Acusus Software India P Ltd, Bangalore V. Income tax Officer, Ward-11(1), Bangalore

ITA 1105/BANG/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9316 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 29-09-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 26-08-2014
• Court: TRIBUNAL
• Department Lawyers: SANJAI KUMAR VERMA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 92C; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER IT(TP) NO.1105/BANG/2014 AND NO. 1043/BANG/2014 ASSESSMENT YEAR : 2009-10 M/S. ACUSIS SOFTWARE INDIA PVT. LTD., NO. 17/2, DOLLARS CHAMBER, LALBAGH ROAD, BANGALORE 560 029. PAN : AADCA 2415 P VS. INCOME TAX OFFICER, WARE 11(1), BANGALORE. APPELLANT RESPONDENT ASSESSEE BY : SHRI. CHAVALI NARAYAN, CA REVENUE BY : SHRI. SANJAI KUMAR VERMA, CIT (DR) DATE OF HEARING : 29.09.2016 DATE OF PRONOUNCEMENT : 19.10.2016 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDE R DATED 26.6.2014 OF CIT (A) FOR THE ASSESSMENT YEAR 2009-10. FIRST WE TAKE UP THE APPEAL FILED BY THE ASSESSEE WHEREIN THE ASSESSEE HAS RAISED VARIOUS GR OUNDS. HOWEVER, AT THE TIME OF HEARING, THE LEARNED AR OF THE ASSESSEE HAS STATED AT BAR THAT THE ASSESSEE PRESSES ONLY ONE ISSUE REGARDING THE TREATMENT OF FOREIGN E XCHANGE FLUCTUATIONS GAIN AS OPERATING IN NATURE WHILE COMPUTING THE OPERATING M ARGIN OF THE ASSESSEE FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE. THU S THE LEARNED AR STATED THAT EXCEPT THE FOREIGN EXCHANGE FLUCTUATIONS BEING PART OF OPERATING MARGIN AND BENEFIT IT(TP) NOS .1105/BANG/2014 AND 1043/BANG/2014 PAGE 2 OF 9 OF TOLERANCE RANGE UNDER PROVISO TO SECTION 92C OF THE ACT, THE ASSESSEE DOES NOT PRESS OTHER GROUNDS RAISED IN THIS APPEAL. ACCORDI NGLY THE EFFECTIVE GROUNDS WHICH ARE PRESSED BY THE ASSESSEE ARE GROUND NOS. 8 TO 10 , AS UNDER: 8. THE LEARNED CIT(A) HAS ERRED IN NOT DECIDING ON THE TREATMENT OF FOREIGN EXCHANGE FLUCTUATION GAIN AS OPERATING IN N ATURE WHILE COMPUTING THE OPERATING MARGIN OF APPELLANT AND THAT OF COMPA RABLE COMPANIES. 9. THE LEARNED CIT(A) HAS ERRED IN COMPUTING THE AR MS LENGTH PRICE WHILE PROVIDING THE BENEFIT OF 5 PERCENT UNDER THE PROV ISO TO SECTION 92C OF THE ACT; 10. THE LEARNED CIT(A) ERRED IN CONFIRMING THE IMPO SITION OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT; 2. GROUND NO. 8 REGARDING FOREIGN EXCHANGE FLUCTUATION S BEING A PART OF OPERATING PROFIT: THE ASSESSEE IS THE INDIAN MEDICAL TRANSCRIPTION CENTRE OF M/S. ACUSIS SOFTWARE INDIA PVT. LTD., RESIDENT OF B RITISH VIRGIN ISLANDS, WHICH IS A WHOLLY OWNED SUBSIDIARY ACUSIS LLC, USA. THE ASSES SEE IS REGISTERED AS SOFTWARE TECHNOLOGY PARK (STP) UNIT UNDER STP SCHEME OF GOVT . OF INDIA. THE ASSESSEE HAS CARRIED OUT INTERNATIONAL TRANSACTIONS FOR PROVIDIN G MEDICAL TRANSCRIPTION SERVICES TO ACUSIS LLC FOR RS.25,92,00,211/-, THE ONLY INTERNAT IONAL TRANSACTION WHICH FALLS UNDER ITES SEGMENT. THE ASSESSEE FURNISHED T.P. STUDY A ND CLAIMED ITS INTERNATIONAL TRANSACTION AT ARMS LENGTH BY CONSIDERING A SET OF 8 COMPARABLES HAVING AVERAGE PROFIT MARGIN @ 18.56% ON COST IN COMPARISON TO THE ASSESSEES OPERATING MARGIN AT 22.69% ON COST. THE TPO DID NOT ACCEPT THE TP ANAL YSIS AS WELL AS THE COMPARABLES SELECTED BY THE ASSESSEE AND CARRIED O UT FRESH SEARCH. THE TPO HAS IT(TP) NOS .1105/BANG/2014 AND 1043/BANG/2014 PAGE 3 OF 9 FINALLY SELECTED 8 COMPARABLES HAVING AVERAGE PROFI T LEVEL INDICATOR (PLI) AT 25.04%. THERE IS NO DISPUTE REGARDING THE MOST APPROPRIATE METHOD ADOPTED BY THE PARTIES AS TRANSACTION NET MARGIN METHOD (TNMM). THE TPO HAS WORKED OUT A NEGATIVE WORKING CAPITAL ADJUSTMENT OF 3.18% AND ACCORDINGLY ARRIVED AT THE ADJUSTED MEAN MARGIN OF 28.22%. ACCORDINGLY THE TPO PROPOSED AN UPWARD ADJUSTMENT UNDER SECTION 92CA OF RS.2,66,09,306/- . THE ASSESSEE CH ALLENGED THE ACTION OF THE TPO BEFORE THE CIT(A) AND GOT PART RELIEF. SINCE THE ASSESSEE HAS NOT PRESSED THE OTHER GROUNDS IN THIS APPEAL, THEREFORE THE ONLY ISSUE BE FORE US IS REGARDING THE TREATMENT OF FOREIGN EXCHANGE GAIN FOR THE PURPOSE OF DETERMI NING THE ARMS LENGTH PRICE. THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT THE F OREIGN EXCHANGE GAIN IS ACCRUED DUE TO FLUCTUATION ON THE RECEIVABLES FROM EXPORTS AND THEREFORE IT WILL BE A PART OF THE OPERATING PROFIT OF THE ASSESSEE. IN S UPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE FOLLOWING DECISIONS: 1. M/S. SAP LABS INDIA PVT. LTD., VS. ACIT, BANGALO RE [2011] 44 SOT 156 (BANG.) 2. M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. , VS. DCIT DATED 23.11.2012 IN ITA NO. 1054/BANG/2011. 3. ON THE OTHER HAND, THE LEARNED DR HAS RELIED UP ON THE ORDER OF THE TPO AND SUBMITTED THAT IN THE ABSENCE OF NECESSARY DETAILS, THE FOREIGN EXCHANGE FLUCTUATIONS CANNOT BE CONSIDERED AS OPERA TING PROFIT. 4. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD WE NOTE THAT THE ISSUE OF TREATMENT OF FOREI GN EXCHANGE FLUCTUATIONS (GAIN/LOSS), ACCRUED ON ACCOUNT OF EXPORT SALES HAS BEEN CONSISTENTLY CONSIDERED AS IT(TP) NOS .1105/BANG/2014 AND 1043/BANG/2014 PAGE 4 OF 9 PART OF THE OPERATING MARGIN FOR THE PURPOSE OF DET ERMINING TRANSFER PRICING ANALYSIS IN A SERIES OF DECISIONS BY THIS TRIBUNAL. IN THE CASE OF SAP LABS INDIA PVT. LTD., VS. ACIT (SUPRA), THE TRIBUNAL HELD THAT IF THE FOREIGN EXCHANGE (GAIN/LOSS) IS ACCRUED TO THE ASSESSEE ON EXPORT SALE, THEN THE SAME WILL BE CONSIDERED AS OPERATING IN NATURE. SIMILARLY, THE FOREIGN EXCHANGE FLUCTUATIO NS ON SALES TURNOVER OF THE COMPARABLES SHOULD ALSO BE CONSIDERED AS PART OF OP ERATING MARGINS. THE TRIBUNAL IN THE CASE OF M/S. TRILOGY E-BUSINESS SOFTWARE VS. DC IT SUPRA HAS AGAIN CONSIDERED AND DECIDED THIS ISSUE IN PARA (B) AS UNDER: B. AS FAR AS FOREIGN EXCHANGE GAIN/LOSS BEING CONS IDERED A NOT FORMING PART OF THE OPERATING COST, THE REASONING OF THE REVENUE IS THAT SUCH LOSS OR GAIN CANNOT BE SAID TO BE ONE REALIZED FROM GAIN/LOSS OF THE EN TERPRISE AND THEREFORE THEY SHOULD BE EXCLUDED WHILE DETERMINING OPERATING COST . ON THE ABOVE ISSUE WE FIND THAT THE BANGALORE BENCH OF ITAT IN THE CASE O F SAP LABS INDIA (P) LTD., VS. ACIT (2011) 44 SOT 156 (BANG.) HAS TAKEN THE VIEW T HAT FOREIGN EXCHANGE FLUCTUATION GAINS ARE REQUIRED TO BE DIRECTED TO AC CEPT THE CLAIM OF THE ASSESSEE IN THIS REGARD. AS FAR AS PROVISION FOR BAD DEBTS ARE CONCERNED, THE TPO HAS ACCEPTED THAT THE SAME WOULD BE PART OF OPERATING E XPENSES PROVIDED THE SAME IS INCURRED EVERY YEAR FOR AT LEAST THREE YEARS AND THE MANNER IN WHICH PROVISION IS MADE IS CONSISTENT. THE ASSESSEE IN REPLY TO TH E QUERY OF THE TPO ON THE ABOVE ASPECT HAS NOT FURNISHED ANY DETAILS. WE ARE OF THE VIEW THAT THE ASSESSEE SHOULD BE AFFORDED OPPORTUNITY TO EXPLAIN ITS POSITION ON THE ABOVE AND THE AO IS DIRECTED TO CONSIDER THE SAME IN ACCORDAN CE WITH LAW. AS FAR AS FRINGE BENEFIT TAX (FBT) IS CONCERNED, THE SAME WAS NOT CO NSIDERED BY THE TPO AS PART OF OPERATING COST IN THE CASE OF COMPARABLES AND TH EREFORE THE SAME SHOULD ALSO IT(TP) NOS .1105/BANG/2014 AND 1043/BANG/2014 PAGE 5 OF 9 NOT BE CONSIDERED AS PART OF OPERATING COST OF THE ASSESSEE. WE HOLD ACCORDINGLY AND DIRECT THE AO TO COMPUTE THE OPERAT ING COST OF THE ASSESSEE. 5. IN VIEW OF THE ABOVE DISCUSSION AS WELL AS BY FO LLOWING THE ORDERS OF THIS TRIBUNAL, WE DIRECT THE AO/TPO TO RECOMPUTE THE OPE RATING MARGIN OF THE ASSESSEE BY CONSIDERING THE FOREIGN EXCHANGE FLUCTUATIONS (G AIN/LOSS) ARISING FROM EXPORT AS OPERATING IN NATURE. SIMILARLY, THE FOREIGN EXCHAN GE FLUCTUATIONS (GAIN/LOSS) ON SALES SHALL BE CONSIDERED AS PART OF OPERATING MARGINS OF COMPARABLES FOR THE PURPOSE OF DETERMINING ARMS LENGTH PRICE. 6. GROUND NO. 9 IS REGARDING THE BENEFIT OF TOLERAN CE RANGE AS PER THE PROVISO TO SECTION 92C OF THE ACT. THE TPO IS DIRECTED TO CON SIDER THE BENEFIT OF TOLERANCE RANGE AS PER THE PROVISO TO SECTION 92C IF THE PRIC E OF THE ASSESSEE IS WITHIN THE RANGE OF 5% OF THE COMPARABLE PRICE. ACCORDINGLY THIS GROUND IS DISPOSED OFF. 7. GROUND NO. 10 IS REGARDING LEVY OF INTEREST UNDE R SECTION 234 B & C WHICH IS MANDATORY AND CONSEQUENTIAL AND THEREFORE NO SPECIF IC ADJUDICATION IS REQUIRED. 8. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. THE ORDER O F T H E C I T ( AP P EAL S) I S O PP OSE D TO LA W AN D THE FACTS AND C IRCUMSTANCES OF THE CASE . 2. THE C IT ( A) E RR ED I N LAW AS WE L L AS ON F A CTS IN HOL D IN G T H AT , AS T HE WORKI N G CA PITAL ADJUS T MENT PROVIDED BY THE TP O HAS NEGA T IVE I MP ACT ON AD J U STED MAR GIN , THE A SSE SSEE I S ENTITLED TO RIS K AD JUS T M EN T AS PER P REVAI L I N G NORMS , WHICH S HALL BE WORKED OUT BY THE T P O A ND G RA N TE D TO THE ASSESSEE WITH OUT APPRECI A TI NG THAT R ISK A DJUS T M EN T COULD N OT BE AL L OWED IN THE ABSE N CE OF SP ECIFIC DIFFERENCE I N RISK AND ITS IMPACT ON PROFIT MARGIN WHEN TP R EGULATIONS IN INDIA AR E AGAINST MAKING ANY ASSUM P TIONS IN RESPECT OF ANY AD J USTMENTS AND SUCH RI SK ADJUSTMENT CANNOT BE PROVIDED WITHOUT MAKING NECESSARY ASSUMPTIONS . 3. TH E CIT (A) ERRED IN HOLDING THAT FOREIGN EXCHANGE LO SS / GA I N I S O P ERAT I NG I N NATURE W I THOUT APPRECIATING THAT SUCH LOSS / GAIN THOUGH ATT R I BUTABLE TO IT(TP) NOS .1105/BANG/2014 AND 1043/BANG/2014 PAGE 6 OF 9 THE OPERAT I NG ACTIVITY I S NOT DER I VED F R OM THE OPERAT I NG A C TIVITY AND WITHOUT ASCERTAINING THE NEXUS OF THE FOREX GAIN / LOSS WITH THE BU S IN E SS ACTIVITY OF THE TAXPAYER . 4. THE CIT( A) ERRED . I N C ON C LUD I NG T HA T F O REX G AIN / LOSS A RE TO BE TREATED AS OPERA T I NG IN NA T UR E WI T H O U T A PP RECIA T ING THAT THO U GH THEY THEY M AY B E INCIDE NT AL T O T HE O PER AT I NG ACTI V ITY, THEY CANNO T BE DEEMED AS OPERATING IN N ATURE SI N CE , T HEY ARE NOT CRITICAL TO OPERATIONAL ACTIVITIES OF T H E BUSINE SS C ONDUCTED B Y THE TAX P AY E R . 5. THE CIT CA) ERRED IN LAW AS WELL AS ON FACTS BY DIR ECTING THE TPO TO DECIDE THE CASE OF THE ASSESSEE, BY APPLYING THE PRINCIPLE S EMERGING FROM THE ORDERS OF THE DELHI BENCH OF THE HON'BLE TRIBUNAL I N HAWORTH (INDIA) PVT. LTD. V DEPUTY COMMISSIONER OF INCOME-TAX 11 ITR (TR IB) 757 AND THE BANGALORE BENCH OF THE HON'BLE TRIBUNAL IN TRILOGY E-BUSINESS SOFTWARE V DEPUTY COMMISSIONER OF INCOME-TAX 23 ITR(TRIB) 464 WITHOUT APPRECIATING THAT IN TRANSFER PRICING EVERY CASE IS UNIQUE AND REQUIRES TO BE DECIDED I.NDEPENDENTLY AND THAT THE DIRECTIONS ISSU ED ARE BEYOND THE MANDATE OF THE PROVISIONS OF SECTION 251(1)(A) OF T HE I.T. ACT WHICH DOES NOT EMPOWER THE CIT(A) TO SET ASIDE THE ISSUE. 6. THE CIT(A) ERRED IN DIRECTING THE AO TO FOLLOW THE RATIO LAID DOWN BY THE HONBLE HIGH COURT IN THE CASE OF TATA ELXSI LIMITE D 349 ITR 98 WHILE COMPUTING THE DEDUCTION U/S 10A BY EXCLUDING THE VA LUE OF THE TELECOMMUNICATION EXPENDITURE AND EXPENSES INCURRED IN FOREIGN CURRENCY FROM THE TOTAL TURNOVER ALSO, WITHOUT APPRECIATING THE FACT THAT THERE IS NO PROVISION I N SECT I ON 10A THAT S U CH EXPEN SE S S HOULD BE R ED U C E D FRO M THE TOTAL TU RN OVER ALSO , AS . CLA U SE (I V ) OF T HE E XP LANAT ION T O SECTIO N 10A PRO V I DE S T H AT SUCH E XP EN S ES AR E TO BE REDUCED ONLY FROM THE EX PORT TU R NOVE R . 7. THE CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE JURISDICTIONAL HI G H CO URT 'S DECISION IN THE CASE OF TATA ELXSI LIMITED 3 49 ITR 9 8 HA S NOT BEEN A C CEPTED BY T HE ' DEPA R T M E N T AND AN APPEAL HAS B E EN F I LE D BE FO RE THE H ON ' BLE S U PREME COU R T . 8. FO R TH ESE AND S U C H OTH E R G R O UND S THAT MA Y B E UR G ED AT TH E TIM E O F H EA RIN G , IT I S HUMBL Y PRA Y ED THAT THE O RD E R O F THE C I T(A) B E R EVE R SE D A ND TH A T OF TH E ASSESS ING OFFIC E R BE RE S T O R E D . 9. T H E A PPE LL ATE C RA V E S L EAVE T O ADD , TO A L TER , T O A M E ND OR D E L E TE A N Y O F TH E G R O UND S TH A T M AY BE U RGED AT T H E T IME OF H EARI N G O F THE APPEA L . 9. GROUND NO. 1 IS GENERAL IN NATURE AND DOES NOT R EQUIRE ANY SPECIFIC ADJUDICATION. 10. GROUND NO. 2 REGARDING THE DIRECTIONS OF THE CI T (A) TO CONSIDER THE RISK ADJUSTMENT. WE HAVE HEARD THE LEARNED DR AND AS WELL AS LEARNED AR IT(TP) NOS .1105/BANG/2014 AND 1043/BANG/2014 PAGE 7 OF 9 AND CONSIDER RELEVANT MATERIAL ON RECORD. THE CIT( A) HAS OBSERVED THAT THE TPO HAS WORKED OUT THE NEGATIVE WORKING CAPITAL ADJ USTMENT AND THEREFORE THE ASSESSEE IS ENTITLED TO RISK ADJUSTMENT AS PER THE PREVAILING NORMS WHICH SHALL BE WORKED OUT BY THE TPO. THE REVENUE IS AGG RIEVED BY THE DIRECTIONS OF THE CIT(A) FOR GRANTING RISK ADJUSTMENT TO BE WO RKED OUT BY TPO. IT IS PERTINENT TO NOTE THAT SINCE THE ASSESSEE IS A CAPT IVE SERVICE PROVIDER AND THEREFORE THERE IS A DIFFERENCE IN THE FINANCIAL RI SK INVOLVED IN THE TRANSACTIONS BETWEEN TWO INDEPENDENT PARTIES AND BETWEEN THE REL ATED PARTIES AS IN THE CASE OF THE ASSESSEE. ACCORDINGLY, IN THE FACTS AN D CIRCUMSTANCES OF THE CASE, WE DO NOT FIND ANY ERROR OR IRREGULARITY IN T HE ORDER OF THE CIT(A) ON THIS ISSUE. HOWEVER WE DIRECT THE TPO TO RECONSIDER THI S ISSUE AFTER VERIFICATION AND EXAMINATION OF THE RELEVANT DETAILS AND MATERIA LS. 11. GROUND NO. 3 TO 5 ARE REGARDING THE DIRECTIONS GIVEN BY THE CIT(A) FOR CONSIDERING THE FOREIGN EXCHANGE (GAIN/LOSS) AS PAR T OF THE OPERATING MARGIN. THIS ISSUE IS COMMON AS IT WAS ALSO INVOLVED IN THE APPEAL OF THE ASSESSEE. IN VIEW OF OUR FINDING ON THIS ISSUE WHILE DEALING WITH THE APPEAL OF THE ASSESSEE, ACCORDINGLY THESE GROUNDS OF THE REVENUE APPEAL STAND ADJUDICATED ON THE SAME TERMS. 12. GROUND NO. 6 AND 7 REGARDING EXCLUSION OF TELEC OMMUNICATION EXPENDITURE AND OTHER EXPENSES INCURRED IN FOREIGN CURRENCY FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10A. IT(TP) NOS .1105/BANG/2014 AND 1043/BANG/2014 PAGE 8 OF 9 13. WE HAVE HEARD THE LEARNED DR AS WELL AS LEARNED AR AND CONSIDER THE RELEVANT MATERIAL ON RECORD. THE AO HAS EXCLUDED T ELECOMMUNICATION EXPENDITURE AND OTHER EXPENSES INCURRED IN FOREIGN CURRENCY FRO M EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10A. ON APPEAL, THE CIT(A) HAS DECIDED THIS ISSUE BY FOLLOWING JUDGMENT OF HONBLE HIGH COURT I N CASE OF CIT VS. TATA ELXSI LTD., 349 ITR 98 AND DIRECTED AO TO EXCLUDE THE SAID EXPE NDITURE FROM TOTAL TURNOVER AS WELL. AT THE OUTSET WE NOTE THAT THIS ISSUE IS COV ERED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF TATA ELXSI (SUPRA). ACCO RDINGLY WE DO NOT FIND ANY ERROR OR IRREGULARITY IN THE IMPUGNED ORDER OF THE CIT(A) QU A THIS ISSUE. THE GROUND NOS. 6 AND 7 OF THE REVENUES APPEALS ARE DISMISSED. 14. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE AS WELL AS REVENUE ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 19 TH DAY OF OCTOBER, 2016. SD/- SD/- (S. JAYARAMAN) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEM BER BANGALORE, DATED, THE 19 TH OCTOBER, 2016. /NS/ IT(TP) NOS .1105/BANG/2014 AND 1043/BANG/2014 PAGE 9 OF 9 COPY TO: 1. APPELLANT S 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.