Income-tax Officer, V. Magic Softward Enterprises India Pvt. Ltd., Pune

ITA 1834/PUN/2014

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 5179 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-07-2018
• Assessment Year: 2010-2011
• Appeal Filed On: 08-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: R D ONKAR
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUN E . , , , ! BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO. 1834/PUN/2014 # # / ASSESSMENT YEAR : 2010-11 ITO, WARD-11(1), PUNE ....... / APPELLANT / V/S. MAGIC SOFTWARE ENTERPRISES INDIA PRIVATE LIMITED, 9-12 TARA ICON, MUMBAI PUNE ROAD, WAKADEWADI, PUNE 411 003 PAN : AABCM2443B / RESPONDENT ASSESSEE BY : SHRI R.D. ONKAR REVENUE BY : SHRI RAJEEV KUMAR, CIT / DATE OF HEARING : 10.10.2018 / DATE OF PRONOUNCEMENT :10.10.2018 / ORDER PER D. KARUNAKARA RAO, AM : THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A)- IT/TP, PUNE, DATED 31-07-2014 FOR THE A.Y. 2010-11. 2. BRIEFLY STATED RELEVANT FACTS OF THE CASE INCLUDE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPME NT & EXPORT. DURING THE IMPUGNED ASSESSMENT YEAR, ASSESSEE FILED THE R ETURN OF INCOME ON 04-10-2010 DECLARING LOSS OF RS.2,00,621/-. IN TH E YEAR 2 ITA NO.1834/PUN/2014 MAGIC SOFTWARE ENTERPRISES INDIA PVT. LTD., UNDER CONSIDERATION, ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES AMOUNTING TO RS.5,69,11,716/ - FOR PROVIDING SOFTWARE DEVELOPMENT SERVICES. DETAILS OF THE SAM E ARE PROVIDED IN PARA NO.3 OF THE ASSESSMENT ORDER. ASSESSEE WAS ASKED TO FURNISH THE WORKING OF ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. ASSESSEE SU BMITTED ITS REPLY STATING THAT IT FOLLOWED COST PLUS METHOD (CPM) AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. THE OPERATING PROFIT MARGIN IS TAKEN AS PROFIT LEVEL INDICATOR. ASSESSEE MENTIONED T HAT THE RISK ADJUSTMENT MARGIN WORKS OUT TO 15.80%. AT THE END OF THE ASSESSMENT U/S.143(3), THE AO REJECTED THE COST PLUS METHOD ADO PTED BY THE ASSESSEE AND HAS SELECTED TRANSACTIONAL NET MARGIN METHOD (TNMM) ANALYSIS AS THE MOST APPROPRIATE METHOD AND DETERMINED THE PROFIT LEVEL INDICATOR AT 0.87%. THE WHOLE EXERCISE OF BENCHMARKING IS DONE BY THE AO AND THE EXPERTISE OF THE TPO WAS NOT SOUGHT AND C ASE WAS NOT REFERRED TO TPO. EVENTUALLY, THE AO MADE ADJUSTMENT OF RS.1,35,72,171/-. IN THE 154 PROCEEDINGS, THE AO DETERMINE D THE ASSESSED INCOME OF THE ASSESSEE COMPANY AT RS.87,69,900/-. 3. BEFORE THE CIT(A), ASSESSEE SUBMITTED THAT AO DID NOT FOLLOW ANY STRATEGIC SEARCH STRATEGY AND HAS MERELY CHERRY PICKE D HIGH PROFIT MAKING COMPANIES ON THE COMPARABLE COMPANIES SELECTED IN A.Y. 2008- 09. AO DID NOT MAKE ANY FAR ANALYSIS AND THEREFORE, THE COMPARABLES SELECTED BY THE AO NEEDS TO BE REJECTED AND FINALLY PRA YED FOR EXCLUSION OF THE COMPANIES SELECTED BY THE AO FROM THE FINAL LIST OF CO MPARABLES. EVENTUALLY, THE CIT(A) DECIDED THE ISSUE IN FAVOUR OF THE A