M/s. Avaya India Private Limited, Mumbai V. DCIT, New Delhi

ITA 1420/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3246 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 19-07-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 10-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; Source of fund
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER ITA NO.1420/DEL/2014 ASSESSMENT YEAR : 2006-07 AVAYA INDIA PRIVATE LIMITED, UNIT NO.202, 2 ND FLOOR, BUILDING PLATINA, PLOT NO.C-59, G-BLOCK, NEAR CITIBANK, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI. PAN: AAECA3592N VS. DCIT, CIRCLE-2(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ANUBHAV RASTOGI, ADVOCATE DEPARTMENT BY : SHRI KUMAR PRANAV, CIT, DR DATE OF HEARING : 30.11.2017 DATE OF PRONOUNCEMENT : 30.11.2017 ORDER PER R.S. SYAL, VP: THIS APPEAL FILED BY THE ASSESSEE ARISES OUT OF TH E FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 31.12 .2013 U/S 254 READ ITA NO.1420/DEL/2014 2 WITH SECTION 143(3) AND 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMEN T YEAR 2006-07. 2. SUCCINCTLY, THE FACTS OF THE CASE ARE THAT AN AS SESSMENT ORDER WAS PASSED BY THE ASSESSING OFFICER ON 16.09.2010 U/S 1 43(3) READ WITH SECTION 144C OF THE ACT MAKING AN ADDITION OF RS.4, 56,86,300/- ON ACCOUNT OF VARIATION IN THE INCOME AS A CONSEQUENCE OF THE ORDER PASSED BY THE TRANSFER PRICING OFFICER (TPO). THE SAID OR DER WAS CHALLENGED BEFORE THE TRIBUNAL. VIDE ORDER DATED 25.02.2011, THE TRIBUNAL, IN ITA NO.5150/DEL/2010, DECIDED MOST OF THE ISSUES. ONE OF THE FILTERS APPLIED BY THE TPO, AS ASSAILED IN THE APPEAL, WAS WAGES TO SALE RATIO BETWEEN 30 TO 60%. THIS FILTER WAS ADOPTED BY THE TPO IN T HE LIGHT OF THE FACT THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SO FTWARE DEVELOPMENT WHICH REQUIRES HIGHLY SKILLED MANPOWER. SINCE WAGE S CONSTITUTE A MAJOR PART OF THE TOTAL EXPENDITURE, THE TPO HELD THAT FI LTER OF WAGES/SALES RATIO BETWEEN 30% TO 60% SHOULD BE APPLIED, AS THE ASSESS EE HAD SUCH WAGES/SALES RATIO OF 46.96%. THE DRP APPROVED THE ACTION OF THE TPO IN THIS REGARD. IT WAS CONTENDED BEFORE THE TRIBUN AL THAT THE ADOPTION OF ITA NO.1420/DEL/2014 3 FILTER OF WAGES TO SALES RATIO BETWEEN 30 TO 60% WA S WRONG AND FURTHER EVEN THE SAME WAS NOT CORRECTLY APPLIED IN DETERMIN ING THE COMPARABILITY IN CERTAIN CASES. THE TRIBUNAL UPHEL D THE ADOPTION OF SUCH A FILTER BY MEANS OF DISCUSSION IN PARA 19 ONW ARDS OF ITS ORDER. HOWEVER, THE OBJECTION OF THE ASSESSEE ABOUT WRONG CALCULATIONS MADE BY THE AUTHORITIES BELOW WHILE APPLYING THIS FILTER WITH RESPECT TO FOUR PARTIES DESCRIBED IN PARA 11 OF THE ORDER, WAS ACC EPTED AND THE MATTER WAS RESTORED TO THE DRP FOR A FRESH DETERMINATION. THE FOUR PARTIES AS REFERRED TO IN PARA 11 OF THE TRIBUNAL ORDER ARE: I ) MELSTAR INFORMATION TECHNOLOGIES LIMITED; II) SQL STAR INTERNATIONAL LT D.; III) SASKEN COMMUNICATION TECHNOLOGIES LTD.; AND IV) SATYAM COM PUTER SERVICES LTD. APART FROM THAT, THE ASSESSEE ALSO CONTENDED BEFORE THE TRIBUNAL THAT M/S SPACE COMPUTER AND SYSTEMS LTD. WAS WRONGL Y EXCLUDED SIMPLY ON THE GROUND THAT IT WAS THE FIRST YEAR OF ITS OPERATION, WHEREAS, ACTUALLY IT WAS THE 16 TH YEAR. THE TRIBUNAL REMITTED THIS ISSUE ALSO TO T HE DRP FOR CARRYING OUT VERIFICATION AND ASCERTAINING IF SUCH CONTENTION OF THE ASSESSEE WAS CORRECT AND, FURTHER: WHETHER THE SAID PARTY CAN BE INCLUDED IN THE LIST OF COMPARABLES AS PER FILTERED CRITERIA. THE MATTER ITA NO.1420/DEL/2014 4 CAME UP BEFORE THE DRP FOR CARRYING OUT THE EXERCIS E AS DIRECTED BY THE TRIBUNAL. VIDE ITS ORDER DATED 20.09.2013, THE DRP FOUND FROM THE ANNUAL REPORTS OF MELSTAR INFORMATION TECHNOLOGIES LTD. AND SATYAM COMPUTER SERVICES LTD. THAT THEIR WAGES TO SALE RA TIO WAS 57.88% AND 58.28% RESPECTIVELY. SINCE THE SAME WAS WITHIN TH E RANGE OF 30% TO 60%, THESE COMPANIES WERE DIRECTED TO BE INCLUDED I N THE LIST OF COMPARABLES. HOWEVER, SUCH RATIO IN THE CASE OF SQL STAR INTERNATIONAL LTD. WAS DETERMINED BY THE DRP AT 27.61% AND IN SAS KEN COMMUNICATION TECHNOLOGIES LTD. AT 61.85%. THAT IS HOW, THESE TWO COMPANIES WERE FOUND TO BE LACKING IN SO FAR AS THE APPLICATION OF FILTER OF WAGES TO SALE RATIO (30% TO 60%) WAS CONCERNED. AS REGARDS THE LAST COMPANY, NAMELY, SPACE COMPUTER AND SYSTEMS LTD., T HE ASSESSEES CONTENTION WAS FOUND CORRECT THAT IT WAS NOT THE FI RST YEAR OF THIS COMPANY. THE DRP NOTICED THAT THE DIRECTION OF THE TRIBUNAL EXTENDED ALSO TO THE APPLICATION OF CORRECT FILTERS. THE DR P COMPUTED WAGES TO SALE RATIO OF THIS COMPANY AT 22.99%, WHICH WAS HEL D TO BE FAILING THE FILTER. THIS RESULTED INTO THE EXCLUSION OF THIS C OMPANY AS WELL. THE ASSESSEE IS AGGRIEVED AGAINST THE THREE EXCLUSIONS DIRECTED BY THE DRP ITA NO.1420/DEL/2014 5 WHICH CULMINATED INTO THE FINAL ASSESSMENT ORDER PA SSED BY THE ASSESSING OFFICER THAT IS IMPUGNED BEFORE US. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS AN ADMITTED POSITION THAT THE TRIBUNAL ORDER REMITTING THE MATTER TO THE DRP FOR THE FRESH EXERC ISE HAS ATTAINED FINALITY INASMUCH AS BOTH THE SIDES HAVE ACCEPTED T HE SAME. WE NOW COME TO THE LIS THAT IS INVOLVED IN THIS APPEAL, NAMELY, THE EXCLU SION OF THREE COMPANIES BY THE DRP, WHICH WE WILL ESPOUSE I N SERIATIM FOR DETERMINATION. (I) SASKEN COMMUNICATION TECHNOLOGIES LTD . 4. THE DRP HAS ADOPTED THE FIGURE OF SALES OF THI S COMPANY AT RS.26,754.43 LAC AND EMPLOYEE COST AT RS.16,548.36 LAC. THAT IS HOW, THE RATIO OF WAGE TO SALE WAS DETERMINED AT 61.85%. THE LD. AR CONTENDED THAT IN THE CALCULATION OF EMPLOYEE COST, THE DRP INCLUDED NOT ONLY SALARIES AND BONUS; CONTRIBUTION TO PROVID ENT FUND AND OTHER FUNDS; AND STAFF WELFARE (HEREINAFTER COLLECTIVELY CALLED ` THE EMPLOYEE COST) IN RESPECT OF DIRECT COSTS INCURRED IN PROVI DING SOFTWARE ITA NO.1420/DEL/2014 6 DEVELOPMENT SERVICES, BUT ALSO INCLUDED THE EMPLOYE E COST IN RESPECT OF RESEARCH AND DEVELOPMENT EXPENSES, SELLING AND MARK ETING EXPENSES AND ADMINISTRATIVE AND GENERAL EXPENSES. THE LD. A R CONTENDED THAT SUCH EMPLOYEE COST IN RELATION TO R&D; SELLING AND MARKETING; AND ADMINISTRATIVE AND GENERAL EXPENSES OUGHT TO HAVE B EEN EXCLUDED FROM TOTAL THE EMPLOYEE COST IN CALCULATING THE RATIO OF WAGES TO SALES. IT WAS CONTENDED THAT IF SUCH AN EXCLUSION OF THE EMPLOYEE COST IS MADE, THEN, THIS COMPANY PASSES THE FILTER OF WAGES TO SALES RA TIO BETWEEN 30% TO 60%. 5. WE ARE NOT CONVINCED WITH THE PROPOSITION P UT FORTH ON BEHALF OF THE ASSESSEE. IT IS DISCERNIBLE FROM THE `SALES F IGURE TAKEN BY THE DRP AT RS.26,754.43 LAC THAT THE SAME REPRESENTS TOTAL REVENUES OF THE COMPANY SHOWN IN ITS PROFIT & LOSS ACCOUNT. NOT ON LY THE EMPLOYEE COST OF DIRECT SOFTWARE DEVELOPMENT WERE BORNE BY T HE ASSESSEE FOR RENDERING SOFTWARE DEVELOPMENT SERVICES BUT ALSO TH E EMPLOYEE COST IN RESPECT OF R&D; SELLING AND MARKETING EXPENSES; AN D ADMINISTRATIVE AND GENERAL EXPENSES FOR EARNING THE FIGURE OF TOTA L REVENUE. OBVIOUSLY, ITA NO.1420/DEL/2014 7 COMPENSATION FOR THE EMPLOYEE COST IN RESPECT OF R& D; SELLING AND MARKETING EXPENSES; AND ADMINISTRATIVE AND GENERAL EXPENSES IS ALSO EMBEDDED IN THE AMOUNT BILLED TO THE CUSTOMERS, WHI CH REPRESENTS THE FIGURE OF TOTAL `SALES ADOPTED BY THE DRP. IF WE EXCLUDE THE EMPLOYEE COST IN RESPECT OF R&D; SELLING & MARKETING; AND AD MINISTRATIVE & GENERAL EXPENSES FROM THE OVERALL FIGURE OF EMPLOYE E COST ADOPTED BY THE DRP AND CONTINUE WITH THE FIGURE OF `SALES AT RS.26,754.43 LAC, IT WILL GIVE SKEWED RESULT. IT IS AXIOMATIC THAT ONCE COMPENSATION FOR THE EMPLOYEE COST IN RESPECT OF R&D; SELLING & MARKETIN G; AND ADMINISTRATIVE & GENERAL EXPENSES IS ALSO INCLUDED IN THE AMOUNT OF TOTAL `SALES ADOPTED FOR THE RATIO, THE CORRESPOND ING COSTS ALSO NEED TO BE INCLUDED IN THE EMPLOYEE COST BASE. WE, THEREFO RE, JETTISON THE CONTENTION RAISED ON BEHALF OF THE ASSESSEE. IT IS NOT DISPUTED THAT IF THE EMPLOYEE COST IN RESPECT OF R&D; SELLING & MARKETIN G; AND ADMINISTRATIVE & GENERAL EXPENSES IS INCLUDED, THEN , THE CALCULATION DONE BY THE DRP IS UNIMPEACHABLE. WE, THEREFORE, UP HOLD THE IMPUGNED ORDER IN EXCLUDING SASKEN COMMUNICATION TECHNOLOGIE S LTD. FROM THE LIST OF COMPARABLES. ITA NO.1420/DEL/2014 8 (II) SQL STAR INTERNATIONAL LTD . 6. THE DRP ADOPTED THE FIGURE OF `SALES OF TH IS COMPANY AT RS.31.70 CRORE WHICH INCLUDES NOT ONLY THE REVENUES FROM `SO FTWARE AND SERVICES BUT ALSO `TRAINING COURSE AND `OTHERS. A COPY OF PROFIT & LOSS ACCOUNT OF THIS COMPANY IS AVAILABLE AT PAGE 329 OF THE PAPER BOOK, WHICH GIVES THE BREAK-UP OF THE FIGURE OF TOTAL SAL ES OF RS.31.70 CRORE, AS `SOFTWARE AND SERVICES (RS.14.76 CRORE); `TRAIN ING COURSE (RS.15.43 CRORE); AND `OTHERS (RS.1.50 CRORE). AS AGAINST T HAT, THE FIGURE OF `EMPLOYEE COST, DESCRIBED AS PERSONNEL EXPENSES IN THE PROFIT & LOSS OF THIS COMPANY, STANDS AT RS.8.75 CRORE, WHICH HA S BEEN ADOPTED BY THE DRP FOR CALCULATING THE RATIO. THE LD. AR CONTENDE D THAT REVENUE FROM TRAINING COURSE AND OTHERS SHOULD BE EXCLUDED F OR WORKING OUT THE RATIO OF `WAGES TO SALE. 7. WE ARE NOT CONVINCED WITH THE SUBMISSION AD VANCED BEFORE US FOR THE RAISON DETRE THAT THE PERSONNEL EXPENSES OF RS.8.75 CRORE ARE A LSO IN RESPECT OF THE SOURCES OF REVENUE FROM TRAINING CO URSE AND OTHERS IN ADDITION TO `SOFTWARE AND SERVICES. ONCE PERSONNEL COST HAS BEEN TAKEN ITA NO.1420/DEL/2014 9 ON ENTITY LEVEL, AS THE SEQUITUR, THE AMOUNT OF `SA LES SHOULD ALSO BE TAKEN AT ENTITY LEVEL WITHOUT EXCLUSION OF REVENUE FROM TRAINING COURSE AND OTHERS. IT IS SO FOR THE REASON THAT SOME SOR T OF THE EMPLOYEE COST IS ALSO INCURRED FOR EARNING SUCH SOURCES OF INCOME . ON A SPECIFIC QUERY, THE LD. AR PUT FORTH THAT THERE WAS NO SEPARATE BIF URCATION OF PERSONNEL EXPENSES IN RELATION TO INCOME FROM SOFTWARE IN THE ANNUAL ACCOUNTS OF THIS COMPANY. IN THIS VIEW OF THE MATTER, IT BECOME S CLEAR THAT THE CALCULATION WILL HAVE TO BE MADE AT ENTITY LEVEL AS HAS BEEN DONE BY THE DRP. SINCE THE ASSESSEE FAILS THIS FILTER, WE HOLD THAT THIS COMPANY HAS BEEN RIGHTLY EXPUNGED FROM THE LIST OF COMPARABLES. (III) SPACE COMPUTER AND SYSTEMS LTD . 8. WE HAVE NOTICED ABOVE THAT THE DIRECTION OF THE TRIBUNAL WAS TO VERIFY IF THIS COMPANY WAS IN THE FIRST YEAR OF OPE RATION AND, FURTHER, IF IT SATISFIES THE OTHER FILTERS ADOPTED BY THE TPO. TH E DRP VERIFIED THE FIRST ASPECT AND FOUND THE ASSESSEES CONTENTION CORRECT INASMUCH AS IT WAS NOT THE FIRST YEAR OF THE COMPANY. AS REGARDS THE OTHER DIRECTION, THE DRP OBSERVED THAT THE : WAGES/SALES RATIO IS ONLY 22.99%, WHICH FAILS ITA NO.1420/DEL/2014 10 FILTER APPLIED BY TPO. THAT IS HOW, THIS COMPANY GOT EXCLUDED FROM THE FINAL TALLY OF COMPARABLES. THE ASSESSEE IS AG GRIEVED AGAINST THIS EXCLUSION. 9. HAVING HEARD BOTH THE SIDES AND PERUSED THE R ELEVANT MATERIAL ON RECORD, THE TRIBUNAL FINDS IT AS A FACTUAL POSITION THAT THIS COMPANY WAS FOUND TO BE WANTING ONLY IN RESPECT OF WAGES TO SA LE RATIO. THE DRP COMPUTED SUCH RATIO AT 22.99% BY TAKING THE AMOUNT OF `SALES AT RS.1.70 CRORE AND `EMPLOYEE COST AT RS.39.27 LAC. WE HAVE GONE THROUGH THE ANNUAL REPORT OF THIS COMPANY, A COPY O F WHICH IS AVAILABLE IN THE PAPER BOOK. IT IS DISCERNIBLE THAT THE AMOU NT OF `SALE HAS BEEN CORRECTLY TAKEN BY THE DRP. AS REGARDS THE `EMPLOY EE COST, IT IS NOTICED THAT UNLIKE SASKEN COMMUNICATION TECHNOLOGI ES LTD., THE DRP INCLUDED ONLY THE FIGURE OF SALARIES AND WAGES IN G ENERAL SECTION WITHOUT INCLUDING RECRUITMENT CHARGES AND STAFF WELFARE EXP ENSES AS GIVEN UNDER THE HEAD ADMINISTRATIVE EXPENSES AND CONSUL TANT FEES AND STAFF WELFARE EXPENSES AS GIVEN UNDER THE HEAD OPERATING EXPENSES. SINCE NO DIFFERENCE IN THE NATURE OF `STAFF WELFARE EXPEN SES INCURRED BY ITA NO.1420/DEL/2014 11 SASKEN COMMUNICATION TECHNOLOGIES LTD. AND THIS COM PARABLE HAS BEEN POINTED OUT BY THE DRP, WE HOLD THAT THE ABOVE REFE RRED EXPENSES SHOULD HAVE ALSO BEEN INCLUDED IN THE `EMPLOYEE COST BASE AS HAS BEEN DONE IN THE CASE OF SASKEN COMMUNICATIONS. `RECRUITMENT CH ARGES AND `CONSULTANT FEES ARE ALSO PART OF EMPLOYEE COST WH ICH OUGHT TO HAVE BEEN INCLUDED BY THE DRP IN THE OVERALL FIGURE OF ` EMPLOYEE COST OF THIS COMPANY THAT HAS BEEN TAKEN AT RS.39.27 LAC. I F THESE FOUR ITEMS ARE INCLUDED, TOTAL `EMPLOYEE COST COMES TO RS.75,80,1 57/-, WHICH GIVES RATIO OF WAGES TO SALE AT 44.38%, THUS, SATISFYING THE FILTER OF 30% TO 60%. WE, THEREFORE, OVERTURN THE IMPUGNED ORDER ON THIS SCORE AND ORDER TO INCLUDE THIS COMPANY IN THE LIST OF COMPAR ABLES. 10. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER O N THE ISSUE OF ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT AND RE MIT THE MATTER TO THE FILE OF AO/TPO FOR A FRESH DETERMINATION OF THE ARM S LENGTH PRICE IN THE HUE OF OUR ABOVE DISCUSSION. NEEDLESS TO SAY, THE A SSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. ITA NO.1420/DEL/2014 12 11. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 30.11.201 7. SD/- SD/- [K. NARASIMHA CHARY] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 30 TH NOVEMBER, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.