M/s. Element K India Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 1153/DEL/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 2210 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 13-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 28-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 92D; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : BENCH I-2 : NEW DELHI BEFORE SRI R.K.PANDA, ACCOUNTANT MEMBER AND SMT. BEENA A PILLAI, JUDICIAL MEMBER ITA NO. 1153/DEL/2014 A.Y. 2009-10 ELEMENT K INDIA PVT. LTD. 8, BALAJI ESTATE, SUDARSHAN MUNJAL MARG, KALKAJI NEW DELHI PAN: AAACE9836D VS . ITO WARD-11(1) NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY SH. RAKESH GUPTA, SH. SOMIL AGGARWAL, SH. LAKSHYA GOYAL, ADV. REVENUE BY SH. H.K.CHOUDHARY, CIT - DR DATE OF HEARING 29 /08/2018 DATE OF PRONOUNCEMENT 06 /0 9 /2018 ORDER PER BEENA A PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST F INAL ASSESSMENT ORDER DATED 21/11/2013 PASSED BY LD. ITO , WARD 11(1), NEW DELHI FOR ASSESSMENT YEAR 2009-10 ON FOL LOWING GROUNDS OF APPEAL: 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSE SSING OFFICER (LD. AO) PURSUANT TO THE DIRECTIONS OF LE ARNED DISPUTE RESOLUTION PANEL (LD. DRP) IS BAD IN FACTS AND LA W. 2. THE LD. AO (FOLLOWING THE DIRECTIONS OF THE LD. DRP), ERRED BOTH 2 ITA NO. 1153/ DEL/2014 (ELEMENT K INDI A PVT. LTD.) ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF R S. 18,118,716 TO THE INCOME OF THE APPELLANT PROPOSED BY THE TRANSFE R PRICING OFFICER (LD. TPO) BY HOLDING THAT THE RELATED PAR TY INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF CONTENT DEV ELOPMENT SUPPORT SERVICES DO NOT SATISFY THE ARMS LENGTH PR INCIPLE ENVISAGED UNDER THE INCOME-TAX ACT, 1961 ('THE ACT' ). 3. IN DOING SO, THE LD. DRP AND THE LD. AO HAS GRO SSLY ERRED IN AGREEING WITH AND UPHOLDING THE LD. TPOS ACTION OF DISREGARDING THE ARMS LENGTH PRICE (ALP), AS DETERMINED BY TH E APPELLANT IN THE TRANSFER PRICING (TP) DOCUMENTATION MAINTAINE D BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 (RULES) AS WELL AS FRESH COMPARABLES STUDY SUBMITTED IN COURSE OF ASSESSMENT PROCEEDINGS; AND IN PARTICULAR MODIFYING AND REJECTING THE ECONOMIC ANALYSIS AND B ENCHMARKING ANALYSIS UNDERTAKEN BY THE APPELLANT THROUGH: 3.1 DISREGARDING THE FACT THAT APPELLANT IS ENGAGED IN CONTENT DEVELOPMENT SERVICES AND ONLY SELECTING SOFTWARE DEVELOPMENT SERVICE PROVIDERS AS COMPARABLES WITHOU T PROVIDING ANY COGENT REASONING THEREOF; 3.2 EXCLUSION OF COMPANIES WHOSE DATA FOR FY 2008-09 WA S NOT AVAILABLE; 3.3 EXCLUSION OF COMPANIES HAVING DIFFERENT FINANCIAL Y EAR ENDING (I.E. NOT MARCH 31,2009); 3.4 EXCLUSION OF COMPANIES HAVING SERVICE INCOME TO SAL ES LESS THAN 75% (AS AGAINST OTHER OPERATING TO SALES LESS THAN 50% APPLIED BY THE APPELLANT); 3 ITA NO. 1153/ DEL/2014 (ELEMENT K INDI A PVT. LTD.) 3.5 EXCLUSION OF COMPANIES WITH EXPORT SALES THAT ARE L ESS THAN 25% OF THEIR TOTAL REVENUE; 3.6 EXCLUSION OF COMPANIES WITH DIMINISHING REVENUES/ PERSISTENT LOSSES FOR LAST THREE YEARS UPTO AND INC LUDING FY 2008-09; 3.7 ADOPTING EMPLOYEE COST/ REVENUES FILTER GREATER THA N 25% OF THEIR TOTAL REVENUES AS A SEARCH CRITERIA FOR EVALU ATING COMPARABLES; 3.8 APPLYING SALES FILTER OF RS. 5 CRORE FOR SELECTING COMPARABLE COMPANIES, THEREBY REJECTING THE TURNOVER FILTER OF RS. 1 CRORE, APPLIED BY ASSESSEE; 3.9 IGNORING THE APPELLANT'S APPROACH AND PLEA OF REJEC TING COMPANIES WITH NEGATIVE NET WORTH; 3.10 IGNORING THE APPELLANT'S APPROACH AND PLEA OF REJEC TING COMPANIES HAVING RESEARCH & DEVELOPMENT COSTS TO SA LES MORE THAN 3%; 3.11 IGNORING THE APPELLANT'S APPROACH AND PLEA OF REJEC TING COMPANIES HAVING ADVERTISING, MARKETING AND DISTRIB UTION COSTS TO SALES MORE THAN 3%; 3.12 INCLUDING COMPANIES HAVING HIGH MARGIN / VOLATILE O PERATING PROFIT MARGINS IN THE FINAL COMPARABLES SET FOR BE NCHMARKING A LOW RISK CAPTIVE UNIT SUCH AS THE APPELLANT; 3.13 INCLUDING CERTAIN COMPANIES THAT ARE NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS E MPLOYED AND RISKS ASSUMED; 4. THE LD. AO (FOLLOWING THE DIRECTIONS OF THE LD. DRP), ERRED IN 4 ITA NO. 1153/ DEL/2014 (ELEMENT K INDI A PVT. LTD.) IGNORING THE FACT THAT THE APPELLANT IS ENTITLED TO TAX HOLIDAY UNDER SECTION 10A OF THE ACT ON ITS PROFITS AND WHEREAS I TS ASSOCIATED ENTERPRISE (AE) IS SUBJECT TO NORMAL TAXES IN USA, THEREFORE IT WOULD NOT HAVE ANY UNTOWARD MOTIVE OF DERIVING A TA X ADVANTAGE BY MANIPULATING TRANSFER PRICES OF ITS INTERNATIONA L TRANSACTIONS; 5. THE LD. AO (FOLLOWING THE DIRECTIONS OF THE LD. DRP), ERRED IN EXCLUDING CERTAIN COST SUCH AS PROVISION FOR DOUBTF UL DEBTS FROM THE COST BASE IN COMPUTATION OF MARK-UP OF CERTAIN COMPARABLE COMPANIES; 6. THE LD. AO (FOLLOWING THE DIRECTIONS OF THE LD. DRP), ERRED IN NOT VERIFYING THE FACTUAL ERRORS IN COMPUTATION OF THE OPERATING MARGINS OF THE COMPARABLES. 7. THE LD. AO HAS GROSSLY ERRED BY INITIATING PENAL TY UNDER SECTIONS 271(I)(C) OF THE ACT MECHANICALLY AND WITH OUT RECORDING ANY SATISFACTION FOR ITS INITIATION. 8. THAT THE LD. AO ERRED ON FACTS AND IN LAW IN CHA RGING INTEREST UNDER SECTIONS 234B OF THE ACT; THE ABOVE GROUNDS A RE WITHOUT PREJUDICE TO EACH OTHER. BRIEF FACTS OF THE CASE ARE AS UNDER: 2. ORIGINAL RETURN OF INCOME FOR YEAR UNDER CONSIDE RATION WAS FILED BY ASSESSEE ON 29/09/2009 DECLARING TOTAL INC OME OF RS.NIL. RETURN WAS PROCESSED U/S 143(1) OF THE INCOME TAX AC T, 1961 (THE ACT) AND CASE WAS SELECTED FOR SCRUTINY. REPRE SENTATIVES OF ASSESSEE ATTENDED HEARINGS FROM TIME TO TIME AND CA SE WAS DISCUSSED. 5 ITA NO. 1153/ DEL/2014 (ELEMENT K INDI A PVT. LTD.) 3. LD.AO OBSERVED THAT FOR YEAR UNDER CONSIDERATI ON, ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTIONS, VALUE OF WH ICH WAS MORE THAN RS.15 CRORES. LD.AO WITH APPROVAL OF LD. CIT, D ELHI-IV, NEW DELHI REFERRED THE CASE TO TRANSFER PRICING OFFICER . 4. LD.TPO OBSERVED THAT ELEMENT K INDIA PVT. LTD. ( ASSESSEE OR EK INDIA) IS WHOLLY OWNED SUBSIDIARY OF ELEMENT K CORPORATION, USA (EK USA). IT WAS OBSERVED THAT AS SESSEE PROVIDES CONTENT DESIGN AND DEVELOPMENT SUPPORT SER VICES FOR ONLINE COURSEWARE UNDER SERVICE AGREEMENT ENTERED WI TH EK USA (AN ASSOCIATED ENTERPRISE AE). ASSESSEE WAS RE MUNERATED ON COST PLUS MARK-UP BASIS FOR SERVICES RENDERED. BASED ON FUNCTIONAL ANALYSIS IN TP STUDY FOR AY 2009-10, AS SESSEE CHARACTERIZED ITSELF AS LOW RISK CAPTIVE SERVICE PR OVIDER. LD.TPO OBSERVED THAT FOR YEAR UNDER CONSIDERATION, ASSESSEE WAS ENTITLED TO AVAIL BENEFITS UNDER SECTION 10A OF THE ACT, AND MADE NECESSARY STATUTORY FILINGS WITH SOFTWARE TECHNOLOGY PARK OF INDIA (STPI) IN THIS REGARD. LD.TPO OBSERVED THAT ASSESSEE ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES: S.N O. PARTICUL ARS AMOUNT OF THE TRANSACTIO N (IN INR) METHODOLOG Y USED OUTCOME OF THE TRANSFER PRICING (TP) ORDER / DRP DIRECTION S TP ADJUSTMEN T AMOUNT (IN INR) 1 PROVISIO N OF CONTRACT CONTENT 16,04,44, 535/- TRANSACTION AL NET MARGIN METHOD ADJUSTME NT 1,81,18,71 6/- IN THE TP ORDER [PLEASE 6 ITA NO. 1153/ DEL/2014 (ELEMENT K INDI A PVT. LTD.) / ONLINE COURSEW ARE DEVELOP MENT SERVICES (TNMM) REFER TO TP ORDER PAGE 177 OF THE MERIT APPEAL SET] & 1,81,18,71 6 AFTER DRP DIRECTIONS [PLEASE REFER FINAL AO ORDER ON PAGE 6 OF THE MERIT APPEAL SET] 5. FOR BENCHMARKING INTERNATIONAL TRANSACTION OF PROVISION OF CONTRACT CONTENT/ ONLINE COURSEWARE DEVELOPMENT SERV ICES, ASSESSEE SELECTED TNMM AS MOST APPROPRIATE METHOD B Y APPLYING OP/TC AS PLI. ASSESSEE SELECTED FOLLOWING 5 COMPARAB LES HAVING AVERAGE MARGIN OF OP/TC AT 9.61% AS AGAINST ASSESSE ES MARGIN OF 14.98 %. ACCORDINGLY TRANSACTION WAS HELD TO BE AT ARMS LENGTH PRICE BY ASSESSEE. S. NO. COMPANY NAME AVERAGE OPERATING MARGIN (OP/TC) 1 DATAMATICS - 6.91% 2 ISOFT TECHNOLOGIES LTD. 17.72% 3 TUTIS TECHNOLOGIES LTD. 11.95% 4 SHREE TULSI ONLINE.COM LTD. 15.98% 5 SQL STAR INTERNATIONAL LTD. (E - GOVERNANCE SEGMENT) 9.31% AVERAGE 9.61% 6. DISSATISFIED WITH ASSESSEES SEARCH RESULTS OF COMPARABLES LD.TPO ADOPTED FRESH SEARCH AND SELECTED FOLLOWING 8 7 ITA NO. 1153/ DEL/2014 (ELEMENT K INDI A PVT. LTD.) COMPARABLES HAVING AVERAGE MARGIN AT 25.71% USING O P/OC AS PLI. SL.NO. COMPARABLES NAME OP/OC 1. BODHTREE CONSULTING LTD. 68.63 2. COMP - U - LEARN TECH INDIA LTD. 28.00 3. SASKEN COMMUNICATION TECHNOLOGIES LTD. 15.99 4. SONATA SOFTWARE LTD. 32.73 5. AKSHAY SOFTWARE TECHNOLOGIES LTD. 12.41 6. L G S GLOBAL LTD. 21.26 7. EVOKE TECHNOLOIGES LTD. 20.68 8. MINDTREE LTD. (SEG.) 5.98 AVERAGE 25.71% LD.TPO THUS MADE ADJUSTMENT OF RS.1,81,18,716. 7. AGGRIEVED BY ORDER OF LD. TPO, ASSESSEE PREFERR ED OBJECTIONS BEFORE LD.DRP. APART FROM OBJECTING FOR COMPARABLES SELECTED/REJECTED BY LD.TPO BEFORE DRP, ASSESSEE RA ISED OBJECTIONS REGARDING COMPUTATION ERRORS IN FINAL TP ADJUSTMENT THAT HAD CREPT IN MARGINS COMPUTED IN CASE OF ASSE SSEE AS WELL AS TWO COMPARABLES SELECTED BY LD.TPO. IT HAS BEEN S UBMITTED THAT DESPITE OBJECTIONS, DRP UPHELD APPROACH OF LD .TPO AND ISSUED DIRECTIONS TO LD.A.O. 8. LD. AO PASSED IMPUGNED FINAL ASSESSMENT ORDER AS PER DIRECTIONS OF DRP. 9. AGGRIEVED BY ADJUSTMENT MADE BY LD. TPO, ON TH E BASIS OF COMPARABLES DISPUTED BY ASSESSEE AS WELL AS TCOMP UTATIONAL 8 ITA NO. 1153/ DEL/2014 (ELEMENT K INDI A PVT. LTD.) ERRORS, WHICH WAS DISREGARDED, ASSESSEE IS IN APPEAL BEFORE US NOW. 10. AT THE OUTSET LD.COUNSEL SUBMITTED THAT APART F ROM ASSESSEES DETAILED CONTENTIONS AGAINST THE ADJUST MENT AND SELECTION/REJECTION OF COMPARABLES, HE HIGHLIGHTED CERTAIN ERRORS IN COMPUTATION OF ADJUSTMENT. LD.COUNSEL SUBMITTED THAT THERE ARE CERTAIN FACTUAL ERRORS IN COMPUTATION OF OPERA TING PROFIT OF ASSESSEE BY LD. TPO. IT WAS SUBMITTED THAT WHILE CO MPUTING ADJUSTMENT, LD.TPO TREATED PENALTY CHARGES PAID TO RBI AMOUNTING TO RS.25 LACS AND LOSS ON SALE OF FIXED A SSETS OF RS.6,811/-, AS A PART OF OPERATING COST, AND ACCO RDINGLY MARK- UP WAS CHARGED ON TOTAL COST OF RS.14,20,43,792/- INSTEAD OF RS.13,95,36,981/-. PARTICULARS COMPUTATIONS AS PER THE LD. TPO CORRECT COMPUTATIONS AS PER THE APPELLANT OPERATING COST (OC) INR 14,20,43,792 INR 13,95,36,981 ARMS LENGTH MARGIN (AS DETERMINED BY THE LD. AO/TPO) 25.71% 25.71% ARMS LENGTH PRICE (25.71% OF THE OC) INR 17,85,63,251 INR 17,54,11,939 11. FURTHER LD.COUNSEL SUBMITTED THAT FINAL TP ADJ USTMENT OF RS.1,81,18,716/- HAS BEEN COMPUTED ON WRONG OPERATI NG COST BASE OF RS.14,20,43,742/- INSTEAD OF RS.13,95,36,981/-. 9 ITA NO. 1153/ DEL/2014 (ELEMENT K INDI A PVT. LTD.) LD.COUNSEL SUBMITTED THAT CERTAIN FACTUAL ERRORS HAVE CREPT IN WHILE COMPUTING OPERATING MARGIN OF CERTAIN COMPARAB LES SELECTED BY LD.TPO. THE COMPARABLE SPECIFIC FACTUAL ERRORS SUBMITTED B Y LD.COUNSEL ARE AS UNDER: S. NO. COMPANY NAME APPELLANTS CONTENTIONS/DISPOSITION AGAINST THE FACTUAL/ COMPUTATION ERRORS 1. SASKEN COMMUNICATIONS TECHNOLOGIES LTD. (SEG) THE CORRECT OP/TC MARGIN OF THE COMPANY IS 15.87% INSTEAD OF 15.99% AS COMPUTED BY LD. AO/TPO ON ACCOUNT OF TREATMENT OF PROVISION FOR DOUBTFUL DEBTS AS NON-OPERATING IN NATURE. 2. SONATA SOFTWARE LTD. THE CORRECT OP/TC MARGIN OF THE COMPANY IS 30.77% INSTEAD OF 32.73% AS COMPUTED BY LD. AO/TPO ON ACCOUNT OF TREATMENT OF DECREASE IN STOCK AS NON- OPERATING IN NATURE. IT WAS SUBMITTED THAT AFTER INCORPORATING CORRECT O PERATING MARGINS OF ABOVE COMPANIES, THE REVISED / CORRECT MEAN OF OP/TC OF COMPARABLES WORKS OUT TO 25.45%. LD. COUNSEL THEREAFTER SUBMITTED THAT COMPARABLES SELECTED BY LD. TPO DOES NOT SATISFY CERTAIN FILTERS LIKE SOME COMP ANIES ARE WITH ABNORMALLY HIGH MARGIN AND HIGH TURNOVER. 10 ITA NO. 1153 /DEL/2014 (ELEMENT K INDI A PVT. LTD.) LD.COUNSEL SUBMITTED THAT AS COMPUTATION OF ADJUS TMENT IS BEING SET ASIDE BACK TO LD.AO, THE COMPARABILITY ANALYSIS OF COMPARABLES SELECTED BY ASSESSEE/LD.TPO MAY ALSO BE SET ASIDE. 12. LD. DR DID NOT OBJECT TO REQUEST ADVANCED BY LD.COUNSEL AS THERE ARE COMPUTATIONAL ERRORS WHICH IS APPARENT FRO M RECORD. 13. WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY BO TH THE SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. 14. THE GROUNDS RAISED BY ASSESSEE ARE BASICALLY IN RESPECT OF ACCEPTANCE AND/OR REJECTION OF COMPARABLES SELECTE D BY LD.AO/TPO. HOWEVER CONSIDERING COMPUTATIONAL ERROR S POINTED OUT BY LD. COUNSEL, WE ARE OF CONSIDERED OPINION THAT L D.TPO SHALL VERIFY THE ITEMS ALLEGED TO HAVE BEEN WRONGLY INCLUD ED IN COMPUTING OPERATIONAL EXPENSES IN CASE OF ASSESSEE. 15. AS REGARDS COMPUTATION OF WRONG MARGIN OF SASKEN COMMUNICATION TECHNOLOGIES LTD (SEG.) AND SONATA SO FTWARE LTD., WE ARE INCLINED TO SET ASIDE ALL COMPARABLES FINALL Y SELECTED BY LD. TPO/AO IN TERMS OF FAR ANALYSIS OF ASSESSEE. LD. AO SHALL DECIDE COMPARABILITY OF COMPARABLES ON THE BASIS OF FUNCT IONS PERFORMED BY THESE COMPANIES, RISKS ASSUMED AND ASSETS OWNED B Y THE COMPARABLES VIS-A-VIS THAT OF ASSESSEE. LD.TPO/AO SHALL VERIFY 11 ITA NO. 1153 /DEL/2014 (ELEMENT K INDI A PVT. LTD.) COMPUTATION OF MARGINS AND GRANT RELIEF TO ASSESSEE AS PER LAW. NEEDLESS TO SAY THAT ASSESSEE SHALL BE GRANTED PROP ER OPPORTUNITY TO REPRESENT ITS CASE. 16. ACCORDINGLY ALL THE GROUNDS RAISED BY THE ASSE SSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. 17. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 06 TH SEPTEMBER, 2018. SD/- SD/- (R.K.PANDA) (BEENA A PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER *BR* DT. 06 TH SEPTEMBER, 2018 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT - TRUE COPY - BY O RDER, 12 ITA NO. 1153 /DEL/2014 (ELEMENT K INDI A PVT. LTD.) ASSISTANT REGISTRAR ITAT DELHI BENCHES S.NO. DETAILS DATE 1 DRAFT DICTATED ON DRAGON 29/08/2018 2 DRAFT PLACED BEFORE AUTHOR 29/08/2018 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 06/08/2018 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 06/08/2018 5 APPROVED DRAFT COMES TO THE SR. PS/PS 06/08/2018 6 KEPT FOR PRONOUNCEMENT 06/08/2018 7 06/08/2018 8 FILE SENT TO BENCH CLERK 9 DATE ON WHICH THE FILE GOES TO HEAD CLERK 10 DATE ON WHICH FILE GOES TO A.R. 11 DATE OF DISPATCH OF ORDER