ITO, Bangalore V. M/s Freescale Software India Pvt. Ltd., Bangalore

ITA 1612/BANG/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0441 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 02-05-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 28-11-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K R VASUDEVAN DR SHANKAR PR
• Keywords: Related party transaction; Transfer pricing; Principle of natural justice
• Section: 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH B, BANGALORE BEFORE SHRI A. K. GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER IT(TP)A NO.1612BANG) 2013 (ASSESSMENT YEAR : 2005-06) THE INCOME TAX OFFICER, WARD-11(2), BANGALORE APPELLANT VS M/S FREESCALE SOFTWARE INDIA PVT.LTD. (NOW AMALGAMATED WITH FREESCALE SEMICONDUCTOR INDIA (P)LTD) CAMPUS 1C, RMZ ECOSPACE, SARJAPUR OUTER RING ROAD, DEVARABISANAHALLI, NO.16/1, GROUND FLOOR, CAMBRIDGE BANGALORE-560 037 PAN NO.AABCP9786C RESPONDENT AND IT(TP)A NO.1566(BANG)/2013 (ASSESSMENT YEAR 2005-06) (BY ASSESSEE) ASSESSEE BY : SHRI K.R.VASUDEVAN, ADVOCATE REVENUE BY : DR. SHANKAR PRASAD, JCIT DATE OF HEARING : 02-05-2016 DATE OF PRONOUNCEMENT : 0 6-05-2016 O R D E R PER SHRI A. K. GARODIA, AM: THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE WHICH ARE DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A )-IV, BANGALORE DATED 16- 09-2013 FOR THE ASSESSMENT YEAR : 2005-06. 2. THE GROUNDS RAISED BY THE REVENUE IN ITS APPEAL ARE AS UNDER; ITA NO.1566(B)/13 & 1612(BANG)2013 2 1.THE ORDER OF THE LD.CIT(A) IS OPPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT(A) ERRED IN DIRECTING THE AO TO EXCLUDE THE INTERNET CHARGES OF RS.1019,612 FROM THE TOTAL TURN OVER ALSO WHILE COMPUTING THE DEDUCTION U/S 10A OF THE IT ACT , WITHOUT APPRECIATING THE FACT THAT THERE IS NO PROVISION IN SECTION 10A THAT SUCH EXPENSES SHOULD BE REDUCED FROM THE TOTAL TURNOVER ALSO, AS CLAUSE(IV) OF THE EXPLANATION TO SEC.10A P ROVIDES THAT SUCH EXPENSES ARE TO BE REDUCED ONLY FROM THE EXPOR T TURNOVER. 3. THE CIT(A) ERRED IN NOT APPRECIATING THE FACT T HAT THE JURISDICTIONAL HIGH COURTS DECISION IN THE CASE OF TATA ELXSI LTD. 349 ITR 98 HAS NOT BEEN ACCEPTED BY THE DEPART MENT AND AN APPEAL HAS BEEN FILED BEFORE THE HONBLE SUPREME COURT. 4. THE CIT(A) ERRED IN DIRECTING THE TPO TO EXCLUD E COMPANIES WHICH ARE FUNCTIONALLY DISSIMILAR SUBJECT TO THE GUIDELINES LAID DOWN BY THE DELHI BENCH OF THE TRIB UNAL IN THE CASE OF ACTIS ADVISERS P.LTD VS DCIT 20 ITR (TRIB. )138 WITHOUT APPRECIATING THE FACT THAT THE DIRECTIONS ISSUED AR E BEYOND THE MANDATE OF THE PROVISIONS OF SEC.251(1)(A) OF THE I T ACT, WHICH DOES NOT EMPOWER THE CIT(A) TO SET ASIDE THE ISSUE. 5. THE CIT(A) ERRED IN NOT APPRECIATING THE FACT T HAT WHEN ANY FILTER OR CRITERIA APPLIED BY THE ASSESSEE IS A CCEPTED OR IF ANY FILTER OR CRITERIA APPLIED BY THE TPO IS RELAXE D, THE ENTIRE ACCEPT/REJECT MATRIX CHANGES RESULTING IN A NEW SET OF COMPARABLES INCLUDING THOSE COMPARABLES WHICH ARE N EITHER TAKEN BY THE ASSESSEE OR THE TPO AND WHICH DO NOT F IND A PLACE IN THE ORDER UNDER SECTION 92CA. ITA NO.1566(B)/13 & 1612(BANG)2013 3 6. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE UR GED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE O RDER OF THE CIT(A) BE RECOVERED AND THAT OF THE AO BE RESTORED. 7. THE APPELLATE CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 3. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS I N ITS APPEAL; 1. THE LEARNED ('LD.') COMMISSIONER OF INCOME-TAX (APPEALS) - IV- BANGALORE, ['CIT (A)'] HAS GROSSLY ERRED IN IGNORIN G THE CONTENTIONS OF THE APPELLANT AND PASSING A CRYPTIC AND NONSPEAKING ORD ER. 2. THE LD. CIT (A) IN HIS ORDER HAS PROVIDED A VAGU E DIRECTION TO THE ID. ASSESSING OFFICER ('AO') INSTEAD OF PROVIDING SPECI FIC GUIDANCE TO REJECT OR ACCEPT THE GROUND OF APPEAL OF THE APPELLANT. 3. THE LD. CIT (A) HAS RIGHTLY DIRECTED THAT THE FU NCTIONALLY DISSIMILAR COMPANIES OUGHT TO BE EXCLUDED, HOWEVER THE LD. CIT (A) HAS ERRED IN NOT PASSING A SPEAKING ORDER SPECIFYING THE FUNCTIONALL Y DISSIMILAR COMPANIES. IN THIS CONNECTION, THE LD. CIT (A) HAS ALSO ERRED IN NOT TAKING COGNIZANCE OF THE JURISDICTIONAL RULING OF HON'BLE INCOME TAX APP ELLATE TRIBUNAL, BANGALORE BENCH IN CASE OF TOSHIBA EMBEDDED SOFTWAR E INDIA PRIVATE LIMITED [IT(TP)A NO. 1368/BANGJ201LAND IT(TP)A NO.1 /BANG/2012), WHEREIN THE FOLLOWING COMPARABLE COMPANIES HAVE BEE N REJECTED AS COMPARABLE TO THE TAXPAYER ENGAGED IN CAPTIVE SOFTW ARE DEVELOPMENT SERVICES SIMILAR TO THE APPELLANT. 3.1 FOUR SOFT LIMITED IS ENGAGED IN THE PROVISION O F SOFTWARE PRODUCT DEVELOPMENT SERVICES, THEREFORE, FUNCTIONAL LY DISSIMILAR TO THE APPELLANT; ITA NO.1566(B)/13 & 1612(BANG)2013 4 3.2 THIRDWARE SOLUTIONS LIMITED IS ENGAGED IN PURCH ASE AND SALE OF LICENSE, HENCE FUNCTIONALLY DISSIMILAR TO T HE APPELLANT; 3.3 GEOMETRIC SOFTWARE SOLUTIONS LIMITED IS ENGAGED IN PROVISION OF PRODUCT DEVELOPMENT AND ENGINEERING SERVICES, HE NCE FUNCTIONALLY DISSIMILAR TO THE APPELLANT; 3.4 TATA ELXSI LIMITED IS ENGAGED IN PROVISION OF P RODUCT ENGINEERING AND DESIGN SERVICES, THEREFORE FUNCTION ALLY DISSIMILAR TO THE APPELLANT; 3.5 EXENSYS SOFTWARE SOLUTIONS LIMITED IS ENGAGED I N PROVISION OF SOFTWARE PRODUCT DEVELOPMENT SERVICES, THEREFORE FUNCTIONALLY DISSIMILAR TO THE APPELLANT; AND 3.6 SANKHYA INFOTECH LIMITED IS ENGAGED IN PROVISIO N OF SOFTWARE PRODUCT DEVELOPMENT SERVICES AND PERFORMS SIGNIFICA NT RESEARCH AND DEVELOPMENT ACTIVITIES AND SELLING AND MARKETING AC TIVITIES, HENCE FUNCTIONALLY DISSIMILAR TO THE APPELLANT. 4. THE LD. CIT (A) ERRED IN NOT ADJUDICATING ON THE CONTENTION OF THE APPELLANT AGAINST THE ACTION OF THE ID. ADDITIONAL DIRECTOR OF INCOME TAX (TRANSFER PRICING-I), BANGALORE (TPO') OF REJECTING THE FOLLOWING FUNCTIONALLY COMPARABLE COMPANIES. A) MAARS SOFTWARE INTERNATIONAL LIMITED; B) QUINTEGRA SOLUTIONS LIMITED; C) C. ZYLOG SYSTEMS LIMITED; D) DATAMATICS LIMITED; AND E) TVS LNFOTECH LIMITED F. THE LD. CIT (A) ERRED IN UPHOLDING THE ACTION OF THE ID TPO OF REJECTING THE TRANSFER PRICING DOCUMENTATION WITHOU T APPRECIATING THE CONTENTIONS, ARGUMENTS, AND EVIDENTIARY DATA PUT FO RWARD BY THE APPELLANT DURING THE COURSE OF THE ASSESSMENT PROCE EDINGS. ITA NO.1566(B)/13 & 1612(BANG)2013 5 G. THE ID. CIT (A) ERRED IN UPHOLDING THE ACTION TH E ID. TPO IN REJECTING THE USE OF MULTIPLE YEAR DATA BY THE APPE LLANT IN THE TRANSFER PRICING DOCUMENTATION DESPITE RULE 109(4) OF THE IN COME TAX RULES. 1962 PROVIDING FOR THE USE OF SUCH DATA AND SELECTE D THE SINGLE YEAR DATA OF THE COMPANIES FOR THE YEAR ENDED MARCH 31, 2005 IN DETERMINING THE ARM'S LENGTH PRICE. H. THE ID. CIT (A) FAILED TO APPRECIATE THE FACT TH E COMPARABLE COMPANIES PROPOSED BY THE LD. TPO PROVIDE SERVICES TO INDEPENDENT THIRD PARTIES IN A CAPACITY OF A FULL-FLEDGED SERVI CE PROVIDERS, ASSUMING ENTREPRENEURIAL RISKS, AS COMPARED TO THE APPELLANT WHO OPERATES AS A RISK INSULATED CAPTIVE SERVICE PROVIDER. HENCE THE LD. CIT (A) HAS ERRED IN NOT ALLOWING THE ADJUSTMENT FOR THE DIFFERENCE I N THE RISK PROFILE. I. THE LD. CIT (A) ERRED IN UPHOLDING THE ACTION OF LD. TPO IN APPLYING THE ONSITE FILTER AND ADOPTING AN AD HOC T HRESHOLD OF 75 PERCENT FOR REJECTING COMPARABLE COMPANIES. IN DOIN G SO, THE LEARNED TPO ERRED IN REJECTING QUINTEGRA SOLUTIONS LIMITED AND DATAMATICS LIMITED. J. THE LD. CIT(A) ERRED IN UPHOLDING THE ACTION OF ID. TPO IN APPLYING EXPORT TURNOVER FILTER AND ADOPTING AN AD HOC THRESHOLD OF 25 PERCENT FOR REJECTING COMPARABLE COMPANIES. K. THE LD. CIT(A) ERRED IN UPHOLDING THE ACTION OF LD. TPO OF CONSIDERING 25 PERCENT AS THE THRESHOLD LIMIT FOR T HE RELATED PARTY TRANSACTIONS FILTER AS THIS NUMBER IS AN ARBITRARY NUMBER AND HAS BEEN ADOPTED WITHOUT ANY REASONABLE BASIS. L. THE LD. CIT (A) ERRED IN UPHOLDING THE ACTION OF LD. TPO OF REJECTING COMPANIES WITH DIFFERENT FINANCIAL YEAR E NDING WITHOUT APPRECIATING THE FACT THAT THE COMPANIES ACT. 1956 ALLOWS COMPANIES TO ITA NO.1566(B)/13 & 1612(BANG)2013 6 FOLLOW DIFFERENT FINANCIAL YEAR AS THEIR REPORTING PERIOD. IN DOING SO, THE LEARNED IPO ERRED IN REJECTING MAARS SOFTWARE INTER NATIONAL LIMITED AND TVS INFOTECH LIMITED. M. THE LD. CIT (A) IS ERRED IN UPHOLDING THE ACTION OF THE LD. TPO OF NOT ALLOWING THE BENEFIT OF RANGE OF /- 5% AS PR OVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT TO THE APPELLANT, WHILE D ETERMINING THE ARM'S LENGTH PRICE. N. THE LD. CIT (A) IS ERRED IN UPHOLDING THE ACTION OF THE ID. TPO IN COMPLETELY RELYING ON THE UNAUDITED DATA REQUISITIO NED AND CONSEQUENTLY OBTAINED BY TAKING RECOURSE TO THE PRO VISION OF SECTION 133(6) OF THE ACT, WHICH, IN MANY INSTANCES ARE INC ONSISTENT WITH THE DATA DISCLOSED IN AUDITED REPORTS AND THEREBY NOT C OMPLYING WITH THE PRINCIPLES OF NATURAL JUSTICE. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER OR AMEN D ALL OR ANY OF THE AFOREMENTIONED GROUNDS OF APPEAL. 3. IT WAS SUBMITTED BY THE LEARNED AR OF THE ASSES SEE THAT GROUND NOS.4(A) TO 4(E) ARE NOT PRESSED AND ACCORDINGLY, T HESE GROUNDS ARE REJECTED AS NOT PRESSED. HE ALSO SUBMITTED THAT THE REMAININ G GROUNDS ARE INTERCONNECTED WITH GROUND NO.4 TO 7 OF THE REVENUE S APPEAL IN RESPECT OF TRANSFER PRICING ISSUE. HE ALSO SUBMITTED THAT GRO UND NO.4 OF THE REVENUES APPEAL ALSO IT IS THE GRIEVANCE OF THE REVENUE THAT AS PER THE PROVISIONS OF SEC.251(1)(A) OF THE IT ACT, LEARNED CIT(A) IS NOT EMPOWERED TO SET ASIDE THE ISSUE. HE ALSO SUBMITTED THAT AS PER THE GROUNDS IN ASSESSEES APPEAL ALSO IT IS THE CONTENTION OF THE ASSESSEE THAT THE LD.CI T(A) HAS NOT DECIDED THE ITA NO.1566(B)/13 & 1612(BANG)2013 7 ISSUE IN PROPER MANNER, BECAUSE HIS ORDER IS NOT A SPEAKING ORDER AND HAS SIMPLY SET ASIDE THE MATTER AND RESTORED IT TO THE FILE OF THE AO/TPO WITH DIRECTION TO IGNORE THESE COMPARABLES WHICH ARE IN RESPECT OF FUNCTIONALLY DISSIMILAR COMPANIES, BUT HE HAS NOT DECIDED THE IS SUE IN RESPECT OF REJECTION OF SIX COMPARABLES AS PER GROUND NO.3.1 T O 3.6 OF THE ASSESSEES APPEAL AND INCLUSION OF FIVE COMPARABLES AS PER GRO UND NO.4(A) TO 4(E) OF THE ASSESSEES APPEAL. HE SUBMITTED THAT UNDER THESE F ACTS THE ISSUE REGARDING THE TP MATTER SHOULD BE RESTORED BACK TO THE FILE O F THE CIT(A) FOR A FAIR DECISION BY WAY OF A SPEAKING ORDER IN RESPECT OF S PECIFIC GROUNDS OF THE ASSESSEE FOR EXCLUDING SIX COMPARABLES ON ACCOUNT O F FUNCTIONALLY DISSIMILARITY AND INCLUSION OF FIVE COMPARABLES WHI CH WERE REJECTED BY THE TPO BY ALLEGING THE FUNCTIONALLY DISSIMILARITY WHER EAS THE SAME ARE FUNCTIONALLY COMPARABLE COMPANIES AS PER THE ASSESS EE. AS AGAINST THIS IT WAS SUBMITTED BY THE LD. DR OF THE REVENUE THAT SIN CE THE LD. CIT(A) HAS NOT DECIDED THE ISSUE HIMSELF AND SET ASIDE THE MATTER TO THE FILE OF THE AO/TPO HIS ORDER ON TP ISSUE IS NOT SUSTAINABLE. AS PER TH E PROVISIONS OF SEC.251(1)(A) OF THE IT ACT WHICH DOES NOT EMPOWER THE CIT(A) O SET ASIDE THE ISSUE. REGARDING GROUND NO.1 TO 3 OF THE REVENUES APPEAL HE SUPPORTED THE ASSESSMENT ORDER, WHEREAS THE LD. AR OF THE ASSESSE E SUPPORTED THE ORDER OF THE LD.CIT(A) ON THIS ISSUE. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. REGARDIN G THE TP ISSUE RAISED BY THE REVENUE AT GROUND NO.4 TO 7 BY THE AS SESSEE AS ALSO GROUND ITA NO.1566(B)/13 & 1612(BANG)2013 8 NO.1,2,3 & 4(A) TO 4(E), NOW WE FIND THAT THE MATTE R HAS TO GO BACK TO THE FILE OF THE LD.CIT(A) FOR A FRESH DECISION, BECAUSE LD.C IT(A) HAS NOT DECIDED THE ISSUE HIMSELF AND HE HAS SET ASIDE THE MATTER TO TH E FILE OF TPO WITH THE DIRECTION TO EXCLUDE FUNCTIONALLY DISSIMILAR COMPAN IES SUBJECT TO THE GUIDELINES LAID DOWN BY THE DELHI BENCH OF THE TRIB UNAL RENDERED IN THE CASE OF ACTIS ADVISERS PVT. LTD VS DCIT AS REPORTED IN 20 ITR(TRIB.) 138 AND DECISION OF BANGALORE BENCH OF THE TRIBUNAL RENDERE D IN THE CASE OF WITNESS SYSTEMS SOFTWARE INDIA (P) LTD. VS DCIT 34 TAXMANN. COM 183. IN OUR CONSIDERED OPINION, INSTEAD OF SETTING ASIDE THE MA TTER AND RESTORING BACK THE SAME TO THE FILE OF THE TPO WITH DIRECTION LD.C IT(A) SHOULD HAVE DECIDED THE ISSUE HIMSELF WITH COMPARABLES COMPANIES IS TO BE INCLUDED AND WITH COMPARABLES COMPANIES IS TO BE EXCLUDED AS PER THES E TRIBUNAL ORDERS. HENCE, WE ASSET ASIDE THE ORDER ON THIS ISSUE AND R ESTORE THE MATTER TO THE FILE OF THE CT(A) FOR FRESH DECISION WITH DIRECTION TO DECIDE THE ISSUE BY WAY OF SPEAKING ORDER, INSTEAD OF SETTING ASIDE THE MATTER TO THE FILE OF THE TPO WITH DIRECTION IF REQUIRED, HE MAY OBTAIN REMAND REPORT FROM THE AO ON THIS ISSUE AND NEEDLESS TO SAY HE SHOULD PROVIDE ADEQUATE OPPO RTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, GROUNDS RAISED BY TH E ASSESSEE IN ITS APPEAL BEING GROUND NO.3.1 TO 3.6, GROUND NO.4(A) TO 4(E) ARE ALLOWED FOR STATISTICAL PURPOSES AND SIMILARLY, GROUND NOS.4 TO 6 OF THE RE VENUES APPEAL ARE ALSO ALLOWED FOR STATISTICAL PURPOSES. GROUND NO.1 & 2 OF THE ASSESSEES APPEAL ARE GENER AL AND DOES NOT REQUIRE ANY SEPARATE ADJUDICATION. REGARDING GROUND NO.1 TO 3 OF THE REVENUES APPEAL, WE FIND THAT THIS ISSUE IS COVERE D IN FAVOUR OF ASSESSEE BY ITA NO.1566(B)/13 & 1612(BANG)2013 9 THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT RE PORTED IN THE CASE OF CIT VS TATA ELXSI LTD. (349 ITR 98)(KAR.), WHEREIN IT WAS HELD THAT TOTAL TURNOVER IN SUM TOTAL ON EXPORT TURNOVER AND DOMEST IC TURNOVER AND THEREFORE, IF SOME ITEM IS EXCLUDED FROM EXPORT TUR NOVER THEN, AS A CONSEQUENCE THE TOTAL TURNOVER IS ALSO REDUCED BY T HE SAME AMOUNT. IN VIEW OF THIS MATTER, RESPECTFULLY FOLLOWING THE JUDGMENT OF HONBLE KARNATAKA HIGH COURT, WE ARE NOT INCLINED TO INTERFERE IN THE ORDE R OF THELD.CIT(A) ON THIS ISSUE. ACCORDINGLY, GROUND NO.1 TO 3 OF THE REVEN UES APPEAL ARE REJECTED. 4. IN THE RESULT, THE APPEAL OF THE ASSESSEE AS WE LL AS OF THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. SD/ - (VIJAY PAL RAO) SD/ - (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER BANGALORE: D A T E D : 06-05-2016 AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE