ISG Novasoft Technologies :Limited, Bangalore V. DCIT, Bangalore

ITA 185/BANG/2015

• Counselvise Citation: 18521114 RSA 2015
• Duration Of Justice: 7 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-09-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 20-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH B, BANGALORE BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER IT(TP)A NO.185(B)/2015 (ASSESSMENT YEAR : 2007-2008) M/S ISG NOVASOFT TECHNOLOGIES LTD., GROUND FLOOR, NORTH WING, VAYU BLOCK, SALARPURIA GR TECH PARK, WHITEFIELD, BANGALORE-560 066 APPELLANT PAN NO.AABC12488Q VS THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)(1), BANGALORE-560 001 RESPONDENT ASSESSEE BY : SHRI CHAVALI NARAYAN, CA REVENUE BY : SMT NEERA MALHOTRA, CIT DATE OF HEARING : 23-09-2015 DATE OF PRONOUNCEMENT : 30 -09-2015 O R D E R PER SHRI ABRAHAM P GEORGE, AM: ASSESSEE IN THIS APPEAL IS AGGRIEVED AGAINST ORDER DATED 18-12-2014 OF ASSESSING OFFICER, PASSED U/S 143(3) OF THE IT A CT, 1961 (THE ACT) READ WITH SECTION 144C OF THE ACT, 1961. THE ASSESSEE A LTOGETHER HAS RAISED AS MANY AS 15 GROUNDS OF WHICH GROUNDS 1 TO 12 ARE ON TP MATTERS. IT(TP)A NO.185(B)/15 2 ASSESSEE ALSO FILED A PETITION FOR ADMITTING THE AD DITIONAL GROUND WHICH AGAIN RELATES TO TP ISSUES. 2. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT HE WAS NOT PRESSING ANY OF THE GROUNDS RELATING TO TP ISSUES E XCEPT GROUND NO. 8 & 11. LEARNED COUNSEL ALSO SUBMITTED THAT HE WAS NO T PRESSING THE ADDITIONAL GROUND EITHER. 2.1 BASED ON THE SUBMISSIONS ON THE LEARNED AR, WE DISMISS GROUND NOS. 1 TO 13 OF THE ASSESSEE EXCEPT GROUND NO.8 & 1 1AS ALSO THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE. 3. GROUND NO.8 OF THE ASSESSEE IS REPRODUCED HEREUN DER; 8 THE LEARNED DRP ERRED IN UPHOLDING THE INCLUSI ON OF CERTAIN FUNCTIONALLY DIFFERENT COMPANIES AS COMPARA BLES BASED ON UNREASONABLE COMPARABILITY CRITERIA. ACCENTIA TECHNOLOGIES LTD.. NOT COMPARABLE TO APPEL LANT SINCE (A) FUNCTIONALLY DIFFERENT (B) EXTRA-ORDINARY EVENTS DURING THE YEAR IN THE FORM OF AMALGAMATION (C) DIFFERENT METHOD OF REVENUE RECOGNITION (D) INSUFFICIENT SEGMENTAL INFO RMATION (E) ABNORMALLY HIGH MARGINS 3.1 LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THA T ASSESSEE WAS PROVIDING A BROAD RANGE OF IT ENABLED SERVICE IN TH E NATURE OF TRANSACTION PROCESSING, CALL CENTRE MANAGEMENT, DATA MANAGEMENT , MORTGAGE PROCESSING, SOFTWARE TECHNICAL SUPPORT SERVICES. A S PER THE LEARNED AR THESE SERVICES WERE BEING RENDERED TO ASSOCIATED EN TERPRISES ( AE ) IN THE IT(TP)A NO.185(B)/15 3 USA CALLED ISGN. AGAIN AS PER THE LEARNED AR, THE T PO WHILE ANALYZING THE PRICING OF THE INTERNATIONAL TRANSACTIONS OF THE AS SESSEE WITH ITS AE IN RELATION TO IT ENABLED SERVICES SEGMENT, HAD CONSID ERED M/S ACCENTIA TECHNOLOGIES LTD., AS A GOOD COMPARABLE. RELYING O N PAPER BOOK PAGE-371 LEARNED AR SUBMITTED THAT M/S ACCENTIA TECHNOLOGIES LTD., WAS FUNCTIONALLY DIFFERENT AND THIS WAS POINTED OUT TO THE DRP. AS PER THE LEARNED AR THE ANNUAL REPORT OF THE SAID COMPANY IN ITS MANAGEMENT DISCUSSION AND ANALYSIS CLEARLY MENTIONED THAT THEY WERE INTO HEALTH CARE AND RELATED SERVICES. RELIANCE WAS PLACED ON THE D ECISION OF THE CO- ORDINATE BENCH IN THE CASE OF M/S NOVO NORDISK INDI A PVT.LTD., VS DCIT IN IT(TP)A NO.146(BANG)/2015 AY: 2010-11)DATED 30-07-2 015. AS PER LEARNED AR THE DECISION IN THE CASE OF M/S NOVO NOR DISK INDIA PVT.LTD., VS DCIT (SUPRA) WAS ALSO FOR THE VERY SAME ASSESSMENT YEAR AND FOR THE SAME SEGMENT VIZ., IT ENABLED SERVICES. ACCORDING TO H IM, THE CO-ORDINATE BENCH HAD HELD M/S ACCENTIA TECHNOLOGIES NOT A GOO D COMPARABLE FOR ITES SEGMENT.. 4. PER CONTRA, LEARNED DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 5. WE HAVE PERUSED THE ORDERS AND HEAR THE RIVAL C ONTENTIONS. THE ISSUE OF COMPARABILITY OF M/S ACCENTIA TECHNOLOGIES LTD., IN THE ITES SEGMENT HAD COME UP BEFORE THIS TRIBUNAL IN THE CAS E OF M/S NOVO NORDISK INDIA PVT.LTD., VS DCIT (SUPRA) THIS TRIBUNAL HAD H ELD AS UNDER; IT(TP)A NO.185(B)/15 4 AS REGARDS THE SELECTION OF ACENTIA TECHNOLOGIES LTD., AS COMPARABLE, THE LEARNED COUNSEL FOR THE ASSESSEE HA S RELIED ON THE DECISIONS OF THIS TRIBUNAL IN THE CASES OF C APITAL IQ INFORMATION SYSTEMS (IND.) PVT.LTD., VS ADDL/DY CIT , CIRCLE- 1(2), HYDERABAD AND VICE VERSA (ITA NO.124 AND 170/HYD/2014 DATED 31.7.2014); EXCELLENCE DATA RESE ARCH PVT.LTD, HYDERABAD VS ITO WARD 2(1), HYDERABAD (ITA NO.159/HYD/2014 DATED 31.7.2014); AND HYNDAI MOTORS INDIA ENG.PVT.LTD., HYDERABAD VS DCIT, CIRCLE-2(2) , HYDERABAD (ITA NO.255/HYD/2014 DATED 31.7.2014, WHE REIN M/S ACCENTIA TECH. LTD., (SEG) WAS EXCLUDED BY THE TRIBUNAL FROM THE LIST OF COMPARABLES ON THE GROUND THAT IT WAS A CASE OF MERGERS AND ACQUISITION AND THE COMPANY WAS ALSO FOUND TO BE FUNCTIONALLY DIFFERENT. THE RELEVANT OBSERV ATIONS OF THE TRIBUNAL AS RECORDED IN PARA-19.2 OF THE ORDER PASS ED IN THE CASE OF EXCELLENCE DATA RESEARCH PVT.LTD. HYDERABA D(SUPRA) BEING RELEVANT IN THIS CASE, ARE REPRODUCED BELOW; 19.2 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND NOTICED THAT THIS COMPANY OPERATES IN A DIFFERENT B USINESS STRATEGY OF ACQUIRING COMPANIES FOR INORGANIC GROWT H AS ITS STRATEGY. IN EARLIER YEARS ON THE REASON OF ACQUISI TION OF SOME COMPANIES BY THAT COMPANY MAY HAVE IMPACT ON THE PR OFIT. CONSIDERING THE PROFIT MARGINS OF THE COMPANY AND I NSUFFICIENT SEGMENTAL DATA, WE ARE OF THE OPINION, THAT THIS CO MPANY CANNOT BE SELECTED AS A COMPARABLE. MOREOVER, THIS IS ALSO NOT A COMPARABLE IN THE CASE OF M/S MERCER CONSULTING ( IND.) PVT.LTD (SUPRA), WHICH INDICATES THAT THE TPO THERE IN HAS EXCLUDED IT AT OUTSET. IN VIEW OF THIS, WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPARABLE, FROM THE LIST OF COMPARABL E SELECTED. IT(TP)A NO.185(B)/15 5 13. AS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, THERE WAS ACQUISITION OF A COMPANY BY M/S ACCENTIA ECHNOLOGIES LTD., DURING THE RELEVANT YEAR , AND THE SAID COMPANY THEREFORE, CANNOT BE CONSIDERED AS CO MPARABLE DUE TO THIS EXTRAORDINARY EVENT WHICH OCCURRED IN T HE RELEVANT YEAR AS RIGHTLY HELD BY THE TRIBUNAL INTER-ALIA IN THE CASE OF EXCELLENCE DATA RESEARCH PVT. LTD(SUPRA). ALTHOUG H, THE LEARNED DR HAS SOUGHT TO CONTEND THAT THE ACQUISITI ON OF A COMPANY BY M/S ACCENTIA TECH.LTD., TOOK PLACE AT TH E FAG END OF THE YEAR UNDER CONSIDERATION, THE LEARNED COUNSE L FOR THE ASSESSEE HAS POINTED OUT THAT THE PROCESS OF ACQUIS ITION HAD STARTED ON 15-05-2008 ITSELF, I.E IN THE EARLIER PA RT OF THE YEAR UNDER CONSIDERATION. WE THEREFORE, FOLLOW THE DECI SION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF E XCELLENCE DATA RESEARCH SERVICES PVT.LTD (SUPRA) AND DIRECT T HE AO/TPO TO EXCLUDE THE ACCENTIA TECH.LTD., FROM THE LIST OF COMPARABLES. SINCE ASSESSMENT YEAR INVOLVED IS VERY SAME, WE ARE OF THE OPINION THAT THE ASSESSEE HAS TO SUCCEED ON ITS CONTENTION. WE DIRECT THE LOWER AUTHORITIES TO EXCLUDE MS ACCENTIA TECH.LTD., FROM THE LIST OF COMPARABLES, WHILE ANALYZING THE PRICING OF THE INTERNATIONAL TR ANSACTION UNDERTAKEN BY THE ASSESSEE IN THE ITES SEGMENT. GROUND NO.8 OF T HE ASSESSEE IS ALLOWED. 6. GROUND NO.11 OF THE ASSESSEE READS AS UNDER; IT(TP)A NO.185(B)/15 6 11. THE LD.DRP ERRED IN REJECTING CERTAIN COMPAR ABLES CONSIDERED BY THE TPO, WHICH WERE NOT CONTENDED BY THE ASSESSEE, WITHOUT PROVIDING AN OPPORTUNITY OF BEING HEARD. MICROLAND LTD., ERRONEOUSLY REJECTED BASED ON OPER ATING REVENUE FILTER AND PERCEIVED UNAVAILABILITY OF EXPO RT TURNOVER DETAILS, WHICH ARE FACTUALLY, INCORRECT, SINCE THE TPO FAILED TO CONSIDER THE INFORMATION PERTAINING TO SEGMENTAL RE SULTS AND THE FOREIGN EXCHANGE EARNINGS PROVIDED IN THE ANNUA L REPORT OF THE SAID COMPANY, WHILE COMPUTING THE MARGIN AND APPLYING THE SAID FILTERS. 7. LEARNED AR SUBMITTED THAT M/S MICROLAND LTD., W AS A COMPARABLE SELECTED BY THE TPO. ASSESSEE HAD NEVE R RAISED ANY OBJECTION TO THIS COMPARABLE. HOWEVER, AS PER THE LEARNED DR , THE DRP SUO-MOTTO DIRECTED EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. AS PER THE LEARNED AR, THE REASON CITED BY THE DRP WAS THA T ITS REVENUE FROM IT ENABLED SERVICES WERE ONLY 23% OF ITS TOTAL REVENUE . FURTHER, AS PER THE LEARNED AR THE DRP ERRONEOUSLY HELD THAT THERE WAS NO INFORMATION WITH REGARD TO THE EXPORT EARNING OF THE SAID COMPANY. SUBMISSION OF THE LEARNED AR WAS THAT BOTH THESE OBSERVATIONS WERE WR ONG. RELYING ON PAPER BOOK AT PAGE NO.410, LEARNED AR SUBMITTED THA T SEGMENTAL RESULTS OF THE COMPANY DIVIDING THE SEGMENTS INTO INFRASTRU CTURE MANAGEMENT AND IT ENABLED SERVICES WERE READILY AVAILABLE IN PUBLI C DOMAIN AS A PART OF THE SCHEDULE TO THE AUDITED ACCOUNTS OF THE RELEVANT PR EVIOUS YEAR. AS PER THE LEARNED AR, ONCE SEGMENTAL RESULTS WERE AVAILABLE T HE QUESTION OF IT(TP)A NO.185(B)/15 7 PROPORTION OF SEGMENTAL REVENUE TO THE TOTAL REVENU E WAS NO MORE RELEVANT. AS FOR EXPORT EARNINGS, THE LEARNED AR SUBMITTED TH AT THE SAID COMPANY HAD EXPORT EARNINGS OF 1060587000/- THIS WAS REF LECTED IN THE NOTES TO THE ACCOUNT FORMING PART OF THE AUDITED ACCOUNTS O F THE SAID COMPANY WHICH WAS ALSO AVAILABLE IN PUBLIC DOMAIN. THUS, ACCORDING TO HIM, BOTH REASONS CITED BY DRP FOR EXCLUDING MICRO LAND LTD F ROM THE LIST OF COMPARABLES WERE INCORRECT. RELIANCE WAS PLACED ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF 24X7 CUSTOMER.COM PVT. LTD VS DCIT (M.P.NO.37(B)/2013 DATED 03-05-2013). 8. PER CONTRA, LEARNED DR STRONGLY SUPPORTED THE D IRECTIONS OF THE DRP. 9. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THE OBSERVATION OF THE DRP WITH REGARD TO M/S MICROLAND LTD., IS REPRODUCED HEREUNDER; HAVING HEARD THE CONTENTION OF THE ASSESSEE ON T HE COMPARABLES SELECTED BY THE TPO, DURING THE HEARING , THE COMPARABILITY OF THE COMPANIES SELECTED AS COMPARAB LES BY THE TPO AND NOT OBJECTED BY THE ASSESSEE WAS EXAMIN ED TO ARRIVE AT A CORRECT CONCLUSION. IT IS NOTICED FROM THE PERUSAL OF THE ANNUAL REPORT OF MICROLAND LTD., (ONE OF T HE COMPARABLES OF THE TPO) THAT OUT OF THE TOTAL REVEN UE OF RS.134.15 CRORES, THE REVENUE FROM ITES IS ONLY 31. 37 CRORES WHICH WORKS OUT TO 23% OF THE TOTAL REVENUE. HENCE, THE COMPANY IS NOT PREDOMINANTLY ENGAGED IN THE ITE S AND IT(TP)A NO.185(B)/15 8 THEREFORE, CANNOT BE RETAINED AS COMPARABLE. FURTH ER, THERE IS NO INFORMATION AVAILABLE IN REGARD TO EXPORT EAR NING AND THEREFORE, IT CANNOT BE ASCERTAINED AS TO WHETHER I T PASSES THE FILTER OF 75% EXPORT TURNOVER AND THEREFORE, IN OUR OPINION, THIS COMPANY CANNOT BE RETAINED AS COMPARABLE. THE AO IS ACCORDINGLY DIRECTED TO EXCLUDE THE ABOVE COMPANY F ROM THE COMPARABLES. 9.1 WHAT WE FIND IS THAT IN THE PUBLISHED ACCOUNT OF M/S MICROLAND LTD., SEGMENTATION BETWEEN ITES AND INFRASTRUCTURE MANAGEMENT WERE RIGHTLY AVAILABLE. THIS IS REPRODUCED AS ANNEXURE TO THIS ORDER. 9.2 THIS TRIBUNAL IN THE CASE OF 24X7 CUSTOMER.COM PVT. LTD.,(SUPRA) IN MP NO.37(B)/2013 HAD HELD AS UNDER; 3.2.2. WE HAVE CAREFULLY CONSIDERED THE SUBMISSI ONS OF THE LEARNED AUTHORIZED REPRESENTATIVE AS LAID OU T AT PARA-3.2.1. OF THIS ORDER, BUT ARE UNABLE TO ACCEPT THE CONTENTIONS MADE THEREIN. A CLEAR FINDING HAS BEEN RENDERED IN PARA-17.8 OF OUR ORDER DATED 09-11-2012 THAT THIS COMPANY HAS CLEARLY DEMARCATED CALL ENTRE SEGM ENT (VIZ. ITES) IN THE ANNUAL REPORT/FINANCIAL STATEMEN TS OF THE COMPANY. ONCE WELL DEMARCATED SEGMENTAL RESULTS ARE AVAILABLE IN THE AUDITED FINANCIAL STATEMENTS, THER E IS NO REASON TO REJECT IT IS COMPARABLE MERELY BECAUSE TH E ITES SEGMENT CONSTITUTE ONLY 16% OF THE REVENUE, AS ONLY SEGMENTAL RESULTS OF ITES SECTOR IS TAKEN. THE OBS ERVATION MADE IN THE CASE OF APOLLO HEALTH STREET LTD., WOUL D THEREFORE, NOT HOLD GOOD HERE. WHILE REMANDING THI S MATTER IT(TP)A NO.185(B)/15 9 OF COMPARABILITY OF APOLLO HEALTH STREET LTD., THE TPO WAS REQUIRED TO VERIFY THE CLAIM ON THE ISSUE OF RELATE D PARTY TRANSACTIONS (RPT) AND WAS ALSO DIRECTED TO LOOK IN TO THE MATTER FROM THE ANGLE OF FUNCTIONAL COMPARABILITY. THAT OBSERVATION BY US CANNOT BE CONSTRUED AS HAVING LAI D DOWN ANY LEGAL PROPOSITION. HAVING NOT RAISED THE SPECI FIC ISSUE OF LOW VOLUME OF ITES SEGMENT AS A GROUND FOR REJEC TION OF THIS COMPANY AS A COMPARABLE IN THE SUBSTANTIVE APP EAL, THE ASSESSSEE CANNOT NOW RAISE THIS ISSUE THROUGH A MISCELLANEOUS PETITION. THE ISSUE RAISED BEING BEY OND THE SCOPE OF AN M.P. AS EVIDENT FROM THE PROVISIONS OF SECTION 254(2) OF THE INCOME-TAX ACT, 1916 (THE ACT) ADDR ESSING THE SAME IN THESE PROCEEDING WOULD AMOUNT TO A REVI SION OF OUR ORDER DATED 9.11.2012, WHICH IS NOT PERMISSIBLE . IN THIS VIEW OF THE MATTER, WE DISMISS THIS GROUND RAISED B Y THE PETITIONER. ULTRAMARINE PIGMENTS LTD., THEREFORE, CONTINUES TO BE A COMPARABLE COMPANY AS HELD IN OUR ORDER DAT ED 9.11.2.012 IN ITA NO.227/BANG/2010. 9.3 THUS, WHEN THE DEMARCATED SEGMENTAL RESULTS AR E AVAILABLE IN THE AUDITED FINANCIAL STATEMENTS, THERE IS NO REASO N TO APPLY REVENUE RATIOS. IN SO FAR AS EXPORT EARNINGS ARE CONCERNE D, AUDITED ACCOUNTS OF M/S MICROLAND LTD, AT ITS SCHEDULE-16(9) PLACED AT PAPER BOOK PAGE NO.405, CLEARLY STATES THAT IT HAD EARNED FOREIGN C URRENCY OF RS.1060587000/-. WE ARE THEREFORE, OF THE OPINION, THAT BOTH THE REASONS CITED BY THE DRP FOR EXCLUDING M/S MICROLAND LTD., WAS INCORRECT. WE THEREFORE, SET ASIDE THE DIRECTIONS OF THE DRP IN T HIS REGARD AND DIRECT THE IT(TP)A NO.185(B)/15 10 TPO TO CONSIDER M/S MICROLAND LTD., AS A GOOD COMPA RABLE FOR THE PURPOSE OF ANALYZING THE PRICING OF THE INTERNATIONAL TRANS ACTION UNDERTAKEN BY THE ASSESSEE. GROUND NO.11 OF THE ASSESSEE STANDS ALLO WED. 10. GROUND NO.13 RAISED OF THE ASSESSEE IS THAT CR EDIT IN RESPECT OF TAX DEDUCTED AT SOURCE (TDS) MENTIONED IN THE RETUR N OF INCOME WAS NOT ALLOWED. WE DIRECT THE AO/TPO TO VERIFY THE CLAIM OF THE ASSESSEE WITH REGARD TO THE TAX DEDUCTED AT SOURCE AND ALLOW CRED IT IF FOUND CORRECT. GROUND NO.13 IS ALLOWED FOR STATISTICAL PURPOSES. 11. GROUND NO.14 & 15 ARE CONSEQUENTIAL IN NATURE NEEDING NO SPECIFIC ADJUDICATION. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 30 TH SEPTEMBER, 2015. SD/- SD/- ( N.V.VASUDEVAN) (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER P L A C E : BANGALORE D A T E D : 30-09-2015 AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE