Altair Engineering India(P)Ltd, Bangalore V. DCIT,Circle11(1), Bangalore

ITA 1184/BANG/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1464 (ITAT-BANGALORE)
• Duration Of Justice: 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 29-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: H V GOWTHAMA
• Keywords: Transfer pricing

Judgement Text

ITA.1184/BANG/2010 P AGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'B', BANGALORE BEFORE DR. O. K. NARAYANAN, VICE PRESIDENT AND SMT. P. MADHAVI DEVI, JUDICIAL MEMBER I.T.A NO.1184/BANG/2010 (ASSESSMENT YEAR : 2006-07) M/S. ALTAIR ENGINEERING INDIA P. LTD., C/O. GOWTHAMA & COMPANY, 23/57, 41ST CROSS, EAST END C MAIN ROAD, 9TH BLOCK, JAYANAGAR, BANGALORE 560 069 .. APPELLANT V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 11(1), BANGALORE .. RESPONDENT APPELLANT BY : SHRI. H. V. GOWTHAMA, CA RESPONDENT BY : SHRI. RANMOY DAS, COMMISSIONER OF INCOME-TAX - III O R D E R PER DR. O. K. NARAYANAN, VICE PRESIDENT : THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVAN T ASSESSMENT YEAR IS 2006-07. THE APPEAL IS DIRECTED AGAINST TH E ASSESSMENT ORDER OF THE DCIT, CIRCLE-11(1), BANGALORE, DATED.29.09.2 010 U/S.143(3) R.W.S.144C OF THE INCOME-TAX ACT, 1961. THE ASSESS MENT ORDER HAS BEEN PASSED IN THE LIGHT OF THE DIRECTIONS OF BY TH E DISPUTES RESOLUTION PANEL (DRP), ISSUED U/S.144C(5) AND SUB-SECTION (8) AND BASED ON THE ORDER OF THE TRANSFER PRICING OFFICER DATED.30.10.2 009, PASSED U/S.92CA OF THE IT ACT, 1961. ITA.1184/BANG/2010 P AGE - 2 02. THE FIRST ISSUE RAISED BY THE ASSESSEE IN THE A PPEAL IS AGAINST THE ARMS LENGTH PRICE ADDITION OF ` .46,35,034/- MADE BY THE ASSESSING AUTHORITY IN THE LIGHT OF THE ORDER OF THE TRANSFER PRICING OFFICER WHILE COMPUTING THE INCOME FROM FOREIGN TRANSACTIONS WITH RELATED PARTIES. 03. THE CASE OF THE ASSESSEE IS THAT THE MEMBERS OF DRP FAILED TO UNDERSTAND THAT THE TRANSFER PRICING OFFICER DID NO T APPRECIATE ANY OF THE SERVICES RENDERED BY THE ASSESSEE COMPANY. THE ASSESSEE COMPANY DID NOT REQUIRE ANY ADDITION TO ARMS LENGTH PRICE BECAUSE THE SERVICES RENDERED BY THE ASSESSEE COMPANY TO ITS HO LDING COMPANY ARE ONLY BASIC SERVICES, AND UNLESS THE VALUE ADDITION OF THE APPELLANT'S HOLDING COMPANY ARE CONSIDERED, THE PRODUCT DEVELOP ED BY THE ASSESSEE COMPANY IS NOT FULL AND FINAL AND NOT THE END PRODUCT. IT IS THE CASE THAT THE TPO WAS NOT CORRECT IN COMPARING COMPANIES WHICH ARE NOT COMPARABLE WITH THE ASSESSEE COMPANY BECAUS E OF THE NATURE OF WORK, TYPE OF COMPANIES, TYPE OF SOFTWARE DEVELO PED ETC., AND, THEREFORE, THE ADDITIONS MADE BY THE TPO AS SHORTFA LL ADJUSTMENT U/S.92CA IS TO BE DELETED. 04. WE CONSIDERED THE CONTENTIONS IN THE LIGHT OF T HE DETAILS SUBMITTED BY THE ASSESSEE'S REPRESENTATIVE, ASSESSM ENT ORDER, THE DIRECTIONS OF THE DISPUTES RESOLUTION PANEL AND THE ORDER OF THE ITA.1184/BANG/2010 P AGE - 3 TRANSFER PRICING OFFICER. WITH REFERENCE TO THE IN TERNATIONAL TRANSACTIONS OF SOFTWARE, THE ASSESSEE HAS AGREED W ITH ITS ASSOCIATE CONCERN'S FORMULA OF COST + PROFIT. THE PROFIT FAC TOR HAS BEEN AGREED TO BE 10%. BUT ON A DETAILED STUDY OF THE ACTIVITI ES CARRIED ON BY THE ASSESSEE COMPANY AND ITS WORKING RESULTS AND THE RE SULTS OF THE COMPARABLE CASES, THE TPO CAME TO A FINDING THAT TH E OPERATING MARGIN (ALP MARGIN) WORKED OUT TO 20.68% OF THE OPE RATING COST. ON THE BASIS OF THE PROFIT LEVEL INDICATOR (PLI), THE TPO COMPUTED THE ALP AT ` .5,95,33,962/- AGAINST THE INTERNATIONAL TRANSACTIO NS PRICE SHOWN BY THE ASSESSEE AT ` .5,48,98,928/-. SHORTFALL OF ` .46,35,034/- HAS BEEN ADDED BY WAY OF ADJUSTMENT U/S.92CA. 05. ON EXAMINATION OF THE CASE, WE FIND THAT THERE IS NO VERIFIABLE BASIS FOR DETERMINING THE PROFIT FACTOR AT 10% OF T HE COST AS EMBODIED IN THE AGREEMENT ENTERED BY THE ASSESSEE AND ITS AS SOCIATE CONCERN. THE ARGUMENT OF THE ASSESSEE THAT THE SERVICES REND ERED BY THE ASSESSEE ARE ONLY BASIC SERVICES TO ITS HOLDING COM PANY AND THEREFORE THE PRICES DECLARED BY THE ASSESSEE ARE TO BE TREAT ED AS REASONABLE, AS THE ARMS LENGTH PRICE CANNOT BE ACCEPTED AS AN OVER WHELMING PROPOSITION FOR THE REASON THAT THE ASSESSEE HAS NO T PLACED BEFORE US ANY COST MODEL AND MARKET POTENTIAL OF THE PRODUCTS SO AS TO ACCEPT OR REJECT THE BENCH MARK PROFIT OF 10%. IT IS THE CAS E OF THE ASSESSEE THAT ITA.1184/BANG/2010 P AGE - 4 THE REAL IMPACT OF THE SERVICES RENDERED BY THE ASS ESSEE WOULD BE KNOWN ONLY AFTER CONSIDERING THE VALUE ADDITIONS/CO NTRIBUTIONS MADE BY ASSESSEE'S HOLDING COMPANY. BUT IT IS TO BE SEE N THAT THE ASSESSEE HAS NOT FURNISHED ANY DETAILS OF SUCH VALUE ADDITIO N CONTRIBUTED BY ITS HOLDING COMPANY. THEREFORE, AN EFFECTIVE EVALUATIO N OF THE MARKET PRICE OF THE FINAL PRODUCT AND THE SHARE OF THE CON TRIBUTION OF THE ASSESSEE IN THAT MARKET PRICE CANNOT BE COMPUTED FO R WANT OF DETAILS, FOR WHICH THE ASSESSEE ALONE IS RESPONSIBLE. 06. FOR THE REASONS ALREADY STATED ABOVE, ALONG WIT H THE FINDINGS OF THE TRANSFER PRICING OFFICER AND THE DISPUTE RESOLU TION PANEL, WE FIND THAT THE PRICE DECLARED BY THE ASSESSEE FOR ITS INT ERNATIONAL TRANSACTIONS CANNOT BE ACCEPTED AS ARMS LENGTH PRICE. THEREFORE , THE ADDITION IS CALLED FOR AND IT IS JUSTIFIED. 07. NOW REGARDING THE QUANTUM OF ADDITION, THE TRAN SFER PRICING OFFICER HAS WORKED OUT THE OPERATING PROFIT AT 20.6 8% OF THE OPERATING COST. WE FEEL THAT A NOMINAL MODIFICATION IS CALLE D FOR IN THIS RATE OF OPERATING PROFIT, ACCEPTING CERTAIN VALID CONTENTIO NS OF THE LEARNED REPRESENTATIVE REGARDING THE COMPETENCE LEVEL OF IT S EMPLOYEES ; THE REMUNERATION PAYABLE TO THEM AND THE EFFECT OF THE SAFE ENVIRONMENT IN WHICH THE ASSESSEE WAS FUNCTIONING. THEREFORE, AS A FAIR MEASURE OF ITA.1184/BANG/2010 P AGE - 5 PRICE DIFFERENCE, WE MODIFY THE ARMS LENGTH PRICE A DJUSTMENT FACTOR TO 20% OF THE OPERATING COST IN PLACE OF 20.68% OF THE OPERATING COST ADOPTED BY THE LOWER AUTHORITIES. WITH THIS NOMINA L MODIFICATION, THE FIRST ISSUE OF TRANSFER PRICING IS DISPOSED OFF. 08. THE SECOND ISSUE RAISED BY THE ASSESSEE IS THAT DISALLOWANCE OF ASSESSEE'S CLAIM OF ` .1,52,58,201/- MADE U/S.10A IS NOT JUSTIFIED. THE VERY SAME ISSUE WAS CONSIDERED IN ASSESSEE'S OWN CA SE FOR ASSESSMENT Y EAR 2005-06 BY ITAT, 'B' BENCH, BANGALORE, THROUG H THEIR ORDER DATED.21.01.2011 IN ITA.762/BANG/2010. THE VERY SA ME ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE FOR ASSESSMENT YE AR 2004-05 AS WELL BY ITAT, BANGALORE BENCH. IN VIEW OF THAT, THE SAI D DISALLOWANCE OF ` .1,52,58,201/- IS DELETED AND THE ASSESSING AUTHORI TY IS DIRECTED TO GIVE CONSEQUENTIAL BENEFITS. 09. IN RESULT, THIS APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON MONDAY, THE 14TH DAY OF MARCH, 2011, AT BANGALORE. SD/- SD/- (P. MADHAVI DEVI) (DR. O. K. NARAYANAN) JUDICIAL MEMBER VICE PRESIDENT ITA.1184/BANG/2010 P AGE - 6