Income Tax Officer,Ward-11(1), Bangalore V. M/s Decho Technology India P Ltd, Bangalore

ITA 1326/BANG/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89881 (ITAT-BANGALORE)
• Duration Of Justice: 5 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 29-10-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR SHANKAR PRASAD JT
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Transfer pricing; International transaction
• Section: 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER IT(TP)A NO.1326/BANG/2014 ASSESSMENT YEAR : 2009-10 THE INCOME TAX OFFICER, WARD 11(1), BANGALORE. VS. M/S. DECHO TECHNOLOGY INDIA PVT. LTD., NO.43/61, SRINIDHI, 1 ST FLOOR, SURVEYORS STREET, BASAVANGUDI, BANGALORE 560 004. PAN: AADCP 2508C APPELLANT RESPONDENT APPELLANT BY : DR. SHANKAR PRASAD, JT. CIT(DR) RESPONDENT BY : SHRI T. SURYANARAYANA, ADVOCATE DATE OF HEARING : 31.03.2015 DATE OF PRONOUNCEMENT : 10.04.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER D ATED 11.9.2014 OF THE CIT(APPEALS)-IV, BANGALORE RELATING TO ASSESSME NT YEAR 2009-10. 2. GROUND NOS.1, 5 & 6 ARE GENERAL IN NATURE AND CA LLS FOR NO ADJUDICATION. 3. GROUND NO.2 RAISED BY THE REVENUE READS AS FOLLO WS:- IT(T)A NO.1326/BANG/2014 PAGE 2 OF 7 2. THE CIT (A) ERRED IN LAW AS WELL AS ON FACTS IN HOLDING THAT, AS THE WORKING CAPITAL ADJUSTMENT PROVIDED BY THE TPO HAS NEGATIVE IMPACT ON ADJUSTED MARGIN, THE ASSESSEE IS ENTITLED TO RISK ADJUSTMENT AS PER PREVAILING NORMS, WHICH SHAL L BE WORKED OUT BY THE TPO AND GRANTED TO THE ASSESSEE WITHOUT APPRECIATING THAT RISK ADJUSTMENT COULD NOT BE ALLOWED IN THE AB SENCE OF SPECIFIC DIFFERENCE IN RISK AND ITS IMPACT ON PROFI T MARGIN AND THE TP REGULATIONS IN INDIA ARE AGAINST MAKING ANY ASSU MPTIONS IN RESPECT OF ANY ADJUSTMENTS AND SUCH RISK ADJUSTMENT CANNOT BE PROVIDED WITHOUT MAKING NECESSARY ASSUMPTIONS. 4. THE ASSESSEE IS AN INDIAN COMPANY AND WHOLLY OWN ED SUBSIDIARY OF PI CORPORATION INC., USA. THE ASSESSEE PROVIDES SO FTWARE DEVELOPMENT SERVICES TO ITS AE. THE TRANSACTION OF PROVIDING S OFTWARE DEVELOPMENT SERVICES IS AN INTERNATIONAL TRANSACTION AND THE PR ICE RECEIVED BY THE ASSESSEE HAS TO SATISFY THE ARMS LENGTH PRICE TEST LAID DOWN U/S. 92 OF THE INCOME-TAX ACT, 1961 [THE ACT IN SHORT]. ON A REFERENCE FOR DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTI ON IN QUESTION, THE TPO SELECTED 11 COMPARABLES AND COMPUTED THE ALP AS FOL LOWS:- SL. NO. COMPANY NAME SALES (RS.CR.) OP TO TOTAL COST % 1. KALS INFORMATION SYSTEMS LTD. 2,14,04,686 13.89 2. AKSHAY SOFTWARE TECHNOLOGIES LTD. 12,23,21,483 8.11 3. BODHTREE CONSULTING LTD. 16,05,75,212 62.27 4. R S SOFTWARE (INDIA) LTD. 1,49,57,12,634 9.97 5. TATA ELXSI LTD. (SEGMENTAL) 3,78,43,03,000 20.28 6. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG) 4,05,31,20,000 27.91 7. PERSISTENT SYSTEMS LTD. 5,19,69,10,000 41.40 8. ZYLOG SYSTEMS LTD. 7,34,93,51,475 7.81 9. MINDTREE LTD. (SEG) 7 93,22,79,326 5.52 10. LARSEN AND TOUBRO INFOTECH 19,50,83,81,374 24.72 11. INFOSYS LTD. 2,02,64,00,00,000 45.61 AVG. 24.32% IT(T)A NO.1326/BANG/2014 PAGE 3 OF 7 ALP ARM'S LENGTH MEAN MARGIN ON COST 24.32% LESS: WORKING CAPITAL ADJUSTMENT (ANNEX.C) (1.43)% ADJUSTED MARGIN 25.75% OPERATING COST 14,24,76,782 ARMS LENGTH PRICE (ALP) 125.75% OF OPERATING COST 17,91,64,553 PRICE RECEIVED 16,39,46,917 SHORTFALL BEING ADJUSTMENT U/C. 92CA 1,52,17,636 5. THE SHORTFALL OF RS.1,52,17,636 BEING ADJUSTMENT U/S.92CA OF THE ACT WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE FINANCIAL RESULTS OF ASSESSEE INSOFAR AS IT RELATES TO PROVISION OF SOFT WARE DEVELOPMENT SERVICES WAS AS FOLLOWS:- DETAILS AMOUNT IN RS. OPERATING REVENUE * 16,39,46,917 OPERATING EXPENSES ** 14,24,76,782 OPERATING PROFIT (PROFIT/LOSS) 2,14,70,135 OP PROFIT ON COST % 15.07% 6. THE ASSESSEE FILED APPEAL BEFORE THE CIT(APPEALS ) AGAINST ADJUSTMENT PROPOSED BY THE TPO, WHICH WAS ADDED TO THE TOTAL INCOME BY THE AO. THE CIT(APPEALS) AFTER HEARING THE SUBMISS IONS OF THE ASSESSEE, EXCLUDED 7 COMPARABLES AND RETAINED ONLY 4 COMPARAB LES AS FOLLOWS:- SL. NO. COMPANY NAME FUNCTION 1. KALS INFORMATION SYSTEMS LTD. SOFTWARE DEVELOPMENT & CONSULTANCY. DURING THE YEAR , SOFTWARE DEVELOPMENT SERVICES HAVE BEEN RENDERED. T HE TPO FOUND THAT DURING THE YEAR THE COMPANY WAS INTO RENDERING SOFTWARE DEVELOPMENT SERVICES AND TRAININ G WHICH CONSTITUTED ONLY 4% OF REVENUES. THE PRODUCTS IT(T)A NO.1326/BANG/2014 PAGE 4 OF 7 MENTIONED IN THE WEBSITE WERE NOT CREATED DURING TH E YEAR. 2. AKSHAY SOFTWARE TECHNOLOGIES LTD. IT OFFERS SOFTWARE SERVICES AND PRODUCTS. THE SALE OF PRODUCTS OF ONLY 4% OF TOTAL TURNOVER. 3. BODHTREE CONSULTING LTD. IT CONSULTANCY AND SOFTWARE DEVELOPMENT SERVICES. 4. R S SOFTWARE (INDIA) LTD. SOFTWARE DEVELOPMENT SERVICES. 7. THE ASSESSEE ALSO PRAYED FOR RISK ADJUSTMENT/WOR KING CAPITAL ADJUSTMENT. THE SAME WAS CONSIDERED BY THE CIT(A) AND ALLOWED IN HIS ORDER. THE RELEVANT OBSERVATIONS OF THE CIT(A) IN THIS REGARD WERE AS FOLLOWS:- 8.4 (IV) RISK ADJUSTMENT/WORKING CAPITAL: 8.4.1. I HAVE EXAMINED THE TPOS WORKING AND FIND THAT SHE HAS PROVIDED A WORKING CAPITAL ADJUSTMENT ON THE BASIS OF THE DETAILED WORKING AS PER ANNEXURE-C OF HER ORDER. RECENTLY, T HE MUMBAI BENCH OF THE HONBLE TRIBUNAL IN EXXON MOBIL COMPAN Y INDIA P. LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX (15 ITR ( TRIB) 353) HAS OBSERVED :- THE OTHER ISSUE IS GRANT OF ADJUSTMENTS, I.E., WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT WHILE ARRIVING AT THE ARMS LENGTH PRICE. IN THIS CASE, ASSESSEE IN HIS TRANSFER PRICING STUDY, HAS NOT MADE ANY WORKING CAPITAL ADJUSTMENT OR RISK ADJUSTMENT. THE ASSESSING OFFICER HAS, IN FACT, GRANTED WORKING CAPITAL ADJUSTMENT. WHEN THE ASSESSEE IS CONFRONTED WITH THE POSSIBLE TRANSFER PRICING ADJUSTMENT DUE TO CHANGE OF SOME COMPARABLES AND ADDITION OF CERTAIN OTHER COMPARABLES BY THE TRANSFER PRICING OFFICER, THIS CLAIM OF RISK ADJUSTMENT IS MADE BY THE ASSESSEE. THOUGH, IN PRINCIPLE, THESE ADJUSTMENTS HAVE TO BE MADE WHILE ARRIVING AT IT(T)A NO.1326/BANG/2014 PAGE 5 OF 7 THE ARM S LENGTH PRICE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AS THE ASSESSEE HAS NOT WORKED OUT THE RISK ADJUSTMENT AND AS THE ASSESSING OFFICER HAS ALREADY ALLOWED 0.47 PER CENT. AS WORKING CAPITAL ADJUSTMEN T, WE ARE OF THE OPINION THAT NO FURTHER ADJUSTMENT IS NECESSARY. 8.4.2. ON THE BASIS OF THE AFORESAID LINE OF RE ASONING, I AM OF THE VIEW THAT ONCE THE AO/TPO HAS GRANTED WORKING C APITAL ADJUSTMENT, THERE IS NO NECESSITY OF PROVIDING ANY FURTHER ADJUSTMENTS. BUT HOWEVER, IN THE INSTANT CASE, IT C ANNOT BE SAID THAT THE TPO HAS PROVIDED WORKING CAPITAL ADJUSTMEN T. AS A MATTER OF FACT, HE HAS PROVIDED IT AT (-)1.43% WHIC H HAS INCREASED THE ARMS LENGTH MEAN MARGIN ON COST FROM 24.32% TO 25.75%. BEFORE ME, IT WAS ARGUED THAT THE APPELLANT IS A CA PTIVE SERVICE PROVIDER AND ASSUMES THE LESS NORMAL RISKS RELATING TO BUSINESS AND OPERATIONS AND ENTREPRENEURIAL RISKS BORNE BY I TS AES OUTSIDE INDIA AND IS THEREFORE INSULATED FROM MOST OF THE B USINESS AND OPERATIONAL RISKS WHICH THE COMPARABLE COMPANIES AR E EXPOSED TO. THEREFORE, CONTROLLED AND UNCONTROLLED TRANSACT IONS ARE COMPARABLE ONLY WHEN ADJUSTMENTS WITH RESPECT TO SI GNIFICANT DIFFERENCES BETWEEN THEM IN THE RISKS ASSUMED ARE M ADE. I HAVE CONSIDERED THE FACTS AND CIRCUMSTANCES OF THE CASE AND FIND THAT THE WORKING CAPITAL ADJUSTMENT PROVIDED BY THE TPO HAS A NEGATIVE IMPACT ON ADJUSTED MARGIN AND THEREFORE, I T CANNOT BE SAID THAT A WORKING CAPITAL ADJUSTMENT HAS BEEN PRO VIDED IN THE POSITIVE SENSE. HENCE, THE HONBLE TRIBUNALS RULIN G WILL NOT APPLY IN THE INSTANT CASE. THEREFORE, IN MY VIEW, T HE APPELLANT IS ENTITLED TO RISK ADJUSTMENT AS PER PREVAILING NORMS WHICH SHALL BE WORKED OUT BY THE TPO AND GRANTED TO THE APPELLANT. IT IS ORDERED ACCORDINGLY . 8. THE GRIEVANCE PROJECTED BY THE REVENUE IN GROUND NO.2 IS THAT THE RISK ADJUSTMENT OUGHT NOT TO HAVE BEEN ALLOWED BY T HE CIT(APPEALS). 9. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT BY REASON OF EXCLUSION OF CERTAIN COMPARABLE C OMPANIES BY THE CIT(APPEALS), THE ASSESSEES MARGIN WOULD BE WITHIN +/- 5% RANGE OF IT(T)A NO.1326/BANG/2014 PAGE 6 OF 7 COMPARABLE COMPANIES ULTIMATELY RETAINED AFTER THE CIT(A)S ORDER. ACCORDING TO HIM, THEREFORE, THERE IS NO NEED TO AL LOW ANY FURTHER RISK ADJUSTMENT AND THEREFORE GROUND OF APPEAL REVENUE M AY BE ALLOWED AND THE ACTION OF THE TPO/AO IN NOT ALLOWING RISK ADJUS TMENT BE UPHELD. 10. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS IN THE PROCESS OF VOLUNTARY WINDING-UP AND WOULD NOT L IKE THE LITIGATION TO PROTRACT AND THEREFORE THE ABOVE CONCESSION IS BEIN G GIVEN. 11. WE ACCEPT THE PLEA OF THE LD. COUNSEL FOR THE A SSESSEE AND ACCORDINGLY ALLOW GROUND NO.2 RAISED BY THE REVENUE . 12. GROUNDS NO.3 & 4 ARE WITH REGARD TO ACTION OF T HE CIT(APPEALS) IN DIRECTING THE AO TO EXCLUDE FROM THE TOTAL TURNOVER ALSO THE INTERNET CHARGES/COMMUNICATION EXPENSES OF RS.24,61,838 AND TRAVEL EXPENSES INCURRED IN FOREIGN CURRENCY OF RS.22,58,586 WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. THE AO REDUCED THE AFORESAID EXPEN SES FROM THE EXPORT TURNOVER AND DID NOT EXCLUDE THE SAME FROM THE TOTA L TURNOVER. AS A RESULT, THE DEDUCTION ALLOWED U/S. 10A TO THE ASSESSEE WAS AT A MUCH LOWER SUM THAN WHAT WAS CLAIMED BY THE ASSESSEE. 13. THE CIT(APPEALS), FOLLOWING THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN TATA ELXSI LTD., 349 ITR 98 (KARN) , DIRECTED THE AO TO EXCLUDE THE AFORESAID SUMS BOTH FROM THE EXPORT TUR NOVER AND TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. ACC ORDING TO THE REVENUE, IT(T)A NO.1326/BANG/2014 PAGE 7 OF 7 THE DECISION OF HONBLE HIGH COURT OF KARNATAKA HAS NOT BEEN ACCEPTED BY THE REVENUE AND THEREFORE THE ISSUE BEING AGITATED. IN OUR VIEW, THE FACT THAT THE DEPARTMENT HAS FILED AN APPEAL AGAINST THE JUDGMENT OF THE HONBLE HIGH COURT CANNOT BE A BAR NOT TO FOLLOW THE SAID D ECISION. THE DECISION BEING THAT OF A JURISDICTIONAL HIGH COURT IS BINDIN G ON THE TRIBUNAL. WE THEREFORE UPHOLD THE ORDER OF THE CIT(APPEALS) AND DISMISS THE GROUNDS NO.3 & 4 RAISED BY THE REVENUE. 14. IN THE RESULT, THE APPEAL BY THE REVENUE IS PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF APRIL , 2015 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 10 TH APRIL , 2015 . /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.