Mr. ITO, New Delhi V. M/s. Interra Infotech (India) Pvt. Ltd., New Delhi

ITA 1632/DEL/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7467 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Next Hearing Date: 08-08-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 21-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI KULDIP SINGH : JUDICIAL MEMBER ITA NO. 1632/DEL/2013 ASSTT. YR. 2009-10 INCOME TAX OFFICER, VS. M/S INTERRA INFOTECH (IND IA) PVT. LTD., WARD 11(4), NEW DELHI. 5/2007, GUPTA ARCADE, LSC, SHRESHTHA VIHAR, DELHI-110092. PAN: AABCI 2814 A (APPELLANT ) ( RESPONDENT) APPELLANT : SHRI ANUJ ARORA CIT(DR) RESPONDENT BY: SHRI AJAY VOHRA SR. ADVOCATE SHRI NEERAJ JAIN ADV. SHRI ABHISHEK AGARWAL CA SHRI MANISH KUMAR CIT(DR) DATE OF HEARING : 08/08/2016. DATE OF ORDER : 23/08/2016. O R D E R PER S.V. MEHROTRA, A.M: THIS IS REVENUES APPEAL AGAINST CIT(A)-XX, NEW DEL HIS ORDER DATED 15.02.2013 IN APPEAL NO. 89/2011-12/CIT(A)-XX, RELA TING TO AY 2009-10. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY, IN THE RELEVANT ASSESSMENT YEAR, WAS ENGAGED IN THE BUSINESS OF DEV ELOPMENT OF COMPUTER SOFTWARE. THE ASSESSEE FILED RETURN OF INCOME DECLA RING INCOME OF RS. 2 3,25,396/-. THE AO NOTICED THAT DURING THE YEAR UND ER CONSIDERATION THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION OF RS. 11,34,95,073/- WITH M/S INTERRA INFORMATION TECHNOLOGIES INC., USA. THE AO VIDE HIS LETTER DATED 9.12.2011 REQUIRED THE ASSESSEE TO WORK OUT T HE VALUE OF INTERNATIONAL TRANSACTION IN VIEW OF ORDER PASSED BY THE ADDL. DI T, TPO-1(5) FOR AY 2009-10, OBSERVING AS UNDER: AS YOU MAY BE AWARE, A REFERENCE U/S 92CA(1) OF TH E IT ACT, 1961 WAS SENT IN YOUR CASE TO JOINT DIT, TRANSFER PRICING OFFICER-1(5), NEW DELHI. THE ORDER U/S 92CA(3) OF T HE ACT DATED 31/10/2011 HAS BEEN RECEIVED FROM THE ADDL. D IT, TPO, NEW DELHI IN WHICH IT HAS BEEN FOUND THAT THE VALUE OF INTERNATIONAL TRANSACTIONS REPORTED BY YOU REQUIRES UPWARD ADJUSTMENT BY RS. 3,52,02,752/- FOR THE DETAILED RE ASON GIVEN IN THE ORDER. IN VIEW OF THIS, YOU ARE REQUIRED TO WOR K OUT THE VALUE OF YOUR INTERNATIONAL TRANSACTIONS IN VIEW OF ORDER PASSED THE ADDL. DIT, TPO-1(5) ACCORDINGLY FOR AY 2009-10. 2.1. THE ASSESSEE IN ITS REPLY DATED 19.12.2011, RE PRODUCED AT PAGES 2-3 OF THE ASSESSMENT ORDER, POINTED OUT THAT ASSESSEE WAS REQUIRED TO COMPUTE THE ALP OF THE INTERNATIONAL TRANSACTION, UNDERTAKEN BY THE ASSESSEE DURING FY 2008-09 IN ACCORDANCE WITH THE ORDER PASSED BY THE TPO FOR AY 2008-09. THE ASSESSEE, INTER ALIA, POINTED OUT THAT COMPARA BLES USED FOR DETERMINATION OF ALP IN A PARTICULAR YEAR MAY NOT BE APPROPRIATE COMPARABLES FOR DETERMINATION OF ALP IN THE SUCCEEDING YEAR. ACCORD INGLY, IT WAS SUBMITTED THAT ALP OF THE INTERNATIONAL TRANSACTIONS UNDERTAK EN BY THE ASSESSEE DURING 3 FY 2008-09 CANNOT BE COMPUTED ON THE BASIS OF COMPA RABLES SELECTED FOR THE PURPOSE OF COMPUTING THE ALP OF THE INTERNATION AL TRANSACTIONS UNDERTAKEN DURING FY 2007-08. ASSESSEE FURTHER POIN TED OUT THAT IT HAD UNDERTAKEN DETAILED BENCH MARKING ANALYSIS IN ACCOR DANCE WITH THE PROVISIONS OF CHAPTER X OF THE ACT. ASSESSEE COMPAR ED THE OPERATING PROFIT MARGIN/OC EARNED BY IT FROM TRANSACTIONS UNDERTAKEN WITH ITS AE WITH THE OPERATING PROFIT MARGIN EARNED BY IT FROM TRANSACTI ONS WITH UNRELATED ENTITIES. THE RESULT OF THIS ANALYSIS WAS AS UNDER: OP/TC% FROM TRANSITIONS WITH UNRELATED ENTITIES 9.78% OP/TC % OF INFERRA INFOTECH 8.03% 2.2. FURTHER, IT WAS POINTED OUT THAT ASSESSEE HAD ALSO UNDERTAKEN EXTERNAL BENCH MARKING WHEREIN OPERATING PROFIT MARGIN EARNE D BY THE ASSESSEE FROM TRANSACTIONS WITH AES WAS COMPARED WITH THE OPERATI NG PROFIT MARGIN EARNED BY COMPARABLE UNCONTROLLED ENTITIES AND THE RESULTS WERE AS UNDER: AVERAGE OF OP/TC% COMPARABLE COMPANIES (-) 1.07% OP/TC% OF INTERRA INFOTECH 5.40% 2.3. ACCORDINGLY, IT WAS SUBMITTED THAT INTERNATION AL TRANSACTIONS OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES ENTERED INTO BY INTERRA INFOTECH WITH INTERRA IT INC. WERE, THEREFORE, AT ALP APPLYI NG TNMM. 4 2.4. THE AO NOTED THAT ASSESSEE HAD SELECTED FOLLOW ING 11 COMPARABLES ON THE BASIS OF OPERATING PROFIT/ COST (OP/COST): S. NO. COMPANY NAME YEAR SALES OPERATING PROFIT OPERATING COST OP/OC% 1 MELSTER INFORMATION TECHNOLOGIES LTD. 2009-10 18 .75 -0.53 19.93 -2.66% 2 SAVEN TECHNOLOGIES LTD. 2009-10 3.66 0.1 3.57 2.8 0% 3 INTENSE TECHNOLOGIES LTD. 2009-10 17.41 -0.65 17.82 -3.65% 4 GOLDSTONE TECHNOLOGIES LTD. 2009-10 23.08 -6.26 30 20.87% 5 COMPULINK SYSTEMS LTD. 2009-10 14.56 -1.46 15.37 -0.50% 6 RELIGARE TECHNOVA GLOBAL SOLUTIONS LTD. 2009-10 19.28 -7.81 28.36 -27.54% 7 ZYLOG SYSTEMS (INDIA) LTD. 2009-10 1.25 0.01 1.3 1 0.76% 8 CETHAR CONSULTANCY SERVICES PVT. LTD. 2009-10 2. 12 0.04 2.31 1.73% 9 AKSHAY SOFTWARE TECHNOLOGIES LTD. 2009-10 12.23 0.93 11.5 8.09% 10. ELEMENT K INDIA PVT. LTD. 2009-10 16.04 2.1 14 .2 17.79% 11 SYNETAIROS TECHNOLOGIES LTD. 2009-10 6.04 1.28 5.28 24.24% AVERAGE PLI (OP/OC%) -1.07% PLI (OP/OC%) OF INTERRA INFOTECH (REFER ANNEXURE II) 5.40% 2.5. THE AO DID NOT ACCEPT THE ASSESSEES CONTENTIO N AND ADOPTED THE COMPARABLES SELECTED BY THE TPO FOR AY 2008-09, WHI CH WERE AS UNDER: S. NO NAME OF THE COMPANY SALES (RS. IN CR.) OP TO TOTAL COST % OF RPT OVER SALES % OF EXPORTS OVER SALES ONSITE REVENUE (%) % OF R&D OVER SALES % OF MARKETING OVER SALES EMP COST (%) 1 AVANI CINCON TECHNOLOGIES 3 21.65 8.08 100 0 0 1.20 63.52 2 BODHTREE CONSULTING LTD. 10.42 19.14 0 96.15 0 0 1.06 58 3 CELESTIAL BIOLABS 20.21 87.94 0 91 0 0 5.34 38.61 4 E-ZEST SOLUTIONS LTD. 7.66 28.95 0 94.74 0 0 0.89 65.37 5 FLEXTRONICS (ARICENT) 958 8.07 5.67 95.8 17.45 0 1.15 63.2 6 IGATE GLOBAL SOLUTION LTD. 781.51 13.9 1782 100 50.14 0 0.54 58.41 7. INFOSYS 15648 40.41 7.78 98.6 50.9 0 0.18 74.25 8 KALS 2.05 41.94 0 100 0 0 0.10 42.28 5 INFORMATION SYSTEMS LTD. (SEG) 9 LGS GLOBAL LTD. 136.52 26.64 0 100 46.8 0 0.00 89.8 10 MINDTREE LTD. (SEG) 572.96 17.51 0.03 93 26.97 0 0.91 66.79 11 PERSISTENT SYSTEMS LTD. 409.88 27.23 3.7 93.93 5.555 0 0.08 73.43 2.6. HE POINTED OUT THAT SINCE THE ASSESSEE WAS ENG AGED IN THE SAME BUSINESS AND THERE WERE NO ABNORMAL CHANGES, IN THE CIRCUMSTANCES AND FACTS OF THE CASE, THE COMPARABLES ADOPTED BY THE TPO FOR AY 2008-09 WERE TO BE APPLIED FOR COMPUTING ALP. HE COMPUTED THE REQUIRED ADJUSTMENT TO THE ALP AS UNDER: ARITHMETIC MEAN PLI : 26.16% LESS: WORKING CAPITAL ADJUSTMENT : -0.96% ADJ.: ARITHMETIC MEAN APLI : 25.20% OPERATING COST RS. 12,40,05,000/- ARMS LENGTH MARGIN 25.20% ARMS LENGTH PRICE (ALP) @ % OF OPERATING COST 15,52,54,260/- PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS. 11,34,95,073/- ADJUSTMENT U/S 92CA RS. 4,17,59,187/- 2.7. BEING AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A), WHO, AFTER ELABORATE CONSIDERATION OF ALL ASPECTS I NCLUDING THE PROFILE OF COMPARABLES FURNISHED BY ASSESSEE IN ITS TP STUDY A S WELL AS THE FUNCTIONAL ANALYSIS OF COMPARABLES SELECTED BY TPO AND ALSO AF TER EXAMINING THE INTERNAL BENCH MARKING ANALYSIS OF ASSESSEE, CONCLU DED THAT THE PLI EARNED BY THE ASSESSEE FROM THE TRANSACTIONS WITH UNCONTRO LLED ENTITIES WAS WITHIN 6 5% RANGE OF THE OPERATING MARGINS OF 8.03% EARNED F ROM TRANSACTIONS WITH AES. 2.8. AS REGARDS EXTERNAL COMPARABLES, LD. CIT(A) OB SERVED THAT APPLYING TNMM THE PLI OF ASSESSEE WAS 5.40% AS AGAINST AVERA GE PLI OF -1.07% NOTED EARLIER. HE FURTHER OBSERVED THAT ONLY TWO CO MPANIES, NAMELY, SAVEN TECHNOLOGIES LTD. AND ZYLOG SYSTEMS (INDIA) LTD. WE RE HAVING DECLINING SALES CONSIDERING MARCH 2007 AS THE BASE YEAR. HE P OINTED OUT THAT EVEN IF THESE TWO COMPANIES WERE EXCLUDED THE PLI OF THE RE MAINING 9 COMPANIES COMES TO -1.71% WITH THE SINGLE YEAR DATA. HE, ACCO RDINGLY, UPHELD THE TP ANALYSIS OF ASSESSEE. 2.9. AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUND OF APPEAL: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, LD. CIT(A) HAS ERRED IN DELETING AN ADDITIO N OF RS. 4,17,59,187/- MADE BY THE AO FOR THE YEAR UNDER CON SIDERATION ON ACCOUNT OF ARMS LENGTH PRICE DETERMINED BY TPO FOR THE A.Y. 2008-09 AS THERE WAS NO ABNORMAL CHANGES IN TH E CIRCUMSTANCES OF THE CASE. 3. AT THE OUTSET LD. CIT(DR) FILED BEFORE US A COPY OF TRIBUNALS ORDER FOR AY 2008-09 IN ASSESSEES OWN CASE AND SUBMITTED THA T THE MATTER HAS BEEN RESTORED BACK TO THE FILE OF TPO AND SINCE AO DID N OT REFER TO TPO IN THIS YEAR AS TRANSACTION WAS LESS THAN RS. 5 CRORES, BUT HE ADOPTED THE REASONING 7 FOR AY 2008-09, THEREFORE, IN VIEW OF TRIBUNALS DE CISION, MATTER SHOULD BE RESTORED. 4. LD. COUNSEL FOR THE ASSESSEE VEHEMENTLY OPPOSED THE SUBMISSIONS ADVANCED BY LD. CIT(DR) AND SUBMITTED THAT LD. CIT( A) HAS UNDERTAKEN DETAILED ANALYSIS IN REGARD TO ALL THE COMPARABLES ADOPTED IN AY 2008-09 BY TPO AND HAS, INTER ALIA, POINTED OUT THAT COMPANIES HAVING LARGE TURNOVER SHOULD NOT BE TAKEN AS COMPARABLE TO THIS CASE. FUR THER, HE POINTED OUT THAT LD. CIT(A) HAS EXAMINED THE COMPANIES SELECTED BY A SSESSEE AND AFTER DETAILED EXAMINATION OF PROFILE OF EACH COMPARABLE , CONCLUDED THAT NONE OF THE COMPANIES SELECTED BY THE ASSESSEE HAD NEGATI VE WORTH. 4.1. HE FURTHER OBSERVED THAT PROWESS DATA BASE WAS ACCESSED TO VERIFY THE CLAIM OF THE ASSESSEE REGARDING PROFILE OF THE COMP ANY AND THEIR FUNCTIONS. HE ELABORATELY EXAMINED THE THREE YEARS SALES AND N ET WORTH POSITION OF THE 11 COMPANIES SELECTED BY THE ASSESSEE AND CONCLUDED THAT APART FROM TWO COMPANIES NAMELY SAVEN TECHNOLOGIES LTD. AND ZYLOG SYSTEMS (INDIA) LTD., WHICH WERE HAVING DECLINING SALES CONSIDERING MARCH 2007 AS THE BASE YEAR, OTHER COMPANIES HAD POSITIVE NET WORTH. HE FURTHER POINTED OUT THAT EVEN IF THESE TWO COMPANIES WERE EXCLUDED, THE PLI OF THE REMAINING 9 COMPANIES COMES TO -1.71% WITH THE SINGLE YEAR DATA. 8 4.2. LD. COUNSEL POINTED OUT THAT LD. CIT(A) HAS E XAMINED THE ISSUE THREAD-BARE FROM ALL FACET INCLUDING DETERMINING T HE ALP WITH REFERENCE TO EXTERNAL COMPARABLES AS WELL AS INTERNAL BENCH MARK ING. HE FURTHER POINTED OUT THAT AS FAR AS DECISION FOR AY 2008-09 IS CONCE RNED, THE MATTER WAS RESTORED TO THE FILE OF AO BECAUSE TRIBUNAL NOTICED THAT AE HAD CHARGED REVENUE OF RS. 26.63 CRORES FROM THE CUSTOMERS WHER EAS VALUE OF ALP WAS DETERMINED BY THE TPO CONSIDERING THE ADJUSTMENT IN THE CASE OF THE ASSESSEE AND M/S INTERRA INFORMATION TECHNOLOGIES I NDIA PVT. LTD. WAS 31.21 CRORES. THUS, THE TOTAL VALUE OF ALP EXCEEDED THE R EVENUE CHARGED BY AE FROM CUSTOMER. TRIBUNAL, AFTER CONSIDERING VARIOUS DECISIONS HELD THAT ADJUSTMENT IN NO CASE COULD EXCEED THE AMOUNT RECEI VED BY AE FROM THIRD PARTY. HOWEVER, SINCE DETAILS OF AE AVAILABLE ON RE CORD WERE ONLY UP TO 31 ST MARCH 2007 AND NOT UP TO 31 ST MARCH 2008, THE MATTER WAS RESTORED TO THE FILE OF AO DIRECTING THE ASSESSEE TO PROVIDE ALL DO CUMENTS TO FIND OUT THE REVENUE EARNED BY THE AE UP TO 31 ST MARCH 2008. IN THESE CIRCUMSTANCES, THE REMAINING GROUNDS WERE NOT ADJUDICATED. HE, THEREFO RE, SUBMITTED THAT THERE IS NO REASON TO RESTORE THE MATTER TO THE FILE OF AO IN THE PRESENT ASSESSMENT YEAR. 5. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE ARE IN AGREEMENT W ITH THE OBSERVATIONS OF 9 LD. CIT(A) THAT THE AO WAS NOT JUSTIFIED IN ADOPTIN G THE COMPARABLES SELECTED FOR AY 2008-09 WITHOUT UNDERTAKING PROPER ANALYSIS. WE HAVE GONE THROUGH THE DETAILED ORDER PASSED BY LD. CIT(A) AND FIND THAT HE HAS ELABORATELY CONSIDERED EXTERNAL BENCH MARKING ANALY SIS AS WELL AS INTERNAL BENCH MARKING ANALYSIS OF ASSESSEE AND ALSO CONSIDE RED THE COMPARABLES SELECTED BY TPO. HE HAS ALSO CONSIDERED IN DETAIL T HE PROFILE OF COMPARABLES SELECTED BY ASSESSEE AND IN THAT REGARD WE FIND CON SIDERABLE FORCE IN THE SUBMISSIONS OF LD. COUNSEL FOR THE ASSESSEE AS NOTE D EARLIER. LD. CIT(DR) HAS NOT CONTROVERTED ANY FACT MENTIONED BY LD. CIT(A) I N HIS ORDER FOR ARRIVING AT HIS CONCLUSION AND, THEREFORE, SINCE THE PLI ON THE BASIS OF EXTERNAL BENCHMARKING WAS 5.40% OF ASSESSEE AS COMPARED TO - 1.71% OF COMPARABLES AND ON THE BASIS OF INTERNAL BENCH MARK ING THE PLI EARNED BY THE ASSESSEE FROM INTERNAL TRANSACTION ENTERED INTO WITH AES WAS 8.03% WHILE THE PLI FROM TRANSACTIONS WITH FOR UNRELATE D PARTIES WAS 9.78%, THEREFORE, INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE WAS AT ALP. WE, ACCORDINGLY, CONFIRM THE ORDER OF LD. CIT(A). 5.1. AS FAR AS LD. CIT(DR)S PLEA THAT MATTER HAS B EEN RESTORED BACK TO THE FILE OF AO IN AY 2008-09 IS CONCERNED, WE ARE IN AG REEMENT WITH THE SUBMISSIONS ADVANCED BY LD. COUNSEL FOR THE ASSESSE E THAT IN AY 2008-09 THE MATTER WAS RESTORED UNDER ENTIRELY DIFFERENT SCENAR IO AND IN THIS YEAR THE SAID 10 EXERCISE HAS NO RELEVANCE TO THE FACTS OBTAINING IN THIS YEAR. ACCORDINGLY, WE SEE NO REASON TO INTERFERE WITH THE ORDER OF LD. CI T(A) AND THE SAME IS UPHELD. 6. IN THE RESULT REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCEMENT IN OPEN COURT ON 23/08/2016. SD/- SD/- (KULDIP SINGH) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 23/08/2016. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.