M/s. Trilogy E-Business Software India Private Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle - 12(4), Bangalore

ITA 1851/BANG/2019

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 4348 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 11-01-2021
• Assessment Year: 2009-2010
• Appeal Filed On: 27-08-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRIYADARSHI MISHRA ADD
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Revenue expenditure; Set aside
• Section: 92D; 92E; 10B; 13; 92CA; 37; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.1851/BANG/2019 ASSESSMENT YEAR : 2009-10 TRIOLOGY E-BUSINESS, SOFTWARE INDIA PVT. LT., #1/2, LALITHA NILAYA, 4 TH CROSS, RMV 2 ND STAGE, BHOOPASANDRA, BENGALURU-560 094. PAN AABCT 2328 Q VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-12(4), BENGALURU. APPELLANT RESPONDENT ASSESSEE BY : SHRI NARENDRA KUMAR JAIN REVENUE BY : SHRI PRIYADARSHI MISHRA, ADD. CIT (DR) DATE OF HEARING : 11-01-2021 DATE OF PRONOUNCEMENT : 15-02-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT APPEAL BY THE ASSESSEE HAS BEEN FIL ED BY ASSESSEE AS AGAINST ORDER DATED 24/6/2019 PASSED BY LD.CIT(A)-1 0 BANGALORE, FOR ASSESSMENT YEAR 2009-10. GENERAL GROUND 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-10 (HEREINAFTER REFERRED TO AS CIT (A)) TO THE EXTENT PREJUDICIAL TO THE APPELLANT IS BAD IN LAW. PAGE 2 OF 19 IT(TP)A NO.1851/BANG/2019 TRANSFER PRICING GENERAL GROUNDS 2. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE A CTION OF THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS AO) AND TRANSFE R PRICING OFFICER (HEREINAFTER REFERRED TO AS TPO) IN: A.MAKING A REFERENCE TO TPO FOR DETERMINING ARM'S L ENGTH PRICE WITHOUT DEMONSTRATING AS TO WHY IT WAS NECESSARY AN D EXPEDIENT TO DO SO; B.NOT APPRECIATING THAT THERE IS NO AMENDMENT TO TH E DEFINITION OF 'INCOME' AND THE CHARGING OR COMPUTATION PROVISION RELATING TO INCOME UNDER THE HEAD 'PROFITS & GAINS OF BUSINESS OR PROF ESSION' DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAP TER X AND THEREFORE ADDITION MADE UNDER CHAPTER X IS BAD IN L AW AND C.PASSING THE ORDER WITHOUT DEMONSTRATING THAT THE APPELLANT HAD ANY MOTIVE OF TAX EVASION. GROUNDS RELATING TO TP ADJUSTMENT 3. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE A CTION OF THE TPO IN: A. COMPUTING THE ARM'S LENGTH PRICE BASED ON THE DA TA FOR THE FINANCIAL YEAR 2008-09 OF THE COMPARABLES, WHICH WA S NOT AVAILABLE WHEN THE APPELLANT UNDERTOOK TRANSFER PRICING DOCUM ENTATION AND REPORTING OBLIGATIONS; B.REJECTING FOLLOWING COMPARABLES SELECTED BY THE A PPELLANT ON UNJUSTIFIABLE GROUNDS; I. CG-VAK SOFTWARE & EXPORTS LTD; II. LANCO GLOBAL SYSTEMS LTD; AND III. QUINTEGRA SOLUTIONS LTD. C. IGNORING THE FOLLOWING ADDITIONAL COMPARABLES PR OPOSED BY THE APPELLANT WITHOUT GIVING ANY COGENT REASONS AND ON UNJUSTIFIABLE GROUNDS I. EVOKE TECHNOLOGIES PVT LTD; AND II.TVS INFOTECH LTD D.REJECTING THE TRANSFER PRICING ANALYSIS UNDERTAKE N BY THE APPELLANT ON UNJUSTIFIABLE GROUNDS. 4. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE A CTION OF THE TPO IN: A. CONDUCTING A FRESH TRANSFER PRICING ANALYSIS DES PITE ABSENCE OF ANY DEFECTS IN THE TRANSFER PRICING ANALYSIS SUBMIT TED BY THE APPELLANT; B. ADOPTING INAPPROPRIATE FILTERS IN THE PROCESS OF SELECTING COMPARABLES; C. ADOPTING COMPANIES AS COMPARABLES EVEN THOUGH TH EY ARE NOT COMPARABLE IN RESPECT OF FUNCTIONS PERFORMED, RISKS ASSUMED, ASSETS UTILIZED, SIZE, TURNOVER, DESPITE UNUSUAL BUSINESS CIRCUMSTANCES OR HIGH MARGINS. THE LOWER AUTHORITIES HAVE ERRED IN A DOPTING FOLLOWING COMPANIES AS COMPARABLES: I. KALS INFORMATION SYSTEMS LTD II. BODHTREE CONSULTING LTD III. TATA ELXSI LTD IV. SASKEN COMMUNICATION TECHNOLOGIES LT PAGE 3 OF 19 IT(TP)A NO.1851/BANG/2019 V. PERSISTENT SYSTEMS LTD VI. MINDTREE LTD VII. LARSEN AND TURBO INFOTECH VIII. INFOSYS TECHNOLOGIES LTD IX. ZYLOG SYSTEMS LTD. 5. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE A CTION OF THE TPO IN: A. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEVE L AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLANT AND THE COM PARABLE COMPANIES; AND B.NOT RECOGNIZING THAT THE APPELLANT WAS INSULATED FROM RISKS, AS AGAINST COMPARABLES, WHICH ASSUME THESE RISKS AND T HEREFORE HAVE TO BE CREDITED WITH A RISK PREMIUM ON THIS ACCOUNT. GROUNDS RELATING TO CORPORATE TAX ADJUSTMENT R&D EXPENSES 6. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE A CTION OF THE AO IN: A. DISALLOWING A SUM OF RS. 3,91,21,647/- BEING RES EARCH AND DEVELOPMENT EXPENSES UNDER SECTION 37 OF THE ACT ST ATING THAT THE SAID EXPENSES CONFER AN ENDURING BENEFIT AND IS NOT REVENUE IN NATURE; AND B. IN THE ALTERNATIVE, THE LEARNED CIT(A) HAS ERRED CONFIRMING THE ACTION OF AO IN NOT GRANTING DEPRECIATION ON THE AM OUNT CAPITALISED BY HIM. GENERAL GROUND RELATING INTEREST 7. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE A CTION OF THE AO IN LEVYING A SUM OF RS. 73,37,407/- AS INTEREST UNDER SECTION 234B, RS.444/- AS INTEREST UNDER SECTION 234C AND RS. 178 965/- AS INTEREST UNDER SECTION 234D. ON THE FACTS AND IN THE CIRCUMS TANCES OF THE CASE, INTEREST UNDER SECTIONS 234B, 234C AND 234D IS NOT LEVIABLE. THE APPELLANT DENIES ITS LIABILITY TO PAY INTEREST. EVE N OTHERWISE THE INTEREST CHARGED IN EXCESSIVE. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUND S/SUB-GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR AT, THE TIME OF HEARING, OF THE APPEAL, SO AS TO ENABLE THE INCOME- TAX APPELLATE TRIBUNAL TO DECIDE THE APPEAL ACCORDING TO LAW. THE APPELLANT PRAYS ACCORDINGLY. BRIEF FACTS OF THE CASE ARE AS UNDER: 2. THE ASSESSEE IS A COMPANY. IT WAS INCORPORATED I N JUNE, 2000. M/S. VERSATA INTERNATIONAL INC., USA HOLDS TH E ENTIRE SHARE CAPITAL OF THE ASSESSEE, EXCEPT TWO SHARES. THE ASS ESSEE PROVIDES SOFTWARE RESEARCH & DEVELOPMENT SERVICES FOR VERSAT A INTERNATIONAL INC. ON A CONTRACT BASIS AND AS REQUE STED BY PAGE 4 OF 19 IT(TP)A NO.1851/BANG/2019 VERSATA INTERNATIONAL INC. FOR YEAR UNDER CONSIDERA TION, ASSESSEE PROVIDED SOFTWARE RESEARCH AND DEVELOPMENT SERVICES AND CALL CENTRE SERVICES TO VERSATA INTERNATIONAL AND IS COM PENSATED ON COST PLUS BASIS, DETAILS OF WHICH ARE AS UNDER: SL NO TYPE OF TRANSACTION AMOUNT (RS) 1 SOFTWARE DEVELOPMENT & SUPPORT SERVICES 32,85,06,958 2 ITES 25,42,495 3 TRAVEL & OTHER EXPENSES 1,24,90,328 3. ASSESSEE CLAIMS THAT THE PRICE CHARGED BY IT FOR SERVICES RENDERED TO ITS AE WAS AT ARMS' LENGTH. THE ASSESSE E FILED A REPORT AS REQUIRED BY THE PROVISIONS OF SECTION 92E OF THE ACT, IN FORM 3CEB TOGETHER WITH DETAILED ANALYSIS. THE ASSE SSEE ADOPTED THE TRANSACTIONAL NET MARGIN METHOD ('TNMM') AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. THE ASS ESSEE ADOPTED OPERATING PROFITS TO COST AS THE PROFIT LEV EL INDICATOR. MARGIN COMPUTED BY THE ASSESSEE WAS 17.74%. ASSESSE E USED 21 COMPARABLES WITH AVERAGE MARGIN OF 14.13%. THE LD.TPO, DISSATISFIED WITH THE COMPARABLES SELEC TED, AND ITS SELECTION CRITERIA, REJECTED TP DOCUMENTATION. LD.T PO APPLIED FOLLOWING FILTERS: COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE REVENU E