DCIT 15(1)(1), MUMBAI V. ARANCA (MUMBAI) P.LTD, MUMBAI

ITA 1913/MUM/2016

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 7219 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Assessment Year: 2011-2012
• Appeal Filed On: 28-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAYANT KUMAR LD
• Keywords: Depreciation; Transfer pricing; International transaction; Rule of consistency; Additional evidence
• Section: 143(3)

Judgement Text

1 M/S ARANCA (MUMBAI) PVT. LTD. ASSESSMENT YEAR-2011-12 IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI , , BEFORE SHRI SAKTIJIT DEY, JM AND SHRI MANOJ KUMAR AGGARWAL, AM ./ ITA NO. 1913/MUM/2016 ( / ASSESSMENT YEAR:2011-12) D C IT - 1 5(1)(1 ) ROOM NO.517, 5 TH FLOOR AAYKAR BHAVAN, M.K. ROAD MUMBAI-400 020 / VS. M/S. ARANCA (MUMBAI) PVT. LTD. UNIT NO.201 & 301, 2 ND AND 3 RD FLOOR B-WING, SUPREME BUSINESS PARK HIRANANDANI GARDENS, POWAI MUMBAI-400 076. <= ./ ./PAN/GIR NO. AAECA-8402-D ( =? /APPELLANT ) : ( @A=? / RESPONDENT ) & C.O. NO.152/MUM/2016 [ARISING OUT OF ITA NO.1913/MUM/2016] ( / ASSESSMENT YEAR:2011-12) M/S. ARA NCA (MUMBAI) PVT. LTD. UNIT NO.201 & 301, 2 ND AND 3 RD FLOOR B-WING, SUPREME BUSINESS PARK HIRANANDANI GARDENS, POWAI MUMBAI-400 076. / VS. D C IT - 1 5(1)(1 ) ROOM NO.517, 5 TH FLOOR AAYKAR BHAVAN, M.K. ROAD MUMBAI-400 020 <= ./ ./PAN/GIR NO. AAECA 8402 D ( =? /APPELLANT ) : ( @A=? / RESPONDENT ) RE VENUE BY : SHRI JAYANT KUMAR LD. CIT DR ASSESSEE BY : SH RI DHANESH BAFNA / MS. HIRALI DESAI - LD. ARS / DATE OF HEARING : 16/07/2019 / DATE OF PRONOUNCEMENT : 30/07/2019 2 M/S ARANCA (MUMBAI) PVT. LTD. ASSESSMENT YEAR-2011-12 / O R D E R MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER): - 1. AFORESAID APPEAL BY REVENUE FOR ASSESSMENT YEAR [IN SHORT REFERRED TO AS AY] 2011-12 CONTEST THE FINAL ASSESSMENT ORDER DATED 30/01/2016 PASSED BY DY. COMMISSIONER OF INCOME-TAX -15(1)(1), MUMBAI [AO] U/S 143 R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 PUR SUANT TO THE DIRECTIONS OF LD. DISPUTE RESOLUTION PANEL-I, MUMBAI [DRP] U/S 144C(5) DATED 23/12/2015. THE GROUNDS RAISED BY REVENUE READS AS UNDER: - 1. WHETHER ON THE BASIS OF THE FACTS AND CIRCUMSTAN CES OF THE CASE AND IN LAW, THE HON'BLE DRP WAS CORRECT IN ACCEPTING FOUR COMPARABLES NAMEL Y E4E HEALTHCARE BUSINESS SERVICES LIMITED. DION GLOBAL SOLUTIONS LIMITED AND OMEGA HEALTHCARE MANAGEMENT SERVICES PVT. LTD, AND INFORMED TECHNOLOGIES INDIA LIMITED AS A COMPARABLES WITHOUT APPRECIATING THE FACT THAT THESE COMPANIES ARE NOT SIMILAR TO THE FUNCTIONS PERFORMED BY THE ASSESSEE AND IT IS NOT IN ACCORDANCE WITH THE R EQUIREMENTS OF DEGREE OF COMPARABILITY AS REQUIRED IN RULE 10B(2) OF THE INC OME TAX RULES, 1962? 2. WHETHER ON THE BASIS OF THE FACTS AND CIRCUMSTAN CES OF THE CASE AND IN LAW, THE HONBLE DRP ERRED IN NOT DIRECTING TO UPHOLD THE ADJUSTMENT OF RS.77.09 LACS AS ADMITTED BY THE ASSESSEE ITSELF, VIDE LETTER DATED 06.07,2015 AS AN NEXURE-C, FILED DURING REMAND PROCEEDINGS BEFORE TPO, BY MENTIONING IN TRANSFER P RICING STUDY REPORT OF UK ENTITY ITSELF THAT THE TRANSACTIONS ARE NOT AT ALP AND ADJ USTMENT OF RS.77.09 LACS IS REQUIRED TO BE MADE. THE ASSESSEE UPON RECEIPT OF HEARING NOTICE, HAS FI LED CROSS-OBJECTIONS AGAINST THE SAME ON FOLLOWING GROUNDS: - THE BELOW MENTIONED GROUNDS ARE WITHOUT PREJUDICE T O THE RELIEF GRANTED BY THE LEARNED ASSESSING OFFICER ('AO') UNDER DIRECTIONS ISSUED BY THE HON'BLE DISPUTE RESOLUTION PANEL ('HON'BLE DRP') IN RELATION TO THE TRANSFER PRICING ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER ('TPO') ON THE INTERNATIONAL TRANSACTION OF PROVISION OF INVESTMENT/ECONOMIC/BUSINESS RESEARCH SERVICES PROVIDED BY THE CROSS-OBJECTOR / RESPONDENT TO ITS ASSOCIATED ENTERPRISES ('AES'). 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE HON'BLE TPO ERRED IN REJECTING/DISREGARDING THE TRANSFER PRICING DOCUMEN TATION AND ECONOMIC ANALYSIS BY NOT APPRECIATING THE FACT THAT THE COMPARABLE COMPANIES SELECTED BY THE RESPONDENT IN THE TRANSFER PRICING DOCUMENTATION ARE COMPARABLE TO TH E RESPONDENT. IT IS THEREFORE PRAYED THAT THE TRANSFER PRICING DO CUMENTATION PREPARED BY THE RESPONDENT BE ACCEPTED. 3 M/S ARANCA (MUMBAI) PVT. LTD. ASSESSMENT YEAR-2011-12 2. FURTHER IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER / TR ANSFER PRICING OFFICER IN SELECTING ACCENTIA TECHNOLOGIES LIMITED ('ACCENTIA') AND ECLE RX SERVICES LIMITED ('ECLERX') AS COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTION OF PROVISION OF INVESTMENT/ECONOMIC/BUSINESS RESEARCH SERVICES PROV IDED BY THE CROSS-OBJECTOR / RESPONDENT TO ITS AE WITHOUT APPRECIATING THAT THE SAME ARE NOT COMPARABLE ON THE GROUND OF FUNCTIONALITY. IT IS THEREFORE PRAYED THAT ACCENTIA AND ECLERX BE EXCLUDED FROM THE FINAL SET OF COMPARABLE COMPANIES, SINCE THEY ARE FUNCTIONALLY N OT COMPARABLE TO THE CROSS-OBJECTOR / RESPONDENT. 3. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO ERRED IN NOT CONSIDERING THE FACT THAT THE TPO IN THE SUBSEQUENT ASSESSMENT YEAR (I.E. ASSESSMENT YEAR 20 12-13) HAS ACCEPTED AE AS 'TESTED PARTY' BEING THE LEAST COMPLEX ENTITY THERE BY RESTRICTING THE ADJUSTMENT TO DIFFERENCE BETWEEN PROFITS OF THE AES AND 1% OF SAL ES OF AES BEING BARE MINIMUM THAT COULD BE ALLOWED TO BE RETAINED BY THE AES. THE PRO FITS OF THE AES DURING THE YEAR ARE 0.26% FOR ARANCA US AND 0.13% FOR ARANCA UK, WHICH IS LESS THAN 1% OF SALES AS DETERMINED BY THE TPO IN THE SUBSEQUENT YEAR. IT IS THEREFORE PRAYED THAT THE SINCE THE PROFITS R ETAINED BY THE AES ARE LESS THAN 1%, THERE CANNOT BE ANY ADJUSTMENT AT ALL. 2.1 FACTS IN BRIEF ARE THAT THE ASSESSEE BEING RESI DENT CORPORATE ASSESSEE STATED TO BE ENGAGED IN PROVIDING SOLUTION IN THE A REAS OF INVESTMENT RESEARCH, BUSINESS RESEARCH, VALUATION AND ADVISORY SERVICES AND INTELLECTUAL PROPERTY RESEARCH SERVICES WAS ASSESSE D U/S 143(3) R.W.S. 144C (13) ON 30/01/2016 PURSUANT TO THE DIRECTIONS OF LD . DRP. THE INCOME OF THE ASSESSEE WAS DETERMINED AT RS.6.23 LACS BEFORE SET-OFF OF LOSSES / DEPRECIATION. 2.2 CERTAIN INTERNATIONAL TRANSACTIONS CARRIED OUT BY ASSESSEE WITH ITS ASSOCIATED ENTERPRISES [AE] AND AS REPORTED IN FORM NO.3CEB WERE REFERRED TO LD. TRANSFER PRICING OFFICER-1(1)(1), M UMBAI [TPO] U/S 92CA (1) FOR DETERMINATION OF ARMS LENGTH PRICE. THE ASSESS EE HAD TWO WHOLLY OWNED SUBSIDIARIES-ONE IN USA & ANOTHER IN UK. THE ASSESSEE EARNED 4 M/S ARANCA (MUMBAI) PVT. LTD. ASSESSMENT YEAR-2011-12 SERVICE REVENUE OF RS.20.09 CRORES FROM ITS AE AND IN ITS TRANSFER PRICING STUDY REPORT, BENCHMARKED THE TRANSACTIONS USING TR ANSACTIONAL NET MARGIN METHOD [TNMM] WITH PROFIT LEVEL INDICATOR BE ING OPERATING PROFIT / OPERATING COST. IT ARRIVED AT MARGIN OF 18.18% AS A GAINST MEAN MARGIN OF 3.97% REFLECTED BY 15 ENTITIES. HOWEVER, TREATING T HE FUNCTIONS OF ASSESSEE AS KPO, LD. TPO REJECTED THE SEARCH ADOPTED BY ASSE SSEE USING THE KEY WORDS AS BPO / ITES. FINDING MORE FALLACIES / SHO RTCOMING IN ASSESSEES METHODOLOGY, THE COMPARABLE ENTITIES WERE REJECTED. IN THE FINAL ANALYSIS, ADOPTING 2 ENTITIES NAMELY ACCENTIA TECHNOLOGIES LT D. & ECLERX SERVICES LTD. HAVING MEAN MARGIN OF 43%, LD. TPO REVISED ASS ESSEES MARGIN TO 16.60% AND PROPOSED TP ADJUSTMENT OF RS.503.02 LACS IN ITS ORDER U/S 92CA (3) DATED 28/01/2015. INCORPORATING THE SAME, DRAFT ASSESSMENT ORDER WAS PASSED BY LD. AO ON 16/03/2015 WHICH WAS SUBJECTED TO OBJECTIONS BEFORE LD. DRP. 3.1 THE ASSESSEE AGITATED THE ADJUSTMENT BEFORE LD. DRP BY WAY OF ELABORATE WRITTEN SUBMISSIONS, WHICH HAS ALREADY BE EN EXTRACTED IN THE ORDER OF LD. DRP AND THEREFORE, NOT REPEATED HERE F OR THE SAKE OF BREVITY AND TO AVOID DUPLICATION. THE ASSESSEE HAS FILED CE RTAIN ADDITIONAL EVIDENCES DURING PROCEEDINGS BEFORE LD. TPO, WHICH WERE REMANDED TO LD. TPO FOR ENQUIRY & VERIFICATION. DURING REMAND PROCE EDINGS, THE ASSESSEE CARRIED OUT FRESH BENCHMARKING BY TREATING OVERSEAS AES AS THE TESTED PARTY ON THE GROUND THAT AES WERE THE LEAST COMPLEX ENTITIES. IN THE FRESH BENCHMARKING, THE MARGINS OF USA AE WERE DEMONSTRAT ED TO BE LESS THAN THE MARGINS REFLECTED BY COMPARABLE ENTITIES AND HE NCE, NO TP ADJUSTMENT 5 M/S ARANCA (MUMBAI) PVT. LTD. ASSESSMENT YEAR-2011-12 WAS PROPOSED. HOWEVER, SINCE THE MARGINS OF UK AE WERE MORE IN COMPARISON TO THE COMPARABLE ENTITY, THE ASSESSEE C OMPUTED TP ADJUSTMENT OF RS.77.09 LACS. HOWEVER, LD. TPO DID N OT ACCEPT THE FRESH BENCHMARKING IN THE REMAND PROCEEDINGS AS DONE BY T HE ASSESSEE USING OVERSEAS ENTITY AS TESTED PARTY. 3.2 THE LD. DRP, AFTER DUE CONSIDERATION, UPHELD TH E ACTION OF LD. TPO IN REJECTING THE FIRST TP STUDY SINCE THE BENCHMARKING WAS NOT DONE CONSIDERING ASSESSEES FUNCTION AS KPO. THE SECOND BENCHMARKING DONE BY THE ASSESSEE ALSO COULD NOT FIND FAVOR WITH LD. DRP SINCE IT WAS, INTER- ALIA, NOTED THAT THE ASSESSEE DID NOT FOLLOW ANY STRUCTUR ED SEARCH PROCEDURES TO IDENTITY THE COMPARABLE AND DATA USED WAS NOT MADE AVAILABLE TO LD. TPO. 3.3 PROCEEDING FURTHER, ALTHOUGH LD. DRP UPHELD THE ACTION OF LD. TPO IN SELECTING 2 COMPARABLE ENTITIES VIZ. ACCENTIA TECHN OLOGIES LTD. & ECLERX SERVICES LTD., HOWEVER, AT THE SAME TIME, LD. DRP A GREED WITH ASSESSEES SUBMISSIONS FOR INCLUSION OF 4 ENTITIES NAMELY (I) DION GLOBAL SOLUTIONS LTD. (II) E4 HEALTHCARE BUSINESS SERVICES LTD. (III) OME GA HEALTHCARE MANAGEMENT SERVICES PVT. LTD. & (IV) INFORMED TECHN OLOGIES INDIA LTD. AGGRIEVED BY THE INCLUSION OF 4 ENTITIES, THE REVEN UE IS IN FURTHER APPEAL BEFORE US. 3.4 BEFORE LD. DRP, THE ASSESSEE HAS ALTERNATIVELY ARGUED THAT TOTAL TP ADJUSTMENT COULD NOT EXCEED THE TOTAL PROFITS OF TH E GROUP WHICH WAS WORKED OUT TO BE RS.147.54 LACS. THE LD. DRP, RELYING UPON THE DECISION OF DELHI TRIBUNAL IN HCL TECHNOLOGIES BPO SERVICES LTD. (ITA 6 M/S ARANCA (MUMBAI) PVT. LTD. ASSESSMENT YEAR-2011-12 NO.3547/DEL/2010) AND VARIOUS OTHER DECISIONS, CONCURRED WITH THE SAI D SUBMISSIONS AND DIRECTED LD. TPO NOT TO MAKE ANY AD JUSTMENT EXCEEDING THE TOTAL PROFITS OF THE AES. THE AFORESAID DIRECTIONS OF LD. DRP HAS REDUCED THE TP ADJUSTMENT TO NIL WHICH IS EVIDENT FROM FINAL ASSESSMENT ORDER DATED 30/01/2016. AGGRIEVED, THE REVENUE IS IN FURTHER APPEAL BEFORE US WHEREAS THE ASSESSEE HAS FILED CROSS-OBJECTIONS AGAINST THE SAME. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED RELEVANT MATERIAL ON RECORD. IT IS EVIDENT FROM REVENUES GROUND THAT REVENUE IS PITCHING FOR EXCLUSION OF 4 COMPARABLE ENTITIES AS ACCEPTED BY L D. DRP. IN GROUND NO.2, THE REVENUE IS PITCHING FOR UPHOLDING THE ADJ USTMENT OF RS.77.09 LACS AS PROPOSED BY THE ASSESSEE IN ITS SUBSEQUENT TP ST UDY REPORT USING OVERSEAS AES AS THE TESTED PARTY. THE ASSESSEE, IN CROSS-OBJECTION, IS PITCHING FOR EXCLUSION OF TWO COMPARABLE ENTITIES A S INTRODUCED BY LD. TPO AND AS CONFIRMED BY LD. DRP. IN GROUND NO.3, THE AS SESSEE HAS CONTENDED THAT OVERSEAS ENTITY HAS BEEN ADOPTED AS TESTED PAR TY IN AY 2012-13 AND ADJUSTMENT HAS BEEN RESTRICTED TO DIFFERENCE BETWEE N PROFITS OF AES AND 1% OF SALES OF AES BEING BARE MINIMUM THAT COULD BE AL LOWED TO BE RETAINED BY THE AES AND THEREFORE, THE SAME METHODOLOGY MAY BE ADOPTED FOR THE YEAR UNDER CONSIDERATION ALSO. 5. THE LD. AUTHORIZED REPRESENTATIVE FOR ASSESSEE [ AR] HAS DRAWN OUR ATTENTION TO THE ORDERS OF LD. TPO IN SUBSEQUENT YE ARS TO SUBMIT THAT A PARTICULAR METHODOLOGY HAS BEEN ACCEPTED BY THE ASS ESSEE AS WELL AS REVENUE TO WORK OUT THE TP ADJUSTMENT AND THEREFORE , THE SAME 7 M/S ARANCA (MUMBAI) PVT. LTD. ASSESSMENT YEAR-2011-12 METHODOLOGY SHOULD BE APPLIED IN THIS YEAR ALSO, FA CTS BEING PARI-MATERIA THE SAME. 6. UPON DUE CONSIDERATION, WE FIND FORCE IN THE ARG UMENTS ADVANCED BY LD. AR. THE PERUSAL OF PARAS 10.3 & 10.4 OF ORDER O F LD. TPO FOR AY 2012- 13, AS PLACED ON RECORD, WOULD REVEAL THAT REVISED MARGINS OF USA & UK AES HAVE BEEN ACCEPTED TO BE 1.05% & 1.71% RESPECTI VELY AND THE ASSESSEE HAS AGREED FOR TP ADJUSTMENT OF RS.81 LACS AFTER CONSIDERING 1% PROFIT RETENTION BY ITS AES BEING BARE MINIMUM THAT COULD BE ALLOWED TO BE RETAINED BY AES AS A RISK FREE DISTRIBUTOR. SIMILAR METHODOLOGY HAS BEEN ACCEPTED BY LD. TPO FOR AY 2015-16 VIDE ITS ORDER D ATED 31/10/2018 ALTHOUGH WITH SLIGHT MODIFICATION OF MINIMUM MARGIN THAT COULD BE RETAINED BY ITS AE. IN AY 2015-16 THE LD. TPO, AT PARA 6.8, HAS RESTRICTED THE MARGINS OF ASSESSEES AE TO 0.5% OF SALES OF THE AE S. THEREFORE, KEEPING IN VIEW THE RULE OF CONSISTENCY AND IN VIEW OF THE FACT THAT THIS METHODOLOGY HAS BEEN ACCEPTED BY THE ASSESSEE AS WELL AS REVENU E, WE DIRECT LD. TPO TO ADOPT THE SAME METHODOLOGY FOR THE YEAR UNDER CO NSIDERATION AND WORK OUT TP ADJUSTMENT BY ACCEPTING AES MARGIN TO BE 0. 5%, AS ADOPTED IN THE LATEST ORDER. THE ASSESSEE IS DIRECTED TO PROVIDE T HE WORKING OF THE SAME. GROUND NO. 3 OF CROSS-OBJECTIONS STANDS ALLOWED FOR STATISTICAL PURPOSES WHICH MAKES OTHER GROUNDS OF ASSESSEES CROSS-OBJEC TIONS AS WELL AS REVENUES APPEAL INFRUCTUOUS. 7. IN RESULT, THE REVENUES APPEAL STANDS DISMISSED WHEREAS ASSESSEES CROSS-OBJECTIONS STANDS PARTLY ALLOWED FOR STATISTI CAL PURPOSES IN TERMS OF OUR ABOVE ORDER. 8 M/S ARANCA (MUMBAI) PVT. LTD. ASSESSMENT YEAR-2011-12 ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JULY, 2019. SD/- SD/- (SAKTIJIT DEY) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 30/07/2019 SR.PS:-JAISY VARGHESE ?@ A@ / COPY OF THE ORDER FORWARDED TO : 1. =? / THE APPELLANT 2. @A=? / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT CONCERNED 5. \ ]@ , , / DR, ITAT, MUMBAI 6. ] _`A / GUARD FILE / BY ORDER, / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI.