M/s. California Software Company Limited, CHENNAI V. ACIT, CHENNAI

ITA 1842/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64194 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 27-08-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 14-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHAJI P JACOB IRS
• Assessee Lawyers: H PADAMCHAN D KHINCHA
• Keywords: Depreciation; Transfer pricing
• Section: 234B; 14A; 133(6); 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ITA NO.1842(MDS)/2011 ASSESSMENT YEAR : 2007-08 M/S. CALIFORNIA SOFTWARE CO. LTD., ROBERT V CHANDRA TOWER, 7 TH FLOOR, 149, VELACHERY-TAMBARAM MAIN RD., PALLIKARANAI, CHENNAI-600 100. PAN AABCC8506B. VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE I(3), CHENNAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI H.PADAMCHAN D KHINCHA, FCA. RESPONDENT BY : SHRI SHAJI P JACOB, IRS, JCIT DATE OF HEARING : 27 TH AUGUST, 2012 DATE OF PRONOUNCEMENT : 27 TH AUGUST, 2012 O R D E R PER DR.O.K.NARAYANAN, VICE-PRESIDENT: THIS IS A TRANSFER PRICING (TP) APPEAL. THE ASSE SSMENT YEAR IS 2007-08. IT IS FILED BY THE ASSESSEE. IT I S DIRECTED AGAINST THE ORDER OF THE ASSESSING AUTHORITY PASSED UNDER S ECTION - - ITA 1842 OF 2011 2 143(3), READ WITH SECTIONS 92CA AND 144C(5) OF THE INCOME-TAX ACT, 1961. THE TRANSFER PRICING OFFICER (TPO) HAS PASSED HER ORDER ON 29-10-2010 UNDER SECTION 92CA OF THE INC OME-TAX ACT, 1961. DIRECTIONS OF THE DISPUTE RESOLUTION PANEL A T CHENNAI ARE DATED 8-9-2011IN THE PROCEEDINGS CONCLUDED UNDER SE CTION 144C(5) OF THE INCOME-TAX ACT, 1961. 2. THE ASSESSEE IS A HUNDRED PER CENT EXPORTER OF COMPUTER SOFTWARE. TRANSACTIONS WERE ENTERED INTO WITH ASSOCIATED ENTERPRISE OVERSEAS AND AS SUCH THE MATT ER WAS DESTINED UNDER THE JURISDICTION OF TRANSFER PRICING REGIME. THE TRANSFER PRICING OFFICER, AFTER MAKING AN ANALYSIS OF THE TRANSFER PRICING STUDY REPORTED BY THE ASSESSEE, WORKED OUT AN INCREMENTAL ADJUSTMENT OF ` 5.84 CRORES TO THE INCOME RETURNED BY THE ASSESSEE AS ARMS LENGTH PRICE (ALP) ADJUSTM ENT. THE DISPUTE RESOLUTION PANEL (DRP) UPHELD THE UPWARD RE VISION MADE BY THE TPO AND AS SUCH CONFIRMED THE DRAFT ASS ESSMENT ORDER PASSED BY THE ASSESSING OFFICER. THUS, THE A SSESSMENT WAS COMPLETED AFTER MAKING AN ADDITION OF ` 5.84 CRORES TO THE INCOME OF THE ASSESSEE-COMPANY. - - ITA 1842 OF 2011 3 3. THE GROUNDS RAISED BY THE ASSESSEE IN THE CONTE XT OF TP ADJUSTMENT ARE AS FOLLOWS:- THE LOWER AUTHORITIES HAVE ERRED IN: 1. NOT APPRECIATING THAT THE CHARGING OR COMPUTATIO N PROVISION RELATING TO INCOME UNDER THE HEAD PROFIT S AND GAINS OF BUSINESS OR PROFESSION DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X AND THEREFORE ADDITION UNDER CHAPTER X IS BAD IN LAW. 2. IN RELYING ON INFORMATION COLLECTED U/S 133(6) B Y OTHER DIRECTORATES OF TRANSFER PRICING WITHOUT PROVIDING THE INFORMATION TO THE APPELLANT. 3. REJECTING INTERNAL COMPARABLES SELECTED BY THE APPELLANT AND REJECTING TRANSFER PRICING ANALYSIS O F THE APPELLANT. - - ITA 1842 OF 2011 4 4. DOING FRESH TRANSFER PRICING ANALYSIS AND ADOPTI NG INAPPROPRIATE FILTERS IN DOING FRESH TRANSFER PRICI NG ANALYSIS. 5. SELECTING INAPPROPRIATE COMPARABLES AND REJECTING APPROPRIATE COMPARABLES. 6. INAPPROPRIATELY COMPUTING THE OPERATING MARGINS OF COMPARABLES AND THE APPELLANT. 7. NOT RESTRICTING THE TP ADJUSTMENT TO AE TRANSACTIONS ONLY. 8. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEVE L AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. 9. NOT ALLOWING THE BENEFIT OF THE +/-5% RANGE MENTIONED IN THE PROVISO TO SECTION 92C(2). - - ITA 1842 OF 2011 5 4. THE ASSESSEE HAS ALSO RAISED GROUNDS RELATING T O ADDITIONS MADE UNDER SECTION 14A, DISALLOWANCE MADE UNDER SECTION 10A AND ALSO CONTENTION AGAINST THE RATE OF DEPRECIATION ADOPTED BY THE ASSESSING AUTHORITY ON UPS AND FURTH ER GROUNDS AGAINST LEVY OF INTEREST UNDER SECTION 234B OF THE ACT. 5. WE HEARD SHRI H.PADAMCHAND KHINCHA, THE LEARNED CHARTERED ACCOUNTANT APPEARING FOR THE ASSESSEE-COM PANY AND SHRI SHAJI P JACOB, THE LEARNED COMMISSIONER OF INC OME-TAX APPEARING FOR THE REVENUE. 6. ON GOING THROUGH THE ORDERS OF THE LOWER AUTHOR ITIES AND THE SUBMISSIONS MADE BY THE LEARNED CHARTERED A CCOUNTANT APPEARING FOR THE ASSESSEE, WE FIND THAT THE TRANSF ER PRICING ANALYSIS HAS BEEN MADE BY THE ASSESSEE AS WELL AS T HE AUTHORITIES BELOW ONLY ON THE BASIS OF INTERNAL COM PARABLES. AT THE SAME TIME, THERE IS NO CASE THAT INSTANCES OF E XTERNAL COMPARABLES ARE UNAVAILABLE. EXTERNAL COMPARABLES ARE AVAILABLE IN THE INDUSTRY CARRIED ON BY THE ASSESSE E COMPANY. - - ITA 1842 OF 2011 6 7. THEREFORE, AT THE OUTSET ITSELF WE FEEL THAT TH E ASSESSEE AS WELL AS THE LOWER AUTHORITIES HAVE ERRO NEOUSLY OVERLOOKED THE NECESSITY OF ANALYZING EXTERNAL COMP ARABLES AS WELL, WHILE MAKING THE EXERCISE OF TP STUDY. IN AN ENVIRONMENT WHERE SUFFICIENT NUMBER OF EXTERNAL COMPARABLES ARE AVAILABLE, IT IS IMPERATIVE TO EXAMINE THOSE EXTERNAL COMPARABLES ALSO ALONGWITH INTERNAL COMPARABLES SO AS TO COME TO A B ALANCED FINDING ON THE MATTERS RELATING TO DECIDING OF ALP AND CONSEQUENTIAL ADJUSTMENT CALLED FOR, IF ANY. 8. THIS IS MORE BECAUSE FROM THE MATERIALS PLACED BEFORE US IT IS NOT SEEN WHETHER THE ASSESSEE HAS M ADE SEGMENTAL ANALYSIS BEFORE EXCLUSIVELY RELYING ON IN TERNAL COMPARABLES AVAILABLE AT ITS DISPOSAL. INTERNAL CO MPARABLES ARE ALSO INFLUENCED BY VARIOUS FACTORS, WHICH MAY DISTO RT THE ACCEPTABILITY NORM, IF NOT EXAMINED WITH THE TOUCHS TONE OF UNBIASED CONCLUSION GENERATED OUT OF A STUDY OF EXT ERNAL COMPARABLES. THEREFORE, THE APPROACH OF TP STUDY M ADE IN THIS CASE IS INAPPROPRIATE. EVEN IF THE ASSESSEE AS WEL L AS THE AUTHORITIES BELOW AGREE THAT THE INTERNAL COMPARABL ES ARE - - ITA 1842 OF 2011 7 SUFFICIENT FOR THE TP STUDY IN THE PRESENT CASE, TH AT DOES NOT JUSTIFY THE LEGAL COMPULSION OF EXAMINING THE EXTER NAL COMPARABLES AS WELL. AN AGREEMENT, ARRIVED AT ON T HE BASIS OF INCORRECT PREMISES BETWEEN THE CONTENDING PARTIES, DOES NOT DETERMINE THE LEGALITY OR OTHERWISE OF THE COURSE O F ACTION OPTED BY THEM. THE COURSE OF ACTION MUST BE DETERMINED S TRICTLY ON THE BASIS OF THE WORDS OF THE STATUTE AND NOT BY THE CO NSENSUS OF THE CONTENDING PARTIES. 9. THEREFORE, THE FACT THAT THE AUTHORITIES BELOW ALSO HAVE BY AND LARGE MADE THE VOYAGE OVER INTERNAL COM PARABLES IS NOT A REASON FOR US TO ACCEPT THE CONTENTION OF THE ASSESSEE THAT THE INTERNAL COMPARABLES RELIED ON BY THE ASSESSEE ARE UNBIASED. 10. AT THE END, THERE COULD BE A CHANCE THAT INTER NAL COMPARABLES MIGHT STILL HOLD GOOD IN ASSESSEES CAS E. BUT THAT SHOULD BE THE RESULT OF A LAWFUL ENQUIRY MADE ON TH E BASIS OF INTERNAL AS WELL AS EXTERNAL COMPARABLES. - - ITA 1842 OF 2011 8 11. BECAUSE OF THE ABOVE STATED INHERENT DIS- QUALIFICATION OF THE IMPUGNED TP ASSESSMENT, WE FIN D THAT THIS MATTER HAS TO GO BACK TO THE CONCERNED AUTHORITY FO R REDOING OF THE TP ANALYSIS ON THE BASIS OF EXTERNAL AS WELL AS INTERNAL COMPARABLES. THE FILE IS REMITTED BACK TO THE TPO FOR THE ABOVE PURPOSE. THE TPO IS DIRECTED TO REDO THE EXERCISE OF TP ANALYSIS IN THE PRESENT CASE TAKING INTO CONSIDERAT ION BOTH EXTERNAL AND INTERNAL COMPARABLES. WHILE DOING SO, THE TPO WILL CONSIDER ALL THE OBJECTIONS RAISED BY THE ASSESSEE REGARDING THE FILTERING PROCESS INCLUDING THE VARIABLES, RISK FAC TORS INVOLVED AND ALL OTHER ESSENTIAL FACTORS WHICH WOULD TAKE CARE O F THE ANXIETIES OF THE ASSESSEE WHILE DETERMINING THE ALP. THE PRO CESS OF THE RE-EXERCISE ALSO PERMITS TO ADOPT ANY OTHER MOST AP PROPRIATE METHOD TO DETERMINE THE ALP, IF THE CIRCUMSTANCES S O WARRANT. 12. REGARDING THE OTHER GROUNDS RELATING TO ADDITI ONS UNDER SECTION 14A AND DISALLOWANCE UNDER SECTION 10 A, THE ASSESSING AUTHORITY SHALL ADJUDICATE THE MATTER AFR ESH AFTER CONSIDERING THE LATEST CASE LAWS AVAILABLE ON THE T OPICS. THIS DIRECTION IS EQUALLY APPLICABLE TO THE RATE OF DEPR ECIATION - - ITA 1842 OF 2011 9 APPLICABLE TO UPS AS WELL. THE LEVY OF INTEREST IS CONSEQUENTIAL AND AS SUCH DOES NOT CALL FOR ANY ADJUDICATION AT T HIS STAGE. 13. IN RESULT, THIS FILE IS REMITTED TO THE TPO VI S-A-VIS TO THE ASSESSING OFFICER AND THE APPEAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING ON MONDAY, THE 27 TH OF AUGUST, 2012 AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 27 TH AUGUST, 2012. V.A.P. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F.