Integral India Software Development Centre Private Limited, Bangalore V. DCIT, Bangalore

ITA 1196/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63798 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 06-02-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 02-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Wholly owned subsidiary
• Section: 92C; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SHRI N. BARAT H VAJA SANKAR, VICE - PRESIDENT A ND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.1196/BANG/2011 (ASSESSMENT YEAR: 2007-08) M/S.INTEGRAL INDIA SOFTWARE DEVELOPMENT CENTRE PV T.LTD. NO.16/1, GROUND FLOOR, CAMBRIDGE ROAD, HALASURU , BANGALORE. APPELLANT PAN: AABCI 0768 B VS. DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 12(3), BANGALORE. RESPONDENT A PPELLANT BY: SHR I CHERIYAN K.BABY, C.A. RESPONDENT BY : SHRI S.K.AMBASTHA, CIT (DR - I). DATE OF HEARING: 18 - 10 - 2012. DATE OF PRONOUNCEMENT: 23 - 11 - 2012. O R D E R PER N. BARATHVAJA SANKAR, VP: THIS IS AN APPEAL PREFERRED BY THE ASSESSEE-M/S. M/ S.INTEGRAL INDIA SOFTWARE DEVELOPMENT CENTRE PVT. LTD., BANGAL ORE FOR THE ASSESSMENT YEAR 2007-08 AGAINST THE ASSESSMENT ORDE R DATED 4-10-2011 PASSED UNDER SEC.143(3) R.W.S. 144C OF TH E INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS THE ACT]. THE AS SESSEE HAS BROUGHT BEFORE US TWO ISSUES FOR ADJUDICATION VIZ., ITA NO.1196/BANG/2011 PAGE 2 OF 7 (I) NON-DEDUCTION FROM THE DENOMINATOR OF EXPENDITU RE ON DELIVERY OF SOFTWARE OUTSIDE INDIA AND EXPENSES INC URRED IN FOREIGN CURRENCY WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT, AND (II) TRANSFER PRICING ADJUSTMENT MADE BY THE AO. 2. LET US FIRST TAKE UP THE FIRST ISSUE RELATING T O DEDUCTION U/S 10A OF THE ACT. BRIEF FACTS ARE THAT THE ASSESSEE-COMP ANY IS A WHOLLY OWNED SUBSIDIARY OF M/S.INTEGRAL DEVELOPMENT CORPORATION, USA WHICH IS A LEADING INDEPENDENT PROVIDER OF ELECTRONIC FOREIGN EXCHANGE TRADING SYSTEMS. M/S.INTEGRAL INDIA IS A SERVICE PROVIDER TO INTEGRAL USA BY PROVIDING OFFSHORE PROGRAMMING SERVICES TO THE FORE IGN COMPANY, WHICH ALSO CARRIES OUT PROJECTS THAT SUPPORT INTERNAL SYS TEMS AND DEVELOPS SOFTWARE FOR INTERNAL USE IN ADDITION TO THE DEVELO PMENT OF NEW PRODUCTS FOR THE INTEGRAL GROWTH. WHILE COMPLETING THE ASSESSMENT, THE AO RESTRICTED THE CLAIM OF DEDUCTION U/S 10A BY RED UCING THE EXPENSES IN FOREIGN CURRENCY FOR DELIVERY OF SOFTWARE AND TE LECOMMUNICATION CHARGES FROM EXPORT TURNOVER BUT NOT FROM THE TOTAL TURNOVER. 2.1. AT THE TIME OF HEARING, THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT THE POINT AT ISSUE IS SQUARELY COVER ED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THIS TRIBUNAL IN ITA NO .1246/BANG/2010 DATED 14-9-2011 IN THE CASE OF THE SAME ASSESSEE FO R ASSESSMENT YEAR 2006-07. 2.2 WE HAVE ALSO HEARD THE LEARNED DEPARTMENTAL REP RESENTATIVE AND CONSIDERED THE FACTS AND MATERIALS ON RECORD. A FTER CAREFUL CONSIDERATION OF THE SUBMISSIONS MADE BEFORE US, WE FIND THAT THE ISSUE ITA NO.1196/BANG/2011 PAGE 3 OF 7 BEFORE US IS COVERED BY THE EARLIER DECISION OF THI S TRIBUNAL IN ASSESSEES OWN CASE CITED SUPRA. IN THE SAID ORDER, THE TRIBU NAL HAS DIRECTED THE AO TO COMPUTE THE DEDUCTION U/S 10A BY INCLUDING TH E EXPENSES TO THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. SIMILAR DIRECTION IS GIVEN TO THE AO FOR THIS ASSESSMENT YEAR ALSO. WE ALSO MAKE IT CLEAR THAT THE ISSUE IS ALSO COVERED BY THE DECISION OF THE HONBL E KARNATAKA HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. & OTHERS (205 TAXMAN 321(KAR). THIS GROUND OF APPEAL IS ALLOWED. 3. NOW LET US TURN TO THE ISSUE RELATING TO THE TR ANSFER PRICING ADJUSTMENT. DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE HAD PROVIDED SERV ICES TO ITS ASSOCIATE ENTERPRISES (AE) AT COST + 10% BASIS. THE ASSESSEE S CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER (TPO) BY THE AO U/S 92C OF THE ACT FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INT ERNATIONAL TRANSACTION. THE ASSESSEE-COMPANY FURNISHED THE TR ANSFER PRICING STUDY ALONG WITH DOCUMENTS MAINTAINED IN THIS REGAR D WHICH SHOWS THAT THE ASSESSEE HAD ADOPTED THE COST PLUS METHOD FOR A RRIVING AT THE ALP. THE TPO, HOWEVER, REJECTED THE ASSESSEES METHOD OF ARRIVING AT THE ALP AND ADOPTED THE TRANSACTION NET MARGIN METHOD ( TNMM) AS THE MOST APPROPRIATE METHOD. THE TPO ALSO REJECTED THE COMPARABLES SELECTED BY THE ASSESSEE AND ARRIVED AT HIS OWN COM PARABLES AND THEREAFTER DETERMINED THE ALP WITH AN ADJUSTMENT OF RS.2,32,59,155/- AS THE INCOME OF THE ASSESSEE. THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) WHICH CONFIRMED THE DRAFT ORDER OF THE AO. NOW, THE ASSESSEE IS ON APPEAL BEFORE US. THE RELEVANT GROUNDS OF APPEAL READ AS UNDER: ITA NO.1196/BANG/2011 PAGE 4 OF 7 1. THE INCOME - TAX OFFIC ER HAS GRIEVOUSLY ERRED IN COMPLETELY RELYING ON THE ARMS LENGTH PRICE DIFFERENCE AS DETERMINED BY THE DEPUTY COMMISSIONER OF TRANSFER PRICING IV, BANGALORE VIDE HIS ORDER DATED 05-10-2010 AS THAT WAS DETERMINED ON THE BASIS OF TRANSACTION NET MARGIN METHOD. 2. THE DEPUTY COMMISSIONER OF INCOME - TAX (TRANSFER PRICING-IV) BANGALORE HAS GROSSLY MISDIRECTED HIMSELF IN COMING TO THE CONCLUSION THAT IN THE INSTANCE OF YOUR APPELLANTS CASE WHICH IS A CAPTIV E BACK OFFICE SUPPORT UNIT TO THE PARENT COMPANY, TRANSACTION NET MARGIN METHOD IS THE MOST APPROPRIATE METHOD INSTEAD OF THE COST PLUS METHOD. COST PLUS METHOD ADOPTED BY YOUR APPELLANT WAS REJECTED ON THE GROUND THAT THERE MAY BE A WIDE RANGE OF GROSS PROFIT MARGINS ALTHOUGH THE TNM METHOD ADOPTED BY THE TPO HAS MARGINS RANGING FROM 3.07% TO 109.79%. 3. THE TPOS ORDER WHICH IS BASED ON INFORMATION COLLECTED BY HIM USING THE POWERS VESTED UNDER THE PROVISIONS OF SECTION 133(6) OF THE INCOME-TAX ACT,1961 TO OBTAIN FURTHER INFORMATION FROM THE COMPANIES OUGHT NOT TO HAVE BEEN ACTED UPON AS BENEFIT OF SUCH DATA WHICH IS NOT IN THE PUBLIC DOMAIN IS NOT AVAILABLE TO YOUR APPELLANT. 4. HENCE IT IS PRAYED THAT THE ENTIRE ORDER OF THE DEPUTY COMMISSIONER OF INCOME-TAX(TRANSFER PRICING-IV) AS ADOPTED BY THE INCOME-TAX OFFICER IN COMPLETING THE ASSESSMENT AND DULY UPHELD BY THE DRP WITHOUT GOING INTO THE MERITS OF THE MATTER PROPERLY IS BASED ON A WRONG UNDERSTANDING OF THE CORRECT FACTS OF THE CASE AND REQUIRES TO BE DELETE D AND THE TRANSFER PRICES AS DETERMINED BY YOUR APPELLANT OUGHT TO HAVE BEEN ACCEPTED IN FULL. 5. ACCORDING LY IT IS PRAYED THAT THE TRANSFER PRICES ACTUALLY CHARGED BY YOUR APPELLANT TO ITS CUSTOMERS IS TO BE HELD AS AT ARMS LENGTH AND THE ADDITION PROPOSED BY THE TPO AND ACTED UPON BY THE ASSESSING OFFICER BASED ON APPROVAL OF THE DRP IN THE ASSESSMENT ORDER IS TO BE ORDERED TO BE DELETED. 