M/s Akamai Technologies India Private Limited, Bangalore V. DCIT, Bangalore

CO 174/BANG/2015

• Counselvise Citation: [2016] 123 COUNSELVISE.COM (IT) 2043 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 6 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 16-03-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 02-03-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 09-09-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Scheme of amalgamation
• Section: 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) A NO. 879 / BANG/20 1 3 (ASSESSMENT YEAR: 2005 - 06) DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 11(1), BANGALORE. VS. APPELLANT M/S.AKAMAI TECHNOLOGIES INDIA PVT.LTD. SALARPURIA SOFTZONE, 80/1, A WING, 2 ND & 3 RD FLOOR, BELLANDUR OUTER RING ROAD, BANGALORE - 560037. RESPONDENT PAN:AAICS0950 J AND CROSS OBJN.NO.17 4/BANG/201 5 (IN IT (TP) A NO. 879 / BANG/20 13 ) (ASSESSMENT YEAR: 2005 - 06) (BY THE ASSESSEE) **** REVENUE BY : DR.P.K.SRIHARI, ADDL.CIT . ASSESSEE BY : SHRI P.K.PRASAD, ADVOCATE. O R D E R PER I NTURI RAMA RAO, AM : TH IS APPEAL BY THE REVENUE AND THE CROSS - OBJECTION BY THE ASSESSEE - COMPANY ARE DIRECTED AGAINST THE ORDER OF THE LD.CIT(APPEALS) - IV, BANGALORE, DATED 12 TH MARCH 2013 FOR THE ASSESSMENT YEAR 2005 - 06. DATE OF HEARING : 03/03/2016 DATE OF PRONOUNCEMENT : 16 /03/2016 IT (TP) A NO . 879 /B/1 3 & CO 174 /B/ 1 5 PAGE 2 OF 22 2. THE REVENUE RAISED THE FOLLOWING GROUNDS OF APPEAL: 1) THE ORDER OF THE LEARNED CIT (APPEALS) IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE, IS OPPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2) THE CIT(A) ERRED IN DIRECTING THE AO TO RE - COMPUTE THE DEDUCTION ALLOWABLE U/S 10A OF THE I.T. ACT AFTER REDUCING THE COMMUNICATION CHARGES FRO M THE TOTAL TURNOVER ALSO. 3) THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THAT THERE IS NO PROVISION IN SECTION 10B WHICH REQUIRES THE CONCERNED EXPENSES, WHICH ARE REQUIRED TO BE REDUCED FROM THE EXPORT TURNOVER AS PER CLAUSE (IV) OF THE EXPLANATION TO SECTION 10B TO BE REDUCED FROM THE TOTAL TURNOVER ALSO. 4) THE LD.CIT(A) OUGHT TO HAVE CONSIDERED THE FACT THAT THE JURISDICTIONAL HIGH COURT DECISION RELIED UPON BY HIM HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND A SLP HAS BEEN FILED BEFORE THE HON'BLE SUPREME COU RT WHICH IS STILL PENDING. 5) THE LEARNED CIT(A) ERRED IN HOLDING THAT THE SIZE, TURNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS A COMPARABLE, AND ACCORDINGLY ERRED IN EXCLUDING WIPRO BPO SOLUTION LTD AND SUTHERLAND GLOBAL SERVICES PVT . LTD., AS COMPARABLES IN THE SEGMENT. 6) THE LD CIT(A) ERRED IN EXCLUDING THE COMPARABLE COMPANIES: MERCURY OUTSOURCING MANAGEMENT LTD., AND FLEXTRONICS SOFTWARE SYSTEMS LTD ON THE BASIS OF ABNORMAL LOSS WITHOUT DEFINING WHAT CONSTITUTES ABNORMAL LOSS FILTE R AND HOW THE SAME IS DETERMINED. 7) THE LD. CIT(A) ERRED IN DIRECTING THE INCLUSION OF M/S PENTASOFT TECHNOLOGIES LTD. AS AN APPROPRIATE COMPARABLE REJECTING THE DIMINISHING REVENUE FILTER USED BY THE TPO TO EXCLUDE COMPANIES THAT DO NOT REFLECT THE NORMAL INDUSTRY TREND. 8) THE CIT(A) ERRED IN HOLDING THAT THE DIFFERENT ACCOUNTING YEAR FILTER, WAS AN INAPPROPRIATE FILTER FOR THE PURPOSE OF COMPARABILITY ANALYSIS. IT (TP) A NO . 879 /B/1 3 & CO 174 /B/ 1 5 PAGE 3 OF 22 9) THE CIT(A) HAS ERRED IN HOLDING THAT THE DIFFERENT ACCOUNTING YEAR FILTER, WAS AN INAPPROPRIATE FILTER FOR THE PURPOSES OF COMPARABILITY ANALYSIS WITHOUT INDICATING HOW THE COMPUTATION OF THE MARGINS COULD BE CORRECTLY DONE SINCE TWO FINANCIAL YEARS WERE INVOLVED AS COMPARED TO THE TAXPAYER WHICH IN ANY CASE WOULD THEN BE CONTRADICTORY TO CIT(A)'S O WN DECISION WHO HAS UPHELD THE REJECTION BY THE TPO OF MULTIPLE YEAR'S DATA AND USE OF ONLY CURRENT YEAR'S DATA FOR THE PURPOSE OF TP ANALYSIS. 10) THE CIT(A) HAS ERRED IN HOLDING THAT NUCLEUS NETSOFT & GIS LTD. IS AN INAPPROPRIATE COMPARABLE WITHOUT APPRECIA TING THE FACT THAT THE TAXPAYER ACCEPTED THAT THE SAME PASSED THROUGH ALL THE FILTERS APPLIED BY THE TPO DURING THE COURSE OF THE TPO PROCEEDING. 11) THE CIT(A) ERRED IN HOLDING THAT NUCLEUS NETSOFT & GIS LTD. IS AN INAPPROPRIATE COMPARABLE WITHOUT APPRECIATI NG THE FACT THAT THE COMPARABLE PASSED THROUGH ALL THE FILTERS APPLIED BY THE TPO (BOTH QUALITATIVE AND QUANTITATIVE). 12) THE CIT(A) ERRED BY TREATING BUSINESS REPUTATION AS AN IMPORTANT DETERMINANT FOR THE PURPOSES OF COMPARABILITY ANALYSIS WITHOUT APPRECIATING THE FACT, ON THE FACTS AND IN THE CIRCUMSTANCES IT IS NEITHER SUPPORTED BY ANY STATISTICAL ANALYSIS AND BEING UNASCERTAINABLE, THEREFORE IS AN INAPPROPRIATE REASON FOR REJECTION. 13) THE CIT(A) ERRED IN HOLDING THAT M/S MAPLE E SOLUTION LTD. IS A N INAPPROPRIATE COMPARABLE GIVEN THE FACTS THAT THE COMPANY SATISFIES THE FUNCTIONALITY TEST (BOTH QUALITATIVE AND QUANTITATIVE) AND THE TAXPAYER DID NOT PRODUCE ANY DATA REGARDING THE REASONS FOR THE EXCEPTIONALITY IN ITS PERFORMANCE TO SUPPORT ITS CONTEN TION OF IN APPROPRIATE COMPARABILITY. 14) THE CIT(A) HAS ERRED IN HOLDING THAT M/S APEX ADVANCED TECHNOLOGY PVT. LTD. IS AN APPROPRIATE COMPARABLE IN CONTRADICTION TO THE INFORMATION AVAILABLE IN THE CONSOLIDATED FINANCIAL STATEMENT THAT THE PRIMARY OPERATION S OF THE GROUP FALLS UNDER A SINGLE BUSINESS SEGMENT VIZ EXPORT OF COMPUTER SOFTWARE AND THEREFORE THE COMPANY HAS A DIFFERENT FUNCTIONAL PROFILE AS COMPARED TO THE TAXPAYER. IT (TP) A NO . 879 /B/1 3 & CO 174 /B/ 1 5 PAGE 4 OF 22 15) THE CIT(A) HAS ERRED IN HOLDING THAT M/S APEX ADVANCED TECHNOLOGY PVT. LTD. IS A N APPROPRIATE COMPARABLE GIVEN THE FACTS THAT THE COMPARABLE DOES NOT PASS THROUGH ALL THE FILTERS APPLIED BY THE TPO FOR THE PURPOSES OF COMPARABILITY ANALYSIS. 16) FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS HUMBLY PRAYE D THAT THE ORDER OF THE CIT(A) BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 17) THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED, AT THE TIME OF HEARING OF THE APPEAL. 3 . BRIEFLY FACTS OF THE CASE ARE THAT THE RESPONDENT - ASSESSEE - COMPANY IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS A SUBSIDIARY OF M/S.SPEEDERA NETWORK, INC., USA. IT IS ENGAGED IN THE BUSINESS OF PROVIDING BACK OFFICE SUPPORT SERVICES WHICH INCLUDES VOICE/NON - VOICE BASED TECHNICAL SUPPORT SERVICES, INVOICE PROCESSING, ACCOUNTS RECEIVABLE AND COLLECTION PROCESSING ETC., TO ITS HOLDING COMPANY. THE RESPONDENT ASSESSEE - COMPANY IS REMUNERATED BY ITS HOLDING COMPANY ON A COST PLUS 10% BA SIS FOR THE SERVICES RENDERED. 4 . R ETURN OF INCOME FOR THE ASSESSMENT YEAR 2005 - 06 WAS FILED DECLARING TOTAL INCOME OF RS.27,680/ - . THE RESPONDENT - ASSESSEE - COMPANY ALSO REPORTED THE INTERNATIONAL TRANSACTION OF RS.5,43,38,993/ - BEING THE CONSIDERATION RECE IVED FROM ITS M/S.SPEEDERA NETWORK, INC., USA. [HEREINAFTER REFERRED TO AS AE ] FOR RENDERING THE AFOREMENTIONED SERVICES. THE RESPONDENT - ASSESSEE - COMPANY SOUGHT TO JUSTIFY THE CONSIDERATION RECEIVED FOR IT (TP) A NO . 879 /B/1 3 & CO 174 /B/ 1 5 PAGE 5 OF 22 THE INTERNATIONAL TRANSACTION ENTERED WITH ITS AE T O BE AT ARM S LENGTH PRICE [ALP]. THE RESPONDENT - ASSESSEE - COMPANY HAD ALSO SUBMITTED TRANSFER PRICING STUDY REPORT ADOPTING THE OPERATING PROFIT TO TOTAL COST (OP/TC) AS A PRO FIT LEVEL INDICATOR FOR THE TRANSFER PRICING STUDY. THE RESPONDENT - ASSESSEE - COM PANY APPLIED TRANSACTIONAL NET MARGIN METHOD [TNMM] WHICH WAS CONSIDERED TO BE THE MOST APPROPRIATE METHOD FOR PURPOSES OF BENCH MARKING THE INTERNATIONAL TRANSACTIONS. THE RESPONDENT - ASSESSEE - COMPANY S PROFIT MARGIN WAS COMPUTED AT 14.74% AND THE RESPONDENT - ASSESSEE - COMPANY CLAIMED THAT THE SAME WAS COMPARABLE WITH OTHER COMPANIES RENDERING THE VOICE CALL SERVICES. FOR THE PURPOSE OF TRANSFER PRICING STUDY, THE RESPOND ENT - ASSESSEE - COMPANY HAD CHOSEN 12 COMPARABLE ENTITIES AND ARITHM E TIC AVERAGE OF OPERATING PROFIT MARGINS OF SAID COMPARABLES WAS COMPUTED AT 12.92%. ACCORDING TO THE RESPONDENT - ASSESSEE - COMPANY, ITS PLI WAS WITHIN THE ACCEPTABLE RANGE AS INDICATED UNDER SECOND PROVISO TO SEC.92C. THE RESPONDENT - ASSESSEE - COMPANY FURTHER CLAIMED THAT THE PLI WAS LIABLE TO BE ADJUSTED ON ACCOUNT OF WORKING CAPITAL PROVIDED BY THE RESPONDENT - ASSESSEE - COMPANY TO ITS AE. THE RESPONDENT - ASSESSEE - COMPANY HAD CHOSEN THE FOLLOWIN G 12 ENTITIES AS COMPARABLES WHOSE AVERAGE PROFIT MARGIN WAS COMPUTED AT 12.92%. IT (TP) A NO . 879 /B/1 3 & CO 174 /B/ 1 5 PAGE 6 OF 22 SL. NO. COMPANY NAME MARGIN AS TAKEN BY TAXPAYER MARGIN IN FY 2004 - 05 1. ACE SOFTWARE EXPORTS LTD. 5.83% 14.63% 2. ALLSEC TECHNOLOGIES LTD - 0 .54% 27.11% 3. CMC LTD. 17.68% 1.46% 4. CS SOFTWARE ENTERPRISE LTD. 11.21% 14.55% 5. COMPUDYNE WINFOSYSTEMS LTD. - 42.27% - 123.00% 6. FORTUNE INFOTECH SYSTEMS 68.34% 17L.43% 7. GENESYS INTERNATIONAL CORPORATION LTD. 35.89% - 2.06% 8. MERCURY OUTSOURCING MGT LTD. 4.88% - 36.94% 9. NUCLEUS NETSOFT & GIS LTD. - 0.17% 40.06% 10 SPANCO TELESYSTEMS AND SOLUTION LTD. 25.62% 22.89% 11 TRANSWORKS INFORMATION SERVICES LTD. - 5.30% 2.87% 12 VISHAL INFORMATION TECH LTD. 33.87% 45.65% TOTAL 155.04% 24.65% AVERAGE 12.92% 2.05% 5. THE ASSESSING OFFICER (AO) REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER (TPO). THE TPO, BY AN ORDER DATED 23/09/2008 PASSED U/S 92CA(3) OF THE IT ACT, 1961 COMPUTED THE TRANSFER PRICING ADJUSTMENT AT RS.63,81,562/ - . THE TPO ACCEPTED THE T NMM ADOPTED BY THE RESPONDENT - ASSESSEE - COMPANY BUT REJECTED THE TRANSFER PRICING STUDY REPORT . THE TPO PROCEEDED TO IDENTIFY A DIFFERENT SET OF COMPARABLE ENTITIES FOR THE PURPOSE OF DETERMINING THE ALP. WHILE DOING SO, THE LD. TPO HAD APPLIED THE FOLLOWI NG FILTERS: A. COMPANIES WHOSE TURNOVER WHILE DOING SO,