SSESSEE AND 3 ITA NO.1834/PUN/2014 MAGIC SOFTWARE ENTERPRISES INDIA PVT. LTD., DELETED THE ADJUSTMENTS MADE BY THE AO. THE OPERATION AL PARAS OF THE ORDER OF CIT(A) IS EXTRACTED HERE AS UNDER : 2.2.9 WITH THE RESULT, I FIND THE LEARNED AOS OR DER IS A NON- SPEAKING ORDER AGAINST WHICH, THE APPELLANT HAS COR RECTLY LEVELED CHARGE OF CHERRY PICKING OF THE COMPARABLE COMPANIES BY TH E LEARNED AO. AS STATED, THE LEARNED AOS APPROACH OF NOT PROVIDING R EASONS AS TO WHY COMPARABLE COMPANIES SELECTED BY THE APPELLANT ARE REJECTED, THE BASIS ON WHICH, HE HAS SELECTED ADDITIONAL COMPARABLE COMPAN IES AND GROUNDS ON WHICH, JE REJECTED THE APPELLANTS OBJECTIONS AGAIN ST THE PROPOSED ADJUSTMENT, IS NOT ACCEPTABLE. THE LEARNED AOS SU CH APPROACH MAKES THE RESULTANT ADJUSTMENT UNSUSTAINABLE. 2.2.10 IN VIEW OF THE ABOVE DISCUSSION, I DELETE T HE ADJUSTMENT OF RS.1,35,27,171 MADE BY THE LEARNED AO. 4. AGGRIEVED WITH THE DELETION OF ADJUSTMENTS BY THE FIRS T APPELLATE AUTHORITY, THE REVENUE FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL WITH THE FOLLOWING GROUNDS : 1. THE LD.CIT(A) HAS FAILED TO APPRECIATE THAT, TH E AO HAS NOT CARRIED OUT FAR ANALYSIS OF COMPARABLE COMPANIES AS THERE I S NO SUCH STATUTORY REQUIREMENT. 2. HONBLE CIT(A) HAS FAILED TO APPRECIATE THE FACT S THAT THE COMPARABLES SELECTED BY THE AO WERE BASED ON COMPAR ABLE SELECTED IN ASSESSEES OWN CASE. 3. THE LD.CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT, THESE COMPANIES WERE EXAMINED BY THE CIT(A) IN RESPECT OF A.Y. 2007-08 AND 2008-09 AND THERE WAS NO SUCH REJECTION ON THE BASI S OF NON-AVAILABILITY OF FAR. 4. THE LD.CIT(A) HAS ERRED IN NOT CONSIDERING THE S HOW CAUSE NOTICE ISSUED BY THE AO WITH SET OF COMPARABLES. 5. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY OR ALL THE GROUNDS OF APPEAL. 5. RULE 27 OF THE ITAT RULES, 1963 : BEFORE US, ASSESSEE FILED AN APPLICATION DATED 16-08-2017 AND INVOKED THE PROVISIONS O F RULE 27 OF THE ITAT RULES, 1963. THIS RULE 27 RELATES TO THE RESPONDENT MAY SUPPORT ORDER ON GROUNDS DECIDED AGAINST HIM . TAKING US THROUGH THE SAID APPLICATION, LD. AR FOR THE ASSESSEE SUBMITTED THAT A SSESSEE RAISED 4 ITA NO.1834/PUN/2014 MAGIC SOFTWARE ENTERPRISES INDIA PVT. LTD., 11 GROUNDS BEFORE THE CIT(A) RAISING VARIOUS SPECIFIC ISSUES RELATING TO THE TP ADJUSTMENTS AND THE SAME WERE NOT DISPOSED OF BY THE CIT(A) BY PASSING A GROUND-WISE SPEAKING ORDER ON EACH OF THE ISS UES RAISED BY THE ASSESSEE IN THE GROUNDS. THE FACT THAT CIT(A) DISPOSED OF THE GROUNDS IN A SUMMARY MANNER, ALTHOUGH THE DECISION IS GIVEN IN FAVOUR OF THE ASSESSEE, DOES NOT AMOUNT TO A SPEAKING ORDER WHICH SH OULD BE A CHARACTERISTIC FEATURE OF ANY APPEALABLE ORDER. THUS, IT IS A CASE WHERE THE TP ADJUSTMENTS WERE DELETED IN FAVOUR OF THE ASSESS EE AND HOWEVER, THE GROUNDS WERE NOT ADJUDICATED IN THE MANNER REQUIRE D UNDER THE STATUTE. FROM THIS POINT OF VIEW, THE ASSESSEE IS AGGRIEVE D AND HAS TAKEN RECOURSE UNDER THE PROVISIONS OF RULE 27 OF THE ITAT RULES, 1963 RELATING TO RESPONDENT MAY SUPPORT ORDER ON GROUNDS DECIDED AGAINST HIM . IN ADDITION TO THE ABOVE, LD. AR FOR THE ASSESSEE FILED ANO THER CHART AND SUBMITTED THAT THE TP ADJUSTMENTS WERE UNU SUALLY MADE BY THE AO WITHOUT MAKING REFERENCE TO THE TPO AS REQUIRED U/S.92CA OF THE ACT AND AS EXPLAINED BY THE CBDT INSTRUCTION NO.03/2003, DATED 20-05- 2003. IN THIS REGARD, SHRI R.D. ONKAR, LD. AR FOR THE ASSE SSEE REFERRED TO RULE 27 OF THE ITAT RULES, 1963 AND SUBMITTED THAT, IN THIS, APPEAL, THE CIT(A) GRANTED RELIEF TO THE ASSESSEE AND THE REVENU E IS IN APPEAL. NOTWITHSTANDING THE RELIEF GRANTED BY THE CIT(A) ON MERITS OF THE TP ADJUSTMENTS, LD. AR FOR THE ASSESSEE SUBMITTED THAT THIS IS A CASE OF TRANSFER PRICING AND THE BENCHMARKING OF THE INTERNATIONA L TRANSACTIONS NEEDS TO BE DONE BY THE TPO AS PER THE INSTRUCTIONS NO.3 OF THE CBDT DATED 20-05-2003. AO HAS NO JURISDICTION TO MAKE SUCH TP ADJUSTMENTS. 5 ITA NO.1834/PUN/2014 MAGIC SOFTWARE ENTERPRISES INDIA PVT. LTD., MENTIONING THAT THIS IS A CASE WHERE AO ASSUMED JURISDIC TION OF THE TPO IN VIOLATION OF THE SAID CBDT CIRCULAR, LD. AR FOR THE ASSESSEE SUBMITTED THAT THE SAID ADJUSTMENTS BECOMES NULL AND VO ID DUE TO LACK OF JURISDICTION. IN THIS REGARD, LD. AR FOR THE ASSESSEE RE LIED ON THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F PR.CIT VS. M/S. S.G. ASIA HOLDINGS (INDIA) PVT. LTD. TS-922-HC-2018 (BOM .) (TP) HE ALSO SUBMITTED THE FOLLOWING WRITTEN SUBMISSIONS : 1. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF MA GIC SOFTWARE ENTERPRISES LTD. ISRAEL AND IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS PARENT COMPANY. THE SERVICES ARE E XPORTED BY THE ASSESSEE. 2. IN THE RELEVANT PREVIOUS YEAR THE ASSESSEE ENTER ED INTO INTERNATIONAL TRANSACTIONS OF EXPORT OF SOFTWARE SE RVICES, IMPORT OF SOFTWARE LICENSES AND COMMISSION INCOME ON SALE OF LICENSES IN INDIA AMOUNTING TO RS.5,69,11,716/- WHICH IS IN EXCESS OF THE THRESHOLD OF RS.5 CR. THE ASSESSEE HAS DETERMINED THE ALP OF THE TRA NSACTIONS BY ADOPTING COST PLUS MARK UP (CPM). 3. THE LEARNED AO IN THE SCRUTINY ASSESSMENT RECALC ULATED THE PRICE OF THE INTERNATIONAL TRANSACTIONS BY THRUSTING NEW COM PARABLE VIZ. PERSISTENT SYSTEMS AND MADE TRANSFER PRICING (TP) ADJUSTMENT O F RS.1,35,72,171/- U/S.92 IN THE ORDER PASSED U/S.143(3). THE TP ADJU STMENT HAS BEEN MADE WITHOUT MAKING THE REFERENCE TO THE TRANSFER PRICIN G OFFICER U/S.92CA AS MANDATED BY THE CBDT INSTRUCTION 3/2003, DATED 20- 05-2003. 4. LD. CIT(A) HAS HELD IN THE ORDER THAT THE AO CHE RRY PICKED COMPARABLE COMPANIES, WITHOUT GIVING BASIS AND REJE CTING ASSESSEES OBJECTIONS THEREAGAINST AND CONCLUDING THAT THE TP ADJUSTMENT RS.1,35,72,171/- MADE IN THE AO PASSED U/S.143(3) A S UNSUSTAINABLE. 5. THOUGH ORDER OF LD.CIT(A) IS IN FAVOUR OF THE AS SESSEE, LD. CIT(A) UNFORTUNATELY HAS NOT SPECIFICALLY ESPOUSED THE REL EVANT ASPECT VITAL TO THE ISSUE NAMELY THE BREACH OF INSTRUCTIONS ON THE PART OF LD. AO TO REFER THE MATTER TO THE TPO BEFORE CONFIRMING TP ADJUSTMENT A S REQUIRED UNDER INSTRUCTION ISSUED BY THE CBDT REF.3/2003 DATED 20- 05-2003. WE HAVE MOVED A PETITION UNDER RULE 27 OF ITAT RULES 1963 I N AUGUST 2017 WITHIN A COPY OF THE LD. DR PRAYING FOR CONSIDERATION AND ADJUDICATION OF THE AFORESAID ISSUE. 6. IT IS SUBMITTED THAT THE INSTRUCTIONS (SUPRA) IS SUED BY CBDT ARE MANDATORY AND APPLICABLE TO THE IMPUGNED YEAR AND B INDING ON THE AO. THE TP ADJUSTMENT MADE BY THE AO WITHOUT REFERENCE TO TPO U/S.92CA IS CONTRARY TO THE INSTRUCTIONS AND IS THEREFORE CLEAR LY UNSUSTAINABLE. 7. THE AFORESAID PROPOSITION IS UPHELD AND THE ISSU E IS SQUARELY COVERED BY THE DECISION OF JURISDICTIONAL BOMBAY HI GH COURT IN THE CASE OF M/S. S.G. ASIA HOLDINGS (INDIA) P. LTD. REPORTED IN TAX SUTRA TS-922-HC- 6 ITA NO.1834/PUN/2014 MAGIC SOFTWARE ENTERPRISES INDIA PVT. LTD., 2018 (BOM) TP WHEREIN HONBLE HC HAS UPHELD THE OR DER OF ITAT HOLDING THE TP ADJUSTMENT BAD IN LAW AND DISMISSED REVENUE S APPEAL (COPIES OF THE DECISION OF HONBLE BOMBAY HIGH COURT, HONBLE MUMBAI ITAT AND INSTRUCTI0N 3/2003 PLACED). 8. IT IS PRAYED THAT ON THE BACKDROP OF IDENTICAL S ET OF FACTS THE TP ADJUSTMENT MADE BY THE AO IN THE ORDER OF ASSESSMEN T U/S.143(3) WITHOUT MANDATORY REFERENCE TO TPO U/S.92CA OF THE INCOME T AX ACT BE DELETED. 6. LD. DR FOR THE REVENUE RELIED ON THE ORDER OF AO AND PRAYED FOR REVERSING THE ORDER OF CIT(A). 7. ON HEARING BOTH THE PARTIES ON THIS LIMITED ISSUE OF JUR ISDICTION IN MATTERS RELATING TO THE TP ADJUSTMENTS, WE FIND IN PRINCIP LE, THE ORDER OF THE CIT(A) IS DEFICIENT TO THE EXTENT OF THE GROUND-WISE AD JUDICATION. OF COURSE, THE APPEAL WAS ALLOWED IN FAVOUR OF THE ASSESSEE. IN OUR VIEW, THE END RESULT OF THE APPEAL BEFORE CIT(A), DOES NOT JUSTIF Y THE SAID DEFICIENCY. TO THAT EXTENT, CONSIDERING THE GRIEVANCE OF TH E ASSESSEE, THE APPLICATION OF THE ASSESSEE DATED 16-08-2017 UNDER RULE 27 OF THE ITAT, RULES, 1963 IS ADMITTED FOR ADJUDICATION. HOWEVER, FOR REMO VAL OF THE DEFICIENCIES IN THE ORDER OF CIT(A), REMANDING THE GROUNDS TO THE FILE OF CIT(A) FOR WANT OF ONE MORE ROUND OF ADJUDICATION MAY BE T HE LIKELY OUTCOME. 7.1 FURTHER, ON THE ISSUE OF REFERRAL OF THE TP CASES TO T HE TPO, WE HAVE EXAMINED THE SAME RAISED BY THE LD. AR FOR THE ASS ESSEE ON THE ISSUE OF REQUIREMENT OF MAKING A REFERRAL TO THE TPO U/S.9 2CA READ WITH CBDT INSTRUCTION NO.03/2003, DATED 20-05-2003. WE FIND T HIS OBJECTION RAISED BY THE ASSESSEE IS ALREADY ANSWERED B Y THE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S.S.G. ASIA HOLDING S (INDIA) PVT. LTD. (SUPRA). FOR THE SAKE OF COMPLETENESS, THE CON TENTS OF PARA NO.10 OF THE SAID JUDGMENT IS EXTRACTED AS UNDER : 7 ITA NO.1834/PUN/2014 MAGIC SOFTWARE ENTERPRISES INDIA PVT. LTD., 10. HOWEVER, IN OUR OPINION, NO CONTROVERSY AS WID E AS IS PROJECTED BEFORE US WOULD ARISE SIMPLY BECAUSE IT IS UNDISPUT ED THAT THERE IS CIRCULAR. IT IS UNDISPUTED THAT IT GAVE CERTAIN IN STRUCTIONS AND IN THE EVENT THE TRANSACTION IS AN INTERNATIONAL TRANSACTION, TH EN, ALL THE RELEVANT PROVISIONS OF THE IT ACT WOULD BE APPLICABLE. THE INSTRUCTIONS WERE ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES (CBDT). THE F ACTUAL FINDING IN THIS CASE IS THAT, GIVEN THE NATURE OF THE TRANSACTION, THESE INSTRUCTIONS WERE APPLICABLE. IF THEY WERE APPLICABLE, THEN, THERE O UGHT TO BE SOME SOLID GROUND FOR IGNORING A MANDATE FLOWING THEREFROM. THE MANDATE IS THAT THE ASSESSING OFFICER SHOULD MAKE A REFERENCE TO TH E TRANSFER PRICING OFFICER. THAT IS TO MAKE THE TRANSFER PRICING ADJUSTMENT. IN THIS CASE, NO SUCH REFERENCE WAS MADE DESPITE THE FACTS WARRANTING SO. THERE IS NO ACCEPTABLE OR JUSTIFIABLE REASON ON RECORD FO R REFUSING TO ABIDE BY THIS CONDITION IN THE CBDT CIRCULAR. ONCE THE CIRCULAR GOES UNCHALLENGED AND BINDS THE REVENUE, THEN, IN THE ABSENCE OF ALL THIS , THE TRIBUNAL HELD THAT THE ASSESSING OFFICER OFFICERS ORDER CANNOT BE SUS TAINED. HE COULD NOT HAVE PROCEEDED TO MAKE THE TRANSFER PRICING ADJUSTM ENT. CONSIDERING THE SETTLED LEGAL POSITION ON THIS PART OF THE LE GAL ISSUE, WE ARE OF THE OPINION THAT THE OBJECTIONS RAISED BY THE ASSESSEE UNDER RULE 27 OF THE ITAT RULES, 1963 IS SUSTAINABLE TO TH IS EXTENT. THE MANDATE IS CLEAR AND THE AO IS UNDER THE OBLIGATION TO MA KE A REFERRAL TO THE TPO AND THE SAME IS NOT DONE IN THIS CASE. REASONS ARE GIVEN FOR THIS FAILURE. THEREFORE, THIS PART OF THE ARGUMENTS APPLY T O RULE 27 OF THE ITAT RULES, 1963 STANDS ALLOWED IN FAVOUR OF THE ASSESSEE. CONSEQUENTLY, THE OTHER ASPECT PASSING OF A SPEAKING OR DER BY THE CIT(A) ON THE GROUNDS RAISED BEFORE HIM AND THEIR ADJUDICA TION BECOMES AN ACADEMIC IMPORTANCE. THEREFORE, THE ISSUES RELATING TO PASSING OF A SPEAKING ORDER RAISED BY THE ASSESSEE IN THE APPLICATION UNDER RULE 27 OF THE ITAT, RULES, 1963 ON THIS PART OF THE ISSUE ARE DIS MISSED AS ACADEMIC. THUS, THE ISSUES RAISED IN THE SAID APPLICATION ST ANDS PARTLY ALLOWED. CONSIDERING OUR OUTCOME ON THE MANDATORY REQUIREMENT O F MAKING A REFERENCE TO THE TPO U/S.92CA OF THE ACT, ADJUDICATION OF THE ISSUES RAISED BY THE REVENUE BECOMES AN ACADEMIC EXERCISE AND THEREFORE, THE 8 ITA NO.1834/PUN/2014 MAGIC SOFTWARE ENTERPRISES INDIA PVT. LTD., REVENUE APPEAL STANDS DISMISSED. ACCORDINGLY, THE GROUND S RAISED BY THE REVENUE ARE DISMISSED. 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON 10 TH DAY OF OCTOBER, 2018. SD/- SD/- ( /VIKAS AWASTHY) ( . /D. KARUNAKARA RAO) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; / DATED : 10 TH OCTOBER, 2018. SATISH ' ) / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(APPEALS)-IT/TP, PUNE 4. THE CIT-1, PUNE 5. , , ' , / DR, ITAT, A BENCH, PUNE. 6. % / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE.