Sella Synergy India Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 2052/CHNY/2011

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7482 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 3 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 04-01-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 14-12-2011
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Assessee Lawyers: N V BALAJI
• Keywords: Related party transaction; Depreciation; Transfer pricing; Business expenditure; Principle of natural justice; International transaction; Revised return; Revenue expenditure
• Section: 143(3); 133(6); 10B; 92

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: CHENNAI . . . , ! ' .. # $!% , ' () BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ! ./ ITA NO.2052/MDS/2011 * +* /ASSESSMENT YEAR: 2007-08 M/S.SELLA SYNERGY INDIA PVT. LTD., 1 ST FLOOR, ELNET SOFTWARE CITY, TS-140, RAJIV GANDHI SALAI, TARAMANI, CHENNAI, TAMIL NADU-600 113. VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-VI(2), CHENNAI, TAMIL NADU-600 034. [PAN: AACCS9750 N ] ( ,- /APPELLANT) ( ./,- /RESPONDENT) ,- 0 1 / APPELLANT BY : MR.N.V.BALAJI, ADV. ./,- 0 1 /RESPONDENT BY : MR.PATHLAVATH PEERYA, CIT # 0 2' /DATE OF HEARING : 04.01.2017 34+ 0 2' /DATE OF PRONOUNCEMENT : 17.03.2017 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER DATED 17/10/2011 OF ASSISTANT COMMISSIONER OF INCOME TAX, (CO), CIRCLE-VI(2), CHENNAI-34, U/S 143(3) R.W.S.144C(13) FOR THE ASSES SMENT YEAR 2007-08 AND RAISED THE FOLLOWING GROUNDS: ITA NO.2052/MDS/2011 :- 2 -: GROUNDS OF APPEAL : 1. THE ASSESSMENT ORDER DATED OCTOBER 17, 2011, PASSED B Y THE LEARNED ASSESSING OFFICER (AO) UNDER SECTION 143(3) READ WITH SECTION 92CA(4 ) AND 144C(13) OF THE INCOME-TAX ACT, 1961 (ACT) IS NOT IN ACCORDANCE WITH THE LAW AND IS CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND IN ANY CASE I N VIOLATION OF PRINCIPLES OF EQUITY AND NATURAL JUSTICE. ADJUSTMENT UNDER SECTION 92CA OF THE ACT IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES 2. THE HONOURABLE DRP AND THE LD.AO/TPO HAVE ERRED IN L AW AND ON FACTS IN REJECTING TRANSFER PRICING DOCUMENTATION CARRIED OUT BY THE A PPELLANT CONTAINING DETAILED COMPUTATION OF ALP AND ERRED IN CONDUCTING A FRESH SEARCH FOR COMPARABLES. 3. THE LEARNED AO/ HONOURABLE DRP HAVE ERRED IN LAW IN REJECTING THE USE OF PREVIOUS YEARS FINANCIAL DATA OF COMPARABLES FOR DETERMINING ALP W ITHOUT APPRECIATING THE FACT THAT IMPACT OR INFLUENCE OF PAST DATA ON THE CURRENT YEAR PROFI TS IS INHERENT IN THE SOFTWARE DEVELOPMENT OR SERVICE INDUSTRY. 4. THE HONOURABLE DRP HAS ERRED IN UPHOLDING THE USE O F INFORMATION OBTAINED UNDER SECTION 133(6) OF THE ACT BY THE TPO AT THE TIME OF ASSESSME NT PROCEEDINGS, AS IT IS NOT IN ACCORDANCE WITH LAW AND IN VIOLATION OF THE PRINCIP LES OF EQUITY AND NATURAL JUSTICE. 5. THE HONORABLE DRP AND LD.AO HAVE ERRED IN LAW AND ON FACTS IN APPLYING ADDITIONAL FILTERS WITHOUT APPRECIATING THAT THE APPELLANT HAD ITSELF APPLIED ADEQUATE AND RELEVANT FILTERS IN ITS BENCHMARKING STUDY. 6. THE HONOURABLE DRP AND THE LD.AO HAVE ERRED IN LAW B Y REJECTING THE OBJECTIONS RAISED BY THE APPELLANT IN RELATION TO INCLUSION OF ADDITIONA L COMPANIES AS COMPARABLES BY THE LD.TPO, WITHOUT CONSIDERING FACTORS SUCH AS FUNCTIONAL DIFF ERENCES, HIGH TURNOVER, ABNORMAL PROFIT MARGINS, EXCEPTIONAL YEAR, FAILING THE FILTERS APPL IED BY THE TPO HIMSELF AND OTHER RELEVANT FACTORS. 7. THE LEARNED AO/HONOURABLE DRP HAS ERRED IN UPHOLDIN G THE REJECTION BY THE TPO OF THE COMPARABLES SELECTED BY THE APPELLANT IN ITS TRANSF ER PRICING STUDY. 8. THE LEARNED AO/HONOURABTE DRP HAS ERRED IN UPHOLDIN G THE EXCESSIVE MARGINS COMPUTED BY THE TPO FOR THE COMPARABLE COMPANIES, WHICH IN SO ME CASES WAS ALSO ERRONEOUSLY COMPUTED ON AN ENTITY WIDE BASIS WITHOUT CONSIDERIN G THAT THAT COMPANY HAD OTHER OPERATIONS, WHICH WERE NOT FUNCTIONALLY COMPARABLE. 9. THE LEARNED AO/HONOURABLE DRP HAVE ERRED IN NOT APP RECIATING THAT THE APPELLANT, BEING A CAPTIVE SERVICE PROVIDER OPERATED AT LOWER RISK LEV ELS AS COMPARED TO COMPARABLE COMPANIES, WHICH CARRY HIGHER RISKS AND ACCORDINGLY ERRED IN NOT GRANTING APPROPRIATE ADJUSTMENTS TO THE MARGINS OF THE COMPARABLES. 10. WITHOUT PREJUDICE TO THE OTHER GROUNDS, LEARNED AO/ HONOURABLE DRP HAVE ERRED IN MAKING THE ADJUSTMENT UNDER SECTION 92 OF THE ACT WHEN THE APPELLANT INCOME IS NOT TAXABLE AS PROVIDED VIDE PARAGRAPH 55.5 OF CIRCULAR NO.14/200 OF THE CBDT AND THE PRINCIPLES OF THE BANGALORE TRIBUNAL IN THE CASE OF PHILIPS SOFTWARE CENTRE PRIVATE LIMITED (26 SOT 226). ADJUSTMENT UNDER SECTION 92CA OF THE ACT IN RESPECT OF MANAGEMENT FEES PAID 11. THE LEARNED AO/HONOURABLE DRP HAS ERRED IN UPHOLDIN G THE TPOS ACTION OF DETERMINING THE ALP OF MANAGEMENT FEE PAID AT ZERO WITHOUT CONSIDER ING THE BENEFITS DERIVED, RELEVANT FACTS AND SUBMISSIONS PROVIDED BY THE APPELLANT. 12. THE LEARNED AO/HONOURABLE DRP HAS ERRED IN DETERMIN ING THAT THE ARMS LENGTH PRICE OF THE MANAGEMENT FEES TO BE NIL WITHOUT REFERRING TO ANY METHOD PRESCRIBED UNDER THE ACT AND WITHOUT REFERRING TO ANY COMPARABLE AND MERELY ON T HE ASSUMPTION THAT THE SERVICES DID NOT RESULT IN ANY BENEFIT TO THE APPELLANT AND THAT THE SERVICES WERE DUPLICATIVE IN NATURE. ITA NO.2052/MDS/2011 :- 3 -: 13. THE LEARNED AO/HONOURABLE DRP HAS ERRED IN CONCLUDI NG WITHOUT ANY BASIS THAT MOST OF THE SERVICES RECEIVED BY THE APPELLANT FROM ITS AES ARE IN THE NATURE OF SHAREHOLDER SERVICES OR STEWARDSHIP SERVICES. GROUNDS OF OBJECTION AGAINST ERROR IN COMPUTATION O F INCOME 14. THE LEARNED AO/HONOURABLE DRP HAS ERRED IN TAKING T HE TOTAL INCOME AT RS.2,33,86,490/- BY FURTHER ADDING INCOME-TAX AND FRINGE BENEFIT TAX ES TO THE PROFIT AND NOT CONSIDERING THE FACT THAT THE TOTAL INCOME OF THE ASSESSEE WAS ONLY RS.1,63,10,363/- WHICH IS THE PROFIT BEFORE INCOME-TAX AND FRINGE BENEFIT TAX. 15. THE LEARNED AO/HONOURABLE DRP FAILED TO RECTIFY THE MISTAKE APPARENT FROM THE RECORD IN THE INTIMATION UNDER SECTION 143(1) OF THE ACT AS W ELL AS IN RESPONSE TO THE ASSESSEES APPLICATION FOR THE RECTIFICATION OF THE SAME. 16. THE LEARNED AO/HONOURABLE DRP FAILED TO TAKE INTO A CCOUNT THE REVISED COMPUTATION OF TOTAL INCOME SUBMITTED BY THE ASSESSEE, WHEREBY THE TOTAL INCOME WAS REDUCED TO RS.1,77,15,551/-. 2.0 M/S.SELLA SYNERGY INDIA PVT. LTD., IS A SUBSIDIARY OF M/S.SELLA HOLDING N.V. AND PART OF GRUPPO BANCA SELLA (GBS) B ASED IN NORTHERN ITALY. M/S.SELLA SYNERGY INDIA PVT. LTD., IS A PAR T OF INFORMATION TECHNOLOGY ARM OF THE GRUPPO BANCA SELL CATERING TO THE SOFTWARE NEEDS THERE FOR. 2.1 DURING THE PREVIOUS YEAR 2005-06, THE COMPANY HAS ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTION WITH ITS AE : NAME OF THE AE NATURE OF TRANSACTIONS VALUE METHOD BENCA SELLA S.P.A, ITALIA, ITALY SOFTWARE DEVELOPMENT 140783711 CUP REIMBURSEMENT OF EXPENSES 16844488 BANCA SELLA MIAMI SOFTWARE DEVELOPMENT 99691 GESTNORD FONDI SGR S.P.A, MILANO SOFTWARE DEVELOPMENT 2315766 TOTAL 160043656 2.2 AO HAVING NOTICED THE INTERNATIONAL TRANSACTION RE FERRED THE ISSUE TO THE TPO FOR DETERMINING THE ALP. THE TPO NOTICED F ROM FORM-3CEB REPORT THAT THE ASSESSEE HAS REPORTED TO HAVE ADOPT ED THE COMPARABLE UNCONTROLLED PRICE (IN SHORT CUP) METHOD BUT THE AO OBSERVED THAT THE ITA NO.2052/MDS/2011 :- 4 -: ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS RELATING TO SOFTWARE DEVELOPMENT SERVICES PROVIDED TO THE ASSOCIATED ENT ERPRISE (AE), BY APPLYING TRANSACTION NET MARGIN METHOD (IN SHORT T NMM) AS MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES. THE PLI ADOPTED IS THE OPERATING PROFIT TO TOTAL COST (OPTC). THE ASS ESSEE HAS SELECTED THE FOLLOWING 28 COMPARABLES WITH AVERAGE ARITHMETIC ME AN OF 14.53%: MARGIN ANALYSIS UNADJUSTED MARGINS OF COMPARABLE COMPANIES SL. NO. NAME OF THE COMPANY WEIGHTED AVERAGE MARGINS (%) 1 AKSHAY SOFTWARE TECHNOLOGIES LIMITED 7.64% 2 AZTECSOFT LIMITED (FORMERLY KNOWN AS AZTEC SOFTWARE & TECHNOLOGY SERVICES LIMITED) 18.42% 3 FOUR SOFT LIMITED 22.27% 4 GEBBS INFOTECH LIMITED 16.52% 5 GENESYS INTERNATIONAL CORPN. LIMITED -11.24% 6 GOLDSTONE TECHNOLOGIES LIMITED 3.79% 7 HELLOS & MATHESON INFORMATION TECHNOLOGY LIMITED 35.17% 8 INFOSYS TECHNOLOGIES LIMITED 41.04% 9 K P I T CUMMINS INFOSYSTEMS LIMITED 13.30% 10 LANCO GLOBAL SYSTEMS LIMITED 6.73% 11 LARSEN & TOUBRO INFOTECH LIMITED 11.03% 12 MAARS SOFTWARE INTERNATIONAL LIMITED 17.12% 13 MELSTAR INFORMATION TECHNOLOGIES LIMITED 1.30% 14 MINDTREE CONSULTING LIMITED 16.60% 15 ORIENT INFORMATION TECHNOLOGY LIMITED 2.68% 16 QUINTEGRA SOLUTIONS LIMITED 11.93% 17 R S SOFTWARE (INDIA) LIMITED 12.19% 18 S I P TECHNOLOGIES AND EXPORTS LIMITED 25.25% 19 SASKEN COMMUNICATION TECHNOLOGIES LIMITED 17.71% 20 SASKEN NETWORK SYSTEMS LIMITED 16.19% 21 SATYAM COMPUTERS SERVICES LIMITED 29.27% 22 T V S INFOTECH LIMITED -4.81% 23 TRANSWORLD INFOTECH LIMITED 26.34% 24 TYCHE INDUSTRIES LIMITED 10.62% 25 V J I L CONSULTING LIMITED 6.26% 26 V M F SOFTECH LIMITED 18.39% 27 VISUALSOFT TECHNOLOGIES LIMITED 18.73% 28 ZYLOG SYSTEMS LIMITED 16.32% ARITHMETIC MEAN 14.53% LOWER RANGE (-5%) 8.80% UPPER RANGE (+5%) 20.25% ITA NO.2052/MDS/2011 :- 5 -: 2.3 THE ASSESSEES COMPANYS MARGIN WAS 11.3% SINCE TH E DIFFERENCE IN MARGIN IS LESS THAN ( +/- 5% ), THE ASSESSEE HELD THE INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH PRICE. THE AO OBS ERVED FROM THE TRANSFER PRICING DOCUMENT THAT THE ASSESSEE HAS ARRIVED THE AVERAGE PLI OF COMPARABLES AT 11.45% BY CONSIDERING WEIGHTED AVERA GE MARGIN OF 3 YEARS DATA FOR THE FY 2004-05, 2005-06 & 2006-07. SINCE THE ASSESSEE STATED IN THE TRANSFER PRICING DOCUMENT THAT THE CU P METHOD HAS BEEN ADOPTED BUT APPLIED TNMM METHOD AND CONSIDERED THRE E YEARS WEIGHTED AVERAGE TO ARRIVE AT THE AVERAGE MARGIN, THE AO REJ ECTED THE TP STUDY OF THE ASSESSEE AND CONDUCTED SEPARATE STUDY, MADE FAR ANALYSIS AND SELECTED FOLLOWING ADDITIONAL FILTERS FOR SELECTION OF SUITABLE COMPARABLES FUNCTIONALLY SIMILAR TO THAT OF THE TESTED PARTY: COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 20 06-07 WERE EXCLUDED. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE INCOME