3.1. AT THE TIME OF HEARING, THE LEARNED AR OF THE ASSESSEE PLACED ON RECORD NOTE ON SUBMISSIONS AND PLEADED TH AT THIS TRIBUNAL, ITA NO.1196/BANG/2011 PAGE 5 OF 7 FOR THE ASSESSMENT YEAR 2006-07 IN THE CASE OF THE SAME ASSESSEE, BY ORDER DATED 14-9-2011 (ITA NO.1246/BANG/2010), FOLL OWING THE ORDER OF THIS TRIBUNAL IN ITA NO.1231/BANG/2010 DATED 5-8 -2011 IN THE CASE OF M/S.GENISYS INTEGRATING SYSTEMS (INDIA) PVT.LTD. VS . DCIT, REMITTED THE ISSUE TO THE FILE OF THE ASSESSING AUTHORITY WI TH A DIRECTION TO REFER THE MATTER TO THE DRP WHO, IN TURN, SHALL DISPOSE O F THE ASSESSEES OBJECTIONS JUDICIALLY AND BY A SPEAKING ORDER. FUR THER DIRECTION WAS GIVEN THAT THE DRP SHALL ALSO TAKE INTO CONSIDERATI ON THE JUDICIAL PRECEDENTS ON THE ISSUE AND ALSO THE ORDER OF THE T RIBUNAL IN THE CASE OF M/S.GENISYS INTEGRATING SYSTEMS (INDIA) PVT.LTD. CITED ( SUPRA) WHEREIN SIMILAR ISSUES HAVE BEEN CONSIDERED. THE LEARNED A R ALSO SUBMITTED THAT THERE ARE CERTAIN ARITHMETICAL MISTAKES IN THE DRPS ORDER WHICH REQUIRE RECTIFICATION. 3.2 WE HAVE ALSO HEARD THE LEARNED DR WHO HAS REIT ERATED THE CONTENTS OF THE DRPS ORDER. WE HAVE ALSO CONSIDER ED THE FACTS AND MATERIALS ON RECORD INCLUDING THE DECISION OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07. W E FIND THAT FOR THE ASSESSMENT YEAR 2006-07 IN THE CASE OF THE SAME ASS ESSEE, THE TRIBUNAL HAD OCCASION TO DEAL WITH THE ISSUE ON IDE NTICAL FACTS AND CIRCUMSTANCES. ON SUCH FACTS AND CIRCUMSTANCES, TH E TRIBUNAL, IN ITS ORDER DATED 14-9-2011 CITED SUPRA (IN WHICH ONE OF US WAS A PARTY), RESTORED THE MATTER BACK TO THE FILE OF THE ASSESSI NG AUTHORITY WITH A DIRECTION TO THE AO AND THE DRP TO FOLLOW THE DIREC TIONS GIVEN IN THE CASE OF M/S.GENISYS INTEGRATING SYSTEMS (INDIA) PVT.LTD. CITED ( SUPRA). FOLLOWING THE SAME, WE GIVE A SIMILAR DIRECTION FOR THIS ASSESSMENT YEAR ALSO. IN OTHER WORDS, FOLLOWING DIRECTIONS ARE GIV EN TO THE AO/DRP: ITA NO.1196/BANG/2011 PAGE 6 OF 7 A) THE OPERATING REVENUE AND THE OPERATING COST OF THE TRANSACTIONS RELATING TO ASSOCIATED ENTERPRISES ONLY SHALL BE CO NSIDERED; B) THE COMPARABLES HAVING THE TURNOVER OF MORE THAN 1. 00 CRORE BUT LESS THAN 200.00 CRORES ONLY SHALL BE TAKEN INT O CONSIDERATION. C) ALL THE INFORMATION RELATING TO COMPARABLE WHICH AR E SOUGHT TO BE USED AGAINST THE ASSESSEE SHALL BE FURNISHED TO THE ASSESSEE. D) TO CONSIDER THE OBJECTIONS OF THE ASSESSEE THAT REL ATE TO ADDITIONAL COMPARABLES SOUGHT TO BE ADOPTED BY THE TPO AND PASS A DETAILED ORDER, AND E) AS REGARDS THE CLAIM OF PLUS OR MINUS, THE AMENDED PROVISIONS OF THE FINANCE ACT, 2012 MAY BE KEPT IN MIND. 3.4 AS REGARDS THE ARITHMETICAL MISTAKES POINTED OU T BY THE LEARNED AR, THE ASSESSEE IS FREE TO TAKE UP THESE I SSUES BEFORE THE AO/DRP. 4. IN THE RESULT, THE ASSESSEES APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD NOVEMBER, 2012 . SD/- SD/- (GEORGE GEORGE K) JUDICIAL MEMBER (N.BARATHVAJA SANKAR) VICE-PRESIDENT EKSRINIVASULU ITA NO.1196/BANG/2011 PAGE 7 OF 7 COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) CONCERNED 4. CIT 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME-TAX APPELLATE TRIBU NAL, BANGALORE