S.R.A.Systems Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1547/CHNY/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73691 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 06-01-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 07-08-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P B SEKARAN
• Assessee Lawyers: T BANUSEKAR
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction
• Section: 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI . . . , ! , ' # $ BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT & SHRI VIKAS AWASTHY, JUDICIAL MEMBER ./ I.T.A. NO. 1547/MDS/2012 ./ I.T.A. NO. 262/MDS/2013 / ASSESSMENT YEAR : 2008-09 S.R.A.SYSTEMS LTD., NO.100, VALLUR KOTTAM HIGH ROAD, NUNGAMBAKKAM, CHENNAI 600 034. [PAN: AAECS 7014 H] ( !% /APPELLANT) VS ASST. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-VI(1), CHENNAI ( &'!% /RESPONDENT) / APPELLANT BY : SHRI T.BANUSEKAR , C.A., / RESPONDENT BY : SHRI P.B.SEKARAN , CIT / DATE OF HEARING : 06-01-2014 /DATE OF PRONOUNCEMENT : 21-02-2014 #( / O R D E R PER VIKAS AWASTHY, JUDICIAL MEMBER: THE AFORESAID TWO APPEALS HAVE BEEN FILED BY THE A SSESSEE. IN ITA NO.1547/MDS/2012, THE ASSESSEE HAS ASSAILED THE ASSESSMENT ORDER DT.06-07-2012 FOR THE ASSESSMENT Y EAR (AY) 2008-09 PASSED U/S.143(3) R.W.S.144C(8) OF THE INCO ME TAX ACT, I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 2 1961 (HEREIN AFTER REFERRED TO AS THE ACT). IN IT A NO.262/MDS/2013 FOR THE SAME AY I.E., 2008-09 THE A SSESSEE HAS IMPUGNED THE DIRECTIONS OF THE DISPUTE RESOLUTION P ANEL [DRP] DATED 30-01-2013 U/S.144C(5) R.W.R.13 OF THE DRP RU LES. THE SECOND APPEAL IS CONSEQUENT TO THE RECTIFICATION PE TITION FILED BY THE ASSESSEE UNDER RULE 13 OF THE DRP RULES WHICH W AS DISMISSED BY THE DRP VIDE IMPUGNED ORDER. I.T.A. NO. 1547/MDS/2012: 2. THE ASSESSEE IS A COMPANY REGISTERED UNDER THE P ROVISIONS OF THE COMPANIES ACT, 1956 AND IS ENGAGED IN PROVID ING COMPUTER SOFTWARE CONSULTANCY AND DEVELOPMENT SERVICES TO CU STOMERS WORLDWIDE IN VARIOUS BUSINESS AREAS. FOR THE AY.20 08-09, THE ASSESSEE FILED ITS RETURN OF INCOME ON 28-09-2008 D ECLARING ITS INCOME AS NIL, AFTER CLAIMING DEDUCTION U/S.10A O F THE ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2) WAS ISSUED TO THE ASSESSEE ON 12-08-2009. T HE CASE OF THE ASSESSEE WAS REFERRED TO THE TRANSFER PRICING O FFICER [TPO] U/S.92CA FOR COMPUTING OF ARMS LENGTH PRICE [ALP] IN RESPECT OF INTERNATIONAL TRANSACTIONS. THE TPO VIDE ORDER DAT ED 31-10-2011 MADE UPWARD ADJUSTMENT OF ` 6.91 CRORES IN ALP. THE TPO WHILE I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 3 DETERMINING ALP, ACCEPTED THE METHOD I.E., TRANSACT IONAL NET MARGIN METHOD [TNMM] ADOPTED BY THE ASSESSEE AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP OF ITS ASSO CIATE ENTERPRISE [AE] TRANSACTION. HOWEVER, THE TPO REJE CTED THE THREE COMPANIES SELECTED BY THE ASSESSEE AS COMPARABLES. THE TPO SELECTED ANOTHER SET OF TEN COMPANIES TO DETERMINE THE PLI. THE TPO ON THE BASIS OF THE ARITHMETIC MEAN OF THE COMP ARABLE COMPANIES DETERMINED THE PLI AS 21.86% AS AGAINST P LI OF 3.68% DETERMINED BY THE ASSESSEE. THE TPO ACCORDINGLY MA DE UPWARD ADJUSTMENT OF ` 6.91 CRORES IN THE INCOME OF THE ASSESSEE. THE ASSESSING OFFICER FURTHER MADE ADDITIONS IN THE INC OME RETURNED BY THE ASSESSEE ON ACCOUNT OF EXCLUSION OF INTERNET CH ARGES FROM EXPORT TURNOVER ONLY, DIS-ALLOWANCE OF DEDUCTION U/ S.10A ON THE GROUND THAT THE ASSESSEE-COMPANY HAS BEEN FORMED BY RE- CONSTRUCTION AND TRANSFER OF PLANT & MACHINERY PREV IOUSLY USED AND DISALLOWING BROUGHT FORWARD LOSSES AND UN-ABSOR BED DEPRECIATION OF THE PREVIOUS YEAR BEFORE ALLOWING D EDUCTION U/S.10A OF THE ACT. AGGRIEVED AGAINST THE DRAFT ASSESSMENT ORDER DT.29- 11-2011, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP, CHENN AI. THE DRP REJECTED THE OBJECTIONS OF THE ASSESSEE WITH REGARD TO EXCLUSION OF I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 4 INTERNET CHARGES FROM EXPORT TURNOVER, DIS-ALLOWANC E OF DEDUCTION U/S.10A AND THE ADDITION MADE WITH REGARD TO SETTIN G OFF OF BROUGHT FORWARD DEPRECIATION BEFORE ALLOWING DEDUCTION U/S. 10A. AS REGARD THE OBJECTIONS OF THE ASSESSEE IN RESPECT OF DETERM INATION OF ALP, THE DRP REJECTED THE OBJECTIONS OF THE ASSESSEE ON MERITS BUT DIRECTED THE TPO TO ADOPT ARITHMETIC MEAN OF PLI OF COMPARABLES AT 13.35% AS AGAINST 21.86% ADOPTED BY TPO. THE AS SESSING OFFICER ON THE BASIS OF THE DIRECTIONS OF THE DRP P ASSED FINAL ASSESSMENT ORDER U/S.143(3) R.W.S.144C(8) OF THE AC T ON 06-07-2012. AGGRIEVED AGAINST THE ASSESSMENT ORDER, THE ASSESSE E HAS COME IN APPEAL BEFORE THE TRIBUNAL. 3. SHRI T.BANUSEKAR, APPEARING ON BEHALF OF THE ASS ESSEE SUBMITTED THAT THE FIRST ISSUE IN APPEAL WITH REGAR D TO EXCLUSION OF INTERNET EXPENSES FROM EXPORT TURNOVER AS WELL AS T OTAL TURNOVER IS SQUARELY COVERED BY THE DECISION OF THE SPECIAL BEN CH OF THE TRIBUNAL IN THE CASE OF ITO VS. M/S. SAKSOFT LTD REPORTED AS 121 TTJ CHENNAI (SB). THE SECOND ISSUE IN APPEAL RELATES TO DIS-ALLOWANCE OF DEDUCTION U/S.10A ON THE GROUND TH AT THE ASSESSEE-COMPANY HAS BEEN FORMED BY SPLITTING UP OR RE- I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 5 CONSTRUCTION OF AN EXISTING BUSINESS. THIS ISSUE W AS CONSIDERED BY THE TRIBUNAL IN ASSESSEES APPEAL FOR THE AY.200 2-03 IN ITA NO.2255/MDS/2006 DECIDED ON 16-05-2008. THE TRIBUN AL HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. THE T HIRD ISSUE IN APPEAL RELATES TO THE METHOD OF COMPUTATION OF INCO ME FOR CLAIMING DEDUCTION U/S.10A. THE LD.AR CONTENDED THAT THE AS SESSING OFFICER HAS ERRED IN HOLDING THAT DEDUCTION U/S.10A HAS TO BE CONSIDERED AFTER SETTING OFF OF BROUGHT FORWARD LOS SES. THIS ISSUE HAS ALREADY BEEN ADJUDICATED BY THE CO-ORDINATE BEN CH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY.2005-06 AND AY.2007- 08. THE TRIBUNAL FOLLOWED THE JUDGMENT OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. YOKOGAWA INDIA LTD. REPORTED AS 341 ITR 385 AND HELD THAT THE DEDUCTION U/S.10A IS TO BE ALLOWE D BEFORE SETTING OFF OF BROUGHT FORWARD LOSSES. THE FOURTH ISSUE IN APPEAL IS IN RESPECT OF UPWARD ADJUSTMENT OF ` 5,12,00,000/- MADE BY THE DRP. THE LD.AR CONTENDED THAT THE DRP HAS E RRED IN ARRIVING AT THE ARITHMETIC MEAN OF PLI OF COMPARABL ES AT 13.35%. THE AUTHORITIES BELOW HAVE ERRED IN NOT ADOPTING TH E PLI BASED ON THE STUDY CARRIED OUT BY THE ASSESSEE. THE DRP AS WELL AS THE ASSESSING OFFICER HAS FAILED TO TAKE INTO CONSIDERA TION THE FACT THAT THE COMPARABLES ADOPTED BY THE TPO HAVE FUNCTIONAL DIFFERENCES AND HAD RELATED PARTY TRANSACTIONS. MOREOVER, THER E WAS HUGE I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 6 VARIANCE IN THE TURNOVER OF COMPARABLE COMPANIES VI Z-A-VIZ ASSESSEE. THE LD.AR SUBMITTED THAT THE LAST GROUND IN THE APPEAL IS THAT THE ASSESSING OFFICER ERRED IN ADOPTING THE OPERATING COST AT ` 20.93 CORES AS AGAINST THE TOTAL OPERATING COST OF ` 20.09 CRORES AS PER THE AUDITED ACCOUNTS FOR THE YEAR ENDING 31- 03-2008. 4. ON THE OTHER HAND, SHRI P.B.SEKARAN , APPEARING ON BEHALF OF THE REVENUE VEHEMENTLY SUPPORTED THE ASSESSMENT ORD ER AND THE REASONING GIVEN BY THE DRP IN REJECTING THE OBJECTI ONS OF THE ASSESSEE. THE LD.DR FAIRLY CONCEDED THAT THE ISSUE NO.1 WITH REGARD TO EXCLUSION OF THE AMOUNT OF INTERNET EXPEN SES FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER IS COVERE D BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. M/S. SAKSOFT LTD (SUPRA) IN FAVOUR OF THE ASSESSEE. THE LD.DR SUBMITTED THAT THE ISSUE WITH REGARD TO SETTING OFF OF BROUGHT FORWARD BUSINESS LOSSES HAVE RECENTLY BEEN DECIDED IN FAVOUR OF THE REVENUE BY THE HONBLE SUPREME COURT OF INDIA. IN CIVIL APPEAL NO.1501/2008 IN THE CASE OF M/S.HIMATSINGKA SEIDE LTD., VS. CIT DECIDED ON 19-09-2013, THE HONBLE COURT DISMISSED THE APPEAL OF THE ASSESSEE AND DECIDED THE ISSUE IN FAV OUR OF THE REVENUE. I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 7 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF BOTH THE SIDES. WE HAVE ALSO PE RUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE DECISIONS O N WHICH THE REPRESENTATIVES OF BOTH THE SIDES HAVE PLACED RELIA NCE. THE FIRST ISSUE IN APPEAL RELATES TO THE EXCLUSION OF THE AMOUNT OF INTERNET EXPENSES FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. THE ASSESSING OFFICER HAS EXCLUDED AN AM OUNT OF ` 11,23,288/- BEING INTERNET EXPENSES FOR EXPORT OF S OFTWARE FROM EXPORT TURNOVER WITHOUT EXCLUDING THE SAME FROM TOT AL TURNOVER. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. M/S. SAKSOFT LTD (SUPRA) HAS HELD THAT THE ELIGIBLE EXPENDITURE HAS TO BE EXCLUDED FROM EXPORT TURNOVER AS WELL AS TOTAL TURN OVER. RESPECTFULLY FOLLOWING THE SAME, THIS GROUND OF APP EAL OF THE ASSESSEE IS ALLOWED. THE EXPENDITURE INCURRED ON A CCOUNT OF THE INTERNET EXPENSES FOR EXPORT OF SOFTWARE IS TO BE E XCLUDED FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. 6. THE SECOND ISSUE IN APPEAL IS DIS-ALLOWANCE U/S. 10A ON THE GROUND THAT THE ASSESSEE HAS BEEN FORMED BY SPLITTI NG UP OR/AND RE-CONSTRUCTION OF THE BUSINESS ACTIVITIES ALREADY IN EXISTENCE. WE FIND THAT THIS ISSUE HAD CROPPED UP IN THE CASE OF ASSESSEE IN THE I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 8 AY.2002-03 AS WELL. THE CO-ORDINATE BENCH OF THE T RIBUNAL IN ITA NO.2255/MDS/2006 DECIDED ON 16-05-2008 HAD HELD THA T THE ASSESSEE HAS NOT BEEN FORMED BY SPLITTING UP OF THE EXISTING BUSINESS OR RE-CONSTRUCTION OF THE BUSINESS AT A NE W PLACE BY SPLITTING UP OF EXISTING BUSINESS. THEREFORE, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 7. THE THIRD ISSUE IN APPEAL RELATES TO THE METHOD OF COMPUTATION OF DEDUCTION U/S.10A OF THE ACT. THE A SSESSEE HAS CLAIMED DEDUCTION U/S.10A BEFORE SETTING OFF OF UNA BSORBED DEPRECIATION AND BROUGHT FORWARD LOSSES. THE LD.AR OF THE ASSESSEE IN ORDER TO FORTIFY THE STAND OF ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF THE TRIBUNAL IN ASSESSE ES APPEAL FOR THE AY.2005-06 AND AY.2007-08 (SUPRA). THE LD.AR H AS ALSO DRAWN SUPPORT FROM THE JUDGMENT OF THE HONBLE KARN ATAKA HIGH COURT IN THE CASE OF CIT VS. YOKOGAWA INDIA LTD. (SUPRA). ON THE OTHER HAND, THE LD.DR HAS RELIED ON THE LATEST DECI SION OF THE HONBLE APEX COURT IN THE CASE OF M/S.HIMATSINGKA SEIDE LTD., VS. CIT (SUPRA). THE HONBLE SUPREME COURT OF INDIA DISMIS SED THE APPEAL OF THE ASSESSEE AND HAS UPHELD THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT. THE HONBLE HIGH COU RT HAS HELD THAT THE BROUGHT FORWARD DEPRECIATION HAS TO BE ADJ USTED AGAINST I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 9 THE PROFITS OF THE EOU BEFORE COMPUTING THE EXEMPTI ON ALLOWABLE U/S.10B. THE PROVISIONS OF SECTION 10A ARE PARI MATERIA WITH THE PROVISIONS OF SECTION 10B OF THE ACT. WE FIND THAT AS FAR AS UN-ABSORBED DEPRECIATION IS CONCERNED, THE HONBLE SUPREME COURT OF INDIA IN TH E CASE OF M/S.HIMATSINGKA SEIDE LTD., VS. CIT (SUPRA), HAS UP-HELD THE FINDINGS OF THE HONBLE KARNATAKA HIGH COURT AND AS SUCH, UN-ABSORBED DEPRECIATION HAS TO BE SET-OFF BEFORE C OMPUTING THE EXEMPTION ALLOWABLE U/S.10A. IN RESPECT OF SETTING -OFF OF THE BROUGHT FORWARD LOSSES, THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. YOKOGAWA INDIA LTD. (SUPRA) STILL HOLDS GOOD. ACCORDINGLY, THE ASSESSEE CAN CLAIM DEDUCTIO N U/S.10A BEFORE SETTING OFF OF BROUGHT FORWARD LOSSES. IN V IEW OF THE ABOVE, THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALL OWED. 8. THE FOURTH ISSUE IN APPEAL RELATES TO UPWARD ADJ USTMENT OF ` 5,12,00,000/- MADE BY DRP ON THE BASIS OF DIFFERENC E IN PLI OF THE ASSESSEE VIZ-A-VIZ PLI OF COMPARABLES. THE TPO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE THAT THE PRI CES CHARGED BY THE ASSESSEE FROM ITS ASSOCIATE ENTERPRISES WERE AT ARMS LENGTH. THE TPO REJECTED THE TRANSFER PRICING STUDY OF THE ASSESSEE ON THE I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 10 GROUND THAT OUT OF THREE COMPANIES SELECTED BY THE ASSESSEE AS COMPARABLES, TWO WERE OPERATING IN DOMESTIC MARKET ONLY. THE COMPARABLES OF ASSESSEE DID NOT PASS THE TEST OF FA R. THE TPO SELECTED TEN COMPANIES FOR COMPARATIVE STUDY. THE ASSESSEE OBJECTED TO THE COMPARABLES SELECTED BY THE TPO ON THE GROUND THAT THE COMPARABLES ARE NOT IN THE SAME LINE OF BU SINESS AS CARRIED ON BY THE ASSESSEE. THE ASSESSE IS BEING C OMPARED TO BPOS WHEREAS THE ASSESSEE IS IN THE BUSINESS OF SOF TWARE DEVELOPMENT. AS PER THE ASSESSEE, ITS PLI AFTER AD JUSTMENT IS 3.68% WHEREAS DRP DETERMINED THE AM OF PLI OF COMPA RABLES AS 13.35%. ADMITTEDLY, THERE IS NO DISPUTE WITH REGAR D TO THE METHOD ADOPTED BY THE ASSESSEE I.E., TNMM AS THE MOST APPR OPRIATE METHOD TO DETERMINE THE ALP OF ITS AE TRANSACTIONS. WE FIND THAT ON SAME SET OF FACTS, THE TRIBUNAL IN THE APPEAL OF THE ASSESSEE I.E., ITA NO.1813/MDS/2011 FOR THE AY.2007-08 DECIDED ON 08-01-2013 HAD DETERMINED THE PLI OF THE ASSESSEE AT 7%. WHILE DETERMINING THE PLI FOR THE AY.2007-08, THE TRIBUNAL HAD ALSO TAKEN INTO CONSIDERATION THE DIRECTIONS OF THE DRP FOR THE AY.2008-09. WE ARE OF THE CONSIDERED OPINION THAT IN VIEW OF THE ABOVE, IT WOULD BE APPROPRIATE TO ADOPT THE PLI AT 7% AS AGAINST 13.35% DETERMINED BY THE DRP. ACCORDINGLY, THIS GR OUND OF I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 11 APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. THE QUAN TUM OF ALP HAS TO BE RE-CALCULATED IN ACCORDANCE WITH THE PLI DETE RMINED HEREIN ABOVE. 9. THE ASSESSEE HAS RAISED AN ADDITIONAL GROUND OF APPEAL IN RESPECT OF THE VALUE OF OPERATING COST. THE ASSESS ING OFFICER HAS ADOPTED OPERATING COST AS ` 20.93 CRORES, WHEREAS THE ASSESSEES CONTENTION IS THAT AS PER AUDITED ACCOUNTS FOR THE FINANCIAL YEAR ENDING ON 31-03-2008, THE TOTAL OPERATING COST OF T HE ASSESSEE IS ` 20.09 CRORES. THIS IS A FACTUAL ERROR WHICH IS TO BE RECTIFIED AFTER REFERRING TO THE BOOKS OF ACCOUNTS OF THE ASSESSEE. THIS ISSUE IS REMITTED BACK TO THE ASSESSING OFFICER TO ADOPT THE CORRECT VALUE OF OPERATING COST AFTER VERIFYING THE SAME FROM THE AU DITED ACCOUNTS OF THE ASSESSEE FOR THE YEAR ENDING 31-03-2008. TH IS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSE. IN VIEW OF OUR ABOVE FINDINGS, THE APPEAL OF THE AS SESSEE IS PARTLY ALLOWED IN THE AFORESAID TERMS. I.T.A. NOS. 1547/MDS/12 & 262/MDS/13 12 ITA NO.262/MDS/2013: 10. IN THIS APPEAL, THE ASSESSEE HAS ASSAILED THE O RDER OF DRP DATED 30-01-2013 ARISING OUT OF RECTIFICATION PETIT ION FILED BY THE ASSESSEE. SINCE ALL THE ISSUES IN THE PRESENT APPE AL HAVE ALREADY BEEN CONSIDERED AND ADJUDICATED ON MERITS IN ITA NO. 1547/MDS/2012, THIS APPEAL HAS BECOME INFRU CTUOUS. THE APPEAL IS DISMISSED, ACCORDINGLY. ORDER PRONOUNCED ON FRIDAY, THE 21 ST FEBRUARY, 2014 AT CHENNAI. SD/- SD/- (DR. O.K. NARAYANAN) (VIK AS AWASTHY) VICE PRESIDENT JUDICIAL MEMBER DATED: 21 ST FEBRUARY, 2014 TNMM COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR