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ITA 1716/HYD/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2596 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 25-04-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 22-12-2016
• Court: TRIBUNAL
• Department Lawyers: P CHANDRA SEKHAR
• Assessee Lawyers: S RAGHUNATHAN
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 1716/HYD/2016 ASSESSMENT YEAR: 2012-13 IMEDX INFORMATION SERVICES PRIVATE LIMITED, HYDERABAD [PAN: AABCI3550P] VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI S. RAGHUNATHAN, AR FOR REVENUE : SHRI P. CHANDRA SEKHAR, CIT-DR DATE OF HEARING : 25-04-2017 DATE OF PRONOUNCEMENT : 28-04-2017 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF TH E ASSESSING OFFICER (AO) U/S. 143(3) R.W.S. 92CA(3) O F THE INCOME TAX ACT [ACT] DATED 29-11-2016 DETERMINING THE TRANSFER PR ICING [AP] ADJUSTMENTS. ASSESSEE HAS RAISED MANY GROUNDS INCLUD ING SUB- GROUNDS RUNNING TO 5 PAGES. HOWEVER, IN THE COURSE OF ARGUMENTS, ASSESSEE HAS PLACED ITS ARGUMENTS ONLY ON THE FOLLOWIN G GROUND: 2.1.4. ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD.AO/LD.TPO ERRED AND THE HON'BLE DRP FURTHER ERRE D IN UPHOLDING/CONFIRMING THE ACTION OF THE LD.AO/LD.TPO IN REJECTING THE COMPARABLE UNCONTROLLED PRICE (CUP) (IN SPITE OF AV AILABILITY OF INTERNAL CUP) METHOD FOR ITES AND THEREBY APPLIED TRANSACTIO NAL NET MARGIN I.T.A. NO. 1716/HYD/2016 IMEDX INFORMATION SERVICES PVT. LTD., :- 2 - : METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR BE NCHMARKING THE SAID TRANSACTION. 2. BRIEFLY STATED, ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF MEDICAL TRANSCRIPTION AND ITES. THE TRANSFER PRI CING OFFICER [TPO] HAS COMBINED BOTH THE TRANSACTIONS AND ADOPTED THE TRANSACTIONAL NET MARGIN METHOD [TNMM] FOR VERIFICATION OF ARMS LENGTH PRICE [ALP]. IT WAS THE CONTENTION OF ASSESSEE THAT COMPARABLE UN-CONTROLLED PRICE [CUP] METHOD SHOULD BE ADOPTED FOR MEDICAL TRANSCRIPTION SERVICES, WHEREAS ASSESSE E HAS NO OBJECTION FOR TNMM ON ITES. 3. AT THE OUTSET, LD. COUNSEL SUBMITTED THAT SIMILAR ISSUE WAS CONSIDERED BY THE CO-ORDINATE BENCH IN EARLIER YEAR I .E., AY. 2011- 12 VIDE ORDER IN ITA NO. 577/HYD/2016 AND 617/HYD/2 016, DT. 08-01-2017 AND THE ISSUE IN RELATION TO YEAR ALSO CA N BE SET ASIDE TO THE FILE OF THE AO/TPO TO RE-DO THE EXERCISE. 4. LD.CIT-DR, HOWEVER, TRIED TO DISTINGUISH THE ORDER IN EARLIER YEAR IN ASSESSEE OWN CASE STATING THAT THE BENCH HAS RE LIED ON THE DECISION OF ACIT VS. M/S. CKAR SYSTEMS (P) LTD, WHER EIN, THE RATE CHARGED IS PER LINE OF TRANSCRIPTION, WHEREAS IN AS SESSEES CASE, ASSESSEE IS REMUNERATED ON COST PLUS BASIS. THERE FORE, THE FACT POSITION BEING DIFFERENT, ITAT SHOULD NOT HAVE RELIE D ON THE DECISION OF ACIT VS. M/S. CKAR SYSTEMS (P) LTD., AND REQUESTED FOR RE-EXAMINATION OF THE ISSUE. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDER. THERE IS NO FACTUAL DIFFERENCE BETWEEN EARLI ER YEAR AND THIS YEAR. WHILE APPRECIATING THE CONCERN OF LD.CIT-DR I N POINTING OUT I.T.A. NO. 1716/HYD/2016 IMEDX INFORMATION SERVICES PVT. LTD., :- 3 - : THE SO CALLED DIFFERENCE IN FACTS IN EARLIER YEAR ORD ER, IN WHICH ITAT HAS COME TO A CONCLUSION AFTER DUE EXAMINATION, WE CA N NOT AGREE TO THE CONTENTIONS. REVIEW OF THE EARLIER YEAR ORDER I S NOT WITHIN THE PURVIEW OF THE ITAT. THEREFORE, OBJECTION OF LD.C IT-DR WITH REFERENCE TO THE ORDER FOR AY. 2011-12 CANNOT BE CONSI DERED IN THE PRESENT PROCEEDINGS. THE ONLY OPTION, IF AT ALL THE OR DER IS ERRONEOUS IN THE OPINION OF REVENUE/ CIT(DR), IS TO A PPEAL TO THE HIGHER FORUM, BUT THE CONTENTIONS OF THE CIT-DR THAT THE ORDER IN AY. 2010-11 IS BASED ON INCORRECT APPRECIATION OF FAC TS, CANNOT BE CONSIDERED IN THESE PROCEEDINGS. THAT ORDER HAS CONSI DERED THE SUBMISSIONS OF BOTH PARTIES AND COMPARED THE COORDINATE BENCH DECISION IN ANOTHER CASE AND DIRECTED THE TPO/AO TO ADOPT CUP METHOD FOR TRANSCRIPTION BUSINESS. 5.1. SINCE THE CO-ORDINATE BENCH HAS ALREADY COME TO A CONCLUSION ON THE ISSUE AGITATED BY ASSESSEE, RESPECTFU LLY FOLLOWING THE SAME, WE DIRECT THE AO/TPO TO RE-DO THE EXERCISE AF RESH GIVING DUE OPPORTUNITY TO ASSESSEE AND DETERMINE THE ALP ACCO RDINGLY, AS DIRECTED IN AY. 2011-12. FOR THE SAKE OF RECORD, THE RELEVANT PARAS OF THE ORDER IN AY. 2011-12 IN ITA NOS. 577/HYD/2016 & 617/HYD/2016 DT. 18-01-2017 ARE REPRODUCED HERE UNDE R: 4. APART FROM VARIOUS OBJECTIONS RAISED BY ASSESSE E, THE MAIN CONTENTION OF ASSESSEE IS WITH REFERENCE TO REJECTI ON OF CUP METHOD IN THE MEDICAL TRANSCRIPTION BUSINESS. IT WAS SUBMITTED T HAT CO-ORDINATE BENCH OF ITAT IN ITA NO. 565/HYD/2011 (AY. 2005-06) IN TH E CASE OF ACIT VS. M/S. CKAR SYSTEMS (P) LTD., DT. 19-10-2012 HAS ACC EPTED THE CIT(A)S ORDER THAT CUP METHOD IS ONLY THE APPROPRIATE METHO D AND DISMISSED THE REVENUES APPEAL, WHICH IN TURN WAS UPHELD BY THE H ON'BLE HIGH COURT OF ANDHRA PRADESH AND TELANGANA IN ITTA NO. 731 OF 201 4 DT.31-12-2014. ASSESSEE HAS SUBMITTED COMPARABILITY WITH THAT OF M /S. CKAR SYSTEMS (P) LTD., (CKAR INDIA) AS UNDER: I.T.A. NO. 1716/HYD/2016 IMEDX INFORMATION SERVICES PVT. LTD., :- 4 - : FACTS APPELLANT CKAR INDIA NATURE OF BUSINESS MEDICAL TRANSCRIPTION SERVICES MEDICAL TRANSCRIPTION SERVICES CURRENCY UNITED STATES DOLLAR (USD) USD RECIPIENT ENTITY HOLDING COMPANY-IMEDX INC., USA ULTIMATE HOLDING COMPANY-CBAY USA IMPUGNED TRANSACTION APPLICATION OF CUP METHOD FOR MEDICAL TRANSCRIPTION SERVICES APPLICATION OF CUP METHOD FOR MEDICAL TRANSCRIPTION SERVICES INTERNAL CUP AVAILABLE AVAILABLE TRANSFER PRICING OFFICER (TPO)/DISPUTE TPOS FINDINGS TPOS FINDINGS RESOLUTION PANEL (DRP)/INCOME TAX APPELLATE TRIBUNAL (ITAT) FINDINGS LD.TPO REJECTED THE APPLICATION OF CUP METHOD FOR MEDICAL TRANSCRIPTION SERVICES BASED ON THE FOLLOWING REASONING: THE APPELLANT IS REMUNERATED ON COST PLUS 11% BASIS AS PER THE INTERCOMPANY AGREEMENT ARE DIFFERENT FROM THE ANALYSES BEING CARRIED OUT. CUP SUFFERS FROM THE DEFECT THAT THE PRICE PER LINE HAS BEEN DETERMINED USING A SINGLE USD RATE AND IS NOT PER INVOICE OR AT THE ACTUAL TIME OF RECEIPT OF PAYMENT. IN CASE OF COMPARABLES THE AE IS REMUNERATING ON THE NUMBER OF LINES TRANSCRIBED AT A FIXED AGREED RATE AND IF THE SAME ANALOGY IS TAKEN TO THE TAXPAYER THE COST PER LINE IN EVERY INVOICE WILL WORK OUT DIFFERENTLY TAKING THE RATE OF USD AT THAT POINT OF TIME. COMPARABLES ARE LD.TPO REJECTED THE APPLICATION OF CUP METHOD FOR MEDICAL TRANSCRIPTION SERVICES BASED ON THE FOLLOWING REASONING: - RATE CHARGED PER LINE OF TRANSCRIPTION IS DEPENDENT ON THE SIZE OF THE TRANSCRIPTION AND THE SOPHISTICATION OF THE TRANSCRIPTION WORK. - IN THE ABSENCE OF THE SEGMENTAL REVENUE DETAILS OF UNRELATED PARTIES FOR THE MEDICAL TRANSCRIPTION WORK AND TOTAL NUMBER OF LINES TRANSCRIBED, THE PER LINE PRICE CANNOT BE USED TO BENCHMARK IN THE CUP METHOD ADOPTED BY THE ASSESSEE. - DATA RELATING TO RATE CHARGED PER LINE OF TRANSCRIPTION AND NUMBER OF LINES DONE WERE NOT AVAILABLE IN PUBLIC DOMAIN WITH RESPECT TO INDEPENDENT ENTERPRISES. (SOURCE: PARA 4, ITA NO. 565/HYD/2011) CIT(A) FINDINGS I.T.A. NO. 1716/HYD/2016 IMEDX INFORMATION SERVICES PVT. LTD., :- 5 - : ASSURED OF THE REVENUES BASED ON THE NUMBER OF LINES TRANSCRIBED BUT IN CASE OF TAXPAYER, REVENUE IS BASED ON COST INCURRED. THE BASIS OF ESTIMATION OF COST OF THE TAXPAYER IS UNKNOWN AND HENCE THE RATE PER LINE DERIVED BY THE TAXPAYER IS SUBJECT TO ASSUMPTIONS. - SIMILAR SERVICES WAS AVAILED BY THE HOLDING COMPANY FROM THIRD PARTY ENTITIES IN INDIA ON IDENTICAL TERMS AND CONDITIONS. HENCE INTERNAL CUP IS AVAILABLE. - CUP METHOD WAS CORRECTLY APPLIED BY THE ASSESSEE TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS AS PER OECD GUIDELINES. - CIT(A) DELETED THE TP ADJUSTMENT SINCE THE RATES PAID BY THE ASSESSEE COMPANY WERE WELL COMPARABLE WITH THE RATES PAID BY AE TO OTHER THIRD ENTITIES IN INDIA. (SOURCE: PARA 7, ITA NO. 565/HYD/2011) (SOURCE: PARA 2.1, PAGE 14 OF THE TPO ORDER) DRP FINDINGS THE DRP DID NOT AGREE TO THE OBJECTIONS OF THE APPELLANT AND REJECTED THE APPLICATION OF CUP METHOD. (SOURCE: PARA 2.3, PAGE 3 OF THE DRP ORDER) ITATS ADJUDICATION CIT(A) HAS PASSED A WELL-REASONED ORDER, ELABORATELY DISCUSSING THE VARIOUS ISSUES RAISED BY THE TPO AND ULTIMATELY CAME TO A CONCLUSION THAT THE CUP METHOD IS THE MOST APPROPRIATE METHOD FOR COMPUTING THE ALP FOR THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT WITH ITS AE. WE FULLY AGREE WITH THE ORDER OF THE CIT(A) IN THIS BEHALF. WE ACCORDINGLY UPHOLD THE SAME AND REJECT THE GROUND OF THE REVENUE ON THIS ISSUE. I.T.A. NO. 1716/HYD/2016 IMEDX INFORMATION SERVICES PVT. LTD., :- 6 - : (SOURCE: PARA 11, ITA NO. 565/HYD/2011) APPELLANTS CONTENTIONS/SUBMISSIONS THE NATURE OF TRANSACTION WAS SIMILAR, I.E., MEDICAL TRANSCRIPTION SERVICES. CKAR IS WHOLLY OWNED SUBSIDIARY OF CBAY SYSTEMS LTD., USA. CBAY USA ENTERED INTO ARRANGEMENTS FOR AVAILING MEDICAL TRANSCRIPTION SERVICES FROM ITS SUBSIDIARY CKAR INDIA AND ALSO FROM INDEPENDENT THIRD PARTIES BASED IN INDIA, WHICH IS A SIMILAR FACT IN THAT OF THE IMEDX INDIA. CUP ANALYSIS WAS DONE BY COMPARING THE AVERAGE PRICE PER LINE OF THE TRANSACTIONS GENERATED FROM CBAY USA AGAINST AVERAGE PRICE REALIZED FROM UNRELATED PARTIES, WHICH IS SAME AS IN THE CASE OF THE IMEDX INDIA. LD.TPO HAS ACCEPTED THE FACT THAT CUP METHOD IS THE MOST DIRECT AND RELIABLE METHOD TO APPLY FOR DETERMINING THE ALP IN THE CURRENT CASE. WHEN INFORMATION AND DATA ARE AVAILABLE, THE LD.TPO SHOULD NOT HAVE REJECTED THE CUP METHOD. HIGH COURTS ADJUDICATION THE HON'BLE HIGH COURT OF ANDHRA PRADESH AND TELANGANA HAS DISMISSED THE REVENUES APPEAL AND UPHELD CKAR INDIAS ITAT ORDER WHEN IT WAS HELD THAT ASSESSEE FOLLOWED ONE PERMISSIBLE METHOD OF COMPUTING THE ARMS LENGTH PRICE AND THE SAME WAS HELD TO BE VALID BY THE TRIBUNAL AND WE SEE NO REASON TO INTERFERE WITH THE ORDER IN SO FAR AS THIS ASPECT IS CONCERNED. (SOURCE: I.T.T.A. NO. 731 OF 2014) 4.1. IN VIEW OF THAT, IT WAS SUBMITTED THAT THE TPO MAY BE DIRECTED TO ADOPT CUP METHOD FOR ITS MEDICAL TRANSCRIPTION B USINESS. IT IS ALSO FAIRLY ADMITTED THAT ASSESSEE HAS NO OBJECTION FOR ADOPTING TNMM FOR THE SOFTWARE DEVELOPMENT WORK AND HOWEVER, IT WAS FAIRL Y SUBMITTED THAT AO/TPO HAS TO RE-DO THE EXERCISE OF TP STUDY. 5. LD. DR HOWEVER, RELIED ON THE ORDERS OF THE TPO AND DRP. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE DOCUMENTS PLACED ON RECORD. ASSESSEE AND CKAR INDI A ARE IN THE SAME LINE OF BUSINESS I.E., MEDICAL TRANSCRIPTION SERVIC ES AND CO-ORDINATE BENCH IN THE ABOVE SAID CASE OF ACIT VS. M/S. CKAR SYSTE MS (P) LTD., HAS UPHELD THE LD.CIT(A)S ORDER THAT CUP METHOD IS THE MOST APPROPRIATE METHOD FOR COMPUTING ALP FOR THE INTERNATIONAL TRAN SACTIONS ENTERED INTO I.T.A. NO. 1716/HYD/2016 IMEDX INFORMATION SERVICES PVT. LTD., :- 7 - : BY ASSESSEE WITH ITS AE IN THAT CASE. SINCE THE FA CTS ARE SIMILAR, WE ARE OF THE OPINION THAT TPO SHOULD HAVE ADOPTED CUP METHOD ONLY FOR ANALYSING THE ASSESSEES INTERNATIONAL TRANSACTIONS. ACCORDIN GLY, WE UPHOLD ASSESSEES OBJECTIONS WITH REFERENCE TO THE ADOPTIO N OF METHOD AND DIRECT THE AO/TPO TO ADOPT CUP METHOD FOR THE MEDICAL TRAN SCRIPTION SERVICES AND TNMM FOR THE SOFTWARE DEVELOPMENT SERVICES. AO /TPO IS DIRECTED TO RE-DO THE EXERCISE AFRESH GIVING DUE OPPORTUNITY TO ASSESSEE AND DETERMINE THE ALP ACCORDINGLY. HE IS ALSO DIRECTED TO KEEP IN MIND THE ORDERS IN OTHER CASES FOR THE SAME ASSESSMENT YEAR, WHILE DOING THE STUDY. WITH THESE DIRECTIONS, THE GROUNDS OF ASSES SEE ARE CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. WE ORDER ACCORDINGLY, IN THIS YEAR ALSO. 6. IN THE RESULT, APPEAL OF ASSESSEE IS CONSIDERED AL LOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH APRIL, 2017 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEM BER HYDERABAD, DATED 28 TH APRIL, 2017 TNMM I.T.A. NO. 1716/HYD/2016 IMEDX INFORMATION SERVICES PVT. LTD., :- 8 - : COPY TO : 1. IMEDX INFORMATION SERVICES PRIVATE LIMITED, 7-1- 62/2, S.K. ROAD, DHARAM KARAN ROAD, AMEER PET, HYDERABAD. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 2(1), HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), BENGALURU. 4. DIRECTOR OF INCOME TAX (IT & TP), HYDERABAD. 5. ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICI NG), HYDERABAD. 6. D.R. ITAT, HYDERABAD.