DCIT, Bangalore V. M/s Intellectual Venture India Consulting Pvt. Ltd., Bangalore

ITA 161/BANG/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7511 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 24-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 16-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Working capital adjustments; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE S HRI N.V. VASUDEVAN , JUDICIAL MEMBER AND SHRI JASON P BOAZ , ACCOUNTANT MEMBER I.T . (T.P) A. NO. 161 /BANG/20 15 (ASSESSMENT YEAR : 20 10 - 11 ) DY. COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(1), BANGALORE. . APPELLANT. VS. M/S. INTELLECTUAL VENTURE INDIA CONSULTING PVT. LTD., 701, RAHEJA PARAMOUNT, RESIDENCY ROAD, BANGALORE - 560 025 . .. RESPONDENT. I.T. (T.P) A. NO.237/BANG/2015 (ASSESSMENT YEAR : 2010 - 11) (BY ASSESSEE) ASSESSEE BY : SHRI S. RAGHUNATHAN, C.A. R E VENUE BY : SHRI G.R. REDDY, CIT (D.R) DATE OF H EARING : 19.10.2017. DATE OF P RONOUNCEMENT : 20 .10 .201 7 . O R D E R PER SHRI N.V.VASUDEVAN, J .M . : IT(TP) A.NO.237/BANG/2015 IS AN APPEAL BY THE ASSESSEE AND IT (TP) A.NO.161/BANG /2015 IS AN APPEAL BY THE REVENUE. BOTH THE APPEALS ARE DIRECTED AGAINST THE FAIR ORDER OF ASSESSMENT DATED 29.12.2014 PASSED BY DCIT, CIRCLE 3(1) (1), BANGALORE, U/S.143(3) READ WITH SEC.144C OF THE INCOME TAX ACT, 1961 (ACT) FOR ASSESSMENT YEAR 2010 - 11 . 2. THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956 ON 30.10.20107 (HEREINAFTER ALSO REFERRED TO AS IV INDIA). IT IS A SUBSIDIARY OF INTELLECTUAL VENTURES ASIA PTE LTD. SINGAPORE (HEREINAFTER REFERRED TO AS IV ASIA). IV ASIA IS A WHOLLY OWNED SUBSIDIARY OF INVENTION DEVELOPMENT MANAGEMENT COMPANY, USA. (HEREINAFTER CALLED IDMC). THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR RENDERED NON - BINDING ADVISORY SERVICES TO IV ASIA UNDER AN AGREEMENT DATED 19.12.2007. THE 2 IT (T.P) A NO S . 161 & 237 /BANG/201 5 ASSESSEE RECEI VED A SUM OF RS.21,89,55,900/ - FOR RENDERING ADVISORY SERVICES TO IV ASIA. IN VIEW OF THE PROVISIONS OF SEC.92 OF THE ACT, THE ASSESSEE HAS TO JUSTIFY THAT THE PRICE IT RECEIVED FROM THE ASSOCIATED ENTERPRISE WAS AT ARM S LENGTH(ALP). THE TRANSACTION BETW EEN THE ASSESSEE AND IV ASIA OF RENDERING ADVISORY SERVICES WAS AN INTERNATIONAL TRANSACTION AND SEC.92 OF THE ACT WAS APPLICABLE. THERE IS NO DISPUTE ON THIS ASPECT. TO SUPPORT THE CONSIDERATION RECEIVED AS ABOVE WAS AT ARM S LENGTH, THE ASSESSEE FILE D A TRANSFER PRICING STUDY (TP STUDY) IN WHICH THE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) AS THE METHOD FOR DETERMINING ALP. THE PROFIT LEVEL INDICATOR (PLI) CHOSEN FOR COMPARING THE MARGINS OF THE ASS ESSEE WITH THAT OF COMPARABLE COMPANIES WAS NET COST PLUS (NCP) MARGIN. THE NCP OF THE ASSESSEE WAS 12.40%. THE ASSESSEE CHOSE 19 COMPARABLE COMPANIES WHOSE AVERAGE NCP MARGIN WAS 15.35%. SINCE THE ASSESSEE S NCP WAS WITHIN (+) OR ( - ) 5% MARGIN PERMITTE D UNDER THE SECOND PROVISO TO SEC.92C OF THE ACT, THE ASSESSEE CLAIMED THAT THE PRICE RECEIVED IN THE INTERNATIONAL TRANSACTION WAS AT ARM S LENGTH. 3. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE AO MADE A REFERENCE FOR DETERMINATION OF ALP U/S.92CA OF THE ACT, ACCEPTED THE MAM AND THE PLI AS CHOSEN BY THE ASSESSEE. HE REJECTED THE 19 COMPARABLE COMPANIES IDENTIFIED BY THE ASSESSEE IN ITS TP STUDY. ON HIS OWN HE SELECTED 7 COMPANIES AND ARRIVED AT THE AVERAGE NCP MARGIN OF THOSE COMPANIES AT 24.80% . BY APPLYING THE ABOVE NCP MARGIN, THE AO FOUND THAT THE PRICE RECEIVED BY THE ASSESSEE FROM ITS AE WAS NOT AT ARM S LENGTH AND DETERMINED THE ADDITION TO BE MADE TO THE TOTAL INCOME ON ACCOUNT OF SHORTFALL OR ADJUSTMENT TO ALP OF RS.2,91,67,910. 4. BEFORE THE DRP, THE ASSESSEE RAISED OBJECTIONS REGARDING INCLUSION OF 2 OUT OF THE 7 COMPARABLE COMPANIES CHOSEN BY THE TPO, VIZ., ASIAN BUSINESS EXHIBITIONS AND CONFERENCES LTD. (ABEC) AND CYBER MEDIA RESEARCH LTD. THE ASSESSEE S PLEA WAS THAT BOTH THE AFORESAID COMPANIES ARE NOT FUNCTIONALLY COMPARABLE AND SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES CHOSEN BY THE TPO. THE DRP ACCEPTED THE PLEA 3 IT (T.P) A NO S . 161 & 237 /BANG/201 5 OF THE ASSESSEE FOR EXCLUSION OF CYBER MEDIA RESEARCH LTD., AS A COMPARABLE COMPANY BUT REJECTED THE PLE A OF THE ASSESSEE FOR EXCLUSION OF ABEC. IN THE APPEAL BY THE ASSESSEE, IN THE REVISED GROUNDS OF APPEAL FILED BEFORE THE TRIBUNAL (ORIGINAL GROUNDS RAISED WERE GIVEN UP BY THE LEARNED DR AT THE TIME OF HEARING), THE ONLY ISSUE RAISED IS WITH REGARD TO CO MPARABILITY OF ABEC WITH THAT OF THE ASSESSEE COMPANY. 5. IN THE APPEAL BY THE REVENUE, THERE ARE TWO ISSUES WHICH NEED TO BE ADJUDICATED VIZ., (I) WHETHER THE DRP WAS JUSTIFIED IN DIRECTING THE TPO TO WORK OUT THE WORKING CAPITAL ADJUSTMENT BY INCLU DING ADVANCES RECEIVED FROM THE AES FOR CALCULATING COST OF WORKING CAPITAL. (II) WHETHER FOREIGN EXCHANGE GAIN OUGHT TO BE CONSIDERED AS OPERATING PROFIT FOR THE PURPOSE OF ASCERTAINING THE PROFIT MARGINS OF THE ASSESSEE AND COMPARABLE COMPANIES. 6. FIRST, WE SHALL TAKE UP FOR CONSIDERATION, APPEAL BY THE ASSESSEE. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE A DECISION OF BANGALORE BENCH OF ITAT RENDERED IN THE CASE OF A COMPANY SIMILAR TO THE ASSESSEE COMPANY ENGAGED IN THE BUSINESS OF PROVIDING SALES SUPPORT SERVICES SERVICES TO AE VIZ., IT (TP) A.NO.331/BNG/2015 FOR AY 2010 - 11 IN THE CASE OF BROCADE COMMUNICATION SYSTEMS PVT. LTD. VS. ACIT ORDER DATED 21.10.2016. IN THAT CASE, ABEC WAS CHOSEN AS A COMPARABL E BY THE TPO. THE DRP UPHELD THE ACTION OF THE TPO. ON FURTHER APPEAL, THE TRIBUNAL HELD THAT ABEC WAS NOT A GOOD COMPARABLE AS IT WAS IN THE BUSINESS OF ORGANIZING EXHIBITIONS AND EVENTS OR CONFERENCES AND THEREFORE NOT A GOOD COMPARABLE WITH A COMPANY PROVIDING SUPPORT SERVICES. IN COMING TO THE ABOVE CONCLUSION THE TRIBUNAL RELIED ON THE DECISION OF ITAT BANGALORE BENCH IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. IT (TP) A.NO.212/BANG/2015 FOR AY 2010 - 11 (2016) 70 TAXMANN.COM 299 ( BANGALORE - TRIB.). IN THE SAID DECISION RENDERED IN THE CASE OF ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA), SALES AND MARKETING SUPPORT SERVICES WERE RENDERED BY THE ASSESSEE AND IT WAS HELD THAT ABEC WAS DERIVING INCOME FROM HOLDING EXHIBITIONS AND E VENTS AND 4 IT (T.P) A NO S . 161 & 237 /BANG/201 5 THEREFORE WAS NOT TO BE COMPARED WITH SUPPORT SERVICES. IN THE LIGHT OF THE ABOVE JUDICIAL PRONOUNCEMENTS AND CONSIDERING THE OBJECTIONS OF THE ASSESSEE IN THIS REGARD BEFORE THE DRP IN PAGE 54 TO 58 OF SUBMISSIONS DATED 2.4.2014 BEFORE THE DRP POINTING OUT THE FUNCTIONAL PROFILE OF ABEC, WE ARE OF THE VIEW THAT THE DRP OUGHT TO HAVE EXCLUDED ABEC FROM THE LIST OF COMPARABLE COMPANIES. THE DRP HAS IN PARA 3.1.1 OF ITS DIRECTIONS WITHOUT CONSIDERING THE ABOVE SUBMISSIONS OF THE ASSESSEE HAS MEREL Y OBSERVED THAT ABEC IS ALSO IN CONSULTANCY SERVICE BUSINESS. THE FINDING OF THE DRP IS THEREFORE NOT CORRECT. RESPECTFULLY FOLLOWING THE PRECEDENT ON THE ISSUE, WE HOLD THAT ABEC SHOULD BE EXCLUDED FROM THE LIST OF FINAL COMPARABLES CHOSEN BY THE TPO. THE APPEAL OF THE ASSESSEE IS ACCORDINGLY ALLOWED. 7. AS FAR AS THE APPEAL OF THE REVENUE IS CONCERNED, THE FIRST ISSUE IS WITH REGARD TO MANNER OF COMPUTING WORKING CAPITAL ADJUSTMENT. IN COMPUTING THE WORKING CAPITAL ADJUSTMENT AVERAGE ACCOUNTS PAYABLE IS ONE OF THE FACTOR TO BE TAKEN INTO ACCOUNT. THE ASSESSEE RECEIVED TRADE ADVANCES FROM ITS AE. THE ISSUE RAISED BY THE REVENUE IN ITS APPEAL ON THIS ASPECT IS AS TO WHETHER THE ADVANCE SO RECEIVED SHOULD BE CONSIDERED AS ACCOUNTS PAYABLE IN CO MPUTING WORKING CAPITAL ADJUSTMENT. THE DRP MERELY OBSERVED THAT THE COMPUTATION OF WORKING CAPITAL ADJUSTMENTS SHOULD BE CONSIDERED BY THE TPO IN PARA 5.2 OF ITS ORDER AND THERE IS NO DIRECTION THAT ADVANCES RECEIVED FROM AE SHOULD BE TAKEN INTO ACCOUNT AS ACCOUNTS PAYABLE WHILE COMPUTING WORKING CAPITAL ADJUSTMENT. NEVERTHELESS, WE FIND THAT THE ITAT BANGALORE IN THE CASE OF CGI INFORMATION SYSTEM & MANAGEMENT CONSULTANT PVT. LTD. VS. ACIT IT(TP) A.NO.346/BANG/2015 ORDER DATED 26.10.2016 (PARA - 18) HELD THAT ADVANCES RECEIVED FROM AE SHOULD BE CONSIDERED AS TRADE PAYABLE FOR THE PURPOSE OF WORKING OUT WORKING CAPITAL ADJUSTMENT. THE TRIBUNAL HELD THAT SUCH ADVANCES ALSO PARTAKE THE CHARACTER OF TRADE PAYABLE WHICH IS TO BE ADJUSTED AGAINST FUTURE INVOIC ES AND AS A RESULT OF RECEIPT OF ADVANCE, THE NECESSITY FOR BORROWING FROM OUTSIDER IS REDUCED AND TO THAT EXTENT THERE IS A REDUCTION IN BORROWING COST. THE TRIBUNAL HELD THAT THERE WOULD BE DIRECT BEARING ON THE PROFITABILITY OF THE BUSINESS AND THEREFO RE SUCH TRADE ADVANCES SHOULD ALSO BE CONSIDERED FOR WORKING OUT WORKING CAPITAL ADJUSTMENT. 5 IT (T.P) A NO S . 161 & 237 /BANG/201 5 RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE REJECT THE RELEVANT GROUND OF APPEAL OF THE REVENUE. 8. THE NEXT ISSUE RAISED BY THE REVENUE IS WITH REGARD TO INCLUSION OF FOREIGN EXCHANGE GAIN AS PART OF THE OPERATING PROFITS OF THE ASSESSEE AND THE COMPARABLE. THE DRP FOLLOWING THE DECISION OF THE ITAT BANGALORE IN THE CASE OF SAP LABS INDIA PVT. LTD. VS. ACIT (2010) 6 ITR (TRIB) 81 (BANG - ITAT) HELD THAT FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS HAS TO BE REGARDED AS PART OF THE OPERATING PROFITS. THE GRIEVANCE OF THE REVENUE IN THIS REGARD, BEFORE THE TRIBUNAL, IS THAT THE NEXUS OF SUCH GAIN WITH THE BUSINESS OF THE ASSESSEE HAS TO BE SEEN AND SUCH GAIN CAN NOT BE REGARDED AS OPERATING PROFIT WITHOUT SUCH NEXUS. THE REVENUE HAS ALSO SAID THAT SUCH GAIN ARE ONLY INCIDENTAL. THIS ARGUMENT DESERVES TO BE DISREGARDED IN THE VIEW OF THE DECISION IN THE CASE OF SAP LABS INDIA PVT.LTD. (SUPRA). AS FAR AS THE QUES TION WHETHER NEXUS WITH THE BUSINESS OF THE ASSESSEE AND THE FOREIGN EXCHANGE GAIN HAS TO BE SEEN OR NOT, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT SUCH NEXUS EXISTS IN THE CASE OF THE ASSESSEE AND THE COMPARABLES CHOSEN BY THE TPO AND THE QU ESTION IS THEREFORE ACADEMIC. THE AO/TPO WILL EXAMINE THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN THIS REGARD. THEREFORE, WE DO NOT FIND ANY MERIT IN THE GENERAL STAND TAKEN BY THE REVENUE ON THIS ISSUE IN ITS GROUNDS OF APPEAL. 9. IN THE RESUL T, THE APPEAL BY THE ASSESSEE IS ALLOWED, WHILE THE APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 20TH DAY OF OCTOBER, 201 7 . SD/ - ( JASON P BOAZ ) ACCOUN TANT MEMBER SD/ - ( N.V. VASUDEVAN ) JUDICIAL MEMBER BANGALORE, DT. 20 .10.2017. *REDDY GP