L3 Communications India Pvt Ltd , Bangalore V. Deputy Commissioner of Income TAx Circle-4(1)(1), Bangalore

ITA 1938/BANG/2017

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1510 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 2 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 28-09-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S VASUDEVAN SHRI PRADEEP
• Keywords: Depreciation; Transfer pricing; International transaction; Working capital adjustments; Procedural lapse
• Section: 143(3); 139(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER IT(TP)A NO.1938/BANG/2017 ASSESSMENT YEAR : 2013-14 L3 COMMUNICATIONS INDIA PVT. LTD., LEVEL 02, BAGHMANE LAUREL, BLOCK B BAGHMANE TECH PARK, CV RAMAN NAGAR, BYRASANDRA, BENGALURU-560 093. PAN AABCC 3536 H VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-4(1)(1), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI S VASUDEVAN, ADVOCATE RESPONDENT BY : SHRI PRADEEP KUMAR, CIT (DR) DATE OF HEARING : 10.12.2019 DATE OF PRONOUNCEMENT : 11.12.2019 O R D E R PER B.R BASKARAN, ACCOUNTANT MEMBER : THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ASSESSMENT ORDER PASSED BY THE AO FOR ASSESSMENT YEAR 2013-14 U/S 143(3) R.W.S 144C(1) OF THE ACT IN PURSUANCE OF DIRECTIONS GIVEN BY LD DISPUTE RESOLUTION PANEL (DRP). 2. THE REVISED GROUNDS OF APPEAL FILED BY THE A SSESSEE ALONG WITH ADDITIONAL GROUNDS READ AS UNDER:- IT(TP)A NO.1938 /BANG/2017 PAGE 2 OF 11 1. THE ORDER OF THE LEARNED DISPUTE RESOLUTION PAN EL ('DRP') AND THE CONSEQUENT ORDER OF THE LEARNED ASSESSING OFFICER ('AO') IS OPPOSED TO LAW AND FACT S OF THE CASE. CORPORATE TAX 2. THE LEARNED AO HAS ERRED IN MAKING A DISALLOWANC E OF INR 2,12,69,220 BEING CONTRACTOR EXPENSES. 3. LEARNED AO HAS ERRED IN IGNORING THE FACT THAT T HE SAID AMOUNT WAS INCLUDED IN THE COST BASE FOR RECOGNISING REVENUE AS A PERCENTAGE THEREOF FOLLOWI NG THE PERCENTAGE OF COMPLETION METHOD. THUS, IF THE EXPENSE WAS TO BE TREATED AS NOT PERTAINING TO THE YEAR UNDER APPEAL THE REVENUE OF THE YEAR WARRANTED A CORRESPONDING REDUCTION. 4. THE LEARNED AO AS ERRED IN DISALLOWING INR 2,67,886 BY INVOKING THE PROVISIONS OF SECTION 36(1)(VA). TRANSFER PRICING. 5. THE LEARNED DRP HAS ERRED IN UPHOLDING AND ENHANCING THE TRANSFER PRICING ADJUSTMENT PROPOSED BY LEARNED TRANSFER PRICING OFFICER (TPO'). WITHOUT PREJUDICE TO THE GENERALITY OF FOREGOING : 6. THE LEARNED DRP HAS ERRED IN IGNORING THE FACT T HAT IN VIOLATION OF INSTRUCTION NO. 3 OF 2016 NO OPPORT UNITY WAS PROVIDED BY THE LEARNED ASSESSING OFFICER TO TH E APPELLANT BEFORE REFERRING THE TRANSFER PRICING ISS UES TO THE TPO. IT(TP)A NO.1938 /BANG/2017 PAGE 3 OF 11 7. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, LEARNED DRP HAS ERRED IN CONFIRMING THE LIST OF COMPARABLE SELECTED BY LD. TPO AND DISREGARDING THE SUBMISSION S MADE BY THE APPELLANT FOR EXCLUSION/ INCLUSION OF CERTAIN COMPARABLE. WITHOUT PREJUDICE TO THE GENERA LITY OF THIS GROUND, SPECIFIC GROUNDS OF APPEAL IN THIS RESPECT ARE GIVEN AS GROUND 7A AND 7B. 7A. THE LEARNED DRP HAS ERRED IN DECLINING TO DEAL WITH THE FOLLOWING GROUNDS OF OBJECTION ON MERITS C ITING PROCEDURAL LAPSES: EXCLUSION OF LARSEN & TOUBRO AND PERSISTENT SYSTEMS LTD. FROM THE FINAL LIST OF COMPARABLE AND II. INCLUSION OF FOLLOWING IN THE SAID LIST: CTIL LTD CAT TECHNOLOGIES LTD SANKHYA INFOTECH LUCID SOFTWARE LIMITED 7B. LEARNED. DRP/ TPO HAS ERRED IN NOT DEALING WITH THE SUBMISSIONS MADE BY THE APPELLANT FOR: I. EXCLUSION OF FOLLOWING FROM THE LIST OF FINAL COMPARABLE COMPANIES: MINDTREE LTD (SEG.) R S SOFTWARE (INDIA) PVT LTD TECH MAHINDRA LTD. (SEG) II. INCLUSION OF THINKSOFT GLOBAL SERVICES LTD IN T HE LIST OF COMPARABLE COMPANIES 8. THE LEARNED DISPUTE RESOLUTION PANEL OUGHT TO HA VE DIRECTED THE LEARNED TPO TO EXCLUDE THE IT(TP)A NO.1938 /BANG/2017 PAGE 4 OF 11 REIMBURSEMENTS RECEIVED BY THE TAXPAYER FROM PROFIT LEVEL INDICATOR. 9. THE LEARNED DRP ERRED IN LAW AND IN FACTS IN DENYING ADJUSTMENTS TOWARDS DEPRECIATION. 10. THE LEARNED TPO ERRED IN HOLDING THAT THE PROVI SO TO SEC 92C(2) OF THE INCOME TAX ACT NEUTRALISES THE RI SK PROFILE. 11. THE LEARNED DISPUTE RESOLUTION PANEL HAS ERRED, IN LAW AND IN FACTS, IN DENYING THE WORKING CAPITAL ADJUSTMENTS GRANTED BY LEARNED TPO. LEVY OF INTEREST 12. IN VIEW OF THE LAW AND FACTS OF THE CASE THE DR P OUGHT TO HAVE HELD THAT THE PROVISIONS OF SECTION 2 34 B AND SECTION 234C WERE NOT ATTRACTED AS THE SAME ARE NOT NECESSARILY CONSEQUENTIAL. 13. THE APPELLANT CRAVES FOR LEAVE TO ADD TO DELETE FROM OR AMEND THE GROUNDS OF APPEAL. ADDITIONAL GROUNDS OF APPEAL 14. THE LEARNED TPO/ DRP HAS ERRED IN CONSIDERING SUBCONTRACT EXPENSES AMOUNTING TO RS. 2,12,69,220 A S A PART OF OPERATING COST FOR TRANSFER PRICING ANALY SIS, DESPITE THE FACT THAT AFORESAID EXPENSES HAVE ALREA DY BEEN DISALLOWED BY THE LD. AO WHILE COMPUTING TOTAL INCOME OF APPELLANT IN THE FINAL ASSESSMENT ORDER, RESULTING IN DOUBLE TAXATION OF THE SAME INCOME. 15. THE LEARNED TPO/ DRP HAVE ERRED IN CHARACTERISI NG APPELLANT AS A SOFTWARE DEVELOPMENT SERVICE PROVIDE R WITH RESPECT TO ALL THE INTERNATIONAL TRANSACTIONS IT(TP)A NO.1938 /BANG/2017 PAGE 5 OF 11 UNDERTAKEN BY THE APPELLANT, WITHOUT ACKNOWLEDGING THE FACT THAT THE APPELLANT IS ALSO ENGAGED IN THE BUSINESS OF DESIGN, DEVELOPMENT, MANUFACTURE AND SUPPLY OF MARINE AUTOMATION SYSTEMS, WHICH IS UNCONNECTED WITH ITS BUSINESS OF PROVISION OF SOFTW ARE DEVELOPMENT SERVICES. 16. THE LEARNED TPO/ DRP ERRED IN AGGREGATING THE INTERNATIONAL TRANSACTIONS FOR APPLYING TRANSACTION AL NET MARGIN METHOD AND NOT BENCHMARKING EACH INTERNATIONAL TRANSACTION SEPARATELY, EVEN THOUGH T HE INTERNATIONAL TRANSACTIONS WERE NOT CLOSELY LINKED. 3. AT THE TIME OF HEARING, THE LD A.R DID NOT P RESS GROUNDS NUMBERED AS 2 & 3 BY MAKING NECESSARY ENDORSEMENT I N THE REVISED GROUNDS OF APPEAL. ACCORDINGLY, THOSE GROU NDS ARE DISMISSED AS NOT PRESSED. 4. GROUND NO.1 IS GENERAL IN NATURE AND GROUND N O.4 RELATES TO THE DISALLOWANCE MADE U/S 36(1)(VA) OF THE ACT. TH E AO DISALLOWED A SUM OF RS.2,67,886/-, BEING THE PF CONTRIBUTION R EMITTED BY THE ASSESSEE BEYOND THE DUE DATE PRESCRIBED UNDER THE P F ACT. THE LD. A.R SUBMITTED THAT THE ABOVE SAID AMOUNT WAS PAID B EFORE THE DUE DATE PRESCRIBED U/S 139(1) OF THE ACT AND HENCE THE SAME IS ALLOWABLE AS DEDUCTION AS PER THE DECISION RENDERED BY THE HONBLE JURISDICTIONAL KARNATAKA HIGH COURT IN THE CASE OF SPECTRUM CONSULTANTS VS. CIT (266 CTR 94)(KAR). IT(TP)A NO.1938 /BANG/2017 PAGE 6 OF 11 5. WE HEARD LD D.R AND PERUSED THE RECORD. SI NCE THE CLAIM OF THE ASSESSEE IS SUPPORTED BY THE BINDING DECISION O F JURISDICTIONAL HIGH COURT, WE DIRECT THE AO TO DELETE THE DISALLOW ANCE AFTER DUE VERIFICATION, IF THE ABOVE SAID AMOUNT HAS BEEN PAI D BEFORE THE DUE DATE PRESCRIBED U/S 139(1) OF THE ACT FOR FILING RE TURN OF INCOME OF THE YEAR UNDER CONSIDERATION. 6. THE REMAINING GROUNDS RELATE TO THE ADDITION MADE TOWARDS TRANSFER PRICING ADJUSTMENT MADE. THE FACTS RELATI NG THERETO ARE DISCUSSED AS UNDER BY THE ASSESSING OFFICER IN THE FINAL ASSESSMENT ORDER:- 10. IT IS SEEN FROM THE ASSESSMENT DETAILS, THAT T HE ASSESSEE HAS INCURRED AN AMOUNT OF 13,88,33,026/-. TOWARDS SUB-CONTRACTOR CHARGES. IT IS PERTINENT TO NOTE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS O F DESIGN, DEVELOPMENT, MANUFACTURE (ASSEMBLY) OF AN AUTOMATION SYSTEM, SPECIFIC TO THE MISSION REQUIREMENTS OF WARSHIP, AND IS FOLLOWING PERCENTAG E COMPLETION METHOD. IT IS SEEN FROM THE DETAILS SUBMITTED BY THE ASSESSEE, THE ASSESSSEE HAS ACHIEVED THE 84.68% COMPLETION. ACCORDINGLY, PRO- RATA EXPENSE INCURRED TOWARDS SUBCONTRACTOR CHARGE SHOULD BE CLAIMED 84.68% ONLY. HERE, THE ASSESSEE HAS CLAIMED 100 PERCENT EXPENSE. THEREFORE, EXPENSE TOWARDS SUB-CONTRACTOR IS RESTRICTED TO 84.68% WHICH AMOUNT TO RS.11,75,63,806/-. HENCE, DIFFERENCE OF' RS.2,12,69,220/- IS HEREBY DISALLOWE D IT(TP)A NO.1938 /BANG/2017 PAGE 7 OF 11 AND ADDED BACK TO THE INCOME RETURNED BY THE ASSESSEE. 7. THE LD A.R SUBMITTED THAT THE ASSESSING OFFI CER HAS DISALLOWED SUB-CONTRACTOR CHARGES TO THE TUNE OF RS.2,12,69, 220/- AND THE ASSESSEE HAS ACCEPTED THE SAME BY NOT PRESSING THE GROUND NO.2 AND 3. HE SUBMITTED THAT THE AMOUNT SO DISALLOWED AND ACCEPTED BY THE ASSESSEE SHALL NOT FORM PART OF OPERATING CO ST AND HENCE IT SHOULD BE EXCLUDED. IN FACT, THE ABOVE SAID AMOUNT HAS BEEN ALLOWED AS DEDUCTION IN THE SUBSEQUENT YEAR. ACCOR DINGLY HE SUBMITTED THAT THE ABOVE SAID AMOUNT SHOULD BE REDU CED FROM THE OPERATING COST AND ACCORDINGLY THE NET PROFIT OF TH E ASSESSEE SHOULD BE INCREASED CORRESPONDINGLY. ACCORDINGLY T HE PLI SHOULD BE COMPUTED BY CONSIDERING THE NET PROFIT SO INCREA SED AND THE OPERATING COST SO REDUCED. HE SUBMITTED SUCH COURS E OF ACTION IS PERMISSIBLE AS PER THE DECISION RENDERED IN THE FOL LOWING CASES:- (A) POLE TO WIN INDIA (P) LTD VS. DCIT (2015)(60 TA XMANN.COM 311)(BANG. TRIB). (B) HAWORTH (INDIA)(P) LTD VS. DCIT (2011)(11 TAXM ANN.COM 76)(DELHI TRIB). 8. THE LD A.R SUBMITTED THAT IF THE PLI OF THE ASSESSEE IS REVISED BY CONSIDERING THE ABOVE SAID CLAIM OF THE ASSESSEE , THEN ITS INTERNATIONAL TRANSACTIONS SHALL BE AT ARMS LENGTH. WITH REGARD TO THE GROUNDS RAISED ON INCLUSION/EXCLUSION OF COMPAR ABLES, THE LD A.R SUBMITTED THAT THE RIGHT OF THE ASSESSEE TO PRE SS THOSE CONTENTIONS MAY BE KEPT OPEN, IF THE ABOVE SAID CLA IM OF THE ASSESSEE IS ACCEPTED. IT(TP)A NO.1938 /BANG/2017 PAGE 8 OF 11 9. WE HEARD LD D.R AND PERUSED THE RECORD. WE NOTICE THAT THE BANGALORE BENCH OF TRIBUNAL HAS CONSIDERED AN IDENT ICAL ISSUE IN THE CASE OF POLE TO WIN INDIA (P) LTD (SUPRA), WHER EIN THE DECISION RENDERED BY THE DELHI BENCH OF TRIBUNAL IN THE CASE OF HAWORTH (INDIA)(P) LTD (SUPRA) HAS BEEN FOLLOWED AND HELD T HAT THE EXPENSES DISALLOWED BY THE ASSESSEE SHOULD BE EXCLUDED FROM OPERATING COST. IN THE CASE BEFORE THE BANGALORE BENCH OF TRIBUNAL (SUPRA), THE ASSESSEE HAD INCLUDED A SUM OF RS.30.00 LAKHS AS TE LECOM EXPENSES AND THE SAME WAS CONSIDERED AS CONTINGENT IN NATURE AS DISCLOSED UNDER CLAUSE 17(K) OF FORM 3CD. THE ASSE SSEE DISALLOWED THE ABOVE SAID AMOUNT WHILE COMPUTING TOTAL INCOME AND ACCORDINGLY CONTENDED THAT THE ABOVE SAID AMOUNT SH OULD BE EXCLUDED FROM OPERATING COST WHILE COMPUTING PLI. THE CO-ORDINATE BENCH HELD AS UNDER:- 8.9 WITH RESPECT TO THE CONTINGENT EXPENSES IN THE NATURE OF PROVISION FOR TELECOM EXPENSES, IT IS SEE N THAT THE ASSESSEE HAS ITSELF DISALLOWED THESE EXPENSES IN THE COMPUTATION OF TAXABLE INCOME ON TH E GROUND ON THE DECISION IN THE CASE OF HAWORTH INDIA PVT. LTD. (SUPRA), WHEREIN IT HAS BEEN HELD THAT EXPENSES DISALLOWED SHOULD BE EXCLUDED FROM OPERATING COST, IS WELL PLACED AND THEREFORE AGREE WITH THE ASSESSEES CONTENTION THAT EXPENSES DISALLOWED IN COMPUTATION OF TAXABLE INCOME SHOULD BE EXCLUDED FROM OPERATING COST. THE ASSESSEES CLAIM IS ALLOWE D. IT(TP)A NO.1938 /BANG/2017 PAGE 9 OF 11 10. IN THE INSTANT CASE, THE ASSESSING OFFICER HAS DISALLOWED A SUM OF RS.2,12,69,220/- OUT OF SUB-CONTRACTING EXP ENSES, WHICH FORMED PART OF OPERATING COST. THE ASSESSEE HAS AC CEPTED THE SAID DISALLOWANCE BY NOT PRESSING THE GROUNDS RELATING T O THE SAME. IT IS THE SUBMISSION OF THE ASSESSEE THAT ABOVE SAID A MOUNT HAS BEEN ALLOWED AS DEDUCTION IN THE SUBSEQUENT YEAR, MEANIN G THEREBY, THE POSITION THAT THE ABOVE SAID EXPENDITURE IS NOT REL ATED TO THE YEAR UNDER CONSIDERATION IS ACCEPTED BOTH BY THE ASSESSI NG OFFICER AND THE ASSESSEE. ACCORDINGLY, BY FOLLOWING THE DECISI ON RENDERED BY THE CO-ORDINATE BENCH IN THE CASE OF POLE TO WIN IN DIA (P) LTD (SUPRA), WE HOLD THAT THE SAME SHOULD BE EXCLUDED F ROM OPERATING COST AND HENCE THERE WILL BE CORRESPONDING INCREASE IN NET PROFIT AMOUNT. ACCORDINGLY THE PLI OF THE ASSESSEE NEEDS TO BE COMPUTED. WE ORDER ACCORDINGLY. 11. IT IS THE SUBMISSION OF LD A.R THAT, IN VIEW OF THE REVISED PLI, ITS INTERNATIONAL TRANSACTIONS SHALL BE AT ARMS LEN GTH. WE DIRECT THE AO/TPO TO EXAMINE THIS CONTENTION OF THE ASSESSEE A ND IF IT IS FOUND TO BE CORRECT, THEN NO TRANSFER PRICING ADJUS TMENT IS CALLED FOR. IN CASE, IF THE CLAIM OF THE ASSESSEE IS FOUN D CORRECT, THEN THE GROUNDS RELATING TO EXCLUSION/INCLUSION OF COMPARAB LES DO NOT REQUIRE ADJUDICATION, AS THE SAME WOULD BE ACADEMIC IN NATURE. ACCORDINGLY, AT THIS STAGE, WE LEAVE ALL THOSE GROU NDS OPEN. IT(TP)A NO.1938 /BANG/2017 PAGE 10 OF 11 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH DECEMBER, 2019. SD/ - (PAVAN KUMAR GADALE) JUDICIAL MEMBER SD/ - (B.R BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED, THE 11 TH DECEMBER , 2019. /VMS/ COPY TO: 1. APPELLANT (S) / CROSS OBJECTOR(S) 2. RESPONDENT(S) 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE IT(TP)A NO.1938 /BANG/2017 PAGE 11 OF 11 1. DATE OF DICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR.P.S .. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DICTATION NOTE ENCLOSED DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER . 12. THE DATE ON WHICH THE FILE GOES TO DISPATCH SEC TION FOR DISPATCH OF THE TRIBUNAL ORDER . 13. DATE OF DESPATCH OF ORDER. .. 14. DICTATION NOTE ENCLOSED