NMS Communications P. Ltd., V. DCIT,

ITA 1541/BANG/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8580 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 24-02-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 26-11-2012
• Court: TRIBUNAL
• Assessee Lawyers: MAHAVIR C JAIN
• Keywords: Transfer pricing; International transaction; Reasonable cause; Difference of opinion; Condonation of delay
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI NARENDRA KUMAR CHOUDHURY, JUDICIAL MEMBER IT(TP)A NO. 1541/BANG/2012 ASSESSMENT YEAR : 2007-08 NMS COMMUNICATIONS PRIVATE LIMITED, NO. 16/1, I FLOOR, CAMBRIDGE ROAD, HALASURU, BANGALORE PAN: AAACO6535D VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE APPELLANT RESPONDENT ASSESSEE BY : SHRI MAHAVIR C. JAIN, CA REVENUE BY : MS. NEERA MALHOTRA, CIT DATE OF HEARING : 15-03-2016 DATE OF PRONOUNCEMENT : 18-03-2016 O R D E R PER B. RAMAKOTAIAH, ACCOUNTANT MEMBER THIS APPEAL BY ASSESSEE IS AGAINST THE ORDER OF T HE ASSESSING OFFICER (AO) U/S. 143(3) R.W.S. 144C CONSEQUENT TO THE DIRECTIONS OF DISPUTE RESOLUTION PANEL [DRP]. 2. BRIEFLY STATED, ASSESSEE, NMS COMMUNICATIONS PRI VATE LIMITED WAS IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES. THE RETURN OF INCOME FOR THE AY. 2007-08 WAS SELECTED FOR SCRUTINY ASSESSMEN T AND THE AO HAS REFERRED THE INTERNATIONAL TRANSACTIONS WITH AE REP ORTED BY ASSESSEE FOR THE SAID ASSESSMENT YEAR TO THE TPO TO DETERMINE THE AR MS LENGTH PRICE IT(TP)A NO. 1541/BANG/2012 PAGE 2 OF 9 (ALP). THE AO REDUCED THE LEASED LINE CHARGES OF R S. 25,76,545/- AND TRAVELLING EXPENSE IN FOREIGN CURRENCY OF RS. 1,02, 30,194/- FROM THE EXPORT TURNOVER BUT NOT FROM THE TOTAL TURNOVER, WHICH RESULTED IN REDUCTION OF CLAIM U/S. 10A OF THE ACT TO THE TUNE OF RS. 17,41, 860/-. THEREAFTER, THE AO DENIED THE ENTIRE DEDUCTION U/S. 10A OF THE ACT ON THE GROUND THAT ASSESSEE DID NOT FURNISH THE FOREIGN INWARD REMITTANCE CERTI FICATE COPIES (FIRC) TO SUBSTANTIATE THE FACT THAT EXPORT PROCEEDS WERE REA LIZED WITHIN THE PERMITTED TIME. THE AO PASSED A DRAFT ASSESSMENT ORDER U/S. 144C OF THE ACT DT. 24 TH DECEMBER, 2010 WITH THE FOLLOWING ADJUSTMENTS: RS. TOTAL INCOME AS RETURNED BY ASSESSEE 7,000 ADD: ADJUSTMENTS: 1. TRANSFER PRICING ADJUSTMENT 1,11,77,183 2. DENIAL OF TAX HOLIDAY U/S. 10A OF THE ACT ON ACCOUNT OF NON-PRODUCTION OF FIRCS AND REDUCTION IN TAX HOLIDAY ON ACCOUNT OF DIFFERENCE OF OPINION OF THE TERM EXPORT TURNOVER. 2,35,83,305 ASSESSED INCOME 3,47,67,488 2.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE DRP AG AINST THE SAID DRAFT ORDER. DRP UPHELD THE TRANSFER PRICING ADJUSTMENT AND REDUCTION IN TAX HOLIDAY CLAIM ON ACCOUNT OF THE TERM EXPORT TURNOV ER. HOWEVER, WITH REGARD TO DISALLOWANCE OF ENTIRE TAX HOLIDAY CLAIM ON ACCOUNT OF NON- PRODUCTION OF FIRCS DIRECTED THE AO TO GRANT SUFFI CIENT OPPORTUNITY TO PRODUCE DOCUMENTS IN SUPPORT OF TAX HOLIDAY CLAIM B EING A FACTUAL ISSUE. PURSUANT TO THE DIRECTIONS, OPPORTUNITY WAS GIVEN B Y THE AO TO PRODUCE DOCUMENTS. ASSESSEE PRODUCED FIRCS COPIES, RECONC ILIATION STATEMENTS IT(TP)A NO. 1541/BANG/2012 PAGE 3 OF 9 ALONG WITH THE DETAILS OF INVOICES. HOWEVER, THIS TIME THE AO DISALLOWED THE ENTIRE SECTION 10A CLAIM ON THE GROUND OF NON-PRODU CTION OF INVOICES. ACCORDINGLY, AO PASSED FINAL ORDER ON 28 TH OCTOBER, 2011 MAKING THE ADJUSTMENTS AS MENTIONED IN THE TABLE HEREIN ABOVE. BEING AGGRIEVED BY THE ABOVE IMPUGNED ORDER OF DRP/AO, ASSESSEE HAS PR EFERRED THIS APPEAL BEFORE THE ITAT. 3. CONDONATION OF DELAY : THE APPEAL WAS FILED WITH A DELAY OF 335 DAYS WITH A PETITION FOR CONDONATION OF DELAY. IT WAS S UBMITTED THAT ASSESSEE- COMPANY CEASED ITS OPERATIONS IN THE YEAR 2009 AND APPOINTED AUTHORIZED PERSON TO REPRESENT THE COMPANY. THE APPOINTED AR S UDDENLY WITHDREW THE REPRESENTATION AND THE AO WAS INFORMED ACCORDIN GLY. THE COMPANY CAME TO KNOW ABOUT THESE FACTS AFTER TRO STARTED RE COVERY PROCEEDINGS ON ERSTWHILE DIRECTORS AND THEN COMPANY TOOK STEPS TO APPOINT A NEW AR, OBTAIN COPIES OF ORDERS FROM THE AO AND PREPARED PR ESENT APPEAL. IT WAS SUBMITTED THAT THE PROCEEDINGS TOOK CONSIDERABLE TI ME AND COMPANY HAS TAKEN STEPS IMMEDIATELY ON COMING TO KNOW OF ORDERS . IT WAS ALSO SUBMITTED THAT IN THE LATER YEARS ORDERS WERE PASSE D EX-PARTE AND LD.CIT(A) HAS CONDONED THE DELAY AND MATTER WAS ADJ UDICATED. CONSIDERING THE SUBMISSIONS AND EXAMINING THE FACTS AS PLACED ON RECORD, WE ARE CONVINCED THAT ASSESSEE HAS REASONABLE CAUSE IN NOT FILING THE APPEAL IN TIME AND SO THE DELAY IN FILING THE APPEA L IS CONDONED AND APPEAL IS ADMITTED. IT(TP)A NO. 1541/BANG/2012 PAGE 4 OF 9 CORPORATE MATTERS: 4. GROUND NO. 2 RAISED BY ASSESSEE IS ON DENIAL OF DEDUCTION U/S. 10A ON THE GROUND OF NON-PRODUCTION OF EXPORT INVOICES. AT THE DRAFT ASSESSMENT ORDER STAGE, AO DENIED THE DEDUCTION U/S . 10A ON THE REASON THAT FORM 56A SUPPORTING FOREIGN INWARD REMITTANCES (FIRCS) WERE NOT PRODUCED. ON OBJECTION FROM ASSESSEE AND FURNISHIN G OF COPIES, DRP DIRECTED THE AO TO EXAMINE THE SAME AND ALLOW DEDUC TION. AO, HOWEVER, DENIED THE ENTIRE DEDUCTION ON THE REASON OF NON-PR ODUCTION OF INVOICES INSPITE OF SUBMISSION OF FIRCS, LIST OF INVOICES A LONG WITH RE-CONCILIATION STATEMENT. IT WAS SUBMITTED THAT ASSESSEE IS PREPA RED TO SUBMIT THE INVOICES FOR VERIFICATION AND FURTHER SUBMITTED THA T ON SIMILAR LINES, ASSESSEE COULD PRODUCE THE INVOICES IN LATER YEAR B EFORE AO IN REMAND PROCEEDINGS AND LD.CIT(A) HAS ACCEPTED THE SAME. T HERE WAS NO APPEAL BY REVENUE ON THE ISSUE IN LATER YEAR. 4.1. AFTER CONSIDERING THE SAME, WE ARE OF THE OPIN ION THAT AO HAS WRONGLY DISALLOWED THE CLAIM. INITIALLY, THE CLAIM WAS DISALLOWED ON NON- PRODUCTION OF FIRCS. IN THE POST DRP PROCEEDINGS, THE DISALLOWANCE WAS MADE ON NON-PRODUCTION OF INVOICES. WE ARE NOT CON VINCED WITH REASONS STATED BY THE AO. IN FACT, HIS ORDER STATES THAT A SSESSEE HAS SHOWN INVOICE VALUE TO THE EXTENT OF RS. 17,11,75,098/- AS AGAINS T RS. 17,33,92,390/- AND BALANCE WAS RECONCILED. BE THAT AS IT MAY, NOW ASS ESSEE UNDERTAKES TO PRODUCE THE COPIES OF INVOICES TO THE AO. THEREFOR E, WITHOUT GOING INTO THE IT(TP)A NO. 1541/BANG/2012 PAGE 5 OF 9 MERITS OF ACTION OF AO, WE DIRECT THE AO TO EXAMINE THE SAME AND ALLOW THE CLAIM. THE ISSUE OF CLAIM OF 10A IS ACCORDINGLY SE T ASIDE TO THE AO FOR THAT LIMITED PURPOSE. GROUND IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 5. GROUND NO. 3 IS ALSO ON THE ISSUE OF CLAIM OF DE DUCTION U/S. 10A. AO EXCLUDED LEASED LINE CHARGES OF RS. 25,76,545/- AND TRAVELLING EXPENSES OF RS. 1,02,30,194/- RESPECTIVELY FROM THE EXPORT TURNOVER BUT HAS NOT REDUCED FROM THE TOTAL TURNOVER. DRP DID NOT H OWEVER, GRANT RELIEF EVEN THOUGH THE ISSUE WAS ALREADY DECIDED BY THAT TIME B Y VARIOUS ORDERS OF ITAT. THIS ISSUE WAS ALREADY DECIDED BY THE JURISD ICTIONAL HON'BLE HIGH COURT IN THE CASE OF TATA ELXSI LTD., VS. CIT,342 I TR 98 (KAR) WHEREIN IT WAS HELD THAT WHATEVER EXPENSES REDUCED FROM EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM TOTAL TURNOVER, WHILE COMPUTING THE DEDUCTION U/S. 10A OF THE ACT. WE DIRECT THE AO ACCORDINGLY. GROUND IS A LLOWED. TP ADJUSTMENT: 6. ASSESSEE HAS RENDERED SOFTWARE DEVELOPMENT SERVI CES TO AN EXTENT OF RS. 17.34 CRORES WITH A NET COST PLUS MARGIN OF 15.65%. TPO HAS SELECTED 26 COMPARABLES AND PROPOSED TP ADJUSTMENT OF RS.1,11,77,183/-. DRP CONFIRMED THE SAME. ASSESSEE HAS RAISED VARIOU S SUB-GROUNDS IN GROUND NO. 4 BUT DURING THE COURSE OF ARGUMENTS, LE ARNED COUNSEL RESTRICTED THE ARGUMENTS TO GROUND NO. 4(G) ON COMP ARABILITY OF CERTAIN IT(TP)A NO. 1541/BANG/2012 PAGE 6 OF 9 COMPANIES SELECTED BY TPO. OTHER GROUNDS ARE NOT P RESSED THEREFORE, TREATED AS WITHDRAWN. 6.1. THE FINAL SELECTION OF COMPARABLES ARE AS UNDE R: SL.NO. COMPANY NAME SALES (RS. CR) OP TO TOTAL COST % 1. ACCEL TRANSMATRIC LTD (SEG) 9.68 21.11 2. AVANI CIMCON TECH. LTD., 3.55 52.59 3. CELESTIAL LABS LTD., 14.13 58.35 4. DATAMATICS LTD. 54.51 1.38 5. E-ZEST SOLUTIONS LTD., 6.26 36.12 6. FLEXTRONICS SOFTWARE SYSTEMS LTD (SEG) 848.66 10.71 7. GEOMETRIC LTD (SEG) -158.38 10.71 8. HELIOS & MATHESON INFORMATION TECH LTD 178.63 36.63 9. IGATE GLOBAL SOLUTIONS LTD., 747.27 7.49 10. INFOSYS TECHNOLOGIES LTD 131.49 40.30 11. ISHIR INFOTECH LTD 7.42 30.12 12. KALS INFORMATION SYSTEMS LTD (SEG) 2.00 30.55 13. LGS GLOBAL LTD (LANCO GLOBAL SOLUTIONS LTD) 45.39 15.75 14. LUCID SOFTWARE LTD 1.70 19.37 15. MEDIASOFT SOLUTIONS LTD 1.85 3.66 16. MEGASOFT LTD., 139.33 60.23 17. MINDTREE LTD., 590.35 16.90 18. PERSISTENT SYSTEMS LTD., 293.75 24.52 19. QUNTEGRA SOLUTIONS LTD., 62.72 12.56 20. RS SOFTWARE (IND.) LTD., 101.04 13.47 21. R SYSTEMS INTERNATIONAL LTD (SEG) 112.01 15.07 22. SASKEN COMMUNICATION TECH. LTD (SEG) 343.57 22.16 23. SIP TECH. & EXPORTS LTD., 3.80 1.99 24. TATA ELXSI LTD (SEG) 262.58 26.51 25. THIRDWARE SOLUTIONS LTD., 36.08 25.12 26. WIPRO LTD., (SEG) 9616.09 3.65 ARITHMETIC MEAN 25.14 6.2. OUT OF THE ABOVE, ASSESSEE HAS NOT OBJECTED TO CERTAIN COMPARABLES AND ALSO THOSE WHICH ARE NOT OBJECTED TO BEFORE DRP /TPO, EVEN THOUGH SOME OTHER COMPANIES WERE ALSO EXCLUDED BY THE ORDE RS OF ITAT IN VARIOUS OTHER SIMILARLY PLACED COMPANIES. THEREFORE, THE A GREED LIST OF COMPANIES BY ASSESSEE ARE AS UNDER: I. DATAMATICS LTD., (SR.NO.4) IT(TP)A NO. 1541/BANG/2012 PAGE 7 OF 9 II. FLEXTRONICS SOFTWARE SUSTEMS (SEG) S.NO. 6 III. GEOMETRIC LTD., (SEG) S.NO. 7 IV. IGATE GLOBAL SOLUTIONS LTD., S.NO. 9 V. LGS GLOBAL LTD., S.NO. 13 VI. MEDIASOFT SOLUTIONS LTD., S.NO. 15 VII. RS SOFTWARE (INDIA) LTD., S.NO. 20 VIII. R SYSTEMS INTERNATIONAL LTD., S.NO. 21 IX. SASKEN COMMUNICATION TECHN LTD., S.NO. 22 X. SIP TECHNOLOGIES & EXPORTS LTD., S.NO. 23 6.3. WITH REFERENCE TO THE BALANCE OF COMPANIES FRO M THE ABOVE LIST IN PARA 6.1, IT WAS SUBMITTED THAT THEY ARE FUNCTIONAL LY DIFFERENT AND WERE EXCLUDED BY VARIOUS ORDERS OF CO-ORDINATE BENCHES I N THE FOLLOWING CASES: I. I2 TECHNOLOGIES INDIA PVT. LTD., VS. DCIT IN IT(TP)A NO. 1189/BANG/11; II. NXP SEMICONDUCTORS INDIA P. LTD., VS. DCIT IN IT(TP)A NO. 1174/BANG/2011; AND III. TRILOGY E BUSINESS SOFTWARE INDIA P. LTD., VS. DCIT IN IT(TP)A NO. 1057/BANG/2011 6.4. WE HAVE CONSIDERED THE DETAILED OBJECTIONS PLA CED ON RECORD BY WAY OF A CHART AND CO-ORDINATE BENCH DECISIONS. WE DO NOT INTEND TO REPEAT THE FINDINGS IN VARIOUS COORDINATE BENCHES O RDERS. SUFFICE TO SAY THAT THE FOLLOWING COMPANIES ARE EXCLUDED FOR THE B RIEF REASONS STATED AGAINST THE COMPANY: IT(TP)A NO. 1541/BANG/2012 PAGE 8 OF 9 1. ACCEL TRANSMATICS LTD (SEG) FUNCTIONALLY DIFFERE NT. PRODUCT/DESIGN COMPANY. 2. AVANI CIMCON TECHNOLOGIES LTD., FUNCTIONALLY DIFFERENT.. PRODUCT BASED COMPANY. 3. CELESTIAL LABS LTD., FUNCTIONAL DISSIMILARITY. P RODUCT BASED COMPANY . 4. E-ZEST SOLUTIONS LTD., FUNCTIONAL DISSIMILARITY. PRODUCT DEVELOPMENT SERVICE COMPANY. 5. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD., FUNCTIONAL DISSIMILARITY. ENGAGED IN SALE OF SOFTWARE. 6. INFOSYS TECHNOLOGIES LIMITED FUNCTIONAL DISSIMIL ARITY. HIGH TURNOVER. HIGH END PRODUCTS, BRAND NAME ETC., 7. ISHIR INFOTECH PVT LTD., FUNCTIONAL DISSIMILARIT Y. PRODUCT COMPANY. 8. KALS INFORMATION SYSTEMS LTD., FUNCTIONAL DISSIM ILARITY. DEVELOPMENT OF SOFTWARE PRODUCTS 9. LUCID SOFTWARE LTD., FUNCTIONAL DISSIMILARITY DE VELOPMENT OF SOFT PRODUCTS & R&D ACTIVITY. 10. PERSISTENT SYSTEMS LTD., FUNCTIONAL DISSIMILARITY. OUT SOURCED SOFTWARE DEVELOPMENT. NO SEGMENTAL DATA 11. QUINTEGRA SOLUTIONS LTD., FUNCTIONAL DISSIMILARITY. FOCUS ON SOFTWARE DEVELOPMENT AND CONSULTANCY SERVICES. 12. TATA ELXSI LTD., (SEG) FUNCTIONAL DISSIMILARITY. PR ODUCTS, DESIGN SERVICES, HIGH END SERVICES. 13. THIRDWARE SOLUTIONS LTD., FUNCTIONAL DISSIMILARITY. SOFTWARE AND PRODUCT DEVELOPMENT TRADING AND LICENSE S . 14. WIPRO LTD., (SEG) FUNCTIONAL DISSIMILARITY, WIDE RA NGE OF SERVICES, PRODUCTS DESIGN AND CONSULTANCY. WE DIRECT THE TPO TO EXCLUDE THE ABOVE COMPARABLES. 6.5. ONE COMPARABLE, MEGASOFT LTD., IS FUNCTIONALLY COMPARABLE BUT CO- ORDINATE BENCHES ARE DIRECTING TPO TO CONSIDER SEGM ENTAL DETAILS OF SOFTWARE DEVELOPMENT SERVICES ONLY. IN CASE OF NON -AVAILABILITY OF DATA OF SEGMENT, TPO MAY CONSIDER EXCLUDING IT FROM THE COM PARABILITY LIST. IT(TP)A NO. 1541/BANG/2012 PAGE 9 OF 9 6.6. TPO IS DIRECTED TO REWORK OUT THE ARITHMETIC M EAN OF ACCEPTED COMPANIES AND PREPARE ADJUSTMENT, IF ANY REQUIRED A FTER CONSIDERING THE PROVISO TO SECTION 92C(2). WITH THESE DIRECTIONS, THE GROUND NO. 4(G) IS CONSIDERED ALLOWED. 7. IN THE RESULT, APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 18 TH DAY OF MARCH, 2016 SD/- SD/- (NARENDRA KUMAR CHOUDHURY) (B. RAMAKOTAI AH) JUDICIAL MEMBER ACCOUNTA NT MEMBER BANGALORE, DATED, THE 18 TH MARCH, 2016. TNMM COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.