M/s.Cisco Video Technologies India Private Limited, Bangalore V. Assistant Commissioner of income tax, Bangalore

ITA 184/BANG/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 6543 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 28-01-2020
• Assessment Year: 2012-2013
• Appeal Filed On: 25-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR CIT BENGALURU
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 144C; 13; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT (TP) A NO. 184/BANG/2017 ASSESSMENT YEAR: 2012 - 13 SYNAMEDIA INDIA PVT. LTD., (FORMERLY KNOWN AS CISCO VIDEO TECHNOLOGIES INDIA PVT. LTD.,) BLOCK 9A & 9B, PRITECH PARK, SURVEY NO.51-64/4, SARJAPUR OUTER RING ROAD, BELLANDUR VILLAGE, BENGALURU 560 103. PAN: AACCN 11 40K VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI PADAM CHAND KHINCHA, CA RESPONDENT BY : SHRI PRADEEP KUMAR, C IT(DR)(ITAT ), BENGALURU. DATE OF HEARING : 28 .0 1 .2020 DATE OF PRONOUNCEMENT : 06 .0 2 .2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE FAIR O RDER OF ASSESSMENT DATED 25.11.2016 PASSED U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX ACT, 1961 [THE ACT] BY THE ACIT, CIRCLE 2(1)(1), BANGALO RE RELATING TO ASSESSMENT YEAR 2012-13. 2. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS WITH REGARD TO ADDITION MADE BEY THE AO CONSEQUENT TO DE TERMINATION OF ALP IN PAGE 2 OF 9 RESPECT OF AN INTERNATIONAL TRANSACTION ENTERED INT O BY THE ASSESSEE WITH ITS AE. THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT AND RELATED SERVICES . IT IS NOT IN DISPUTE THAT THE ASSESSEE RENDERED SOFTWARE DEVELOPMENT SER VICES TO ITS ASSOCIATE ENTERPRISE (AE), NDS, UK. THE AFORESAID TRANSACTIO N WAS AN INTERNATIONAL TRANSACTION AND AS LAID DOWN UNDER THE PROVISIONS O F SECTION 92 OF THE ACT AND ACCORDINGLY THE INCOME FROM THE AFORESAID TRANS ACTION HAS TO BE DETERMINED KEEPING IN MIND THE ARMS LENGTH PRICE. 3. THE ASSESSEE IN SUPPORT OF ITS CLAIM, THAT THE P RICE RECEIVED IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH, FILE D A TP ANALYSIS FOR WHICH THE ASSESSEE HAD CHOSEN TNMM AS THE MOST APPROPRIAT E METHOD FOR DETERMINING THE ALP. THE PROFIT LEVEL INDICATOR (P LI) CHOSEN FOR THE PURPOSE OF COMPARISON OF THE PROFIT MARGIN OF THE A SSESSEE WITH THE COMPARABLE COMPANIES WAS OP/OC. THE OP/OC AS WORKED OUT BY THE ASSESSEE AND AS DONE BY THE TPO WAS AS FOLLOWS:- SEGMENTAL FINANCIALS AS GIVEN IN TP STUDY PARTICULARS SOFTWARE RESEARCH & DEVELOPMENT MARKETING SUPPORT SERVICES INCOME SEGMENT REVENUE 3,90,15,86,819 1,48,62,204 FOREIGN EXCHANGE GAIN 15,13,57,335 TOTAL OPERATING INCOME 4,05,29,44,154 1,48,62,204 EXPENDITURE SEGMENT COST 3,54,45,16,069 1,29,23,657 TOTAL OPERATING COST 3,54,45,16,069 1,29,23,657 OPERATING PROFIT 50,84,29,085 19,38,547 OPERATING PROFIT/ OPERATING COST 14.34% 15.00% PAGE 3 OF 9 AS RECOMPUTED BY TPO PARTICULARS SOFTWARE RESEARCH & DEVELOPMENT MARKETING SUPPORT SERVICES NON AE TOTAL INCOME SEGMENT REVENUE 4,05,29,44,154 1,48,62,204 31,46,23,733 438,24,30,091 LESS: OTHER INCOME 15,13,57,335 17,78,152 15,31,35,487 TOTAL OPERATING INCOME 390,15,86,819 1,48,62,204 31,28,45,581 4229294604 EXPENDITURE TOTAL EXPENSES 3,54,45,16,069 1,29,23,657 238,427,243 3795866969 LESS: PROVISION FOR DOUBTFUL ADVANCES 27327365 : BANK CHARGES 2794176 TOTAL OPERATING COST 3,54,45,16,069 1,29,23,657 208,305,702 3,765,745,428 OPERATING PROFIT 357070750 19,38,547 104539879 OPERATING PROFIT/ OPERATING COST 10.07% 15.00% 50.18% 4. AS CAN BE SEEN FROM THE ABOVE TABLE, THE PLI COM PUTED BY THE ASSESSEE WAS MODIFIED BY THE TPO AND THIS IS BECAUS E OF THE ACTION OF THE TPO IN CONSIDERING THE FOREIGN EXCHANGE GAIN OF RS. 15,13,57,335 AS NOT PART OF THE OPERATING INCOME OF THE ASSESSEE. THIS IS THE REASON WHY THE PLI COMPUTED BY THE ASSESSEE WAS 14.34%, WHILE TPO COMPUTED THE PLI AT 10.07%. PAGE 4 OF 9 5. AFTER REJECTING THE TP ANALYSIS OF THE ASSESSEE, THE TPO CHOSE 10 COMPARABLE COMPANIES AND THE AVERAGE ARITHMETIC PRO FIT MARGIN OF THOSE 10 COMPANIES WAS AS FOLLOWS:- SL. NO. NAME OF THE COMPANY OP/OC % 1 DATAMATICS GLOBAL SERVICES LTD. 14.57 2 GENESYS INTERNATIONAL SERVICES LTD. 30.09 3 ICRA TECHNO ANALYTICS LTD. 17.24 4 INFOSYS LTD. 43.10 5 LARSEN & TOUBRO I NFOTECH LTD. 25.47 6 MI NDTREE LTD. 15.01 7 PERSISTENT SYSTEMS LTD. 27.20 8 R S SOFTWARE (INDIA) LTD. 15.34 9 SASKEN COMMUNICATION TECHNOLOGIES LTD. 12.15 10 SPRY RESOURCES INDIA PVT. LTD. 26.18 AVERAGE MARK-UP 22.63 6. THE TPO DETERMINED THE ALP AND THE CONSEQUENT AD DITION TO BE MADE TO THE TOTAL INCOME OF THE ASSESSEE AS FOLLOWS :- 12.4 THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDI CATORS IS TAKEN AS THE ARMS LENGTH MARGIN. PLEASE SEE ANNEXURE B FOR DETAILS O F COMPUTATION OF PLI OF THE COMPARABLES. BASED ON THIS, THE ARMS LENGTH PRICE OF THE SERVICES RENDERED BY THE TAX PAYER TO ITS AE(S) IS COMPUTED AS UNDER: SOFTWARE DEVELOPMENT SERVICES ARM'S LENGTH MEAN MARGIN ON COST 22.63% LESS: WORKING CAPITAL ADJUSTMENT 0.95% (AS PER ANNEX. C) ADJUSTED MARGIN 21.68% OPERATING COST 3544516069 ARMS LENGTH PRICE(ALP) 4312967153 121.68% OF OPERATING COST) PRICE RECEIVED 3901586819 SHORTFALL BEING ADJUSTMENT U/S 92CA: 411380334 PAGE 5 OF 9 5% OF PRICE RECEIVED 1950,79,341 SINCE THE SHORTFALL IS EXCEEDING THE 5% OF THE INTE RNATIONAL TRANSACTION , ADJUSTMENT IS MADE THE ABOVE SHORTFALL OF RS. 41,13,80,334/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA IN RESPECT OF SOFTWARE DEVELOPMENT SEGMENT OF THE TAXPAYER'S INTERNATIONAL TRANSACTIONS. 7. AGGRIEVED BY THE ORDER OF TPO, WHICH WAS INCORPO RATED IN THE DRAFT ORDER OF ASSESSMENT BY THE AO, THE ASSESSEE PREFERR ED OBJECTIONS BEFORE THE DRP. THE DRP ACCEPTED THE PLEA OF THE ASSESSEE THAT OUT OF 10 COMPARABLE COMPANIES CHOSEN BY THE TPO, 6 COMPANIES CANNOT BE REGARDED AS GOOD COMPARABLES AND ONLY THE FOLLOWING FOUR CAN BE REGARDED AS COMPANIES:- SL. NO. NAMES OF THE COMPANIES OP/OC % ADJUSTED OP/OC AFTER WORKING CAPITAL ADJUSTMENT 1 LARSEN & TOUBRO INFOTECH LTD. 25.47% 26.50% 2 MINDTREE LTD. 15.01% 15. 76% 3 PERSIST ENT SYSTEMS LTD. 27.20% 27.90% 4 R S SOFTWARE (INDIA) LTD. 15.34% 18.58% MEAN MARGIN 20.75% 22.18% 8. THE DRP, HOWEVER, OPINED THAT IT WOULD BE APPROP RIATE TO CONSIDER THE ENTIRE 10 SET OF COMPARABLES AS BY DOING SO, TH E LARGER SET OF COMPARABLES WILL TAKE CARE OF DIFFERENCES BETWEEN T HE COMPARABLES. WITH REGARD TO THE ACTION OF THE TPO IN CONSIDERING THE FOREIGN EXCHANGE GAIN AS NOT PART OF OPERATING PROFITS FOR THE PURPOSE OF CO MPUTING OP/OC, THE DRP HELD THAT FOREIGN EXCHANGE GAIN HAS TO BE TREATED A S PART OF THE OP WHILE COMPUTING OP/OC OF THE ASSESSEE AND IN DOING SO, FO LLOWING THE DECISION OF THE BANGALORE TRIBUNAL IN THE CASE OF SAP LABS (I) P. LTD. V. ACIT [2011] 44 SOT 156 (BANG. TRIB) . DESPITE THE ABOVE DIRECTION, THE TPO WHILE PAGE 6 OF 9 GIVING EFFECT TO THE DIRECTIONS OF THE DRP DATED 24 .11.2016, EXCLUDED SIX COMPARABLE COMPANIES WHICH WAS HELD BY THE DRP TO B E NOT COMPARABLE WITH THE ASSESSEE. IN THE AFORESAID ORDER, THE TPO DID NOT GIVE EFFECT TO THE DIRECTIONS OF THE DRP TO CONSIDER FOREIGN EXCHA NGE GAIN AS PART OF OPERATING PROFITS OF THE ASSESSEE. 9. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SEEK S EXCLUSION OF 2 OUT OF 4 COMPARABLE COMPANIES THAT REMAIN AFTER THE ORD ER OF DRP AND ORDER GIVING EFFECT TO THE DIRECTIONS OF THE DRP PASSED B Y THE TPO DATED 24.11.2016. THE 2 COMPANIES WHICH THE ASSESSEE SEE KS EXCLUSION ARE L&T INFOTECH LTD. AND PERSISTENT SYSTEMS LTD. 10. THE LD. COUNSEL FOR THE ASSESSEE FILED BEFORE U S AN ORDER OF THE TRIBUNAL DATED 21.12.2018 IN IT(TP)A NO.216/BANG/20 17 FOR AY 2012-13 IN THE CASE OF EVOLVING SYSTEMS NETWORK (I) P. LTD. IN THIS DECISION ALSO WITH REFERENCE TO THE SOFTWARE DEVELOPMENT SERVICES PROV IDER SUCH AS THE ASSESSEE WHERE THE VERY SAME 10 COMPARABLES WERE CH OSEN BY THE TPO AS IN THE PRESENT CASE, THE TRIBUNAL HELD THAT L&T INFOTECH LTD. AND PERSISTENT SYSTEMS LTD. CANNOT BE REGARDED AS COMPA RABLE WITH THE FOLLOWING OBSERVATIONS :- 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN THE CASE OF AGILIS INFORMATION TECHNOLOGIES INDIA (P) LTD., (SU PRA), THIS TRIBUNAL CONSIDERED THE COMPARABILITY OF THE 3 COMP ANIES WHICH THE ASSESSEE SEEKS TO EXCLUDE FROM THE FINAL LIST O F COMPARABLE COMPANIES CHOSEN BY THE TPO. THE FUNCTIONAL PROFILE OF THE ASSESSEE AND THAT OF THE ASSESSEE IN THE CASE OF AG ILIS TECHNOLOGIES INDIA (P) LTD., IS IDENTICAL IN AS MUC H AS THE SAID COMPANY WAS ALSO INVOLVED IN PROVIDING SWD SERVICES TO ITS AE AND THE TPO HAD CHOSEN SOME COMPARABLE COMPANIES WH ICH WERE ALSO CHOSEN BY THE TPO IN THE CASE OF THE ASSE SSEE FOR THE PURPOSE OF COMPARABILITY. IN THE AFORESAID DECISION THE TRIBUNAL HELD ON THE COMPARABILITY OF THE 3 COMPANIES WHICH THE ASSESSEE SEEKS TO EXCLUDE AS FOLLOWS: PAGE 7 OF 9 (A) INFOSYS LTD., WAS EXCLUDED FROM THE LIST OF COMPARA BLE COMPANIES BY FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES (2013) 36 TAXMANN.COM 289 (DELHI). THE DISCUSSION IS CONTAINED IN PARAGRAPHS 4.5 TO 4.7 OF THE TRIBUNALS ORDER. THE TRIBUNAL ACCEPTED THAT INFOSY S LTD. IS A GIANT RISK TAKING COMPANY AND ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS AND ALSO OWNS INTANGIBLE ASSETS AND THEREFORE NOT COMPARABLE WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH A S THE ASSESSEE IN THAT CASE. (B) LARSEN & TOURBRO INFOTECH LTD., WAS EXCLUDED FROM THE LIST OF COMPAR ABLE COMPANIES BY RELYING ON THE DECISION OF THE DELHI BENCH OF ITAT IN THE CASE OF SAXO INDIA (P) LTD. VS. ACIT (2016) 67 TAXMANN.COM 155 (DEL-TRI). THE DISCUSSION IS CONTAINED IN PARAGRAPHS 4.8 TO 4.10 O F THE TRIBUNALS ORDER. THE TRIBUNAL HELD THAT L & T INFOT ECH LTD., WAS A SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES WAS NOT AVAILABLE. THE TRIBUNAL ALSO NOTICED THAT THE APPEAL FILED BY THE REVENUE AGAINST THE TRIBUNALS ORDER WAS DISMISSED BY THE HONBLE DELHI HIGH COURT IN ITA NO.682/2016. (C) PERSISTENT SYSTEMS LTD., WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES ON THE GROUND THAT THIS COMPANY WAS A SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES WAS NOT AVAILABLE. THE TRIBUNAL IN COMING TO THE ABOVE CONCLUSION REFERRED TO THE DECISION RENDERED BY ITAT DELHI BENCH IN THE CASE OF CASH EDGE INDIA PVT.LTD. VS. ITO ITA NO.64/DEL/2015 ORDER DATED 23.9.2015 AND THE DECISION OF HONBLE DELHI HIGH COURT IN THE CAS E OF SAXO INDIA PVT.LTD. (SUPRA). THE FINDINGS IN THIS R EGARD ARE CONTAINED IN PARAGRAPHS 4.14 TO 4.16 OF ITS ORD ER. 9. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBU NAL WE HOLD THAT THE AFORESAID 3 COMPANIES BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF ARRIVING AT THE ARITHMETIC MEAN OF COMPARABLE COMPANIES FOR THE PUR POSE OF COMPARISON WITH THE PROFIT MARGINS. 11. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNA L, WE DIRECT THE EXCLUSION OF LARSEN & TOUBRO INFOTECH LTD. AND PERS ISTENT SYSTEMS LTD. FROM THE LIST OF COMPARABLE COMPANIES. PAGE 8 OF 9 12. IT WAS SUBMITTED THAT WITH THE EXCLUSION OF THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE COMPANIES AND IF FOREIG N EXCHANGE GAIN IS REGARDED AS OPERATING PROFIT AND THE PLI IS REWORKE D, THEN THE PROFIT MARGIN OF THE ASSESSEE AND THE AVERAGE ARITHMETIC PROFIT M EAN OF THE COMPARABLE COMPANIES THAT REMAIN AFTER EXCLUSION OF THE AFORES AID TWO COMPANIES WOULD BE WITHIN THE ARMS LENGTH RANGE AND THEREFOR E NO ADDITION COULD BE MADE ON ACCOUNT OF DETERMINATION OF ALP. HENCE THE OTHER GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN THE APPEAL WERE NO T PRESSED FOR ADJUDICATION. 13. WE ARE OF THE VIEW THAT THE AFORESAID SUBMISSIO N IS ACCEPTED AND THE OTHER GROUNDS OF APPEAL IN CHALLENGING THE TP A DJUSTMENT ARE HELD TO BE ACADEMIC AND NOT DECIDED. WE, HOWEVER, DIRECT THE TPO TO CONSIDER THE FOREIGN EXCHANGE GAIN AS PART OF OPERATING PROFIT O F ASSESSEE AND WORK OUT THE PLI. 14. ONLY TWO COMPARABLE COMPANIES REMAIN AFTER EXCL USION OF 8 OUT OF 10 COMPANIES CHOSEN BY THE TPO VIZ., MINDTREE LTD. AND R S SOFTWARE (I) LTD. THE TPO IS DIRECTED TO DETERMINE THE ALP AS P ER THE DIRECTIONS CONTAINED IN THIS ORDER, AFTER AFFORDING DUE OPPORT UNITY TO THE ASSESSEE. 15. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 6 TH DAY OF FEBRUARY, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVA N ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 6 TH FEBRUARY, 2020. / DESAI S MURTHY / PAGE 9 OF 9 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FIL E BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.