ITO, Ward-2(1), Hyderabaad, Hyderabad V. M/s I Space Global Services (India) Private Limited, Hyderabad

ITA 1920/HYD/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6133 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 15-09-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 24-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: N PRADEEP
• Keywords: Transfer pricing; International transaction
• Section: 92C; 143(3)

Judgement Text

ITA NO 1920 OF 2014 I SPACE GLOBAL SERVICES INDIA P LTD HYDERABAD. PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.1920/HYD/2014 (ASSESSMENT YEAR: 2010-11) INCOME TAX OFFICER WARD 2(1) HYDERABAD VS M/S. I SPACE GLOBAL SERVICES (INDIA) PVT. LTD HYDERABAD PAN: AAGCA 2813 C FOR REVENUE: SHRI P. SOMASEKHAR REDDY, DR FOR ASSESSEE: SHRI N. PRADEEP O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS REVENUES APPEAL FOR THE A.Y 2010-11. IN THI S APPEAL, THE REVENUE IS AGGRIEVED BY THE ORDER OF TH E DRP AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP WAS JUSTIFIED IN REJECTING COMPANIES ON THE GROUND OF EXCEPTIONALLY LARGE SCALE OF OPERATIONS AND THEREBY IGNORING THE FACT THAT HIG H OR LOW TURNOVER DO NOT INFLUENCE THE MARGINS OF THE COMPARABLES. THE DRP ERRED IN NOT APPRECIATING THE JUDGMENT DELIVERED BY THE MUMBAI ITAT IN THE CASES OF NETHAWK NETWORKS INDIA PVT. LTD (TS-303-ITAT- 2013(MUM)-TP). 2. THE DRP ERRED IN DIRECTING TO EXCLUDE TELECOMMUNICATION CHARGES FROM BOTH TOTAL TURNOVER AND EXPORT TURNOVER WHEN DEFINITION WAS GIVEN ONLY FOR EXPORT TURNOVER BUT NOT TOTAL TURNOVER WHICH GOES TO DEFEAT THE SPIRIT AND INTENTION OF THE PARLIAMENT. DATE OF HEARING : 15.09.2016 DATE OF PRONOUNCEMENT : 21.10.2016 ITA NO 1920 OF 2014 I SPACE GLOBAL SERVICES INDIA P LTD HYDERABAD. PAGE 2 OF 6 3. THE DRP ERRED IN DIRECTING TO CONSIDER RS.35,28,177 AS COMMUNICATION EXPENSES WITHOUT ANY BASE, WHEN THE COST OF COMMUNICATION DEBITED TO P&L ACCOUNT WAS RS.51,60,616. 2. AS FAR AS GROUND NO.1 IS CONCERNED, BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY ENGAGED IN THE B USINESS OF SOFTWARE DEVELOPMENT, FILED ITS RETURN OF INCOME FO R THE RELEVANT A.Y ON 29.9.10 DECLARING NIL INCOME AFTER CLAIMING DEDUCTION U/S 10A OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS U /S 143(3) OF THE ACT, AO OBSERVED THAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS AE. THE DETERMIN ATION OF THE ALP OF THE TRANSACTION WAS REFERRED TO THE TPO U/S 92C OF THE ACT. THE TPO PROPOSED THE ADJUSTMENT OF RS.59,04,363/- A ND ACCORDINGLY AO PROPOSED THE DRAFT ASSESSMENT ORDER. THE ASSESSEE PREFERRED ITS OBJECTIONS BEFORE THE DRP. W E FIND THAT THE DRP HAS DIRECTED THE EXCLUSION OF TWO COMPANIES I.E . INFOSYS BPO LTD AND TCS E-SERVE HYDERABAD FROM THE FINAL LIST O F COMPARABLES ON THE GROUND THAT THE TURNOVER OF INFOSYS TECHNOLO GIES LTD WAS OF RS.1130 CRORES AS AGAINST THE TURNOVER OF THE AS SESSEE OF RS.17.00 CRORES ONLY FOR THE YEAR UNDER CONSIDERATI ON. THE DRP HAS FELT THAT INFOSYS BPO LTD CANNOT BE TAKEN AS A COMPARABLE AS IT IS A LARGER AND BIGGER COMPANY IN THE AREA OF DE VELOPMENT OF SOFTWARE AND THE PROFITS EARNED CANNOT BE BENCH MAR KED OR EQUATED WITH THE ASSESSEE TO DETERMINE THE RESULTS DECLARED BY THE TAXPAYER. SIMILARLY, THE DRP HAS ALSO DIRECTED EXCLUSION OF TCS E-SERVE LTD FROM THE FINAL LIST OF COMPARABLES ON THE GROUNDS OF HUGE TURNOVER OF RS1405 CRORES. AGAINST THE DIRE CTION TO EXCLUDE THESE COMPANIES FROM THE LIST OF FINAL COMP ARABLES, THE REVENUE IS IN APPEAL BEFORE US. 3. WHILE THE LEARNED DR RELIED UPON THE ORDER OF TH E TPO, THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE OR DER OF THE DRP AND ITA NO 1920 OF 2014 I SPACE GLOBAL SERVICES INDIA P LTD HYDERABAD. PAGE 3 OF 6 ALSO THE DECISION OF THE HON'BLE DELHI HIGH COURT I N THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD, IN ITA NO.1204/ 2011 DATED 10 TH JULY, 2013. 4. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT THE HON'BLE DELHI HIGH COURT I N THE CASE OF AGNITY INDIA TECHNOLOGIES (CITED SUPRA), HAS ACCEPTED AND UPHELD THE FINDING OF THE TRIBUNAL THAT INFOSYS TECHNOLOGIES IS NOT CO MPARABLE TO ANY OTHER SOFTWARE DEVELOPMENT COMPANY BOTH ON ACCOUNT OF ITS HUGE TURNOVER AND ALSO BECAUSE IT ASSURED ALL RISKS LEADING TO HI GHER PROFITS AND WAS A GIANT COMPANY IN THE DEVELOPMENT OF SOFTWARE. THE A BOVE ANALOGY APPLIED TO BOTH INFOSYS BPO LTD AS WELL AS TCS E-SE RVE LTD. FURTHER, IN THE CASE OF KNOAH SOLUTIONS PVT LTD, IN ITA NOS.180 & 326/HYD/2015 FOR A.Y 2010-11, VIDE ORDERS DATED 24.08.2016, THE C OORDINATE BENCH OF THIS TRIBUNAL (TO WHICH ONE OF US I.E. THE J.M. IS A SIGNATORY) HAVE DIRECTED EXCLUSION OF THESE TWO COMPANIES BOTH ON T HE GROUND OF HIGHER TURNOVER AND FUNCTIONAL DISSIMILARITIES. FOR READY R EFERENCE, THE RELEVANT PORTION IS REPRODUCED HEREUNDER: 5.2 INFOSYS BPO LTD., AND TCS ESERVICE LTD., I) THE TPO ADDED THESE COMPANIES AS COMPARABLE WHIC H ARE FUNCTIONALLY DIFFERENT BESIDES BEING SUPER TURNOVER COMPANY, WHICH IS ABOVE RS. 200 CRORES. II) THE OBJECTIONS OF THE ASSESSEE ARE THAT THE COM PARABLE COMPANY UNDER TNMM SHOULD BE SIMILAR TO THE TESTED COMPANY IN FUNCTIONALLY, SIZE, EMPLOYEES SKILL SETS, BRAND VAL UE AND INTANGIBLES. AS THESE THREE COMPANIES ARE DIFFERENT FROM THE ASS ESSEE COMPANY IN TERMS OF THE TURNOVER, BRAND VALUE, INTANGIBLES AND OTHER ASSETS EMPLOYED, EMPLOYEE SKILL SETS, AND ALSO THE CUSTOME RS THAT IT CATERS ALL OVER THE WORLD, THESE CANNOT BE COMPARABLES FOR ASSESSEE COMPANY WHICH RENDERS LOW END BPO SERVICES AS CAPTIVE SERVICE PROVIDER TO ITS AE COMPANY LOCATED IN US ON A COST PLUS MODEL. 6. THE DRP HELD AS FOLLOWS: ITA NO 1920 OF 2014 I SPACE GLOBAL SERVICES INDIA P LTD HYDERABAD. PAGE 4 OF 6 11.2 THE TAXPAYER VEHEMENTLY ARGUED THAT THE FOUR C OMPANIES SHOULD NOT BE INCLUDED IN VIEW OF THEIR BRAND VALUE AND HIGH TURNOVER AS WELL AS RELYING ON THE DECISION OF THE ITAT TO EXCLUDE M/S. INFOSYS TECHNOLOGIES LTD ALSO ARGUED THAT M/S ECLERX IS KPO NOT COMPARABLE. THE PANEL FEELS THAT ONLY M/S INFOS YS SPO AND TCS E SERVE LTD SHOULD NOT BE INCLUDED AS COMPARABLE IN VIEW OF THEIR ADVANTAGEOUS BRAND VALUE ALONG WITH HIGH TURNOVER O F 1000 CRORES AND ABOVE. SIMILARLY, M/S. ECLERX SERVICES THAT ALS O TO BE EXCLUDED AS IT RENDERS HIGH END SERVICES AND CONSIDERED AS K PO. HOWEVER, THE ARGUMENT OF THE TAXPAYER WITH REGARD TO THE COM PARABLE COMPANY M/S. TCS ESERVE INTERNATIONAL LTD. IS NOT A CCEPTABLE, AS THE SAID COMPANY HAS PASSED ALL THE FILTERS AND IT IS TRUE COMPARABLE TO THE TAXPAYER COMPANY. HENCE, THE TAXP AYER'S OBJECTION FOR EXCLUSION OF TCS ESERVE INTERNATIONAL LTD. IS REJECTED AND DIRECT THE TPO/AO TO EXCLUDE THE FOLLOWING COMP ARABLES FROM THE FINAL SET OF COMPARABLES AND RECOMPUTE THE ARM' S LENGTH PRICE. (I) ECLERX SERVICES LTD. (II) TCS ESERVE LTD. (III) INFOSYS BPO LTD. ACCORDINGLY THE TPO/AO IS DIRECTED TO REWORK THE AL P BY EXCLUDING THE ABOVE THREE COMPANIES FROM THE ALP ADJUSTMENT. 7. CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES A ND PERUSED THE MATERIAL FACTS ON RECORD. THE ISSUE IN DISPUTE IS S QUARELY COVERED BY THE DECISIONS OF THE ITAT INCLUDING THE DECISION IN ASSESSEE'S OWN CASE FOR AY 2007-08 VIDE ORDER DATED 25/04/2014 IN ITA NO. 1407/HYD/2013 AND FOR AY 2009-10 VIDE ORDER DATED 3 1/10/2014 IN ITA NO. 392/HYD/2014 WHEREIN THE COORDINATE BENC H DIRECTED TO EXCLUDE THE SAID COMPANIES FROM THE LIST OF COMPARA BLES AND RECOMPUTE THE ALP ACCORDINGLY. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE DRP IN DIRECTING THE AO/TPO TO EXCLUDE THE SAID COMPANIES FROM THE LIST OF COMPARA BLES CONSIDERING THEIR ADVANTAGEOUS BRAND VALUE ALONG WI TH HIGH TURNOVER. ACCORDINGLY, THIS GROUND OF APPEAL OF REV ENUE IS DISMISSED . 5. FURTHER, IN THE CASE OF M/S HYUNDAI MOTORS INDIA ENGINEERING PRIVATE LTD IN ITA NO.1743/HYD/2014, THE COORDINATE BENCH OF THIS TRIBUNAL (TO WHICH BOTH OF US ARE SIGNATORIES) AT P ARA 11.2.2 HAS HELD AS UNDER: 11.2.2. WE FIND THAT THE ASSESSEE'S CONTENTIONS ABO UT THE PRESENCE OF 'BRAND VALUE' AND OWNING OF 'INTANGIBLES' IS SUPPORTED BY THE EVIDENCE ON RECORD. HOWEVER, AS REG ARDS THE EXTRAORDINARY EVENT OR EXCEPTIONAL CIRCUMSTANCE THERE IS NO MATERIAL PLACED BEFORE US BY THE LD. COUNSEL FOR T HE ASSESSEE. THEREFORE, MERELY BECAUSE THE TPO IN ANOT HER CASE ITA NO 1920 OF 2014 I SPACE GLOBAL SERVICES INDIA P LTD HYDERABAD. PAGE 5 OF 6 HAS HELD THAT THERE IS AN EXTRAORDINARY EVENT FOR WH ICH THIS COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARABL ES, IT CANNOT BE EXCLUDED. SUCH CLAIM HAS TO BE SUPPORTED BY EVIDENCE ON RECORD. AS REGARDS THE FUNCTIONAL DISSIM ILARITY AND HUGE TURNOVER AND BRAND VALUE IS CONCERNED, WE FIN D THAT THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR A.Y. 2009-10 WHILE CONSIDERING THE COMPARABILITY OF THE ASSESSEE WITH LNFOSYS BPO LTD, HAS TAKEN NOTE OF THE POSSESSION OF THE BRAND VALUE AND INTANGIBLES WHICH INFLUENCED THE FINAN CIAL RESULTS OF THIS COMPANY. THE HON'BLE DELHI HIGH COU RT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES P. LTD., ( 2013) 219 TAXMAN 26 (DEL.), HELD THAT HUGE TURNOVER COMPANIES LIKE INFOSYS AND WIPRO CANNOT BE CONSIDERED AS COMPARABLE TO SMALLER COMPANIES LIKE ASSESSEE THEREIN. IN THE CAS E BEFORE THE HON'BLE HIGH COURT (SUPRA), THE TURNOVER OF THE ASSESSEE WAS ABOUT RS.15.79 CRORES AS AGAINST THE TURNOVER O F RS.1016 CRORES OF THE LNFOSYS. CONSIDERING THESE FAC TS, THE HON'BLE HIGH COURT HAD DIRECTED FOR EXCLUSION OF LNFO SYS BPO BECAUSE OF ITS BRAND VALUE AND ALSO ON THE GROUNDS O F FUNCTIONAL DISSIMILARITY AND HUGE TURNOVER. THOUGH, THE COMPANY BEFORE US IS TCS E-SERVICE LTD.. AND NOT LNF OSYS BPO, WE FIND THAT THE TURNOVER OF THE ASSESSEE COMPA NY FOR THIS ASSESSMENT YEAR IS AROUND RS.50 CRORES AS AGAIN ST THE TURNOVER OF TCS E-SERVE LIMITED OF RS.1405.10 CRORES. THEREFORE, FOLLOWING THE TURNOVER FILTER AS WELL AS TAKING NOTE OF THE FACT THAT IT OWNS AND POSSESSES BRAND VALUE AN D INTANGIBLES AS COMPARED TO THE ASSESSEE WHICH DOES N OT OWN SUCH ASSETS, WE DIRECT THAT THIS COMPANY BE EXCLUDE D FROM THE LIST OF FINAL COMPARABLES. ACCORDINGLY, ASSESSE E'S GROUNDS OF APPEAL NO.6 IS PARTLY ALLOWED. RESPECTFULLY FOLLOWING THE SAME, THE GROUND OF APPE AL NO.1 IS REJECTED. 6. AS REGARDS GROUND NO.2, WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF TATA ELXSI LTD, REPORTED IN 349 ITR 98 (KARN.) WHEREIN T HE HON'BLE HIGH COURT HAS DIRECTED THAT IF ANY EXPENDITURES ARE EXC LUDED FROM EXPORT TURNOVER, THEN, THEY SHOULD BE EXCLUDED FROM THE TO TAL TURNOVER ALSO. RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE ORDE R OF THE DRP AND THE REVENUES GROUND OF APPEAL IS DISMISSED. ITA NO 1920 OF 2014 I SPACE GLOBAL SERVICES INDIA P LTD HYDERABAD. PAGE 6 OF 6 7. AS REGARDS GROUND NO.3, THE CASE OF THE REVENUE IS THAT THE CORRECT FIGURE OF COMMUNICATION CHARGES DEBITED TO THE P&L A/C WAS RS.51,60,616, WHILE THE DRP HAS DIRECTED TO CONSIDE R RS. 35,28,177 ONLY AS COMMUNICATION EXPENDITURE WITHOUT ANY BASIS . WE FIND THAT BEFORE THE DRP THE ASSESSEE HAD SUBMITTED THAT THE ACTUAL COMMUNICATIONS EXPENSES ATTRIBUTABLE TO DELIVERY OF THE SERVICES IS RS.35,28,177 ONLY AND THE DRP AT PARAS 6 TO 6.2 HAS EXTRACTED THE ASSESSEES SUBMISSIONS AND THEREAFTER AT PARA 6.3 H AS DIRECTED TO THE AO TO RECALCULATE THE ELIGIBLE DEDUCTION U/S 10A, A S PER LAW, AFTER DUE VERIFICATION OF THE ASSESSEES CLAIM. WE FIND THAT THE DRP HAS NOT ACCEPTED THE ASSESSEES CONTENTION BUT HAS DIRECTED THE AO TO VERIFY THE ASSESSEES CLAIM IN ACCORDANCE WITH LAW. IN VIEW OF THE SAME, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE SAME. ACCORDI NGLY, THIS GROUND OF APPEAL OF THE REVENUE IS REJECTED. 7. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST OCTOBER, 2016. SD/- SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 21 ST OCTOBER, 2016. VINODAN/SPS COPY TO: 1 INCOME TAX OFFICER WARD 2(1) 8 TH FLOOR, B BLOCK, ROOM NO.827 IT TOWERS, AC GUARD, HYDERABAD 500004 2 M/S. I SPACE GLOBAL SERVICES (INDIA) PVT. LTD, 7- 1-79/80, 3 RD FLOOR, CAPITAL BUILDING, AMEERPET, HYDERABAD 500016 3 D.R.P. HYDERABAD 4 CIT II HYDERABAD 500004 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER