISSUE IS NO MORE RES INTEGRA AS THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF QUARK SYSTEMS HAS HELD OTHERWISE. THIS IS A BINDING JUDGMENT AND THE ASSESSEE SUCCEEDS IN ITS CONTENTIONS. 1 6 . AS WE HAVE SET ASIDE GROUND NO.2, TO THE FILE OF THE TPO, WE ARE OF THE CONSIDERED OPINION THAT THIS ISSUE, ARE ALSO BE SET ASIDE TO THE FILE OF THE AO OR TPO SHALL FOLLOW THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL. 1 7 . IN THE RESULT, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 18. ON GROUND NO., 4 L D. COUNSEL SUBMITTED THAT BAD DEBTS ARE EXTRAORDINARY ITEMS AND CANNOT BE CONSIDERED AS OPERATIONAL COST AND HENCE, THEY SHOULD HAVE BEEN REMOVED BEFORE ARRIVING AT OPERATIONAL MARGINS. THE LD. DR OPPOSED THESE CONTENTIONS. 7 1 9 . GROUND NO. 4 IS ALLOWED , FOR THE REASON THAT WHILE ARRIVING AT OPERATIONAL PROFIT RATIO, EXTRAORDINARY ITEMS SHOULD BE ELIMINATED. BAD DEBTS OR PROVISION FOR BAD DEBTS ARE EXTRAORDINARY ITEMS AND HAVE TO BE ELIMINATED FOR ARRIVING AT THE OPERATIONAL PROFIT. 20 . IN THE RESULT, GROUND NO. 4 OF THE ASSESSEE IS ALLOWED. 21 . GROUND NO. 5 IS DISMISSED AS NOT PRESSED. 22. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED AND THE CROSS - OBJECTION OF THE ASSESSEE IS ALLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 1 9 / 02/2015. S D / - S D / - ( I. C. SUDHIR ) (J. S. REDDY) JUDICI AL MEMBER ACCOUNTANT M EMBER DATED: 1 9 /02/2015 *AK VERMA* COPY FORWARDED TO: 1. ASSESSEE 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR