Quotient Engineering Inc., Kolkata V. ADIT(IT),2(1),Kolkata, Kolkata

ITA 1503/KOL/2012

• Counselvise Citation: 150323514 RSA 2012
• Duration Of Justice: 1 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2014
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 11-08-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 17-10-2012
• Court: TRIBUNAL
• Keywords: Transfer pricing
• Section: 143(3); 92

Judgement Text

ITA NO.1503/KOL/12-B-AM M/S. QUOTIENT ENGG. ENC. 1 , B IN THE INCOME TAX APPELLATE TRIBUNAL, B BENCH: KO LKATA ( ) , 1 , BEFORE HONBLE SRI SHAMIM YAHYA, AM & HONBLE SRI GEORGE MATHAN, JM $ / ITA NO. 1503/KOL/2012 A.Y 2008-09 M/S. QUOTIENT ENGINEERING INC PAN: AAACQO738N - - - VERSUS -. A.D.I.T (INTERNATIONAL TAXATION) CIR-2(1), KOLKATA ( % / APPELLANT ) ( &'% / RESPONDENT ) FOR THE APPELLANT: FOR THE RESPONDENT : /S/SHRI ADITYA HANS, FCA, ASHISH JAIN, CA, LD.ARS / SHRI VARINDER MEHTA, LD. CITD/SR.DR * + /DATE OF HEARING: 11-08-2014 * + /DATE OF PRONOUNCEMENT: 11--08-2014 / ORDER , SHRI SHAMIM YAHYA, AM THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF THE LD. ASSESSING OFFICER DATED 27-9-2012 143(3) PASSED U/S. 143(3) R .W.S 144C(5) OF THE I.T ACT 1961 PERTAINING TO ASSESSMENT YEAR 2008-09. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE REA D AS UNDER:- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE ORDER OF THE TRANSFER PRICING OFFICER-III(HEREINAFTER REFERR ED TO AS LD. TPO) PASSED U/S. 92 CA(3) OF THE INCOME-TAX ACT, 1961 (H EREINAFTER REFERRED TO AS THE ACT), SUBSEQUENTLY CONFIRMED IN PART BY THE D ISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS LD. PANEL) AND CONSEQ UENTLY INCORPORATED BY THE ASSISTANT DIRECTOR OF INCOME TAX (HEREINAFTER R EFERRED TO AS LD. AO) IN THE ASSESSMENT ORDER U/S. 143(3) R.W.S 144C OF T HE ACT, IS ERRONEOUS ON FACTS AND BAD IN LAW. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, LD. PANEL AND CONSEQUENTLY THE LD.AO ERRED IN CONFIRMING THE ADJU STMENT OF RS.28,20,250 ITA NO.1503/KOL/12-B-AM M/S. QUOTIENT ENGG. ENC. 3 UNCONTROLLED PRICE (CUP) METHOD AS MOST APPROPRIATE METHOD AND ON THE BASIS OF SIMILAR SERVICES RENDERED TO NICCO CORPORATION LTD (UNCONNE CTED COMPARABLE) AT THE RATE OF RS.625 PER HOUR, JUSTIFIED THE CHARGE MADE TO THE A E TO BE AN ARMS LENGTH TRANSACTION. IN ADDITION TO THIS THE ASSESSEE ALSO USED CPM AS THE MOST APPROPRIATE METHOD AND SELECTING ITSELF AS THE TESTED PARTY SEARCHED COMPARABLES A ND USING OPERATING PROFIT/SALES(OP/SALES) AS THE PLI ARRIVED AT THE CH ARGE OUT RATE OF RS.550 PER HOUR. THE AO HAS NOT ACCEPTED THE TRANSACTION WITH NICCO AS A CO MPARABLE TRANSACTION FOR ESTABLISHING THE CUP ON THE GROUND THAT THE ASSESSEE HAD NOT B EEN ABLE TO ESTABLISH THE EFFECTIVE REVENUE PER HOUR FOR THE MAIN PORTION OF THE CONTRA CT AND ALSO AS IT INCLUDED A CONDITION ACCORDING TO WHICH THE APPLICABLE BILLING RATE WAS TO BE RS.5,000/- PER DAY IF THE ASSESSEES PERSONNEL WERE TO TRAVEL OUTSIDE KOLKATA. THE TPO ALSO QUESTIONED THE ASSESSEES METHOD OF WORKING OUT THE ARMS LENGTH PRICE USING THE CPM METHOD ON THE GROUND THAT CONTRACT EXPENSES AND REIMBURSEMENTS COULD NOT BE SUBTRACTED FROM THE VARIABLE COST FOR THIS PURPOSE. FURTHER THE AO HELD THAT VARIABLE COSTS S HOULD NOT BE DIVIDED BY THE TOTAL BILLED HOURS (95,990) BUT BY THE ACTUAL HOURSE OF SERVICE RENDERED (47,543). FINALLY THE AO HELD THAT AUDIT FEES, BANK CHARGES AND RATES AND TAXES A MOUNTING TO RS.1,42,136/-, RS.46,465/- AND RS.1,31,896/- SHOULD BE INCLUDED IN THE FIXED C OST AND NOT IN THE VARIABLE COST. BASED ON THESE FINDINGS THE TPO HAS PROPOSED AN UPWARD AD JUSTMENT OF RS.55,83,930/- 4. AGAINST THE ABOVE, THE ASSESSEE APPEALED BEFOR E THE LD. DISPUTE RESOLUTION PANEL (LD. DRP). THE LD. DRP HAS UPHELD THE ABOVE ACTION OF THE LD. TPO (TRANSFER PRICING OFFICER). AS REGARDS GROUND NO.5 BEFORE THE LD.DRP , IT HAS DIRECTED THE LD.ASSESSING OFFICER TO VERIFY THE FACTS AND EXAMINE THE ASSESS EES CONTENTIONS. 5. NOW THE ASSESSEE IS IN APPEAL BEFORE US AND SUB MITTED AS UNDER:- TABLE 1: COMPUTATION OF ARMS LENGTH PRICE BY APPEL LANT AND LD.AO PARTICULARS REFERENCE AS CALCULATED BY THE APPELLANT AS CALCULATED BY THE LD.AO TOTAL VARIABLE COSTS [A] 1,53,99,050 1,53,9 9,050 ITA NO.1503/KOL/12-B-AM M/S. QUOTIENT ENGG. ENC. 5 MARGIN OF COMPARABLE COMPANIES HAS BEEN ERRONEOUS LY COMPUTED TO BE 38.03% ON TOTAL COST INCURRED. THE APPELLANT HAS SUBMITTED THE TRANSFER PRICING S TUDY REPORT WITH LD.AO ATTACHED AS ANNEXURE 1 OF THE SUBMISSIONS DATED 23 RD FEBRUARY, 2011. ON PAGE 49 OF THE TRANSFER PRICING STUDY REPORT FINANCIAL DET AILS OF THE COMPARABLE COMPANIES HAS BEEN PROVIDED WHICH HAS BEEN REPRODUCED BELOW F OR HONBLE MEMBERS CASE OF REFERENCE. TABLE 2: FINANCIAL DETAILS OF COMPARABLE COMPANIES (RS. IN CRORES) PARTICULARS YEAR END NET SALES NET PROFIT NET PROFI T/ NET SALES ACCCETIA TECH 200803 51.05 15.19 29.76% COSMIC GLOBAL 200803 5.87 1.11 18.91% DATAMATICS TECH 200803 75.34 17.12 22.72 GALAXY COMMERCIA 200803 10.92 0.49 4.49% HOV SERVICES 200803 6.26 1.08 17.25% ICRA ONLINE 200803 10.92 0.65 5.95% INFORMED TECHN 200803 4.55 1.68 36.92% SHREEJAL INFO 200803 1.57 -0.01 -0.64% TRICOM INDIA 200803 45.22 18.77 41.51% VISHAL INFORM 200803 38.08 12.74 33.46% TOTAL 249.78 68.82 AVERAGE NET PROFIT ON SALES 27.55% 21.03% AVERAGE NET PROFIT ON TOTAL COSTS 38.03% 26.63% YOUR HONBLE MEMBERS WOULD APPRECIATE THE FACT, THA T THE AVERAGE ARMS LENGTH PROFIT ON COSTS IS ACTUALLY 26.63%, PURSUANT TO 1 ST PROVISO TO SECTION 92C(1) OF THE ACT, AND IT HAS BEEN MISTAKENLY CONSIDERED AS 38.0 3% FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH RATE OF RECOVERY BY THE APPELLANT FOR SERVICES RENDERED TO ITS AE. 1 ST PROVISO TO SECTION 92C(1) OF THE ACT STATES: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES. FURTHER, THE MEMORANDUM EXPLAINING PROVISIONS OF F INANCE BILL, 2002 ALSO STATES: UNDER THE EXISTING PROVISIONS CONTAINED IN THE PR OVISO TO SUB-SECTION (2) OF THE INCOME-TAX ACT, IF THE APPLICATION OF THE MOST APPR OPRIATE METHOD LEADS TO ITA NO.1503/KOL/12-B-AM M/S. QUOTIENT ENGG. ENC. 7 SUBMITS FOR YOUR HONBLE MEMBERS CONSIDERATION THAT WHILE UNDERTAKING THE CALCULATION ( AS CAN BE SEEN FROM THE TABLE-1 ABOVE ) THE LD.AO ERRED ON THE FOLLOWING POINTS:- INCLUDING REIMBURSEMENTS AS PART OF THE APPELLANTS VARIABLE COSTS. IGNORING THE RECOVERY MADE BY THE APPELLANT FROM IT S AE ON ACCOUNT OF IDLE TIME. NOT CONSIDERING THE IDLE TIME RECOVERY WHILE CONSID ERING REIMBURSEMENTS IN THE COST LINE. THE APPELLANT APPEALS AGAINST EACH ERROR MADE BY T HE LD. AO IN GROUNDS 3.4 AND 5 RESPECTIVELY. THE RATIONALE EXPLAINING WHY THE I NTERNATIONAL TRANSACTIONS WOULD BE AT ARMS LENGTH BUT FOR EACH OF THE AFOREMENTION ED ERRORS HAS BEEN PROVIDED IN THE SUBSEQUENT PARAGRAPHS. 5.1 IN FURTHER SUBMISSIONS THE ASSESSEE HAS PUT FOR TH THE ARGUMENTS REGARDING THE ABOVE SUBMISSIONS. 6. WE HAVE ALSO HEARD THE LD.DR. 7. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORD. WE NOTE THAT THE SUBMISSIONS OF THE LD. COUNSEL ARE THAT THERE WAS A MISTAKE COMMITTED BY THE ASSESSEE IN PREPARING THE COMPUTATION , WHICH HAS RESULTED IN THE COMPUTATION OF AVERAGE NET PROFIT ON TOTAL COST AT 38.03%S, WHICH WOULD ACTUALLY BE AT 2 6.63%. IN SUPPORT OF THE CONTENTION, THE LD. COUNSEL OF THE ASSESSEE HAS RELIED UPON THE DE CISION OF THE ITAT BANGALORE, BENCH A, BANGALORE IN THE CASE OF M/S. LG SOFT INDIA PR IVATE LTD VS. DCIT, CIRCLE 1(2), BANGALORE-1 IN IT(TP) A NO.1121/BANG/2011 FOR ASSE SSMENT YEAR 2007-08 DATED 22 ND MARCH 2013. THE LD. COUNSEL OF THE ASSESSEE HAS CLA IMED THAT IF THE CORRECT COMPUTATION FIGURE IS ADOPTED, ASSESSEES RATE WILL FALL WITHI N THE ACCEPTABLE RANGE AND NO ADJUSTMENT WOULD BE REQUIRED. HE FURTHER PLEADED BEFORE US TH AT THE ASSESSEE HAD MADE A MISTAKE IN PUTTING FORTH THE WRONG COMPUTATION BEFORE THE AO. HE HAS ALSO CLAIMED THAT THIS MATTER WAS NOT RAISED BEFORE THE LD.DRP BY OVERSIGHT. HENC E, HE PLEADED THAT THE MATTER MAY BE REMITTED BACK TO THE FILE OF THE AO TO EXAMINE THIS ASPECT AFRESH. THE LD.DR HAS NO SERIOUS OBJECTION TO THIS PROPOSITION OF THE LD. COUNSEL O F THE ASSESSEE.