Intellinet Technologies India Pvt. Ltd., Bangalore V. ITO, Bangalore

ITA 1331/BANG/2011

• Counselvise Citation: 133121114 RSA 2011
• Duration Of Justice: 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 11-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 21-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIIIDR
• Assessee Lawyers: VISHNU BAGRI F
• Keywords: Transfer pricing

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO.1331/BANG/2011 ASSESSMENT YEAR : 2007-08 M/S. INTELLINET TECHNOLOGIES INDIA PVT. LTD., # 201, 1 ST FLOOR, OXFORD TOWERS, # 139, OLD AIRPORT ROAD, KODIHALLI, BANGALORE 560 008. PAN : AABCI 7939P VS. THE INCOME TAX OFFICER, WARD 11(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI VISHNU BAGRI, F.C.A. RESPONDENT BY : SHRI ETWA MUNDA, CIT-III(DR) DATE OF HEARING : 11.09.2012 DATE OF PRONOUNCEMENT : 21.09.2012 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 21.10.2011 OF THE ITO, WARD 11(2), BANGALORE PASSED U/S. 143(3 ) R.W.S. 144C(13) OF THE ACT. ITA NO.1331/BANG/11 PAGE 2 OF 5 2. GROUNDS 1 & 2 RAISED BY THE ASSESSEE ARE GENERAL IN NATURE AND CALLS FOR NO ADJUDICATION. 3. GROUND NO.3 RAISED BY THE ASSESSEE IS WITH REGAR D TO THE DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TR ANSACTION WHICH THE ASSESSEE HAD WITH ASSOCIATED ENTERPRISE (AE) DURI NG THE PREVIOUS YEAR. THE MATERIAL FACTS IN THIS REGARD ARE AS FOLLOWS. 4. THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN TH E BUSINESS OF DEVELOPMENT OF SOFTWARE TO ITS PARENT COMPANY, M/S. INTELLINET TECHNOLOGIES INC. USA. SINCE THE ASSESSEE HAD INTERNATIONAL TRA NSACTIONS WITH ITS AE VIZ., THE TRANSACTIONS PROVIDING SOFTWARE DEVELOPME NT SERVICES FOR WHICH THE ASSESSEE RECEIVED PAYMENT OF Q 9,74,01,989, THE ASSESSEE FILED A REPORT JUSTIFYING THE ALP RECEIVED FOR SERVICES RENDERED A S AFORESAID IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92CA OF T HE ACT. THE TPO AFTER CONSIDERING THE OTHER COMPARABLES CAME TO THE CONCL USION THAT THE ALP WOULD BE Q 10,96,04,785. SINCE THE ASSESSEE HAD CHARGED LESS THAN THE ALP, THE TPO SUGGESTED AN ADJUSTMENT TO THE ALP OF Q 1,22,02,796. THE ASSESSING OFFICER PROPOSED THE ADDITION SUGGESTED B Y THE TPO IN THE DRAFT ASSESSMENT ORDER WHICH WAS CONFIRMED BY THE DRP IN THE APPEAL FILED BY THE ASSESSEE AGAINST THE DRAFT ASSESSMENT ORDER. T HE FAIR ASSESSMENT ORDER WAS PASSED BY THE AO WHICH IS IMPUGNED IN THE PRESENT APPEAL BEFORE THE TRIBUNAL. 5. AT THE TIME OF HEARING OF THIS APPEAL, IT WAS BR OUGHT TO OUR NOTICE THAT IN RESPECT OF IDENTICAL TRANSACTION WITH THE SAME A E, THE ISSUE WAS CONSIDERED BY THE ITAT IN ITA NO.1237/BANG/2010 FOR THE A.Y. 2006-07 AND THE TRIBUNAL HELD AS FOLLOWS:- ITA NO.1331/BANG/11 PAGE 3 OF 5 7. HAVING HEARD BOTH THE PARTIES AND HAVING CONS IDERED THE RIVAL CONTENTIONS, WE FIND THAT THE ASSESSEE HAS CL AIMED THE RISK ADJUSTMENT WHICH IS NOT ALLOWED BY THE TPO ON THE G ROUND THAT THE ASSESSEE ALSO HAS THE RISK OF HAVING A SINGLE C USTOMER. THE QUESTION BEFORE US IS AS TO WHETHER THE RISK OF HAV ING A SINGLE CUSTOMER IS EQUIVALENT TO THE MARKETING AND TECHNIC AL RISK ATTACHED TO THE COMPARABLES. ACCORDING TO THE TPO, THE ASSESSEE HAS THE SINGLE CUSTOMER RISK MEANING, IF THE SING LE CUSTOMER REFUSES TO HAVE ANY DEALINGS WITH THE ASSESSEE, THE ASSESSEE WOULD LOSE ALL OF ITS BUSINESS AND THERE WOULD BE NO PROF IT AT ALL. BUT, AS WE SEE IT, THE RISK OF HAVING A SINGLE CUSTOMER IS ANTICIPATED RISK WHICH MAY OR MAY NOT HAPPEN. WHAT WE HAVE TO SEE IS THE POSITION IN THE RELEVANT PERIOD WHETHER THE ASSESSE E HAD ENCOUNTERED SUCH A RISK DURING THE RELEVANT PERIOD. 7.1 AS SEEN FROM THE RECORDS, THE ASSESSEE HAD AC QUIRED THE BUSINESS AND ALSO EARNED INCOME OUT OF THE SAID TRANSACTION BY COST PLUS BASIS. THUS, IT CAN BE SEEN THAT THE ASSE SSEE HAS NOT ENCOUNTERED THE RISK OF HAVING A SINGLE CUSTOMER, W HEREAS THE SAME CANNOT BE SAID AS REGARDS THE COMPARABLES. AS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE COMPAR ABLES WERE DEALING IN OPEN MARKET AND THEREFORE, THEY WERE PRO NE TO THE MARKETING AND TECHNICAL RISKS. THEY WOULD HAVE INCU RRED CERTAIN EXPENDITURE ON MARKETING SERVICES AND ALSO TO SAFEG UARD THE TECHNICAL USE BY THEM. IN SUCH A CASE, THE RISK ENC OUNTERED BY THE ASSESSEE CANNOT BE SAID TO BE THE EQUIVALENT RISKS ATTACHED TO THE COMPARABLES. THE RISK ATTRIBUTED TO THE ASSESSEE BY THE TPO IS AN ANTICIPATED RISK WHEREAS THE RISK ATTRIBUTED BY THE ASSESSEE TO THE COMPARABLES IS AN EXISTING RISK. IN SUCH SITUATION, THE TPO OUGHT TO HAVE GIVEN THE RISK ADJUSTMENT TO THE NET MARGIN OF THE COMPARABLES FOR BRINGING THEM ON PAR WITH THE ASSES SEE COMPANY. THE ASSESSEES CONTENTION THAT THE RISK ADJUSTMENT SHOULD BE AT 5.5% OR AT THE DIFFERENCE OF PRIME LENDING RATE OF THE RBI AND THE BANKS IS NOT ACCEPTABLE TO US. THEREFORE, WE DIRECT THE TPO TO CONSIDER ALL THE CONTENTIONS OF THE ASSESSEE AND AF TER TAKING INTO ACCOUNT ALL THE RELEVANT MATERIAL DECIDE THE PERCEN TAGE OF RISK ADJUSTMENT TO BE MADE IN ACCORDANCE WITH LAW. THIS GROUND IS ACCORDINGLY, ALLOWED FOR STATISTICAL PURPOSES. 8. AS REGARDS SUB-GROUND-(F), WE FIND THAT IT IS CONSEQUENTIAL TO SUBGROUND-(E) AND THEREFORE, THIS ISSUE IS ALSO REMANDED TO THE FILE OF THE APO/O (SIC) TPO/AO. 6. WHILE THE PARTIES BEFORE US AGREED THAT THE MATT ER HAS TO BE REMANDED TO THE TPO ON THE LINES SUGGESTED BY THE I TAT FOR THE A.Y. ITA NO.1331/BANG/11 PAGE 4 OF 5 2006-07. IT WAS FURTHER SUBMITTED THAT THERE WERE S OME ADDITIONAL COMPARABLES CONSIDERED BY THE TPO IN THE PRESENT AS SESSMENT YEAR TO WHICH THE ASSESSEE HAS OBJECTED BUT SUCH OBJECTION WAS NEITHER CONSIDERED BY THE TPO NOR BY THE DRP. WE ARE OF TH E VIEW THAT THE ASSESSEE WILL BE AT LIBERTY TO RAISE HIS OBJECTIONS ON SUCH NEW COMPARABLES CONSIDERED BY THE TPO IN THE PROCEEDINGS BEFORE THE TPO. IT WAS ALSO MADE CLEAR THAT THE ADJUSTMENT OF 5% PLUS OR MINUS TO THE ALP UNDER THE PROVISO TO SECTION 92CA AS A STANDARD DEDUCTION CAN NOT BE ALLOWED IN VIEW OF THE RETROSPECTIVE STATUTORY AMENDMENT TO THOSE P ROVISIONS. TO THE EXTENT THAT THE SAFE HARBOUR BENEFITS ARE CLAIMED I N ACCORDANCE WITH THE AMENDED PROVISIONS, THE TPO WILL CONSIDER THE CLAIM OF THE ASSESSEE. WITH THE AFORESAID DIRECTIONS, THE ORDER OF THE AO IS SE T ASIDE AND THE MATTER IS REMANDED TO THE TPO FOR FRESH CONSIDERATION IN THE LIGHT OF THE DIRECTIONS GIVEN IN THE ORDER OF THE TRIBUNAL FOR THE A.Y. 200 6-07 AND THE OBSERVATIONS MADE AS AFORESAID. 7. FOR STATISTICAL PURPOSES, THE APPEAL OF THE ASSE SSEE IS TREATED AS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF SEPTEMBER, 2012. SD/- SD/- ( N. BARATHVAJA SANKAR ) ( N.V. VASUDEVAN ) VICE PRESIDENT JUDICIAL MEMB ER BANGALORE, DATED, THE 21 ST SEPTEMBER, 2012. DS/- ITA NO.1331/BANG/11 PAGE 5 OF 5 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.