ACIT, Hyderabad V. M/s. Infotech Enterprises Ltd ( formerly Tele Atlas India P. Ltd, Hyderabad

ITA 1604/HYD/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69936 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 19-05-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 15-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: V RAGHAVENDRA RAO
• Keywords: Transfer pricing; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1604/HYD/2010 ASSESSMENT YEAR 2003-04. ACIT, CIR-2(1), -V- M/S INFOTECH ENTERPRISES LTD., HYDERABAD. (FORMERLY TELE A TLAS INDIA PVT LTD.) MADHAPUR, HYDERABAD. PAN:AAACT4446Q (APPELLANT) (RESPONDENT) APPELLANT BY SHRI D. SUDHAKAR R AO RESPONDENT BY SHRI V. RAGHAVENDRA RAO DATE OF HEARING 05-11-2013 DATE OF PRONOUNCEMENT 13-11-2013 ORDER PER SAKTIJIT DEY, J.M: THIS APPEAL BY THE DEPARTMENT IS DIRECTED AGAINST T HE ORDER DATED 29-9-2010 OF CIT (A)-XX, NEW DELHI PERT AINING TO THE ASSESSMENT YEAR 2003-04. 2 ITA NO.1604 OF 2010 INFOTECH ENTERPRISES LTD., HYD. 2. THE DEPARTMENT HAS RAISED ALTOGETHER SIX GROUNDS . GROUND NOS. 1 AND 6 BEING GENERAL IN NATURE ARE NOT REQUIRED TO BE ADJUDICATED UPON. 3. GROUND NOS. 2 AND 3 RELATES TO THE ISSUE OF CIT (A) EXCLUDING HINDUJA TMT LIMITED AS A COMPARABLE. 4. BRIEFLY THE FACTS ARE, THE ASSESSEE, A COMPANY W AS EARLIER KNOWN AS M/S TELE ATLAS HERTOGENBOSECH BV WHICH SUBSEQUENTLY MERGED WITH THE PRESENT ASSESSEE BY VI RTUE OF AN ORDER PASSED BY THE HONBLE HIGH COURT OF ANDHRA P RADESH IN COMPANY PETITION NO.105/05 VIDE ORDER DATED 27-1-20 06. BE THAT AS IT MAY, DURING THE RELEVANT ASSESSMENT YEAR , THE ASSESSEE WAS AN WHOLLY OWNED SUBSIDIARY OF HEROTOG ENBOSCH BV ENGAGED IN THE BUSINESS OF DEVELOPMENT OF DIGITI SED GEOGRAPHIC DATABASES AND OTHER SOFTWARE THROUGH ITS UNIT IN NOIDA. FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE A SSESSEE WAS ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT AND IT ENABLED BACK OFFICE SERVICES. T HE ASSESSEE UNDERTOOK A TP STUDY TO JUSTIFY THE PRICE CHARGED T O ITS ASSOCIATED ENTERPRISE ( AE IN SHORT) TO BE WITHIN T HE ARMS LENGTH. FOR THAT PURPOSE, THE ASSESSEE ADOPTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD AND OPERATING PROFIT/TOTAL COST (OP/TC) AS THE PROFIT LEVEL INDICATOR. 5. THE ASSESSEE SELECTED SIX COMPANIES AS COMPARABL ES WITH AVERAGE OP/TC MARGIN BASED ON MULTIPLE YEAR DATA WO RKED OUT 3 ITA NO.1604 OF 2010 INFOTECH ENTERPRISES LTD., HYD. AT 10%. SINCE THE ASSESSEES OP/TC MARGIN OF 11.03 % WAS HIGHER THAN THE AVERAGE MARGIN OF 10% OF THE COMPAR ABLES, THE PRICE CHARGED BY THE ASSESSEE TO ITS AE WAS FOUND TO BE WITHIN THE ARMS LENGTH. 6. DURING THE PROCEEDINGS BEFORE THE TPO FOR DETER MINING THE ARMSS LENGTH PRICE OF THE INTERNATIONAL TRANSA CTION ENTERED INTO THE BY THE ASSESSEE WITH ITS AE, THE TPO REJEC TED ONE OF THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE N AMELY; VANS INFORMATION LIMITED ON THE GROUND OF FUNCTIONA L DISSIMILARITY, PERSISTENTLY LOSS MAKING ENTITY AND FURTHER IS NOT A REPRESENTATIVE SAMPLE OF THE INDUSTRY CHOSEN FOR THE PURPOSE OF COMPARABILITY. THOUGH THE ASSESSEE, IN THE COURS E OF PROCEEDINGS HAD OBJECTED TO SUCH REJECTION OF THE S AID COMPANY BUT THE TPO REJECTED THE SAME AND SELECTED BALANCE 5 COMPANIES AS COMPARABLES. THE TPO THEREAFTER RELYIN G UPON THE DATA FOR FINANCIAL YEAR 2000-01 AND 2001-02 OF THE SAID 5 COMPANIES ARRIVED AT THE AVERAGE OP/TC AT 19%. SIN CE THE ASSESSEES OP/TC MARGIN WAS DECLARED AT 11.03%, TH E TPO DETERMINED THE ARMSS LENGTH PRICE AT RS.25,18,17,4 89/- AS AGAINST RS.23,45,68,090/- DECLARED BY THE ASSESSEE THEREBY COMPUTING THE TRANSFER PRICING ADJUSTMENT OF RS.1,7 2,49,399/-. ON THE BASIS OF THE ADJUSTMENT, THE ASSESSING OFFIC ER COMPLETED THE ASSESSMENT BY MAKING THE ADDITION OF RS.1,72,49,399/- TO THE INCOME OF THE ASSESSEE. BE ING AGGRIEVED OF THE ADDITION SO MADE, THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE CIT (A). 4 ITA NO.1604 OF 2010 INFOTECH ENTERPRISES LTD., HYD. 7. IN COURSE OF HEARING OF APPEAL BEFORE THE CIT ( A) , THE ASSESSEE CONTENDED THAT ONE OF THE COMPARABLES I.E. , HINDUJA TMT LTD., WAS HAVING SIGNIFICANT RELATED PARTY TRAN SACTION OF ABOUT 28%, HENCE IT CANNOT BE TREATED AS COMPARABL E TO THE ASSESSEE. IN THIS RESPECT, THE ASSESSEE SUBMITTED THE DETAILS OF TRANSACTION OF HINDUJA TMT LTD.,. IT WAS FURTHE R CONTENDED THAT THE TPO HAS USED MULTIPLE YEAR DATA OF THE COM PARABLES TO ARRIVE AT THE OP/TC MARGIN WHICH IS IN COMPLETE VI OLATION OF RULE 10B(4) OF THE IT RULES WHICH MANDATE THAT ON LY CURRENT YEAR DATA OF THE COMPARABLE COMPANIES ARE TO BE CON SIDERED. THE ASSESSEE ALSO FURNISHED A WORKOUT SHOWING OP/T C MARGIN OF THE COMPARABLE COMPANIES ON THE BASIS OF THE CUR RENT YEAR DATA I.E., THE DATA FOR THE FINANCIAL YEAR 2002-03 WHICH IS AS UNDER:- S.NO. COMPANY NAME OP/TC MARGIN BASED ON CU RRENT YR (I.E. FY 2002-03) DATA INC LUDING EXCLUDING HINDUJA TMT LTD. HINDUJA TMT LTD. 1. AMI COMPUTERS (I) LTD -63% -63% 2. ACE SOFTWARE EXPORTS LTD. 8% 8% 3. HINDUJA TMT LTD. 106% X 4. MCS LTD. 15% 15% 5. NUCHEUS NETSOFT & GIS INDIA LTD. -26% -26% AVERAGE 8% -17% APPELLANTS OP/TC MARGIN 11.3% 11.3% 5 ITA NO.1604 OF 2010 INFOTECH ENTERPRISES LTD., HYD. 8. REFERRING TO THE SAID WORK OUT, IT WAS CONTENDE D BY THE ASSESSEE THAT EVEN AFTER RETAINING HINDUJA TMT LTD. , IF THE CURRENT YEAR DATA WILL BE CONSIDERED, WHICH IS ALSO IN ACCORDANCE WITH STATUTORY PROVISIONS, THEN THE AVER AGE OP/TC MARGIN OF COMPARABLES WOULD BE 8% AND WHILE EXCLUDING HINDUJA TMT LTD., THE AVERAGE OP/TC WOULD BE (-)17 %. THEREFORE, IT WAS CONTENDED THAT SINCE THE ASSESSEE HAD SHOWN OP/TC MARGIN OF 11.03% THERE CANNOT BE ANY TRANSFER PRICING ADJUSTMENT BECAUSE IT IS MUCH ABOVE THE AVERAGE OP/ TC OF THE COMPARABLES. THE ASSESSEE FURTHER OBJECTED TO THE REJECTION OF ONE OF THE COMPARABLES NAMELY VANS INFORMATION LTD. , BY THE TPO. HOWEVER SINCE WE ARE NOT CONCERNED WITH THAT I SSUE IN THE PRESENT APPEAL, IT IS NOT NECESSARY TO DEAL WITH TH E SAME. 9. THE CIT (A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE VIS A VIS THE STATUTORY PROVISIONS AGREED WITH THE CONTENTION OF THE ASSESSEE THAT ONLY CURRENT YEAR DATA CAN BE CONSIDERED FOR ARRIVING AT OP/TC MARGIN OF THE COMP ARABLE COMPANIES. THE CIT (A) AFTER CONSIDERING THE CURREN T YEAR DATA OF THE COMPARABLE COMPANIES NOTICED THAT THE OP/TC MARGIN AS PER THE WORK OUT GIVEN AT PAGE-13 OF HIS ORDER WHIL E INCLUDING THE REJECTED COMPANY, VIZ., VANS INFORMATION TECHN OLOGY, THE AVERAGE OP/TC WOULD BE (-)4.32% . WHEREAS ON EXCLUDING THE SAID COMPANY THE AVERAGE OP/TC WOULD BE 8%. SIMIL ARLY, IF BOTH THE COMPANIES I.E. I.E. HINDUJA TMT LTD., AND VANS INFORMATION ARE EXCLUDED FROM THE LIST OF COMPARABL ES, THE 6 ITA NO.1604 OF 2010 INFOTECH ENTERPRISES LTD., HYD. AVERAGE OP/TC MARGIN OF THE REMAINING COMPARABLES O N THE BASIS OF CURRENT YEAR DATA COMES TO (-17%). THE CIT (A) THE REFORE HELD THAT SINCE THE ASSESSEES OP/TC MARGIN IS 11.03% WHICH I S MUCH HIGHER THAN THE OP/TC MARGIN OF THE COMPARABLE COMPANIES BY USING THE CURRENT YEAR DATA, NO ADJUSTMENT CAN BE MADE TO THE ARMS LENGTH PRICE DECLARED AND ACCORDINGLY HE DELETED THE ADDIT ION MADE BY THE ASSESSING OFFICER. 10. WE HAVE HEARD THE CONTENTIONS OF THE PARTIES AN D PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF THE AU THORITIES BELOW. UNDISPUTEDLY, THE TPO WHILE DETERMINING THE ARMS L ENGTH PRICE HAS ARRIVED AT THE AVERAGE OP/TC MARGIN OF COMPARABLE COMPANIES BY RELYING UPON MULTIPLE YEAR DATA WHICH IS CONTRARY T O RULE 10 B(4) OF IT RULES. THE SAID RULE MAKES IT CLEAR THAT ONLY TH E DATA RELATING TO THE RELEVANT FINANCIAL YEAR HAS TO BE RELIED UPON FOR COMPUTING THE OP/TC MARGIN OF THE COMPARABLE COMPANY. THEREFORE, WHEN THE CURRENT YEAR DATA OF THE COMPARABLE COMPANIES WERE AVAILABLE ON PUBLIC DOMAIN, THE TPO WAS NOT JUSTIFIED FOR USIN G MULTIPLE DATA IN VIOLATION OF RULE 10B(4) OF I T RULES. AS HAS BEEN DEMONSTRATED BY THE ASSESSEE BEFORE THE CIT ( A), THE AVERAGE OP/T C MARGIN OF COMPARABLE COMPANIES, EVEN AFTER INCLUDING HINDUJA TMT LTD., AS A COMPARABLE, COMES TO 8% WHICH IS MUCH BELOW THE MAR GIN OF 11.03% SHOWN BY THE ASSESSEE. IN AFORESAID VIEW OF THE MATTER, NO ADJUSTMENT CAN BE MADE TO THE ARMS LENGTH PRICE DE CLARED BY THE ASSESSEE. THEREFORE, IN THE AFORESAID FACTS AND CI RCUMSTANCES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT ( A) WHICH IS ACCORDINGLY UPHELD. THE GROUNDS RAISED ARE DISMISS ED. 11. GROUND NO.4 READS AS UNDER:- 7 ITA NO.1604 OF 2010 INFOTECH ENTERPRISES LTD., HYD. THE LEARNED CIT (A) ERRED BOTH ON FACTS, IN LAW AN D CIRCUMSTANCES BY NOT CONSIDERING MARK UP ON THE REC HARGES RECEIVED BY THE TAXPAYER. THE LEARNED AR, AT THE OUTSET, OBJECTING TO THE AFO RESAID GROUND SUBMITTED THAT THE SAID GROUND DOES NOT ARISE EITHE R FROM THE ORDER OF THE TPO OR CIT (A). HENCE, THE DEPARTMENT CANN OT BE PERMITTED TO RAISE SUCH GROUND BEFORE US. IN FACT THE LEARNED DEPARTMENTAL REPRESENTATIVE WANTED TO WITHDRAW THE SAID GROUND. 12. AFTER PERUSING THE ORDER OF THE TPO AS WELL AS THE CIT (A), WE FIND THE AFORESAID CONTENTION OF THE LEARNED AR TO BE CORRECT, AS THE SAID GROUND DOES NOT ARISE OUT OF THE ORDER PASSED BY THE TPO OR CIT (A). IN AFORESAID VIEW OF THE MATTER, WE DISMI SS THE SAID GROUND AS NOT MAINTAINABLE. 13. IN GROUND NO.5, THE DEPARTMENT HAS RAISED THE I SSUE OF THE CIT (A) NOT PROVIDING ANY OPPORTUNITY TO THE TPO WHILE DISTURBING THE MARGINS BY ADOPTING FINANCIALS FOR THE YEAR ENDED O N 31-3-2003. 14. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES ON THIS ISSUE AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. IT IS A FACT N RECORD THAT THE TPO HAS USED MULTIPLE YEAR DATA FOR ARRIVING AT THE AVERAGE OP/TC MARGIN OF THE COMPARABLE COMPANIES. WHEREAS RULE 10B(4) OF IT RULES SPECIFICALLY PROVIDES FOR CONSIDERING T HE CURRENT YEAR DATA OF THE COMPARABLE COMPANIES UNLESS IT FALLS WI THIN THE EXCEPTION AS PROVIDED IN PROVISO TO RULE 10B(4). I T IS ALSO A FACT ON RECORD THAT CURRENT YEAR DATA OF THE COMPARABLE COM PANIES WERE AVAILABLE IN PUBLIC DOMAIN. THE CIT (A) HAS SIMPLY FOLLOWED THE STATUTORY PROVISION WHILE DETERMINING THE OP/TC MAR GIN OF THE COMPARABLE COMPANIES BY APPLYING THE CURRENT YEAR D ATA, HENCE IN THESE CIRCUMSTANCES, THE GRIEVANCE OF THE DEPARTMEN T THAT NO 8 ITA NO.1604 OF 2010 INFOTECH ENTERPRISES LTD., HYD. OPPORTUNITY WAS GRANTED TO THE TPO CANNOT BE ACCEPT ED. ACCORDINGLY, WE DISMISS THE GROUND RAISED BY THE DE PARTMENT. 15. IN THE RESULT, APPEAL FILED BY THE DEPARTMENT S TANDS DISMISSED. ORDER PRONOUNCED IN THE COURT ON13 -11-2013. SD/- ( CHANDRA POOJARI) ACCOUNTANT MEMBER SD/- (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 13 TH NOVEMBER, 2013 JMR* COPY TO:- 1) ACIT, CIR-2(1), 8-B, IT TOWERS, AC GUARDS, MASABTAN K, HYDERABAD. 2) M/S INFOTECH ENTERPRISES LTD., 4 TH FLOOR, A- WING, PLOT NO.11, SOFTWARE UNITS LAYOUT, INFOCITY, MADHAPUR, HYDERABAD. 3) CIT (A)-XX, NEW DELHI. 4) CIT, DELHI-VI, NEW DELHI. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABA D. 9 ITA NO.1604 OF 2010 INFOTECH ENTERPRISES LTD., HYD.