Dy.D.I.T., Bangalore V. M/s NDS Ltd., India Branch Office, Bangalore

ITA 1253/BANG/2011

• Counselvise Citation: 125321114 RSA 2011
• Duration Of Justice: 1 year(s) 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 18-06-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 12-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JACINTA ZIMIK VASHAI
• Assessee Lawyers: N KRISHNA
• Keywords: Related party transaction; Transfer pricing; Rectification of order
• Section: 143(3); 133(6); 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER IT(TP)A NO. 1253/BANG/2011 ASSESSMENT YEAR : 2005-06 THE DEPUTY DIRECTOR OF INCOME TAX, (INTERNATIONAL TAXATION), CIRCLE 1(1), BANGALORE. VS. M/S. NDS LTD. INDIA BRANCH OFFICE, NO.9, ASHFORD PARK VIEW, 80 FT. ROAD, KORAMANGALA, BANGALORE 560 034. PAN: AABCN 2524L APPELLANT RESPONDENT IT(TP)A NO. 1254/BANG/2011 ASSESSMENT YEAR : 2005-06 M/S. NDS LTD. INDIA BRANCH OFFICE, NO.9, ASHFORD PARK VIEW, 80 FT. ROAD, KORAMANGALA, BANGALORE 560 034. PAN: AABCN 2524L VS. THE DEPUTY DIRECTOR OF INCOME TAX, (INTERNATIONAL TAXATION), CIRCLE 1(1), BANGALORE. APPELLANT RESPONDENT REVENUE BY : SMT. JACINTA ZIMIK VASHAI, ADDL. CIT(DR) RESPONDENT BY : SHRI N. KRISHNA, C.A. DATE OF HEARING : 08.08.2013 DATE OF PRONOUNCEMENT : 08.08.2013 IT(TP)A NO.1253 & 1254/BANG/2011 PAGE 2 OF 9 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO.1253/BANG/2011 IS AN APPEAL BY THE REVENUE , WHILE ITA NO.1254BANG/2011 IS AN APPEAL BY THE ASSESSEE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 11.10.2011 OF THE CIT(APPEALS)-IV, BANGALORE RELATING TO ASSESSMENT YEAR 2005-06. 2. THE GROUNDS RAISED BY THE REVENUE READS AS FOLL OWS:- 1. THE LD. CIT (APPEALS) HAS ERRED IN PARTLY ALLO WING THE APPEAL OF THE ASSESSEE WHICH IS OPPOSED TO LAW, EQU ITY, FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LD.CIT (A) ERRED IN DIRECTING THE AO TO EXC LUDE THE FOREIGN CURRENCY EXPENSES FROM THE TOTAL TURNOVER ALSO FOR COMPUTING THE DEDUCTION U/S 10A WHICH DEFEATS THE I NTENT AND PURPOSE OF THE PROVISIONS CONTAINED IN SEC. 10A OF THE ACT TO CONSIDER THE TURNOVER IN ITS TOTALITY WITHOUT ANY E XCLUSION. 3. THE LD.CIT (A) HAS ERRED IN RELYING ON THE DECI SION OF THE HONBLE ITAT, BLORE DECISION IN THE CASE OF TATA E LXSI LTD VS DCIT (115 TTJ 423) WHEN THE REVENUE HAS CONTESTED A ND PREFERRED FURTHER APPEAL AND THE ISSUE HAS NOT REAC HED FINALITY. GROUNDS RELATING TO TPO 4. THE LD.CIT (A) HAS ERRED IN HOLDING THAT THE TP O ERRED IN NOT EXCLUDING COMPARABLES HAVING ANY RELATED PARTY TRANSACTIONS, NOT ONLY THOSE WITH MORE THAN 25% RELATED PARTY TRA NSACTIONS ON SALES. 5. THE LD.CIT (A) HAS ERRED IN HOLDING THAT PROFIT ON COST OF MORE THAN 50% OF THE COMPARABLE COMPANY(IES) IS ABN ORMAL WITHOUT GIVING REASONS HOW FUNCTIONS DISCHARGED, AS SETS DEPLOYED IT(TP)A NO.1253 & 1254/BANG/2011 PAGE 3 OF 9 AND RISKS ASSUMED OF SUCH COMPANIES WERE DIFFERENT FROM THE APPELLANT COMPANY. 6. THE LD.CIT (A) HAS ERRED IN HOLDING THAT FOREIG N EXCHANGE LOSS OR GAIN IS A PART OF OPERATING EXPENSE OR OPER ATING INCOME, AS THE CASE MAY BE, WHEN THE TPO HAS EXCLUDED THIS DAT A FROM THAT OF THE COMPARABLES. 7. THE LD.CIT (A) HAS ERRED IN HOLDING THAT THE AS SESSEE IS ELIGIBLE FOR A STANDARD DEDUCTION OF 5% FROM THE AR MS LENGTH PRICE (ALP) UNDER THE PROVISO TO SECTION 92C(2) OF THE INCOME TAX ACT. 3. THE GROUNDS RAISED BY THE ASSESSEE READS AS FOLL OWS:- BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, NDS LIMITED INDIA BRANCH OFFICE (HEREINAFTER REFERRED TO AS THE APPELLANT), RESPECTFULLY SUBMITS THE FOLLOWING IN RESPECT OF TH E ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) -IV [CIT(A)] UNDER SECTION 250 OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT): 1. THE IMPUGNED ORDER OF ASSESSMENT DATED DECEMBER 29, 2008 WAS MADE BASED ON AN ORDER DATED JUNE 13, 2008 , PURPORTEDLY UNDER SECTION 92CA MADE BY THE JOINT DI RECTOR OF INCOME TAX, TPO I, BANGALORE. HOWEVER, THE SAID TRA NSFER PRICING ORDER IS MADE WITHOUT JURISDICTION AND HENC E INVALID. IN VIEW OF THE PROVISIONS OF THE ACT AND THE NOTIFI CATIONS, IT IS EVIDENT THAT THE JDIT, TPO I, BANGALORE, WHO MADE T HE ORDER PURPORTEDLY UNDER SECTION 92CA OF THE ACT ON JUNE 1 3, 2008 ACTED WITHOUT PROPER JURISDICTION. HENCE, THE SAID ORDER IS INVALID AND VOID AB INITIO. 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN DISALLOWING THE APPELLANTS CLAIM THAT THE ASSESSIN G OFFICER (AO) HAS ERRED IN MAKING A REFERENCE IN MECHANICA L AND ROUTINE MANNER TO THE LEARNED TRANSFER PRICING OFFI CER (TPO) WITHOUT RECORDING DETAILED REASONS FOR SUCH A REFER ENCE. IT(TP)A NO.1253 & 1254/BANG/2011 PAGE 4 OF 9 3. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN HOLDING THAT ONCE THE ARMS LENGTH PRICE IS DETERMI NED BY THE TPO, THE AO DOES NOT HAVE ANY ALTERNATE BUT TO ADOP T THE ARMS LENGTH PRICE AS DETERMINED BY THE TPO. 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN UPHOLDING THE ACTION OF THE LEARNED TPO OF REJECTIN G THE TRANSFER PRICING STUDY CONDUCTED BY THE APPELLANT. 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN HOLDING THAT COMPARABILITY HAS TO BE MADE WITH RESP ECT TO DATA RELEVANT TO THE FINANCIAL YEAR 2004-05 ONLY, IE CUR RENT YEAR DATA, AS AGAINST USAGE OF MULTIPLE YEAR DATA (IE 3 YEARS) . 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S BY UPHOLDING THE TPOS ACTION OF EXERCISING HIS POWERS UNDER SECTION 133(6) OF THE ACT TO OBTAIN SELECTIVE INFOR MATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN AND RELYING ON T HE SAME FOR COMPARABILITY PURPOSES. 7. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN REJECTING THE CONTENTION OF THE APPELLANT THAT CONS OLIDATED FINANCIAL STATEMENTS WOULD NOT HAVE A SIGNIFICANT V ARIATION FROM THE STANDALONE FINANCIALS AS IT ELIMINATES THE PROF IT ELEMENT IN INTER-COMPANY TRANSACTIONS AND IN CONSIDERING ONLY STANDALONE FINANCIAL STATEMENTS OF COMPANIES WHILE APPLYING TH E RELATED PARTY TRANSACTIONS FILTER. 8. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN REJECTING THE CONTENTION OF THE APPELLANT THAT 25 P ERCENT FOREIGN EXCHANGE EARNINGS/ EXPORT REVENUES FILTER IS APPROP RIATE. 9. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN UPHOLDING REJECTION OF COMPARABLE COMPANIES HAVING A DIFFERENT ACCOUNTING YEAR. 10. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN UPHOLDING REJECTION OF COMPARABLE COMPANIES HAVING ONSITE INCOME MORE THAN 75 PERCENT OF TOTAL INCOME. 11. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN UPHOLDING REJECTION OF COMPARABLE COMPANIES HAVING EMPLOYEE COST LESS THAN 25 PERCENT OF THE SALES. IT(TP)A NO.1253 & 1254/BANG/2011 PAGE 5 OF 9 12. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN UPHOLDING REJECTION OF COMPARABLE COMPANIES HAVING INCOME FROM SOFTWARE DEVELOPMENT SERVICES LESS THAN 75 PER CENT OF THE TOTAL OPERATING REVENUES. 13. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN REJECTING CERTAIN FILTERS APPLIED BY THE APPELLANT AND IN UPHOLDING NEW FILTERS APPLIED BY THE TPO. 14. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN REJECTING CERTAIN COMPARABLE COMPANIES SELECTED BY THE APPELLANT AND IN UPHOLDING SELECTION OF A NEW COMPARABLE COMP ANY BY THE LEARNED TPO. 15. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN NOT PROVIDING ANY RISK ADJUSTMENT BENEFIT TO THE APPELL ANT. 16. WITHOUT PREJUDICE TO ALL OF THE ABOVE, THE LEA RNED CIT(A) OUGHT TO HAVE HELD THAT THE TRANSFER PRICING PROVIS IONS SHOULD NOT HAVE APPLIED WHEN TAX PAYERS INCOME IS ELIGIBLE FO R RELIEF UNDER SECTION 10A OF THE ACT. 17. THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE ACTION OF THE LEARNED AO IN INITIATING PENALTY PROCEEDINGS ON THE APPELLANT UNDER SECTION 271(1)(C) OF THE ACT. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUND S IS INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. FURTHER, THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMIT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR AT, THE TIME OF HEARING, OF THE APPEAL. 4. THE ASSESSEE (HEREINAFTER REFERRED TO AS NDS IN DIA OR THE ASSESSEE) IS THE BRANCH OFFICE OF NDS LIMITED, UNI TED KINGDOM (NDS UK). THE ASSESSEE WAS SET UP IN INDIA AS A RESEAR CH AND DEVELOPMENT UNIT TO DEVELOP SOFTWARE FOR NDS UK. THE ASSESSEE W AS CARRYING OUT EXPORT ACTIVITIES AND WAS ELIGIBLE TO CLAIM TAX HOL IDAY UNDER SECTION 10A OF IT(TP)A NO.1253 & 1254/BANG/2011 PAGE 6 OF 9 THE ACT. THE ASSESSMENT OF THE ASSESSEE FOR AY 05 -06 WAS SELECTED FOR SCRUTINY ASSESSMENT. IN THE COURSE OF ASSESSMENT P ROCEEDINGS, THE ASSESSING OFFICER REFERRED THE CASE OF THE ASSESSEE TO THE JOINT DIRECTOR OF INCOME-TAX (TRANSFER PRICING)-I (TPO) FOR DETERMI NING THE ARMS LENGTH PRICE (ALP) IN RESPECT OF ITS INTERNATIONAL TRANS ACTIONS WITH ASSOCIATED ENTERPRISES. 5. THE ASSESSEE FILED ITS SUBMISSIONS IN RESPONSE T O THE NOTICE ISSUED BY THE TPO. SUBSEQUENTLY, THE TPO VIDE ORDER UNDER SECTION 92CA OF THE ACT DATED JUNE 13, 2008 RECOMPUTED THE ALP AND DETE RMINED A TRANSFER PRICING (TP) ADJUSTMENT OF RS 40,581,125 WHICH WA S THEREAFTER REDUCED TO AN AMOUNT OF RS 35,193,547 VIDE A RECTIFICATION ORDER DATED JUNE 13, 2008 PASSED BY THE TPO. 6. THEREAFTER, THE AO PASSED AN ORDER UNDER SECTION 143(3) OF THE ACT DATED DECEMBER 29, 2008 COMPUTING THE TOTAL INCOME OF NDS INDIA FOR THE SUBJECT AY AT RS 37,177,261 INTER ALIA MAKING THE F OLLOWING ADJUSTMENTS: ADDITION OF RS 35,193,547 TO THE TAXABLE INCOME RETURNED BY THE APPELLANT IN ACCORDANCE WITH THE ORDER PASSED B Y THE TPO UNDER SECTION 92CA OF THE ACT; RE-COMPUTATION OF RELIEF UNDER SECTION 10A OF TH E ACT AT RS 22,567,247 BY REDUCTION OF FOREIGN CURRENCY EXPENSE S OF RS 19,394,895 ONLY FROM THE EXPORT TURNOVER, AS AGAINS T THE RELIEF AMOUNTING TO RS 24,333,501 CLAIMED IN THE RE TURN OF INCOME. IT(TP)A NO.1253 & 1254/BANG/2011 PAGE 7 OF 9 7. AGGRIEVED BY THE ABOVE ORDER PASSED UNDER SECTIO N 143(3) OF THE ACT, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CI T(APPEALS). THE CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE IN RELATION TO T HE RE-COMPUTATION OF RELIEF UNDER SECTION 10A OF THE ACT AND HAD PARTLY ALLOWED THE APPEAL IN RELATION TO THE TP ADJUSTMENT. 8. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), TH E REVENUE AND THE ASSESSEE HAVE FILED THE PRESENT APPEALS. 9. AS FAR AS GR.NO.1 TO 3 RAISED BY THE REVENUE IN ITS APPEAL ARE CONCERNED, THE SAME RELATES TO RE-COMPUTATION OF RE LIEF UNDER SECTION 10A OF THE ACT. THE AO WHILE COMPUTING DEDUCTION U/S.1 0A OF THE ACT REDUCED EXPENSES INCURRED IN FOREIGN CURRENCY WHILE CARRYIN G ON ONSITE ACTIVITIES FROM THE EXPORT TURNOVER. AS A RESULT, THE RELIEF UNDER SECTION 10A OF THE ACT WAS ALLOWED AT RS 22,567,247 BY REDUCTION OF FO REIGN CURRENCY EXPENSES OF RS 19,394,895 ONLY FROM THE EXPORT TURN OVER, AS AGAINST THE RELIEF AMOUNTING TO RS 24,333,501 CLAIMED IN THE RE TURN OF INCOME. THE CIT(A) FOLLOWING THE DECISION OF THE SPECIAL BENCH OF ITAT IN THE CASE OF ITO VS. SAK SOFT LTD. 121 TTJ 865 (CHENNAI) HELD THAT WHATEVER IS REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE RED UCED FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S.10A OF THE A CT. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENUE HAS RAISED THE AFO RESAID GROUNDS BEFORE THE TRIBUNAL. IT(TP)A NO.1253 & 1254/BANG/2011 PAGE 8 OF 9 10. IT IS NOT IN DISPUTE BEFORE US THAT THE PRINCIP LE OF REDUCING FOREIGN CURRENCY EXPENSES FROM BOTH THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER HAS NOW BEEN UPHELD BY THE HONBLE KARNATA KA HIGH COURT IN THE CASE OF CIT VS TATA ELXSI LIMITED AND OTHERS (349 ITR 98 (K ARN) . IN VIEW OF THE ABOVE, WE HOLD THAT THE ORDER OF THE CIT(A) IS RIGHT IN LAW AND IS UPHELD. 11. AS FAR AS THE REMAINING GROUNDS RAISED BY THE REVENUE IN ITS APPEAL AND THE GROUNDS RAISED BY THE ASSESSEE IN ITS APPEA L ARE CONCERNED, THEY RELATE TO THE DETERMINATION OF ALP IN RESPECT OF IN TERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE WITH ITS AE AND CONSEQU ENT ADDITION MADE TO THE TOTAL INCOME BY THE AO WHICH WAS REDUCED PARTLY BY THE CIT(A). AS FAR AS THE GRIEVANCE OF THE REVENUE AND THE ASSESSEE ON THE ABOVE ISSUE PROJECTED IN THE SAID GROUNDS ARE CONCERNED, IT WAS BROUGHT TO OUR NOTICE THAT THE TRANSFER PRICING ISSUE HAS BEEN RESOLVED U NDER THE MUTUAL AGREEMENT PROCEDURE AND THE ASSESSEE HAS SINCE ACCE PTED THE RESOLUTION AND ALSO COMMUNICATED THE SAME TO THE ASSESSING OFF ICER. COPY OF THE RESOLUTION PASSED UNDER MUTUAL AGREEMENT PROCEDURE UNDER ARTICLE 27 OF THE INDIA-UNITED KINGDOM DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) HAS BEEN FILED BEFORE US. THE AO HAS ALSO PASSED A N ORDER GIVING EFFECT (OGE) TO THE RESOLUTION PASSED UNDER SECTION 90 O F THE ACT IN TERMS OF RULE 44(H)(4) AND RULE 44(H)(5) OF THE INCOME TAX R ULES, 1962. COPY OF THE OGE HAS BEEN FILED BEFORE US. THE TRANSFER PRIC ING GROUNDS THEREFORE IT(TP)A NO.1253 & 1254/BANG/2011 PAGE 9 OF 9 DO NOT REQUIRE CONSIDERATION. HENCE GROUNDS 4 TO 7 RAISED BY THE REVENUE IN ITS APPEAL AND THE GROUNDS RAISED BY THE ASSESSE E IN ITS APPEAL ARE DISMISSED. 12. IN THE RESULT BOTH THE APPEALS ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 08 TH DAY OF AUGUST, 2013. SD/- SD/- ( N. BARATHVAJA SANKAR ) ( N.V. VASU DEVAN ) VICE PRESIDENT JUDIC IAL MEMBER BANGALORE, DATED, THE 08 TH AUGUST, 2013. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.