Dy CIT, Pune V. Software AG [ I ] P. Ltd, Pune

ITA 1264/PUN/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 0882 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 03-11-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 04-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B C MALAKAR
• Keywords: Transfer pricing; International transaction; Working capital adjustments
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA , AM . / ITA NO. 1264 /PN/201 3 / ASSESSMENT YEAR : 20 08 - 09 THE ASST . COMMISSIONER OF INCOME TAX, CIRCLE - 1 (2) , PUNE . / APPELLANT VS. SOFTWARE AG (INDIA) PVT. LTD., 223, ASHOKA CENTRE, PUNE SATARA ROAD , PUNE 411009 . / RESPONDENT PAN: AAHCS 4583J / APPELLANT BY : S HRI B.C. MALAKAR / RESPONDENT BY : NONE / DATE OF HEARING : 03 . 1 1 .2015 / DATE OF PRONOUNCEMENT: 10 .1 1 .201 5 / ORDER PER SUSHMA CHOWLA, J M : TH IS APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER OF CIT (A) - IT/TP , PUNE , DATED 2 0 . 0 3 .20 1 3 RELATING TO ASSESSMENT YEAR 20 08 - 09 AGAINST ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C(4) OF THE INCOME - TAX ACT , 196 1 (IN SHORT THE ACT) . 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THE LEARNED COMMISSIONER OF INCOME - TAX(APPEALS) ERRED IN ALLOWING WORKING CAPITAL ADJUSTMENT TO THE PROFIT LEVEL INDICATOR OF THE COMPARABLES WHEN IT HAS NOT BEEN DEMO NSTRATED OR P ROVED THAT THE PRICING OF THE PRODUCT AND SERVICES IN CASE OF COMPARABLES OR EVEN IN CASE OF THE ASSESSEE COMPANY WAS ACTUALLY DETERMINED O N THE BASIS OF THE WORKING CAPITAL. ITA NO. 1264 /PN/20 1 3 SOFTWARE AG (INDIA) PVT. LTD . 2 2. THE LEARNED COMMISSIONER OF INCOME - TAX(APPEALS) ERRED IN ALLOWIN G THE ABOVE ADJUSTMENT WHEN THE COMPARABLES HAVE BEEN IDENTIFIED FOLLOWING VIGOROUS SEARCH PROCESS FOLLOWING THE PROVISION OF RULE 10A(A), RULE 10 B (2), RULE 10 B (3) AND RULE 10 B (1), COMPARING FUNCTIONS, ASSETS AND RISKS, WHERE IN THERE WAS NO CASE FOR ANY A DJUSTMENT; WHICH NEEDED TO BE MADE TO THE FINANCIAL RESULTS OF EITHER ASSESSEE COMPANY OR THE COMPARABLES AS THE FACTORS WHICH MATERIALLY EFFECT THE PRICES OF THE PRODUCTS AND SERVICES HAD ALREADY BEEN TAKEN CARE IN THE QUALITATIVE AN D QUANTITATIVE SEARCH CRITERIA AND THE ASSESSEE HAD NEITHER ASKED NOR WORKED OUT ANY WORKING CAPITAL ADJUSTMENT IN THE TRANSFER PRICING DOCUMENTATION. 3. THE LEARNED COMMISSIONER OF INCOME - TAX(APPEALS) ERRED IN ALLOWING THE ABOVE ADJUSTMENT WHEN IT HAD NOT CONSIDERED THE FACT THAT THE PROFIT LEVEL INDICATOR USED FOR COMPARISON WA S OPERATING PROFIT BEFORE INTEREST AND THUS ANY IMPACT OF CREDIT POLICY ON INTEREST COS T WAS, AUTOMATICALLY EXCLUDED FROM THE CASE OF THE ASSESSEE COMPANIES AND THE COMPARABLES 4. THE LEARNED COMMIS SIONER OF INCOME - TAX(APPEALS) ERRED IN ALLOWING THE ABOVE ADJUSTMENT WHEN IT ALLOWED THE CLAIM OF THE ASSESSEE IN ROUTINE MANNER DESPITE THE FACT THAT THE OEC D GUIDELINES IN GENERAL AND SPECIFICALLY IN PARA 3.47 TO 3.54 DID NOT CONSIDER SUCH ADJUSTMENTS TO BE APPLIED IN AN AUTOMATIC AND ROUTINE MANNER.' 5. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEND ANY OR ALL THE GROUNDS OF APPEAL. 3. DESPITE SERVICE OF NOTICE, NONE APPEARED ON BEHALF OF THE ASSESSEE, NOR ANY APPLICATION WAS MOVED FOR ADJOURNMENT BY THE ASSESSEE . NONE APPEARED ON BEHALF OF THE ASSESSEE ON THE EARLIER DATE OF HEARING ALSO , HENCE, WE PROCEED TO DECIDE THE PRESENT APPEAL AFTER HEARING THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE. 4. THE ISSUE RAISED BY THE REVENUE IN THE PRESENT APPEAL IS AGAINST THE ORDER OF CIT(A) IN ALLOWING WORKING CAPITAL ADJUSTMENT. 5 . BRIEFLY, IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE WAS A SUBSIDIARY OF SOFTWARE AG, GERMANY AND SOFTWARE AG GMBH, GERMANY . THE ASSESSEE HAD PROVIDED SOFTWARE AP PLICATI ON DEVELOPMENT AND MAINTENANCE, SOFTWARE SOLUTIONS AND SERVICES. THE ASSESSEE HAD STARTED THE BUSINESS OPERATIONS IN INDIA IN OCTOBER, 2003 , WHICH HAD FURTHER REDUCED DURING THE FINANCIAL YEAR 2007 - 08 AND HAD FINALLY DISCONTINUED FROM 19 TH DECEMBER , 2007. THE ASSESSING OFFICER HAD REFERRED THE TRANSFER PRICING ISSUE TO THE TRANSFER PRICING ITA NO. 1264 /PN/20 1 3 SOFTWARE AG (INDIA) PVT. LTD . 3 OFFICER (TPO) , WHO IN TURN HAD DETERMINED THE PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFITS / OPERATING COST OF THE COMPARABLE COMPANIES AT 31.93% AS AGAIN ST PLI OF THE APPELLANT AT ( - ) 6.86% , IN TURN THE TPO HAD PROPOSED AN ADJUSTMENT OF RS.1,13,50,290/ - IN THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT. THE ASSESSING OFFICER IN DRAFT ASSESSMENT ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C(1) OF THE AC T HAD PROPOSED THE VARIATION COST OF TP ADJUSTMENT. THE ASSESSEE IN REPLY, COMMUNICATED THAT HE WOULD PREFER AN APPEAL BEFORE THE CIT(A) WITH REGARD TO THE ADJUSTMENT PROPOSED BY THE TPO. CONSEQUENTLY, THE ASSESSING OFFICER PASSED ORDER UNDER SECTION 143 (3) R.W.S. 144C(4) OF THE ACT, IN TURN MAKING AN ADJUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTION AT RS. 1,13,50,290/ - . 6. IN APPEAL BEFORE THE CIT(A), THE ASSESSEE RAISED VARIOUS ISSUES WITH REGARD TO DETERMINATION OF ARM'S LENGTH PRICE OF VARIOUS FACET S. SOME OF THE ISSUES WERE DECIDED IN FAVOUR OF THE ASSESSEE AND SOME AGAINST THE ASSESSEE. 7. THE REVENUE IS IN APPEAL BEFORE US ONLY WITH REGARD TO THE ORDER OF CIT(A) IN ALLOWING WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE. THE RELEVANT OBSERVATIONS OF CIT(A) ARE AS UNDER: - 4.7.1 THE APPELLANT SUBMITTED THAT THE LEARNED TPO SHOULD HAVE GIVEN DUE COGNIZANCE TO THE DIFFERENCES ON ACCOUNT OF WORKING CAPITAL POSITION LEVELS OF ACCOUNTS RECEIVABLES AND ACCOUNTS PAYABLES IN THE BOOKS OF THE TESTED PARTY VIS - A - VIS COMPARABLE COMPANIES. A COMPANY WOULD BE WILLING TO ACCEPT SLIGHTLY LOWER PRICE FOR ITS SERVICES IF IT WERE TO PROVIDE THE SERVICES ON CASH BASIS THAN A COMPANY, WHICH ALLOWS A CUSTOMERS TO PAY AT LATER DATE. CONVERSELY, IN CASE OF COMPANIES RECE IVING CREDIT IN FORM OF ACCOUNTS PAYABLE, THEIR COST OF SALES REFLECTS NOT ONLY THE PURCHASE PRICE OF GOODS BUT ALSO TIME VALUE F OR THE CREDIT ALLOWED BY THE SUPPLIERS. IT WAS SUBMITTED THAT, HENCE TO BRING ALL THE COMPANIES TO AN EQUAL FOOTING, AN ADJUSTM ENT IS REQUIRED TO BE MADE TO ACCOUNT FOR THE UNDERLYING INTEREST COMPONENT IN THE SALES PRICE OR COST OF SALES. 4.7.2 THE APPELLANT HAS RELIED ON SEVERAL JUDICIAL PRONOUNCEMENTS IN SUPPORT OF ITS ARGUMENTS. THESE ARE LISTED AS UNDER: PHILIPS SOFTWARE CENTRE PRIVATE LIMITED 119 TTJ 721 E GAIN COMMUNICATIONS PRIVATE LIMITED 118 TTJ 354 MENTOR GRAPHICS (P) LTD V DCIT 112 TTJ 408 SONY INDIA PVT LIMITED VS DCIT (2008) 118 TTJ (DEL) 865 ITA NO. 1264 /PN/20 1 3 SOFTWARE AG (INDIA) PVT. LTD . 4 GLOBAL VANTEGDE PRIVATE LIMITED VS DC I T ( ITA NO 116 / D EL /2011) QUARK SYSTEMS PVT VS DCIT ( 2010) (004 ITR 0606) INTERVET INDIA PVT L TD VS ACIT (IT A NO 2845 / MUM / 2006) DIAMOND DYE CHEM LTD VS DCIT (ITA NO 3073 / MUM / 2006) WESTRECO INC 64 CCH TCM 849 - US TAX COURT ACIT VS FIAT INDIA PVT L TD (IT A NO 1848 / MUM / 2009) FINDINGS 4.7.3 I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AND THE DATA AVAILABLE ON RECORD. DELHI BENCH OF ITAT IN THE CASE OF VEDARIS TECHNOLOGIES PVT. LTD. V ACIT (2010) 41 DTR 73 (DEL) AND THE OECD HAS ALSO EXPRESSED THE S AME VIEW ON THE ABOVE ISSUE. IT IS WELL ACCEPTED THAT PROFIT MARGINS ARE AFFECTED BY EXTENDING CREDIT AND HOLDING OF INVENTORY. THEREFORE, SUCH WORKING CAPITAL ADJUSTMENTS ARE REQUIRED FOR COMPUTING PROFIT MARGINS OF TRANSACTIONS. 4.7.4 IN VIEW OF THE ABOVE, THE LEARNED AO IS DIRECTED TO GRANT WORKING CAPITAL ADJUSTMENT TO THE APPELLANT ON THE BASIS OF AVERAGE CREDIT / DEBIT PERIOD FOR THE YEAR AND COMMERCIAL RATE OF INTEREST. 8. THE OBJECTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE WAS THAT NO SUCH WORKING CAPITAL ADJUSTMENT WAS CLAIMED BEFORE THE TPO AND THE CIT(A) ALLOWED THE SAME WITHOUT ANY VERIFICATION. ON PERUSAL OF THE RECORD AND THE ORDERS PASSED BY THE AUTHORITIES BELOW , WE FIND THAT TRANSFER PRICING ADJUSTMENT ORDER WAS P ASSED BY THE TPO PROPOSING AN ADJUSTMENT OF RS.1,13,50,290/ - , WHICH WAS ADOPTED BY THE ASSESSING OFFICER WHILE PASSING THE ORDER UNDER SECTION 143(3) R.W.S. 144C(4) OF THE ACT. THE CASE OF THE ASSESSEE WAS THAT SINCE THE ASSESSEE WAS PROVIDING SERVICES TO ITS ASSOCIATE ENTERPRISES, THEN IT WAS WORKING ON LOWER PRICES FOR ITS SERVICES. ON THE OTHER HAND, IF SERVICES WERE PROVIDED WHEREIN THE CUSTOMERS PAYS ON LATER DATE, THEN THE WORKING CAPITAL ADJUSTMENT IS TO BE ALLOWED TO A COMPANY, WHICH IS PROVIDING THE SERVICES ON CASH BASIS. 9. WE FIND THAT SI MILAR ISSUE OF ALLOWING WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE HAS BEEN HELD IN FAVOUR OF THE ASSESSEE BY SERIES OF DECISION ON VARIOUS BENCHES OF THE TRIBUNAL INCLUDING PUNE BENCH OF TRIBUNAL IN DCIT VS . EMPTORIS TECHNOLOGIES INDIA PVT. LTD. IN ITA NO.1500/PN/2012 AND EMPTORIS TECHNOLOGIES INDIA PVT. LTD. VS. DCIT IN ITA NO. 1550/PN/2012 , RELATING TO ITA NO. 1264 /PN/20 1 3 SOFTWARE AG (INDIA) PVT. LTD . 5 ASSESSMENT YEAR 2007 - 08, ORDER DATED 08.07.2015 . THE CIT(A) ON THE OTHER HAND HAD PLACED RELIANCE ON THE DECISION OF DELHI BENCH OF TRIBUNAL IN VEDARIS TECHNOLOGIES PVT. LTD. V ACIT (SUPRA) AND THE OECD GUIDELINES. IN VIEW OF THE ABOVE , WE FIND MERIT IN THE ORDER OF CIT(A) IN DIRECTING THE ASSESSING OFFICER TO GRANT WORKING CAPITAL ADJ USTMENT TO THE ASSESSEE ON THE BASIS OF AVERAGE CREDIT/DEBIT PERIOD FOR THE YEAR AND COMMERCIAL RATE OF INTEREST. IN VIEW THEREOF, WE FIND NO MERIT IN THE GROUNDS OF APPEAL RAISED BY THE REVENUE AND THE SAME ARE DISMISSED. 10 . IN THE RESULT, THE APPEAL O F THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 10 TH DAY OF NOVEMBER , 2015. SD/ - SD/ - (PRADIP KUMAR KEDIA) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL M EMBER / PUNE ; DATED : 10 TH NOVEMBER , 2015 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - IT/TP, PUNE ; 4. / THE CIT - I , PUNE ; 5. , , / DR B , ITAT, PUNE; 6. / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE