M/s. Integral India Software Development Centre Pvt. Ltd., Bangalore V. ITO, Bangalore

ITA 1246/BANG/2010

• Counselvise Citation: 124621114 RSA 2010
• Duration Of Justice: 9 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2011
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 14-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 16-11-2010
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 133(6); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI N BARADHVAJA SANKAR, VICE PRESIDENT AND SMT. P MADHAVI DEVI, JUDICIAL MEMBER ITA NO.1246/ BANG/2010 (ASST. YE AR 2006-07) M/S INTEGRAL INDIA SOFTWARE DEVELOPMENT CENTRE PVT. LTD., # 16/1, GROUND FLOOR, CAMBRIDGE ROAD, BANGALORE-560 008. . APPELLANT VS. THE INCOME-TAX OFFICER, WARD 11(2), BANGALORE. . RESPONDENT APPELLANT BY : SHRI CHERIYAN K BABY REVENUE BY : SHRI ETWA MUNDA DATE OF HEARING : 14-06-2011 DATE OF PRONOUNCEMENT : 14-09-2011 O R D E R PER SMT. P MADHAVI DEVI, JUDICIAL MEMBER THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2006-07. THE APPEAL IS DIRECTED AGAINST TH E ORDER OF THE DISPUTE RESOLUTION PANEL AT BANGALORE DATED 13.09.2 010. THE APPEAL ITA NOS.1246/B/10 2 ARISES OUT OF THE ASSESSMENT COMPLETED U/S 144C(5) R.W.S 144C(8) OF THE INCOME-TAX ACT, 1961. 2. IN THIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER IN DISALLOWING THE CLAIM OF THE A SSESSEE FOR FULL DEDUCTION U/S 10A FOR ALL OF ITS PROFIT AND GAINS F ROM THE SOFTWARE BUSINESS OF THE STPI UNIT AT BANGALORE BY ADOPTING AS THE DENOMINATOR, THE TOTAL TURNOVER OF THE BUSINESS WIT HOUT DEDUCTING THE EXPENDITURE ON DELIVERY OF SOFTWARE OUTSIDE INDIA A ND EXPENSES INCURRED IN FOREIGN CURRENCY WHICH HAS BEEN REDUCED FROM THE NOMINATOR, THE EXPORT TURNOVER. THE ASSESSEE IS AL SO AGGRIEVED BY THE ADJUSTMENT MADE TO THE ARMS LENGTH PRICE OF THE TRA NSACTION BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES WHICH H AS BEEN CONFIRMED BY THE DRP. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS A WHOLLY OWNED SUBSIDIARY OF M/S INTEGRAL DEVELOPMENT CORPORATION, USA, WHICH IS A LEADING INDEPENDENT PROVIDER OF ELE CTRONIC FOREIGN EXCHANGE TRADING SYSTEMS. INTEGRAL INDIA IS A SERV ICE PROVIDER TO INTEGRAL USA BY PROVIDING OFFSHORE PROGRAMMING SERV ICES TO THE FOREIGN COMPANY, WHICH ALSO CARRIES OUT PROJECTS TH AT SUPPORT INTERNAL ITA NOS.1246/B/10 3 SYSTEMS AND DEVELOPS SOFTWARE FOR INTERNAL USE IN A DDITION TO THE DEVELOPMENT OF A NEW PRODUCTS FOR THE INTEGRAL GROW TH. DURING THE RELEVANT FINANCIAL YEAR, THE ASSESSEE HAD PROVIDED SERVICES TO ITS ASSOCIATED ENTERPRISES (AE) ON COST + 10% BASIS. T HE ASSESSEES CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER (TPO) BY THE ASSESSING OFFICER U/S 92CA OF THE ACT FOR DETERMINING THE ARM S LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION. THE ASSESS EE COMPANY FURNISHED ITS TP STUDIES ALONG WITH DOCUMENTS MAINT AINED IN THIS REGARD WHICH SHOWS THAT THE ASSESSEE HAD ADOPTED TH E COST + METHOD FOR ARRIVING AT THE ARMS LENGTH PRICE. THE TPO HOW EVER, REJECTED THE ASSESSEES METHOD OF ARRIVING AT THE ALP AND ADOPTE D THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOS T APPROPRIATE METHOD AND THE TPO ALSO REJECTED THE COMPARABLES SE LECTED BY THE ASSESSEE AND ARRIVED AT ITS OWN COMPARABLES AND THE REAFTER DETERMINED THE ALP WITH AN ADJUSTMENT OF RS.1,42,68,174/- AS I NCOME OF THE ASSESSEE. TAKING THE SAME INTO CONSIDERATION, THE ASSESSING OFFICER DRAFTED THE ASSESSMENT ORDER MAKING THE ADJUSTMENTS TO THE ALP AND ALSO RESTRICTING THE CLAIM OF DEDUCTION U/S 10A OF THE ACT AND FORWARDED THE SAME TO THE DRP AND ALSO TO THE ASSES SEE. THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP, WHICH CONFIRME D THE DRAFT ORDER OF ITA NOS.1246/B/10 4 THE AO. AGAINST THIS ORDER OF THE AO, CONFIRMED BY THE DRP, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW. FURTHER, THE ASSESSING OFFICER HAD ALSO REDUCED THE EXPENSES IN FOREIGN CURRENCY FOR DELIVERY OF SOFTWARE AND TELECOMMUNICATION CHAR GES FROM EXPORT TURNOVER BUT NOT FROM THE TOTAL TURN OVER FOR COMPU TING THE DEDUCTION U/S 10A OF THE ACT. AGAINST THIS DISALLOWANCE U/S 10A ALSO, THE ASSESSEE IS IN APPEAL BEFORE US. 5. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO THE DECISION OF HONBLE CHEN NAI SPECIAL BENCH IN THE CASE OF SAK SOFT LTD., 313 ITR 353 (AT) AND ALSO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF M/ S GEM PLUS JEWELLERY INDIA LTD, 2010-TIOL-456-HC-MUM-IT), WHE REIN IT HAS BEEN HELD THAT IF CERTAIN EXPENDITURE IS REDUCED FR OM THE EXPORT TURNOVER, THE SAME IS ALSO TO BE REDUCED FROM THE T OTAL TURNOVER FOR THE PURPOSES OF COMPUTING DEDUCTION U/S 10A OF THE INCO ME-TAX ACT. THE LEARNED DR HOWEVER, PLACED RELIANCE UPON THE DECISI ON OF THE ORDERS OF THE AUTHORITIES BELOW. ITA NOS.1246/B/10 5 6. HAVING HEARD BOTH THE PARTIES, WE FIND THAT THIS ISSUE IS FAIRLY COVERED BY THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE. THE AO IS ACCORDINGLY DIRECTED TO COMPUT E THE DEDUCTION U/S 10A BY INCLUDING THE EXPENSES BOTH FROM EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER. 7. AS REGARDS THE TRANSFER PRICING ADJUSTMENT MADE BY THE AO WHICH IS CONFIRMED BY THE DRP, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO HAS REJECTED THE COST PLUS M ETHOD ADOPTED BY THE ASSESSEE AND HAS DETERMINED THE ARMS LENGTH PRI CE BY USING THE TRANSACTIONAL NET MARGIN METHOD (TNMM). ACCORDING TO HIM CPM IS THE MOST APPROPRIATE METHOD BECAUSE ACCORDING TO HIM THE ARRANGEMENT WITH ITS ASSOCIATED ENTERPRISES IS ON A LONG TERM. HE SUBMITTED THAT THE TPO USED HIS POWERS U/S 133(6) F OR OBTAINING THE INFORMATION WHICH WAS NOT AVAILABLE IN THE PUBLIC D OMAIN BUT THE SAME WAS NOT MADE AVAILABLE TO THE ASSESSEE. AS RE GARDS THE DETERMINATION OF THE ALP, THE LEARNED COUNSEL FOR T HE ASSESSEE SUBMITTED THAT TPO HAS NOT TAKEN INTO CONSIDERATION THE DIFFERENCE IN THE RISKS ASSUMED BY THE ASSESSEE VIS--VIS COMPARA BLE COMPANIES BECAUSE THE ASSESSEE OPERATES IN A RISK FREE ENVIRO NMENT AS COMPARED TO THE COMPARABLE COMPANIES. AS REGARDS COMPARABLE S CONSIDERED BY ITA NOS.1246/B/10 6 THE ASSESSING OFFICER, HE SUBMITTED THAT ONE OF THE COMPARABLES I.E MEGA SOFT HAS BEEN WRONGLY CONSIDERED THOUGH IT IS A SOFTWARE PRODUCT AND SERVICES COMPANY AND NO SEGMENTAL BREAK UP OF ITS REVENUES WAS AVAILABLE. HE FURTHER SUBMITTED THAT THE PROFITS OF THE ASSESSEE COMPANY ARE TAX FREE IN INDIA AND, THEREFO RE, THERE IS NO ATTEMPT TO TRANSFER ITS PROFITS TO ITS AE SINCE AE MADE A LOSS FOR THE YEAR DEC, 2005 AND DEC, 2006 WITH ITS THIRD PARTY D EALINGS. HE ALSO PRAYED FOR THE DEDUCTION IN ACCORDANCE WITH THE PRO VISO TO SEC. 92 OF THE ACT AT THE RATE OF + OR 5 % RANGE AS IS APPLI CABLE FOR THE ASSESSMENT YEAR 2006-07. HE SUBMITTED THAT ALL THE SE SUBMISSIONS WERE MADE BEFORE THE DRP ALSO BUT THE DRP HAS REJE CTED ASSESSEES CONTENTIONS AND HAS UPHELD THE ORDER OF THE AO. 8. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE O RDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE TPO HAS GI VEN REASONS IN ITS ORDER FOR REJECTING THE METHOD ADOPTED BY THE ASSES SEE AND ALSO REJECTING THE COMPARABLES SELECTED BY THE ASSESSEE. HE SUBMITTED THAT THE TPO HAS GIVEN EXHAUSTIVE REASONS FOR THE ADOPTI ON OF THE COMPARABLES AFTER CONDUCTING SEARCH ON THE DATA AVA ILABLE IN PROWESS AND CAPITA-LINE DATA BASES. THEREFORE, THERE WAS N O REASON FOR THE DRP TO INTERFERE WITH THE ORDER OF THE TPO AND HAVE ACCORDINGLY ITA NOS.1246/B/10 7 SUSTAINED THE SAME AND HENCE THE SAME NEEDS TO BE S USTAINED BY THE ITAT ALSO. 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDE RED THE RIVAL CONTENTIONS, WE FIND THAT THE ASSESSEE HAS RAISED V ARIOUS OBJECTIONS BEFORE THE TPO AND WHILE MAKING THE TP ADJUSTMENT, THE TPO HAS CONSIDERED THE SAME AND HAS REJECTED THE OBJECTIONS OF THE ASSESSEE. THE ASSESSEE HAS AGAIN RAISED THE OBJECTIONS BEFORE THE DRP BUT THE DRP HAS SUMMARILY SUSTAINED THE ORDER OF THE TPO AN D THE AO. THE DRP IS ENTRUSTED WITH THE DUTY OF DEALING WITH THE OBJECTIONS OF THE ASSESSEE JUDICIALLY. THERE IS NO SPEAKING ORDER OF THE DRP ON THE OBJECTIONS OF THE ASSESSEE. IN VIEW OF THE SAME, W E DEEM IT FIT AND PROPER TO REMIT THE ISSUE TO THE FILE OF THE ASSESS ING AUTHORITY WITH A DIRECTION TO REFER THE MATTER TO THE DRP WHO IN TUR N SHALL DISPOSE OFF THE ASSESSEES OBJECTIONS JUDICIALLY AND BY A SPEAK ING ORDER. THE DRP SHALL ALSO TAKE INTO CONSIDERATION THE JUDICIAL PRE CEDENTS ON THE ISSUE AND ALSO ORDER OF THE TRIBUNAL IN ITA NO.1231 OF 20 10 DATED 5/8/2011 IN THE CASE OF M/S GENISYS INTEGRATING SYSTEMS INDI A PVT. LTD., WHERE SIMILAR ISSUES HAVE BEEN CONSIDERED. THE COPY OF T HE ORDER IN THE CASE OF M/S GENISYS INTEGRATING SYSTEMS INDIA PVT. LTD., SHALL BE APPENDED TO THIS ORDER. ITA NOS.1246/B/10 8 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 14TH SEPT, 2011. SD/- SD/- (N BARADHVAJA SANKAR) (P MADHAVI DEVI ) VICE PRESIDENT JUDICIAL MEMBER VMS. BANGALORE DATED : 14/09/2011 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER ASST. REGISTRAR, I TAT, BANGALORE.