ITO, New Delhi V. M/s. Toluna India (P) Ltd., Gurgaon

ITA 1058/DEL/2016

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 5095 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 29-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: NIDHI SHARMA
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3); 142(1); 115JB; 144C

Judgement Text

1 I.T.A NO. 1058/DEL/2016 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SH. R. K. PANDA, ACCOUNTANT MEMB ER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER I.T.A NO. 1058/DEL/2016 (ASSESSMENT YEAR : 2011-12) INCOME TAX OFFICER, WARD 25(3), C. R. BUILDING, NEW DELHI. (APPELLANT) VS M/S. TOLUNA INDIA (P.) LTD., (FORMERLY KNOWN AS M/S. G. REENFIELD ONLINE (P) (LTD.), FIRST FLOOR, UNITECH TRADE CENTRE, SUSHANT LOK, PHASE I, GURGAON, HARYANA. (PAN : AACCG 0003 G) (RESPONDENT) APPELLANT BY SHRI RISHABH MALHOTRA, ADV. SHRI ANUBHAV RASTOGI, ADV. RESPONDENT BY MS. NIDHI SHARMA, SR. D.R ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORD ER DATED 30.12.2015 PASSED BY INCOME TAX OFFICER, WARD 25(3), NEW DEL HI UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 FOR ASSESSMENT YEAR 2011-1 2. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DRP-2 ERRED IN DIRECTING AO TO COMPLETE THE ASSESSMENT AS PER O BSERVATIONS DATE OF HEARING 23.09.2019 DATE OF PRONOUNCEMENT 25.11.2019 2 I.T.A NO. 1058/DEL/2016 MADE BY DRP IN THE ORDER WHICH RESULTING IN REDUCIN G THE ADDITION TO NIL IN PLACE OF ORIGINAL RECOMMENDED ALP OF RS.2,08 ,50,458/- FOR THE INTERNATIONAL TRANSACTIONS UNDERTAKEN THE ASSES SEE COMPANY WITH ITS ASSOCIATE/PARENT ENTERPRISES. 2. THE HONBLE DRP HAS ERRED IN LAW AND ON FACTS I N REJECTING INFOSYS OF TECHNOLOGIES LTD. BY PLACING MISPLACED RELIANCE ON THE JUDGMENT OF HONBLE HIGH COURT OF DELHI IN THE CASE OF AGINT Y TECHNOLOGY LTD. 3. THE HONBLE DRP HAS ERRED IN LAW AND ON FACTS I N CARRYING OUT ARBITRARY ANALYSIS WHILE EXAMINING THE FILTERS BY T HE TPO WITHOUT VERIFYING INTO THE FACTS OF THE CASE. 4. THE HONBLE DRP HAS ERRED IN LAW AND FACTS IN CA RRYING OUT ARBITRARY ANALYSIS WHILE EXAMINING THE FUNCTIONAL DIFFERENTIA BILITY OF THE COMPARABLES. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE DRP-II ERRED IN DIRECTING TPO TO EXCLUDE BELOW MENTIONED COMPANIES FROM THE FINAL SET OF COMPARABLES: (I) ACROPETAL TECHNOLOGIES LTD. (II) E-INFOCHIPS LTD. (III) E-ZEST SOLUTIONS LTD (IV) INFOSYS LTD 6. THE APPELLANT CRAVES, LEAVE FOR RESERVING THE RIGH T TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) OF APPEA L AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL 3. THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF SURVEY PROGRAMMING, DATA PROCESSING, CONTRACT SOFTWARE, HE LP DESK, ACCOUNT MANAGEMENT AND PROJECT MANAGEMENT. RETURN DECLARING INCOME OF RS.20,44,920/- UNDER THE NORMAL PROVISIONS OF ACT A ND RS. 4,19,37,130/- UNDER THE PROVISIONS OF SECTION 115JB WAS E-FILED O N 30.11.2011. THE CASE WAS SELECTED FOR SCRUTINY AND STATUTORY NOTICE U/S 143( 2) HAS ISSUED AND SERVED ON THE ASSESSEE. FURTHER, NOTICE U/S 142(1) WAS ALSO I SSUED AND IN RESPONSE, CA & AR OF THE ASSESSEE ATTENDED THE PROCEEDING FROM T IME TO TIME DETAILS CALLED FOR BY THE ASSESSING OFFICER WAS FILED. BOOKS OF AC COUNTS WERE PRODUCED BY THE ASSESSEE COMPANY BEFORE THE ASSESSING OFFICER. DURI NG THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD UNDERTAKEN INTERNAT IONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES. AS THE VALUE OF THE INTERNA TIONAL TRANSACTIONS WAS MORE 3 I.T.A NO. 1058/DEL/2016 THAN RS.15 CRORE, THE INTERNATIONAL TRANSACTIONS EN TERED INTO BY THE ASSESSEE WITH THE ASSOCIATED ENTERPRISES WERE REFERRED TO TH E TRANSFER PRICING OFFICER FOR DETERMINING THE ARMS LENGTH PRICE ON 28.01.2013. T HE TRANSFER PRICING OFFICER PASSED ORDER U/S 92CA OF THE INCOME TAX ACT DATED 22.01.2015 WHEREIN HE MADE AN ADJUSTMENT OF RS. 2,08,50,458/- U/S 92CA ARRIVED AT AFTER MAKING CUMULATIVE ADJUSTMENT TO THE CASE. IN VIEW O F THE ABOVE, ADDITION OF RS. 2,08,50,458/- WAS MADE IN THE INCOME OF THE ASS ESSEE BEING DIFFERENCE BETWEEN THE ARMS LENGTH PRICE AND DRAFT ORDER U/S 144C OF THE I.T. ACT WHICH WAS PASSED ON 03.03.2015. THE ASSESSEE FILED OBJECT ION BEFORE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE DRAFT ORDER. THE DRP DIRECTIONS U/S 144C(5) ON 05.11.2015 FOR WHICH THE ORDER GIVING EF FECT WAS ISSUED BY THE ASSESSING OFFICER ON 09.12.2015. THE ASSESSING OFFI CER AFTER FOLLOWING THE DIRECTIONS OF THE DRP AS WELL AS THE ORDER GIVING A N EFFECT DATED 09.12.2015 PASSED ASSESSMENT ORDER DATED 30.12.2015 THEREBY MA KING NIL ADJUSTMENTS TO THE MARGIN OF THE ASSESSEE COMPANY BY OBSERVING THA T AS THE MARGIN OF THE ASSESSEE COMPANY IS WITHIN THE RANGE OF +/- 5% OF T HE MEAN MARGIN OF THE COMPARABLES THE ADJUSTMENT REMAINS NIL. BEING AGGRI EVED BY THE ASSESSMENT ORDER, THE REVENUE FILED APPEAL BEFORE US. 4. THE LD. DR SUBMITTED THAT THE DRP ERRED IN DIREC TING ASSESSING OFFICER TO COMPLETE THE ASSESSMENT AS PER THE OBSERVATIONS MADE BY THE DRP IN THE ORDER WHICH RESULTED IN REDUCING THE ADDITION TO NI L IN PLACE OF ORIGINAL RECOMMENDED ALP OF RS.2,08,50,458/- FOR THE INTERNA TIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE COMPANY WITH ITS ASSOCIA TE ENTERPRISES. THE LD. DR FURTHER SUBMITTED THAT THE DRP ERRED IN REJE CTING INFOSYS TECHNOLOGY LIMITED AS WELL AS EXCLUDING OTHER THREE COMPARABLE COMPANIES WHICH ARE ACROPETAL TECHNOLOGIES LTD., E-INFOCHIPS LIMIT ED AND E-ZEST SOLUTIONS LTD. THE LD. DR SUBMITTED THAT THESE COMPARABLE COMPANIE S PASSED THE FILTERS SET OUT BY THE TPO HIMSELF, IN THE ORIGINAL ORDERS AND RELIED UPON THE ORDER OF 4 I.T.A NO. 1058/DEL/2016 THE TRANSFER PRICING OFFICER. THE LD. DR FURTHER SU BMITTED THAT ALL THESE COMPARABLES ARE FUNCTIONALLY SIMILAR. 5. THE LD. AR SUBMITTED THAT THE DRP HAS TAKEN A PR OPER COGNIZANCE OF EACH AND EVERY COMPARABLE AND THEREAFTER HAS RIGHTL Y DIRECTED TO EXECUTE THESE COMPARABLES FROM THE FINAL SET OF COMPARABLES. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL T HE RELEVANT MATERIALS AVAILABLE ON RECORD. THE DRP HAS GIVEN FOLLOWING DI RECTIONS AS RELATES TO COMPARABLES: DRP DIRECTIONS: THE TPO HAS INCLUDED THE FOLLOWING COMPARABLES COMPARABLE TPO ASSESSEE DRP 1. ACROPETAL TECHNOLOGIES LIMITED FUNCTIONALLY COMPARABLE FAILS THE EMPLOYEE COST TO SALES FILTER : EMPLOYEE COST INCURRED BY ACROPETAL TO THE TOTAL OPERATING COST IS 13.74% WHICH IS LESS THAN 25% LIMIT AS ADOPTED BY THE LD. TPO. FUNCTIONALLY DISSIMILAR: TO BE EXCLUDED IN VIEW OF FAILING THE TPO FILTER OF EMPLOYEE COST. 2. E-INFOCHIPS LIMITED FUNCTIONALLY COMPARABLE FAILS THE SERVICE REVENUE FILTER: E- INFOCHIPSFAILS LD. TPOS OWN FILTER OF SERVICE REVENUE TO TOTAL REVENUE LESS THAN 75% (SERVICE REVENUE TO TOTAL REVENUE IS 74%). FUNCTIONALLY TO BE EXCLUDED IN VIEW OF FAILING THE TPO FILTER OF SERVICE REVENUE. 5 I.T.A NO. 1058/DEL/2016 DIFFERENT: E- INFOCHIPS IS ENGAGED IN PROVISION VARIETY OF IT SERVICES LIKE APPLICATION SOFTWARE, E- COMMERCE; MOBILITY; BI AND VISSUALISATION; FIRMWARE AND SYSTEM SOFTWARE; BOARD DESIGN; ASIC / SOC / FPGA SERVICES; MECHANICAL AND INDUSTRIAL DESIGN; ETC. 3. E-ZEST SOLUTIONS LIMITED FUNCTIONALLY COMPARABLE FUNCTIONALLY DISSIMILAR : E- ZEST IS ENGAGED IN THE PROVISION OF PRODUCT ENGINEERING SERVICES / OUTSOURCED PRODUCT DEVELOPMENT SERVICES; ENTERPRISE APPLICATION DEVELOPMENT; IT SERVICES AND TECHNOLOGY EXPERTISE. TO BE EXCLUDED IN VIEW OF DIFFERENT FUNCTIONALITY. 4. INFOSYS LIMITED FUNCTIONALLY COMPARABLE SCALE OF OPERATIONS: THE TURNOVER OF INFOSYS FOR FY 2010-11 IS INR 25,385 CRORES, BRAND PROFITS AND SIGNIFICANT INTANGIBLE ASSETS: SIGNIFICANT R & D EXPENSES: PRODUCT DEVELOPMENT: TO BE EXCLUDED BEING THE SECTORAL GIANT WITH ECONOMIC ADVANTAGE. THE ORDER OF DELHI HIGH COURT IN CASE OF AGNITY INDIA ITA NO.1204/2011 SHALL APPLY IN THIS CASE. 5. PERSISTENT SYSTEMS LIMITED FUNCTIONALLY COMPARABLE FUNCTIONALLY DISSIMILAR : PERSISTENT SYSTEMS THIS IS A GOOD COMPARABLE IN VIEW OF SIMILAR 6 I.T.A NO. 1058/DEL/2016 IS ENGAGED IN RENDERING OUTSOURCED PRODUCT DEVELOPMENT SERVICES AS AGAINST SOFTWARE DEVELOPMENT SERVICES FUNCTIONALITY. THE HIGH MARGINS OR HIGH TURNOVER ARE NOT VALID FACTORS AND HAVE BEEN REJECTED BY HONBLE DELHI HIGH COURT IN CASE OF CHRYSCAPITAL. 6. SASKEN COMMUNICATION TECHNOLOGIES LIMITED FUNCTIONALLY COMPARABLE FUNCTIONALLY DISSIMILAR : SASKEN ENGAGED IN PROVIDING SERVICES IN RELATION TO THE APPLICATIONS IN THE TELECOMMUNICATIONS INDUSTRY AND IS ALSO ENGAGED IN PROVIDING SOFTWARE PRODUCTS. THIS IS GOOD COMPARABLE IN VIEW OF SIMILAR FUNCTIONALITY. THE HIGH MARGINS OR HIGH TURNOVER ARE NOT VALID FACTORS AND HAVE BEEN REJECTED BY HONBLE DELHI HIGH COURT IN CASE OF CHRYSCAPITAL. 7. SANKHYA INFOTECH LIMITED FUNCTIONALLY COMPARABLE FUNCTIONALLY DISSIMILAR : SANKHYA INFOTECH IS A LEADING PROVIDER OF SIMULATION AND TRAINING SOLUTIONS. IT HELPS CORPORATE ORGANIZATIONS AND INSTITUTIONS WITH A ROBUST END-END ENTERPRISE WIDE TRAINING SOLUTION. THEY PROVIDE TARGETED TRAINING SOLUTIONS AND CONSULTANCY SERVICES TO MEET THE ORGANIZATIONAL OBJECTIVES AND BUSINESS NEEDS TO THIS IS A GOOD COMPARABLE IN VIEW OF SIMILAR FUNCTIONALITY AND FAR. THE HIGH MARGINS OR HIGH TURNOVER ARE NOT VALID FACTORS AND HAVE BEEN REJECTED BY HONBLE DELHI HIGH COURT IN CASE OF CHRYSCAPITAL. 7 I.T.A NO. 1058/DEL/2016 THE ASSESSEE. 8. WIPRO TECHNOLOGY SERVICES LIMITED FUNCTIONALLY COMPARABLE TURNOVER FILTER: DURING THE YEAR, THE TURNOVER OF WTS WAS APPROX. INR 346.87 CRORES, WHICH IS OVER 10.37 TIMES THE TURNOVER OF THE ASSESSEE OF INR 25.15 CRORES. ABNORMALLY VOLATILE PROFIT MARGIN : RELATED PARTY TRANSACTIONS THIS IS A GOOD COMPARABLE IN VIEW OF SIMILAR FUNCTIONALITY. THE HIGH MARGINS OR HIGH TURNOVER ARE NOT VALID FACTORS AND HAVE BEEN REJECTED BY HONBLE DELHI HIGH COURT IN CASE OF CHRYSCAPITAL. 3.7 INCLUDING CERTAIN COMPANIES IN THE FINAL SET OF COMPARABLES, WHICH HAVE A SIGNIFICANTLY HIGH TURNOVER AS COMPARED TO THE ASSE SSEE; DURING THE HEARING, THE ASSESSEE ALSO DEMONSTRATED THAT THESE COMPARABLE COMPANIES WERE FUNCTIONALLY DISSIMILAR A S WELL AS FAILED THE VARIOUS FILTERS SET OUT BY THE TPO HIMSELF. THEREFORE, THE DRP IS RIGHT IN EXCLUDING THESE COMPARABLES. THERE IS NO NEED TO INTERFERE WI TH THE FINDINGS OF THE DRP. THEREFORE, APPEAL OF THE REVENUE IS DISMISSED. 8. IN RESULT, THE APPEAL OF THE REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH DAY OF NOVEMBER, 2019 . SD/- SD/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 25/11/2019 PRITI YADAV, SR. PS * COPY FORWARDED TO: 1. APPELLANT 8 I.T.A NO. 1058/DEL/2016 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE OF DICTATION 22.11.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 2 5 .11.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER 25.11.2019 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS 25.11.2019 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 25.11.2019 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 25.11.2019 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 25.11.2019 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 25.11.2019 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK