Cambridge Solutiions Limited, Bangalore V. DCIT, Bangalore

ITA 1385/BANG/2011

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8651 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 03-01-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 30-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUDHAKAR RAO
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Application of stay
• Section: 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH C, BANGALORE BEFORE SHRI A. K. GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER IT (TP) A NO.1385 (BANG) 2011 (ASSESSMENT YEAR : 2007-08) M/S XCHANGING SOLUTIONS LTD. (FORMERLY KNOWN AS CAMBRIDGE SOLUTIONS LTD., PLOT NO.13,14,15, SJR IPARK, EPIP INDUSTRIAL AREA, PHASE-I, WHITEFIELD, BANGALORE-560 066 PAN NO.AADCA2451M APPELLANT VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(2), 14/3, 4 TH FLOOR, R.P.BHAVAN, BANGALORE-560 001 RESP ONDENT ASSESSEE BY : SHRI CHAVALI NARAYAN, CA REVENUE BY : SHRI SUDHAKAR RAO, CIT DATE OF HEARING : 03-01-2017 DATE OF PRONOUNCEMENT : 11-01-2017 O R D E R PER SHRI A.K.GARODIA, AM THIS IS ASSESSEES APPEAL WHICH DIRECTED AGAINST TH E ASSESSMENT ORDER PASSED BY THE AO ON 27-10-2011 U/S 143(3) R.W.S. 14 4C OF THE IT ACT, 1961 FOR THE ASSESSMENT YEAR : 2007-08. 2. THE GROUNDS RAISED BY THE ASSESSEE IN ITS APPEAL ARE AS UNDER; BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, XCHANGING SOLUTIONS LTD.(FORMERLY KNOWN AS CAMBRIDG E SOLUTIONS LTD. (APPELLANT) RESPECTFULLY CRAVES TO LEAVE TO PR EFER AN APPEAL U/S 253 OF THE I T ACT, 1961(ACT) AGAINST THE ORDER PASSED BY THE DCIT, IN PURSUANCE OF THE DIRECTIONS ISSUED BY DRP, BANGALOR E DATED 29-09- IT(TP)A NO.1385(B)2011 2 2011 ON THE FOLLOWING GROUNDS; GENERAL 1.THE ORDER OF THE LD. AO AND DIRECTIONS OF THE HO NBLE DRP ARE BASED ON INCORRECT INTERPRETATION OF LAW AND THEREF ORE, ARE BAD IN LAW. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW AND BASED ON DIRECTIONS OF DRP, THE LD. AO ERRED IN ASS ESSING THE TOTAL INCOME ATRS.14,774,120 AS AGAINST RETURNED INCOME O F NIL COMPUTED BY THE APPELLANT. CORPORATE TAX GROUNDS 3. THE LD. AO HAS ERRED IN LA AND ON FACTS BY NOT C ONSIDERING THE PLEA THAT SINCE THE APPELLANT IS NOT RENDERING ANY TECHNICAL SERVICES OUTSIDE INDIA, FOREIGN CURRENCY EXPENDITURE INCURRE D BY THE APPELLANT SHOULD NOT BE REDUCED FROM EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING THE DEDUCTION U/S 10A OF THE ACT. 4. THE LD.AO HAS ERRED IN LAW BY NOT CONSIDERING TH E PLEA OF THE APPELLANT THAT IF COMMUNICATION EXPENSES ATTRIBUTAB LE TO RENDERING BUSINESS PROCESS OUTSOURCING/IT ENABLED SERVICES AR E EXCLUDED FROM EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUCED FR OM TTO IN COMPUTING THE DEDUCTION U/S 10A OF THE ACT. 5. THE LD. AO HAS ERRED IN LAW AND ON FACTS BY CONS IDERING TRAVEL EXPENDITURE INCURRED IN FOREIGN CURRENCY AMO UNTING TO RS.24,261,123 ON AN AD HOC BASIS AS BEING ATTRIBUTA BLE TO THE SERVICES RENDERED BY THE APPELLANT OUTSIDE INDIA. 6. THE LD. AO AS ERRED IN LAW AND ON FACTS BY NOT C ONSIDERING THE ALTERNATIVE PLEA OF THE APPELLANT THAT, IF THE TRAVEL EXPENSES INURED IN FOREIGN CURRENCY ATTRIBUTABLE TO RENDERING OF SE RVICES ARE EXCLUDED FROM EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUC ED FROM THE TTO IN COMPUTING THE DEDUCTION U/S 10A OF THE ACT. 7. THE LD. AO HAS ERRED IN LAW IN NOT APPLYING THE PREVAILING JUDICIAL PRECEDENTS OF THE HONBLE TRIBUNAL AND HON BLE KARNATAKA HIGH COURT ON THE PRINCIPLE OF PARITY BETWEEN ETO A ND TTO WHILE COMPUTING THE DEDUCTION U/S 10A. IT(TP)A NO.1385(B)2011 3 8. THE LD. AO HAS ERRED IN LAW AND ON FACTS BY REST RICTING THE QUANTUM OF SET OFF OF B/F BUSINESS LOSS OF RS.5,959 ,754 WITHOUT GIVING EFFECT TO THE QUANTUM OF B/F LOSS AVAILABLE FOR SET OFF AND CONSIDERING THE TOTAL INCOME NOT SO SET OFF AS TAXABLE. 9. WITHOUT PREJUDICE TO THE RECTIFICATION FILED, TH E LD. AO HAS ERRED IN NOT GRANTING CREDIT IN RESPECT OF TDS OF R S.2,984,285 CLAIMED BY THE APPELLANT. TRANSFER PRICING GROUNDS 10.THE LD. AO/TPO HAVE ERRED IN LAW AND ON FACTS, B Y IGNORING/DISREGARDING THE ECONOMIC ANALYSIS UNDERTA KEN BY THE APPELLANT (USING INTERNAL TNMM/CPM) IN ACCORDANCE W ITH THE PROVISIONS OF THE ACT READ WITH RULES, CONDUCTING A FRESH ECONOMIC ANALYSIS FOR THE DETERMINATION OF THE ALP IN CONNEC TION WITH THE IMPUGNED INTERNATIONAL TRANSACTION (USING EXTERNAL TNMM) AND HOLDING THAT THE APPELLANTS INTERNATIONAL TRANSACT IONS ARE NOT AT ARMS LENGTH. 11. THE LD. AO/TPO HAVE ERRED IN LAW AND ON FACTS B Y IGNORING THE FACT THAT SINCE THE APPELLANT IS AVAILING TAX H OLIDAY U/S 10A OF THE ACT, THERE IS NO MOTIVE OR REASON TO SHIFT PROFITS OUT OF INDIA, CURBING WHICH, IS THE BASIC INTENTION OF INTRODUCING THE TP PROVISIONS. 12. THE LD. AO/TPO HAVE ERRED IN LAW AND ON FACTS, BY FAILING TO APPRECIATE THAT TOTAL TRANSFER PRICING ADJUSTMENT M ADE, ALONG WITH THE ALP ALREADY REPORTED BY THE APPELLANT. CANNOT EXCEE D THIRD PARTY END CUSTOMER REVENUES. 13.THE LD. AO/TPO HAVE ERRED IN LAW AND ON FACTS, B Y APPLYING THE TURNOVER OF RS.1 CRORE AS A COMPARABILITY CRITE RION. 14. THE LD. AO/TPO HAVE ERRED IN LAW AND ON FACTS, BY APPLYING THE DIMINISHING REVENUE TREND AS A COMPARABILITY CR ITERION. 15. THE LD. AO/TPO HAVE ERRED IN LAW AND ON FACTS, BY REJECTING COMPANIES HAVING A DIFFERENT ACCOUNTING YEAR (I.E. COMPANIES HAVING ACCOUNTING YEAR OTHER THAN MARCH 31 OR COMPANIES WH OSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS). IT(TP)A NO.1385(B)2011 4 16. THE LD. TPO HAS ERRED IN LAW BY EXERCISING THIS POWERS U/S 133(6) OF THE ACT TO OBTAIN INFORMATION WHICH WAS N OT AVAILABLE IN PUBLIC DOMAIN AND RELYING ON THE SAME FOR COMPARABI LITY PURPOSES. 17. THE LD. AO/TPO HAVE ERRED IN LAW ON FACTS, BY N OT PROVIDING THE APPELLANT ANY OPPORTUNITY OF BEING HEARD IN CER TAIN CASES AND INCLUDING SOME COMPANIES AS COMPARABLE WITHOUT COMM UNICATING THE REASONS THEREOF. 18. THE LD.AO/TPO HAVE ERRED IN LAW, AND ON FACTS, BY INCLUDING CERTAIN COMPANIES BASED ON UNREASONABLE COMPARABILI TY CRITERIA. 19. THE LD. AO/TPO HAVE ERRED IN LAW AND ON FACTS, BY NOT TAKING INTO CONSIDERATION, FOREIGN EXCHANGE FLUCTUA TION GAIN/LOSS IN COMPUTING THE OPERATING MARGIN OF THE APPELLANT AS WELL AS THE COMPARABLE COMPANIES. 20. THE LD. AO/TPO ERRED, IN LAW AND ON FACTS, WHIL E COMPUTING THE WORKING CAPITAL ADJUSTMENT. 21. THE LD. AO/TPO HAVE ERRED IN LAW AND ON FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFEREN CES IN THE RISK PROFILE OF THE APPELLANT (IN THE PROJECTS WHERE IT ACTS AS A CONTRACT SERVICE PROVIDER) VIS--VIS THE COMPARABLES. 22. THE LD.AO/TPO HAVE ERRED IN LAW AND FACTS, IN C OMPUTING THE ALP WITHOUT GIVING BENEFIT +/- 5% UNDER THE PRO VISO TO SEC.92C OF THE ACT. 2. THE MEMORANDUM OF APPEAL BY AN ASSESSEE UNDER SE CTION 253(1) OF THE IT ACT, MUST BE ACCOMPANIED BY A FEE SPECIFIED BELOW:- A) WHERE THE TOTAL INCOME OF THE ASSESSEE AS COMPUT ED BY THE AO, IN THE CASE TO WHICH HE APPEAL RELATES, IS ONE HUNDRED THOUSAND RUPEES OR LESS, FIVE HUNDRED RUPEES. B) WHERE THE TOTAL INCOME OF THE ASSESSEE COMPUTED AS AFORESAID IN THE CASE TO WHICH THE APPEAL RELATES I S MORE THAN ONE HUNDRED THOUSAND RUPEES BUT NOT MORE THAN TWO HUNDR ED THOUSAND RUPEES, ONE THOUSAND FIVE HUNDRED RUPEES, C) WHERE THE TOTAL INCOME OF THE ASSESSEE COMPUTED AS AFORESAID IN THE CASE TO WHICH THE APPEAL RELATES IS MORE THA N TWO HUNDRED IT(TP)A NO.1385(B)2011 5 THOUSAND RUPEES, ONE PERCENT OF THE ASSESSED INCOME , SUBJECT TO A MAXIMUM OF TEN THOUSAND RUPEES. D) NO FEES SHALL BE PAYABLE IN THE CASE OF A MEMORA NDUM OF CROSS OBJECTIONS. E) AN APPLICATION FOR STAY OF DEMAND SHALL BE ACCOM PANIED BY A FEE OF FIVE HUNDRED RUPEES. IT IS SUGGESTED THAT THE FEE SHOULD BE CREDITED IN A BRANCH OF AUTHORIZED BANK OR BRANCH OF THE STATE BANK OF INDI A OR A BRANCH OF THE RBI AFTER OBTAINING A CHALLAN AND THE TRIPLICAT E CHALLAN SENT TO THE APPELLATE TRIBUNAL WITH A MEMORANDUM OF APPEAL. T HE APPELLATE TRIBUNAL WILL NOT ACCEPT CHEQUES, DRAFTS, HUNDIES O R OTHER NEGOTIABLE INSTRUMENTS. 3. THE MEMORANDUM OF APPEAL SHOULD BE WRITTEN IN EN GLISH OR, IF THE APPEAL IS FILED IN A BENCH LOCATED IN ANY SUCH STATE AS IS FOR THE TIME BEING NOTIFIED BY THE PRESIDENT OF THE APPELLA TE TRIBUNAL FOR THE PURPOSE OF RULE 5A OF THE IT RULES, 1963, THEN, AT THE OPTION OF APPELLANT, IN HINDI AND SHOULD SET FORTH, CONCISELY AND UNDER DISTINCT HEADS THE GROUNDS OF APPEAL WITHOUT ANY ARGUMENT OR NARRATIVE AND SUCH GROUNDS SHOULD BE NUMBERED CONSECUTIVELY. 4. THE NUMBER AND YEAR OF APPEAL WILL BE FILED IN T HE OFFICE OF THE APPELLATE TRIBUNAL. 5. IF THE SPACE PROVIDES IS FOUND INSUFFICIENT, SEP ARATE ENCLOSURES MAY BE USED FOR THE PURPOSE. IT WAS SUBMITTED BY THE LD.AR OF THE ASSESSEE THAT GROUND 1 TO 2 ARE GENERAL AND GROUND NO.3,5,7 & 9 ARE NOT PRESSED. ACCORDINGL Y, THESE GROUNDS ARE REJECTED. 3. REGARDING THE CORPORATE TAX ISSUE INVOLVED IN G ROUND NO.4 & 6, HE SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT RENDERED IN THE CA SE OF M/S TATA ELXSI LTD. AS REPORTED IN 349 ITR 98. IT(TP)A NO.1385(B)2011 6 4. REGARDING THE TP ISSUE, HE SUBMITTED THAT GROUN D NO.11,13 TO 17 ARE NOT PRESSED. ACCORDINGLY, THESE GROUNDS ARE REJECTED. R EGARDING THE REMAINING GROUNDS FOR TP ISSUE, HE SUBMITTED THAT THE MATTER SHOULD GO BACK TO THE FILE OF THE TPO FOR FRESH DECISION BECAUSE THIS WAS THE CLA IM OF THE ASSESSEE BEFORE THE TPO AS WELL AS BEFORE THE DRP THAT THE ASSESSEE IS HAVING SUBSTANTIAL TRANSACTION WITH UNRELATED PARTIES TO THE EXTENT OF RS.2515.56 LAKHS AS AGAINST SIMILAR TRANSACTIONS WITH RELATED PARTIES OF RS.1234.44 LAK H AS CONTRACT SERVICE PROVIDER AND RS.254.18 LAKHS AS AN ENTREPRENEUR AND THEREFOR E, THE ASSESSEES INTERNAL TNMM SHOULD ALSO BE CONSIDERED FOR DECIDING THE ALP AND IF THIS IS DONE, NO TP ADJUSTMENT IS CALLED FOR BECAUSE OPERATING PROFIT/O PERATING POST PERCENTAGE IN RESPECT OF UNRELATED PARTIES IS 9.76% WHEREAS THE S AME FOR TRANSACTION WITH AE IS IN THE RANGE OF 17.93% AND 20.35%. HE SUBMITTED T HAT NO FINDING HAS BEEN GIVEN BY THE TPO/DRP ON THIS ASPECT AND THEREFORE, THE EN TIRE MATTER OF TP SHOULD BE RESTORED BACK TO THE FILE OF THE TPO FOR FRESH DECI SION. 5. THE LD. DR OF THE REVENUE SUPPORTED THE ORDER O F DRP. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. REGAR DING THE CORPORATE TAX ISSUE AS PER GROUND NO.4 & 6 OF ASSESSEES APPEAL, WE FIND THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT O F THE HONBLE KARNATAKA HIGH COURT RENDERED IN THE CASE OF M/S TATA ELXSI LTD. ( SUPRA) WHEREIN IT WAS HELD THAT THE TOTAL TURNOVER IS THE SUM TOTAL OF EXPORT TURNO VER AND DOMESTIC TURNOVER AND THEREFORE, IF AN AMOUNT IS REDUCED FROM THE EXPORT TURNOVER THEN THE TOTAL TURNOVER ALSO AUTOMATICALLY GOES DOWN BY THE SAME AMOUNT. H ENCE, BY RESPECTFULLY FOLLOWING THIS JUDGMENT OF THE HONBLE KARNATAKA HI GH COURT, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND THE A.O. IS DIRECTED TO RECOMPUTED THE AMOUNT OF IT(TP)A NO.1385(B)2011 7 DEDUCTION ALLOWABLE U/S 10A IN THE LIGHT OF THIS JU DGMENT OF THE HONBLE KARNATAKA HIGH COURT. 7. REGARDING THE TP ISSUE, WE FIND FORCE IN THE SU BMISSION OF THE LD. AR OF THE ASSESSEE THAT THIS ISSUE SHOULD GO BACK TO THE FILE OF THE TPO FOR FRESH DECISION BECAUSE THIS WAS THE CLAIM OF THE ASSESSEE BEFORE T HE AUTHORITIES BELOW THAT INTERNAL TNMM OF THE ASSESSEE FOR ITS SUBSTANTIAL T RANSACTION WITH UNRELATED PARTIES SHOULD ALSO BE CONSIDERED TO DECIDE THE ALP BUT THIS ASPECT OF THE MATTER HAS BEEN BRUSHED ASIDE BY THE TPO AND DRP. HENCE, WE SET ASIDE THE ORDER OF THE AO ON TP ISSUE AND RESTORE THE MATTER TO THE FILE O F THE AO/TPO FOR A FRESH DECISION, AFTER EXAMINING THE CLAIM OF THE ASSESSEE FOR CONSIDERATION OF INTERNAL TNMM. WE WANT TO MAKE IT CLEAR THAT THE ENTIRE TP ISSUE IS OPEN AND WE EXPRESS NO OPINION ON ACCEPTABILITY OF ASSESSEES CLAIM FOR ADOPTING INTERNAL TNMM. THE ASSESSEE CAN RAISE ALL ARGUMENTS REGARDING THE TP I SSUE BEFORE THE AO/TPO AND HE SHOULD DECIDE THE ISSUE AS PER LAW AFTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. (VIJAY PAL RAO) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER PLACE: BANGALORE: D A T E D : .01.2017 AM * COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT IT(TP)A NO.1385(B)2011 8 5 DR, ITAT, BANGALORE. 6 GUARD FILE AR, ITAT, BANGALORE 1. DATE OF DICTATION 2. , , DATE ON WHICH TYPED DRAFT IS PLACED BEFORE THE DICT ATING MEMBER .. 3. !' # . $ %# / $ %# # & DATE ON WHICH THE APPROVED DRAFT COMES TO THE PS/SR .PS. 4. ''() & * + DATE ON WHICH THE ORDER IS PLACED BEFORE THE DICTAT ING MEMBER FOR PRONOUNCEMENT 5. * . %# / # . . %# # + DATE ON WHICH THE ORDER COMES BACK TO THE PS/SR.PS .. 6 * !', + DATE OF UPLOADING THE ORDER ON WEBSITE .. 7. ! !', ' , - ) IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO . 8. .% / 0 + DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. * 1'2 / 34 & 5 + DATE ON WHICH ORDER GOES FOR XEROX &ENDORSEMENT 10. 0 6 / + DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 11. * 7 & 0 8 + THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 12. !) * 9() & 0 9() /#5 . + THE DATE ON WHICH THE FILE GOES TO DESPATCH SECTION FOR DESPATCH OF THE TRIBUNAL ORDER 13. * 9() + DATE OF DESPATCH OF ORDER . IT(TP)A NO.1385(B)2011 9