Deputy commissioner of income tax, Bangalore V. M/s Amba Research India P Ltd, Bangalore

ITA 1376/BANG/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89865 (ITAT-BANGALORE)
• Duration Of Justice: 5 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 11-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI
• Assessee Lawyers: ROHIT NAIR
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI VIJAYPAL RAO , JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T. (T.P.) A. NO. 1376 /BANG/201 4 (ASSESSMENT YEAR : 200 9 - 10 ) DY. COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. VS. M/S. AMBA RESEARCH INDIA PVT. LTD., 12 TH FLOOR, CONCORDE TOWER, U B CITY, N O .24, VITTAL MALLYA ROAD, BANGALORE. PAN AAECA 9391H APPELLANT RESPONDENT. APPELLANT BY : DR. P.K. SRIHARI, ADDL. CIT(D.R) RESPONDENT BY : SHRI ROHIT NAIR, C .A. DATE OF H EARING : 13.04.2015. DATE OF P RONOUNCEMENT : 17.4.2015 . O R D E R PER SHRI JASON P. BOAZ, A.M. : THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - IV, BANGALORE DT.4.9.2014 FOR ASSESSMENT YEAR 2009 - 10. 2. THE FACTS OF THE CASE, BRIEFLY, ARE AS UNDER : - 2.1 THE ASSESSEE COMPANY, A SUBSIDIARY OF AMBA HOLDINGS INC., IS ENGAGED IN THE BUSINESS OF PROVIDING INFORMATION TECHNOLOGY ENABLED SERVICES ( ITES ) TO ITS ASSOCIATED ENTERPRISES ( AE ). FOR ASSESSMENT YEAR 2009 - 10, THE ASSESSEE FILED THE RETURN OF INCOME ON 29.9.2009 DECLARING INCOME OF RS .60,56,224 AFTER CLAIMING DEDUCTION OF RS.8,82,24,106 UNDER SECTION 10A OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') . THE RETURN WAS 2 IT (T.P) A NO. 1376 /BANG/ 2014 PROCESSED UNDER SECTION 143(1) OF THE ACT AND THE CASE WAS SUBSEQUENTLY TAKEN UP FOR SCRUTINY. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD REPORTEDLY ENTERED INTO INTERNATIONAL TRANSACTIONS IN THE YEAR UNDER CONSIDERATION AND THEREFORE A REFERENCE WAS MADE UNDER SECTION 92CA OF THE ACT TO THE TRANSFER PRICING OFFICER ( TPO ) FOR DETERMINING THE ARM S LENGTH P RICE ( ALP ) OF THE INTERNATIONAL TRANSACTIONS AFTER OBTAINING THE APPROVAL OF THE CIT, BANGALORE I. THE TPO VIDE ORDER UNDER SECTION 92CA OF THE ACT DT.29.1.2013 PROPOSED A T.P. ADJUSTMENT OF RS.4,08,55,503 IN RESPECT OF THE ITES SEGMENT OF THE ASSESS EE'S INTERNATIONAL TRANSACTIONS. THE ASSESSING OFFICER THEN PROCEEDED TO COMPLETE THE ASSESSMENT UNDER SECTION 143(3) RWS 144C OF THE ACT VIDE ORDER DT.30.4.2013 WHEREIN THE INCOME OF THE ASSESSEE WAS DETERMINED AT RS.5,06,90,105 AS AGAINST THE RETURNED IN COME OF RS.60,56,224 IN VIEW OF THE FOLLOWING ADDITIONS / DISALLOWANCES : - (I) T.P. ADJUSTMENT : RS.4,08,55,503. (II) DISALLOWANCE OF EXCESS CLAIM U/S.10A OF THE ACT : RS.29,05,918. (III) DISALLOWANCE U/S.40(A)(IA) : RS.8,72,460. 2.2 AGGRI EVED BY THE ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2009 - 10 DT.30.4.2013, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (APPEALS) IV, BANGALORE. THE LEARNED CIT (APPEALS) DISPOSED OFF THE ASSESSEE'S APPEAL VIDE ORDER DT.4.9.2014 ALLOWING THE ASSESSEE PARTIAL RELIEF. 3 IT (T.P) A NO. 1376 /BANG/ 2014 3. REVENUE BEING AGGRIEVED BY THE ORDER OF THE CIT (APPEALS) IV, BANGALORE DT.4.9.2014 FOR ASSESSMENT YEAR 2009 - 10, HAS PREFERRED THIS APPEAL RAISING THE FOLLOWING GROUNDS : - 1. THE ORDER OF THE CIT (APPEALS) IS OPPOSED TO LAW AN D THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT (APPEALS) ERRED IN HOLDING THAT FOREIGN EXCHANGE LOSS / GAIN IS OPERATING IN NATURE WITHOUT ASCERTAIN THE NEXUS OF THE FOREX GAIN / LOSS WITH THE BUSINESS ACTIVITY OF THE TAXPAYER AND WITHOUT APPRECIAT ING THAT SUCH LOSS / GAIN THOUGH ATTRIBUTABLE TO THE OPERATING ACTIVITY IS NOT DERIVED FROM THE OPERATING ACTIVITY. 3. THE CIT (APPEALS) ERRED IN CONCLUDING THAT FOREX GAIN / LOSS ARE TO BE TREATED AS OPERATING IN NATURE WITHOUT APPRECIATING THAT THOUGH T HEY MAY BE INCIDENTAL TO THE OPERATING ACTIVITY, THEY CANNOT BE DEEMED AS OPERATING IN NATURE SINCE, THEY ARE NOT CRITICAL TO OPERATIONAL ACTIVITIES OF THE BUSINESS CONDUCTED BY THE TAXPAYER. 4. THE CIT (APPEALS) ERRED IN LAW AS WELL AS ON FACTS BY DIRE CTING THE TPO TO DECIDE THE CASE OF THE ASSESSEE, BY APPLYING THE PRINCIPLES EMERGING FROM THE ORDERS OF THE DELHI BENCH OF THE HON'BLE TRIBUNAL IN HAWORTH (INDIA) PVT. LTD. V DCIT 11 ITR (TRIB) 757 AND THE BANGALORE BENCH OF THE HON'BLE TRIBUNAL IN TRILO GY E BUSINESS SOFTWARE V DCIT 23 ITR (TRIB.) 464 WITHOUT APPRECIATING THAT IN TRANSFER PRICING EVERY CASE IS UNIQUE AND REQUIRES TO BE DECIDED INDEPENDENTLY AND THAT THE DIRECTIONS ISSUED ARE BEYOND THE MANDATE OF THE PROVISIONS OF SECTION 251(1)(A) OF TH E IT ACT WHICH DO NOT EMPOWER THE CIT (APPEALS) TO SET ASIDE THE ISSUE. 5. THE CIT (APPEALS) ERRED IN DIRECTING THE ASSESSING OFFICER TO FOLLOW THE RATIO LAID DOWN BY THE HON'BLE COURT IN THE CASE OF TATA ELXSI LTD. 349 ITR 98 AND EXCLUDE THE TELECOMMUN ICATION EXPENSES AND OTHER FOREIGN CURRENCY EXPENSES FROM THE TOTAL TURNOVER ALSO WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE IT ACT, WITHOUT APPRECIATING THE FACT THAT THERE IS NO PROVISION IN SECTION 10A THAT SUCH EXPENSES SHOULD BE REDUCED FR OM THE TOTAL TURNOVER ALSO, AS CLAUSE (IV) OF THE EXPLANATION TO SECTION 10A PROVIDES THAT SUCH EXPENSES ARE TO BE REDUCED ONLY FORM THE EXPORT TURNOVER ALSO. 6. THE CIT (APPEALS) ERRED IN NOT APPRECIATING THE FACT THAT THE JURISDICTIONAL HIGH COURT S DEC ISION IN THE CASE OF TATA ELXSI LTD. 349 ITR 98 HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND AN APPEAL HAS BEEN FILED BEFORE THE HON'BLE SUPREME COURT. 7. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT (APPEALS) BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 8. THE APPELLATE CRAVES TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 4 IT (T.P) A NO. 1376 /BANG/ 2014 4. THE GROUNDS RAISED AT S.NOS.1, 7 & 8 BEING GENERAL IN NATURE, NO ADJUDICATION IS CALLED FOR THEREON. 5. GROUND NOS. 2 TO 4 : TRANSFER PRICING ISSUES. 5.1 THE ASSESSEE COMPANY, ENGAGED IN PROVIDING ITES TO ITS AES HAS REPORTED THE FOLLOWIN G INTERNATIONAL TRANSACTIONS ENTERED INTO BY IT IN THE YEAR UNDER CONSIDERATION : - S.NO. TYPE OF TRANSACTION AMOUNT (RS.) 1. ITES RESEARCH SERVICES 49,35,00,659 2. CROSS CHARGES FOR TRAVELLING, TRAINING AND COMMUNICATION EXPENSES (PAID) 3,40,13 9 . 3. REIMBURSEMENT OF EXPENSES (RECEIVED) 1,69,01,265 5.2 THE ASSESSEE CONDUCTED ITS TP STUDY APPLYING TNMM AS THE MOST APPROPRIATE METHOD (MAM) AND CONDUCTED ITS SEARCH OF THE DATA BASES FOR COMPARABLE COMPANIES. THE SEARCH YIELDED THE FOLLOWING SET OF 8 COMPARABLE COMPANIES. S.NO. NAME OF THE COMPARABLE 1. ALLSEC TECHNOLOGIES LTD. 2. CG - VAK SOFTWARE & EXPORTS LTD. 3. COSMIC GLOBAL LTD. 4. GENYSYS INTERNATIONAL CORPORATION LTD. 5. ICRA ONLINE LTD. 6. INFORMED TECHNOLOGIES INDIA LTD. 5 IT (T.P) A NO. 1376 /BANG/ 2014 7. R. SYSTEMS INTERNATIONAL LTD. 8. VISHAL INFORMATIONTECHNOLOGIES LTD. AS THE AVERAGE PROFIT MARGIN OF THE C OMPARABLE COMPANIES , WORKED OUT @ 14.01 % ON COST , WAS LOWER THAN THE PROFIT MARGIN OF THE ASSESSEE @ 14.64% , THE ASSESSEE HELD ITS INTERNATIONAL TRANSACTIONS T O BE AT ARM S LENGTH. TPO S APPROACH 5.3 THE TPO AFTER EXAMINING THE ASSESSEE'S T.P. STUDY, REJECTED IT . AFTER CONDUCTING A SEARCH FOR FRESH COMPAR A BLES AND CONSIDERING THE ASSESSEE'S OBJECTIONS IN THIS REGARD, THE TPO ARRIVED AT THE FINAL LIST OF 8 C OMPARABLE COMPANIES AND THEIR PROFIT MARGINS, THE DETAILS OF WHICH ARE EXTRACTED HEREUNDER : - S.NO. NAME OF THE COMPANY MARGIN % 1. INFOSYS BPO LTD. 24.41 2. ADITYA BIRLA MINACS WORLDWIDE LTD. 23.86 3. MICROLAND LTD. (BOTH SEGMENTS) 1.53 4. ALLSEC TEC HNOLOGIES LTD. - 16.63 5. ACCENTIA TECHNOLOGIES LTD. 46.40 6. INFORMED TECHNOLOGIES INDIA LTD. 22.61 7. COSMIC GLOBAL LTD. 40.61 8. ECLERX SERVICES LTD. 57.50 AVERAGE MEAN MARGIN 25.04 6 IT (T.P) A NO. 1376 /BANG/ 2014 5.4 THE AVERAGE MEAN MARGIN OF THESE 8 COMPARABLES WAS COM PUTED AT 25.04%. AFTER ALLOWING WORKING CAPITAL ADJUSTMENT OF 0.91%, THE ADJUSTED MEAN MARGIN WAS WORKED OUT AT 24.13 %. THE RESULTANT SHORTFALL AMOUNTING TO RS.4,08,55,503 WAS TAKEN AS THE T.P. ADJUSTMENT TO THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES IN THE ITES FIELD . 5.5 IN THE GROUNDS RAISED AT S.NOS.2 TO 4 , REVENUE CONTENDS THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT FOREIGN EXCHANGE LOSS / GAIN TO BE OPERATING IN NATURE WITHOUT ASCERTAINING THE NEXUS BETWEEN THE FOREX GAIN/LOSS WITH THE BUSINESS ACTIVITY OF THE ASSESSEE AND WITHOUT APPRECIATING THAT THIS GAIN/LOSS IS NOT DERIVED FROM THE OPERATING ACTIVITY OF THE ASSESSEE. REVENUE FURTHER CONTENDS THAT THE LEARNED CIT (A) ERRED IN DIRECTING THE TPO/ASSESSING O FFICER TO DECIDE THE MATTER FOLLOWING THE DECISIONS OF THE ITAT, DELHI BENCH IN HAWORTH (INDIA) PVT. LTD. IN 11 ITR (TRIB) 757 AND OF THE ITAT, BANGALORE BENCH IN THE CASE OF TRIOLOGY E - BUSINESS SOFTWARE INDIA PVT. LTD. IN 23 ITR (TRIB) 464. THE LEARNED D EPARTMENTAL REPRESENTATIVE WAS HEARD IN SUPPORT OF THE GROUNDS RAISED. 5.6 PER CONTRA, THE LEARNED AUTHORISED REPRESENTATIVE SUPPORTED THE IMPUGNED ORDER OF THE LEARNED CIT(A) IN HOLDING THAT FOREIGN EXCHANGE GAIN / LOSS TO BE PART OF THE OPERATING RE VENUE FOR THE PURPOSE OF COMPUTING THE ASSESSEE'S MARGIN FOR COMPARISON WITH THE MARGIN OF THE COMPARABLE COMPANIES. THE LEARNED AUTHORISED REPRESENTATIVE CONTE N DED THAT REVENUE S APPEAL ON THIS ISSUE IS LIABLE TO BE DISMISSED AS THE ISSUE OF FOREIGN EXC HANGE GAIN BEING PART OF THE OPERATING REVENUE S FOR THE PURPOSE OF COMPUTING THE 7 IT (T.P) A NO. 1376 /BANG/ 2014 ASSESSEE'S MARGIN HAS BEEN HELD IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE CO - ORDINATE BENCH ES OF THIS TRIBUNAL IN THE CASE OF MINDTECK (INDIA) LTD. IN IT(T.P) A NO.70/ BANG/2014 DT.21.8.2014 WHICH HAS FOLLOWED THE DECISIONS OF EARLIER CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF TRIOLOGY E - BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) AND SAP LABS INDIA (P) LTD. (2011) 44 SOT 156 (BANG). 5.7 WE HAVE HEARD THE RIVAL CO NTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL DECISIONS CITED AND PLACED RELIANCE UPON. WE OBSERVE THAT IT HAS NOT BEEN DISPUTED THAT THE FOREIGN EXCHANGE GAIN HAS ARISEN AS A CONSEQUENCE OF THE REALIZATION OF THE CONSIDERATION FOR RENDERING ITES SERVICES AND THEREFORE THERE IS NO REASON FOR ITS EXCLUSION FROM THE OPERATING REVENUES FOR THE PURPOSE OF CALCULATING THE OPERATING MARGIN OF THE ASSESSEE. WE FIND THAT THIS PROPOSITION HAS BEEN UPHELD BY A CO - ORDI NATE BENCH OF THIS TRIBUNAL IN THE CASE OF MINDTECK (INDIA) LTD. IN IT(TP)A NO.70/BANG/2014 DT.21.8.2014 WHEREIN AT PARA 11 THEREOF IT HAS BEEN HELD AS UNDER : - 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS NOT DISPUTED BY THE REVENUE THAT THE FO REIGN EXCHANGE FLUCTUATION HAS ARISEN AS A RESULT OF THE REALIZATION OF THE CONSIDERATION FOR RENDERING SOFTWARE DEVELOPMENT SERVICES. IT IS THEREFORE INCURRED IN THE NORMAL COURSE OF BUSINESS AND THEREFORE THERE IS NO REASON WHY IT SHOULD BE EXCLUDED F ROM DETERMINING THE OPERATING REVENUE FOR THE PURPOSE OF CALCULATION OF OPERATING MARGIN. IN OUR VIEW, THE ANALOGY DRAWN BY THE DRP REGARDING EXCLUSION OF INTEREST EXPENSES WHILE COMPUTING OPERATING MARGINS IS NOT PROPER. IN OUR VIEW, FOREIGN EXCHANGE GA IN ON REALIZATION OF CONSIDERATION FOR RENDERING SOFTWARE DEVELOPMENT SERVICES SHOULD BE REGARDING AS PART OF THE OPERATING REVENUE. FOLLOWING THE DECISION OF THE ITAT, BANGALORE BENCH IN THE CASE OF SAP LABS (SUPRA), WE HOLD THAT THE OPERATING REVENUE FO R THE ASSESSEE BE COMPUTED BY INCLUDING THE FOREIGN EXCHANGE GAIN. 8 IT (T.P) A NO. 1376 /BANG/ 2014 FOLLOWING THE DECISION OF THE CO - ORDINATE BENCHES OF THIS TRIBUNAL IN THE CASE OF SAP LABS INDIA (PVT.) LTD. (SURPA), TRIOLOGY E BUSINESS SOFTWARE INDIA PVT. LTD. (SUPRA) AND MINDTEC K (INDIA) LTD. (SUPRA), WE HOLD THAT OPERATING REVENUE SHOULD BE COMPUTED BY INCLUDING THE FOREIGN EXCHANGE GAIN. CONSEQUENTLY, THE GROUNDS AT S.NOS.2 TO 4 RAISED BY REVENUE ARE DISMISSED. 6. GROUND NO S . 5 & 6 DEDUCTION U/S.10A OF THE ACT. 6.1 I N TH E S E GROUND S (SUPRA) , THE REVENUE CONTENDS THAT THE IMPUGNED ORDER OF THE LEARNED CIT (APPEALS) WAS ERRONEOUS IN DIRECTING THE ASSESSING OFFICER TO FOLLOW THE RATIO LAID DOWN BY THE HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V TATA ELXSI LTD. ( 349 ITR 98 ) AND EXCLUDE TELECOMMUNICATION EXPENSES AND OTHER EXPENSES INCURRED IN FOREIGN CURRENCY FROM BOTH EXPORT AS WELL AS TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT. IT IS ALSO CONTENDED THAT THE DEPARTMENT HAS NOT AC CEPTED THE ABOVE DECISION IN THE CASE OF TATA ELXSI LTD. (SUPRA) AND HAS FILED AN APPEAL BEFORE THE HON'BLE APEX COURT, WHICH IS PENDING DISPOSAL. 6.2 WE HAVE HEARD BOTH THE LEARNED DEPARTMENTAL REPRESENTATIVE AND THE LEARNED AUTHORISED REPRESENTATIVE AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE BINDING DECISION OF HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V TATA ELXSI LTD. 349 ITR 98 (KAR.) . WE FIND THAT THIS GROUND IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECIS ION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT V TATA ELXSI LTD. 349 ITR 98, WHEREIN THE HON'BLE COURT HAS HELD THAT TELECOMMUNICATION EXPENSES REDUCED FROM EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM EXPORT TURNOVER 9 IT (T.P) A NO. 1376 /BANG/ 2014 WHILE COMPUTING DEDUCTION U NDER SECTION 10A OF THE ACT. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF TATA ELXSI LTD. (SUPRA) THE DEDUCTION UNDER SECTION 10A OF THE ACT BY EXCLUDING THE TELECOMMUNICATION EXPENSES FROM BOTH EXPORT T URNOVER AS WELL AS FROM TOTAL TURNOVER. CONSEQUENTLY, GROUND NO S . 5 & 6 ARE DISMISSED. 7. IN THE RESULT, REVENUE S APPEAL FOR ASSESSMENT YEAR 2009 - 10 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH APRIL, 201 5 . SD/ - ( VIJAYPAL RAO ) JUDICIAL MEMBER SD/ - (JASON P BOAZ) ACCOUNTANT MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE. (TRUE COPY) BY ORDER ASST. REGISTRAR, ITAT, BANGA LORE