Societe Generale Global Solution Centre Private Limited, Bangalore V. DCIT, Bangalore

ITA 1188/BANG/2011

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 7454 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2016
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 30-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G. R. REDDY
• Keywords: Business income; Transfer pricing; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary
• Section: 271(1)(c); 143(3); 80HHC; 234B; 64; 13; 22; 92CA

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.1188/Bang/2011 (Assessment year: 2007-08) M/s.Societe Generale Global Solution Centre Pvt. Ltd. ‘Inventor’ Bldg., 6 th floor, International Tech Park Whitefield Road, Bangalore-560006. PAN:AAECS 6764L Vs. ... Appellant Deputy Commissioner of Income-tax, Circle 12(3), Bangalore. ... Respondent Appellant by : Shri S.Raghunathan, Advocate. Respondent by : Shri G.R.Reddy, CIR(DR). Date of hearing : 15/03/2016 Date of pronouncement : 22/04/2016 O R D E R Per INTURI RAMA RAO, AM : This is an appeal filed by the assessee-company against the assessment order dated 29/09/2011 passed u/s 143(3) r.w.s.144C(3) of the Income-tax Act,1961 [ for short ‘the Act’] by the Deputy Commissioner of Income-tax Circle 12(3),Bangalore [for short ‘AO’] for the assessment year 2007-08. IT(TP)A No.1188/Bang/2011 Page 2 of 37 2. The assessee-company raised the following grounds of appeal: The grounds stated here under are independent of, and without prejudice to one another: 1. Assessment and reference to Transfer Pricing Officer are bad in law a) The final order issued by the Deputy Commissioner of Income-tax - Circle 12(3) ['DCIT' or'AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Societe Generale Global Solution Centre Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. b) The AO has erred in law in making a reference to the Transfer Pricing Officer ['TPO'],inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. 2. Determination of arm's length price a) The AO/TPO erred in determining a transfer pricing adjustment to software development ('IT') amounting to Rs. 39,863,492 and IT enabled Services (ITeS') amounting to Rs. 18,646,103 by substituting the arm's length price as determined by the Appellant. b) The AO/TPO erred in rejecting the value of international transaction as recorded in the books of accounts, as the arm's length price. 3. The fresh comparable search undertaken by the TPO is bad in law a) The TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed. IT(TP)A No.1188/Bang/2011 Page 3 of 37 b) The TPO erred in introducing additional comparable companies in the final set, in addition to the companies proposed in the show cause notice, without giving an opportunity to the Appellant to make its submissions on the additional comparables. c) On the facts and in the circumstances of the case and in law, the learned TPO erred in and the Hon'ble Dispute Resolutions Panel ('DRP') further erred in upholding / confirming the action of the TPO in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which is a pre — requisite condition to make any adjustment under the provision of Chapter X of the Act. 4. Comparability analysis adopted by the TPO for determination of arm's length price a) The AO/TPO grossly erred on facts in benchmarking the transactions of IT services and ITeS services of the Appellant with companies operating as full fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-a-vis comparable companies. b) The TPO erred on facts by not analysing the functional and risk profile of Appellant vis- à-vis comparables selected in the Transfer Pricing Order. c) The AO/TPO erred on facts in rejecting most of the comparable companies arrived at in the Transfer Pricing Study. d) The AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability. e) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. f) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables. IT(TP)A No.1188/Bang/2011 Page 4 of 37 g) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with 4 different year ending (i.e. other than 31 March 2007) and inconsistently applying such filter. h) The AO/TPO grossly erred on facts in arbitrarily rejecting companies having IT and ITeS service revenue less than 75% of total operating revenue and inconsistently applying such filter, without considering the specific segmental results. i) The AO/TPO erred on facts in arbitrarily rejecting companies earning less than 25% of revenue from exports. j) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the comparability. k) The AO/TPO erred on facts and in law in considering a set of 'secret data', i.e. data 1which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. l) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. m) The AO/TPO erred on facts in arbitrarily rejecting companies whose employee cost is less than 25% of their total sales for IT services. n) The AO/TPO erred on facts in arbitrarily rejecting companies whose onsite revenue is greater than 75% of their total export revenue for IT services. 5. Erroneous data used by the AO/TPO a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO1TPO erred in law in not applying the multiple-year data while computing the margin of alleged comparable companies. IT(TP)A No.1188/Bang/2011 Page 5 of 37 6. Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule lOB to account for, inter a/ia, differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the Appellant and the comparable companies. 7. Variation of 5% from the arithmetic mean a) The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. b) The Dispute Resolution Panel DCIT has erred in law in not providing relief as set down under section 92C(2) of the Act and has erred in not following the directions provided as per CBDT Circular No. 05/2010 dated 3 June 2010 and by not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. 8. Reduction in deduction under Section 10A a) The DRP and the DCIT have erred in computing the deduction under section 10A at Rs. 94,534,939; b) The DRP and the DCIT erred in reducing an amount of Rs. 89,546,490 from the 'export turnover', while computing the deduction under section 10A; c) Having made the above-mentioned reduction from the export turnover, the DRP and the DCIT erred in not making a corresponding reduction from the 'total turnover' while computing the deduction under section 10A. 9. Interest under section 234B of the Act The DCIT erred in levying and compounding the interest under section 234B of the Act of Rs. 14,708,020. 10. Initiation of penalty proceedings The DCIT erred in initiating penalty proceedings under section 271(1)(C) of the Act in the case of the Appellant. IT(TP)A No.1188/Bang/2011 Page 6 of 37 Directions issued by the DRP The DRP has erred in law and facts in not taking cognizance of the objections filed by the Appellant in relation to the draft assessment order issued by the AO/ TP order. The DRP erred in facts and law in confirming the draft order of the AO/TPO. Relief: a) The appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. c) The appellant further prays that the adjustment in relation to Transfer Pricing matters made by the learned AO/TPO and upheld by the Hon’ble DRP be deleted. 2. Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is a wholly owned subsidiary of M/s.Genefinance, Paris, which is in turn a subsidiary of Societe Generale, Paris. The assessee-company is engaged in providing IT and ITES services only to its AEs. Being a captive service centre providing contact services to its AEs, SG India assumes less than normal risks and all the significant business and entrepreneurial risks are borne by the overseas affiliates. 3. Return of income for the assessment year 2007-08 was filed on 30/10/2007 declaring a total income of Rs.87,89,920/-. IT(TP)A No.1188/Bang/2011 Page 7 of 37 The assessee-company also reported the following international transactions with its Associated Enterprises (AE): International transactions Paid/ Payable Received/ Receivable Provision of Software Development and support services Rs.57,70,20,075 IT enabled and support services Rs.15,80,86,628 Recovery of expenses Rs. 2,46,42,713 Reimbursement of expenses (paid) Rs.1,70,58,838 Advance against service received Rs. 9,39,996 The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm’s length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting TNMM as most appropriate method and cost + margin as a profit level indicator for the transferring pricing study. The assessee-company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assessee-company’s profit margin was computed at 16.25% in respect of software services segment and 15.73% in respect of ITeS segment. The assessee- company claimed that the same was comparable with other companies rendering software development services and ITe services. For the purpose of transfer pricing study, the assessee- company had chosen 55 companies as comparable entities in respect of software development services and 22 comparable entities in respect of ITeS segment and arithmetic average of operating profit margins of said comparables was computed at IT(TP)A No.1188/Bang/2011 Page 8 of 37 14.64% in respect of software development services and 12.51% in respect of ITeS segment. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm’s length. 4. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO). The TPO, by an order dated 26/10/2010 passed u/s 92CA of the IT Act, 1961 computed the transfer pricing adjustment at Rs.3,98,63,492/- in respect of software development services and Rs.1,86,46,103/- in respect of ITeS segment. The TPO accepted TNMM adopted by the assessee- company as well as cost + margin as a profit level indicator 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 following filters in software segment: ∑ Use of current year data only; ∑ Turnover filter i.e. excluding companies having income from software development services less than INR 1 crore. ∑ Software development services income less than 75% of total operating revenues were excluded ∑ Related party transactions greater than 25% of operating revenue. ∑ Export sales less than 25% of operating revenues were excluded; ∑ Diminishing revenues/ persistent operating loss for last 3 years were excluded; ∑ Employee cost less than 25% of sales were excluded; IT(TP)A No.1188/Bang/2011 Page 9 of 37 ∑ Companies whose onsite income greater than 75% of their operating revenue were excluded 5. The TPO rejected 45 of the comparables in respect of software development services selected by the assessee-company in the TP study and introduced 16 new companies by undertaking fresh TP study and finally selected the following comparables: The TPO computed average profit margin of the comparables in respect of software development services at 25.14% and after giving working capital adjustment of 1.76%, adjusted arithmetical mean of PLI was determined at 23.38%. On the above basis, the IT(TP)A No.1188/Bang/2011 Page 10 of 37 TPO computed the transfer pricing adjustment in respect of software segment as follows: Operating cost (Rs.49,63,44,321/- + reimbursement of expenses received of Rs.1,92,21,316/- Rs.51,55,65,637/- Arm’s Length Margin 23.38% of the Operating Cost Arm’s Length Price (ALP) @ 123.38% of operating cost Rs.63,61,04,883/- Arm’s length price @ 123.38% of operating cost Rs.63,61,04,883/- Price shown in the international transactions (Rs.57,70,20,075/- + Reimbursement of expenses received of Rs.1,92,21,316/- Rs.59,62,41,391/- Shortfall being adjustment u/s 92CA Rs. 3,98,63,492/- ITeS segment: In respect of ITeS Segment, assessee-company, in its transfer pricing study, had selected 22 companies. Out of these companies, 13 companies were rejected by the TPO on account of use of earlier year’s data. The TPO undertook the fresh exercise of transfer pricing analysis and introduced his own comparables by rejecting the transfer pricing study of the assessee-company. The TPO applied the following filters: ∑ Companies whose data is not available for the FY 2006-07 were excluded and the data for the FY 2006- 07 has been considered for the period from 01-04-2006 to 31-03-2007. IT(TP)A No.1188/Bang/2011 Page 11 of 37 ∑ Companies whose IT enabled service income