Deputy Commissioner of Income Tax Circle-2(1)(2), Bangalore V. M/s E4e Business Solutions India Private Limited , Bangalore

ITA 2112/BANG/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 5143 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 29-01-2020
• Assessment Year: 2007-2008
• Appeal Filed On: 02-07-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR BENGALURU
• Assessee Lawyers: T RAVINDRA
• Keywords: Transfer pricing; International transaction; Corroborative evidences

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN, ACCOUNTANT MEMBER ITA NO.2112/BANG/2018 ASSESSMENT YEAR: 2007-08 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(2), BANGALORE. VS. E4E BUSINESS SOLUTIONS INDIA PVT. LTD., 389/1, 7 TH MAIN, 42 ND CROSS, 5 TH BLOCK, JAYANAGAR, BANGALORE 560 041. PAN: AAACI 6324A APPELLANT RESPONDENT APPELLANT BY : SHRI PRADEEP KUMAR, CIT(DR)(ITAT), BENGALURU. RESPONDENT BY : SHRI T. RAVINDRA, CA DATE OF HEARING : 29.01.2020 DATE OF PRONOUNCEMENT : 19.02.2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF CIT(APPEALS)-2, BENGALURU DATED 27.04.2018 RELATING TO ASSESSMENT Y EAR 2007-08. THE GROUNDS OF APPEAL READ AS FOLLOWS:- ITA NO.2112/BANG/2018 PAGE 2 OF 7 1. ASSESSEE IS A LOW END BPO SERVICE PROVIDER :- I) WHETHER THE LD. CIT(A) HAS ERRED IN FACT AND LAW BY HOLDING THE ASSESSEE AS, LOW END BPO SERVICE PROVIDER. II) LD CIT(A)) HAS ERRED IN NOT APPRECIATING THE FA CT THAT THE ASSESSEE IS PROVIDING HIGH END SERVICES AND HENCE C ANNOT BE TERMED AS LOW END BPO SERVICES PROVIDER. 2. EXCLUSION OF ECLERX SERVICES LIMITED & MOLD-TEK TECHNOLOGIES LIMITED FROM THE LIST OF FINAL COMPARA BLE SELECTED BY THE TPO IN ITES SEGMENT :-. I) WHETHER THE LD CIT(A) ERRED IN FACT AND LAW BY H OLDING THE COMPANY M/S. ECLERX AND M/S MOLD TEK TECHNOLOGIES A S FUNCTIONALLY DISSIMILAR WITHOUT, ANALYZING THE FACT OF THE COMPANY. II) WHETHER THE LD CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE ASSESSEE FUNCTIONALLY SIMILAR TO THAT OF M /S ECLERX AND M/S MOLD TEK TECHNOLOGIES. 3. EXCLUSION OF ACCURATE DATA CONVERTERS LIMITED FR OM THE LIST OF FINAL COMPARABLE SELECTED BY THE TPO IN ITE S SEGMENT :- I) WHETHER WHILE SEEKING THE EXACT COMPARABILITY AS MENTIONED ABOVE THE LD. CIT(A) WAS RIGHT IN FACT AN D IN LAW IN IMPOSING CONDITION BEYOND LAW WHEREAS THE REQUIR EMENT OF LAW IS TO ACKNOWLEDGE ONLY THOSE DIFFERENCES THA T ARE LIKELY TO MATERIALLY AFFECT THE MARGIN. II) WHETHER THE LD. CIT(A) ERRED IN FACT AND LAW BY HOLDING THE COMPANY ACCURATE DATE CONVERTERS LIMITED AS FUNCTIO NALLY DISSIMILAR WITHOUT ANALYSING THE FACTS OF THE COMPA NY. III) WHETHER THE LD. CIT(A) ERRED IN FACT AND LAW B Y REJECTING THE COMPARABLES ON A LOW EMPLOYEE COST FILTER WITHO UT APPRECIATING THE FACT OUTSOURCING OF CERTAIN MANPOW ER IS COMMON IN ITES SEGMENT AND IT DOES NOT ANYWAY MAKE THEM FUNCTIONALLY DISSIMILAR. ITA NO.2112/BANG/2018 PAGE 3 OF 7 4. INTERNAL TNMM METHOD SHOULD APPLIED FOR DETERMIN ING THE ARM'S, LENGTH PRICE :- I) WHETHER THE LD. CIT(A) ERRED IN FACT AND LAW BY DIRECTING THE TPO TO ADOPT THE. INTERNAL TNMM AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING WITHOUT APPRECI ATING THE FACT THAT THE REVENUE EARNED FROM THE AE IS FRO M THE INTERNATIONAL MARKET WHEREAS THE REVENUE EARNED FRO M THE NON-AE IS FROM THE DOMESTIC MARKET. II) WHETHER THE LD.CIT(A) ERRED IN NOT APPRECIATIN G THE FACT THAT SERVICES RENDERED IN TWO DIFFERENT MARKETS CANNOT B E SAME OR SIMILAR AND HENCE INTERNAL TNMM WAS NOT THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATION AL TRANSACTION. III) WHETHER THE LD. CIT(A) ERRED IN NOT APPRECIATI NG THE FACT THAT THE PROFIT MARGINS EARNED FROM TRANSACTION WIT H INTERNATIONAL MARKETS CANNOT BE SAME OR SIMILAR TO THE PROFIT MARGINS EARNED FROM TRANSACTION WITH THE DOMESTIC M ARKET SINCE THERE ARE DIFFERENCES IN THE FACTORS THAT INF LUENCE THE PROFIT MARGINS AND HENCE INTERNAL TNMM WAS NOT THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATION AL TRANSACTION. IV) WHETHER THE ID. CIT(A) OUGHT TO HAVE APPRECIAT ED THE FACT THAT FACTORS LIKE GEOGRAPHY, FUNCTIONS PERFORMED, A SSETS EMPLOYED, RISK TAKEN, COST OF LABOR, LEGAL PROVISIO NS BETWEEN TWO DIFFERENT MARKETS HAVE A BEARING ON THE PROFIT MARGINS. HENCE, THE PROFIT MARGIN EARNED FROM INTERNATIONALS TRANSACTIONS CANNOT BE COMPARED WITH PROFIT MARGINS EARNED FROM TRANSACTIONS WITH THE DOMESTIC MARKET, THEREFORE INTERNAL TNMM WAS NOT THE MOST APPROPRIAT E METHOD FOR BENCHING THE INTERNATIONAL TRANSACTION. V) WHETHER THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE TAXPAYER HAS NOT REPORTED SEGMENTAL BREAK- UP IN RESPECT OF AE AND NON AE'S TRANSACTION IN THE AUDIT ED FINANCIALS. IT IS ONLY BEFORE THE TRANSFER PRICING OFFICER THAT A BREAK-UP BETWEEN AE AND NON AE SEGMENT HAS BEEN FURNISHED AND IT IS WITHOUT ANY' KEY OF ALLOCATION AND SUPPORTING EVIDENCES IN RESPECT OF EXPENSES ACROSS THE ITA NO.2112/BANG/2018 PAGE 4 OF 7 SEGMENTS. HENCE THE INTERNAL TNMM IS NOT THE MOST APPROPRIATE METHOD FOR BENCHMARKING. 2. AS FAR AS GROUND NO.1 IS CONCERNED, IT WAS AGREE D BY THE PARTIES THAT IF GROUND NO.4 IS DECIDED IN FAVOUR OF ASSESSEE, TH EN GROUND NO.1 WILL BECOME INFRUCTUOUS AND WILL NOT ARISE OUT OF THE IM PUGNED ORDER OF CIT(APPEALS). 3. GROUND NO.2 IS WITH REFERENCE TO EXCLUSION OF 2 COMPARABLE COMPANIES VIZ., E-CLERKS AND MOLD TEK TECHNOLOGIES. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF RENDERING INFORMATION TE CHNOLOGY ENABLED SERVICES [ITES] TO ITS AE AND IN DETERMINING THE AL P IN RESPECT OF CONSIDERATION RECEIVED BY THE ASSESSEE FOR RENDERIN G ITES SERVICES TO AE, THE ISSUE WAS REFERRED TO TPO AND ADDITION SUGGESTE D BY THE TPO WAS INCORPORATED IN THE AFORESAID ORDER OF ASSESSMENT B Y THE AO. AGAINST THE AFORESAID ORDER OF AO, THE ASSESSEE PREFERRED APPEA L CHALLENGING THE METHOD OF DETERMINATION OF ALP AND CONSEQUENT ADDIT ION TO THE TOTAL INCOME. ONE OF THE RELIEFS ALLOWED BY THE CIT(APPEA LS) WAS TO EXCLUDE TWO COMPARABLE COMPANIES CHOSEN BY THE TPO VIZ., ECLERX SERVICES LIMITED & MOLD-TEK TECHNOLOGIES LIMITED. 4. AS FAR AS ECLERX SERVICES LIMITED IS CONCERNED, IT IS UNDISPUTED THAT THIS COMPANY WAS CONSIDERED AS NOT COMPARABLE WITH A COMPANY PROVIDING ITES SUCH AS THE ASSESSEE FOR THE SAME ASSESSMENT Y EAR BY THE BANGALORE TRIBUNAL IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES PVT. LTD. IN IT(TP)A NO.1086/BANG/2011 . THE TRIBUNAL IN THE AFORESAID DECISION TOOK THE VIEW THAT THIS COMPANY WAS OUTSOURCING ALL ITS ACTIVITIES AND THEREFORE CANNOT BE REGARDED AS A COMPANY ENGAGED O N ITS OWN IN RENDERING ITES. ITA NO.2112/BANG/2018 PAGE 5 OF 7 5. AS FAR AS MOLD-TEK TECHNOLOGIES LIMITED IS CONCE RNED, THIS TRIBUNAL BY THE VERY SAME DECISION BY WHICH ECLERX SERVICES LIMITED WAS EXCLUDED REFERRED TO IN THE EARLIER PARA, EXCLUDED MOLD-TEK TECHNOLOGIES LIMITED ALSO ON THE GROUND THAT IT WAS FUNCTIONALLY DIFFERE NT FROM AN ITES COMPANY. IN VIEW OF THE AFORESAID JUDICIAL PRECEDENTS, WE AR E OF THE VIEW THAT THERE IS NO MERIT IN GROUND NO.2 RAISED BY THE REVENUE. 6. AS FAR AS GROUND NO.3 IS CONCERNED, WE FIND THAT THE CIT(APPEALS) EXCLUDED THIS COMPANY IN PARA 18 & 19 OF HIS ORDER ON THE GROUND THAT THIS COMPANY FAILS THE EMPLOYEE COST FILTER OF 25% APPLI ED BY THE TPO I.E., EMPLOYEE COST SHOULD BE AT LEAST 25% OF THE REVENUE TO REGARD THIS COMPANY AS COMPARABLE WITH ITES. THE CIT(APPEALS) FOUND THAT THE EMPLOYEE COST WAS ONLY 11.45% OF THE TURNOVER AND T HIS COMPANY WAS EXCLUDED FROM COMPARABLES. IN THE GROUND OF APPEAL , THE REVENUE HAS NOT CHOSEN TO CHALLENGE THIS FINDING OF THE CIT(A). EV EN OTHERWISE, THE TPO HIMSELF HAS EMPLOYED THIS FILTER FOR THE PURPOSE OF EXCLUDING AND INCLUDING COMPARABLE COMPANIES AND THEREFORE THE REVENUE CANN OT BE HEARD TO SAY THAT THIS EMPLOYEE COST FILTER OUGHT NOT TO HAVE BE EN APPLIED IN THE ITES SEGMENT WHERE OUTSOURCING OF MANPOWER IS COMMON. W E THEREFORE FIND NO MERIT IN GROUND NO.3 RAISED BY THE REVENUE AND DISM ISS THE SAME. 7. AS FAR AS GROUND NO.4 IS CONCERNED, THE CIT(APPE ALS) IN THE IMPUGNED ORDER IN PAGE 21 HAS FOUND THAT IN ASSESSE ES OWN CASE FOR AY 2010-11 IN IT(TP)A NO.324/BANG/2015 THE TRIBUNAL HA S TAKEN A VIEW THAT THAT INTERNAL MARGINS EVEN UNDER TNMM SHOULD BE PRE FERRED. THE CIT(APPEALS) FOLLOWING THE AFORESAID DECISION HELD AS FOLLOWS:- HAVING CONSIDERED THE SUBMISSIONS, IT IS OBSERVE D THAT THE SERVICES RENDERED BY THE APPELLANT TO AE AND NON-AE ARE SIMILAR, WHICH IS EVIDENT FROM THE SCHEDULE 1.6 TO THE FINAN CIAL STATEMENTS UNCLE! THE HEAD 'REVENUE RECOGNITION' WH EREIN IT IS STATED: ''THE COMPANY DERIVES ITS REVENUE PRIMARILY FROM ITA NO.2112/BANG/2018 PAGE 6 OF 7 CUSTOMER RELATIONSHIP MANAGEMENT SERVICES TO THE PA RENT COMPANY AS WELL AS EXTERNAL CUSTOMERS. REVENUE FROM SERVICES RENDERED TO PARENT COMPANY ARE BILLED ON THE BASIS OF THE CONTRACT WITH THE PARENT COMPANY. REVENUES FROM OTHER CUSTOM ERS ARE CHARGED BASED ON TIME AND MATERIAL OR UNIT BASED PR ICING. REVENUES FROM OTHER CUSTOMERS ARE CHARGED BASED ON TIME AND MATERIAL OR UNIT BASED CONTRACTS IS RECOGNISED UPON PERFORMANCE OF SERVICES. IT IS ALSO STATED THAT AS THE TPO HAS NOT DISPUTE D THE KEY OF ALLOCATION AND ALSO THE NATURE OF SERVICES, HE SHOU LD HAVE THEREFORE APPLIED THE INTERNAL MARGIN UNDER THE TRA NSACTIONAL NET MARGIN METHOD (TNMM). THE TPO SHOULD HAVE CONCLUDE D THAT THE INTERNATIONAL TRANSACTIONS ARE AT ARM'S LENGTH ON APPLICATION OF INTERNAL MARGIN UNDER THE TRANSACTIONAL NET MARGIN METHOD SINCE THE MARGINS EARNED ON AE TRANSACTIONS ARE MOR E THAN THE MARGIN EARNED ON NON-AE TRANSACTIONS . IN THIS REGARD ON THIS SPECIFIC ISSUE, THE BANGAL ORE BENCH OF THE HON'BLE ITAT IN THE APPELLANTS OWN CASE FOR IN ITA IT(TP)A NO.324(B)/2015 FOR AY 2010-11 HAS RULED THA T PREFERENCE SHOULD HAVE BEEN GIVEN TO INTERNAL MARGI N UNDER THE TRANSACTIONAL NET MARGIN METHOD. CONSIDERING THE FACTS AND CIRCUMSTANCES, I AM IN AGREEMENT WITH THE SUBMISSIONS THAT DUE TO THE SIMI LARITY OF FUNCTIONS PERFORMED TO AE AND NON AE DURING THE CUR RENT FINANCIAL YEAR, INTERNAL COMPARABLE SHOULD HAVE BE EN ADOPTED. FURTHER, IT IS SUBMITTED THAT THE FACTS AND CIRCUMS TANCES AND THE FUNCTIONAL PROFILE OF THE COMPANY REMAINED SAME GOI NG FORWARD UPTO THE AY 2010-11. EVEN THOUGH, THE DECISION OF THE JURISDICTIONAL ITAT IS BINDING PARTICULARLY IN THE APPELLANTS OWN CASE IN ITA IT(TP)A NO.324(B)/2015, FOR AY 2010-11, HOWEVER IN VIEW OF THE FINDINGS GIVEN SUPRA IN RESPECT OF G ROUND NO.3 TO 3.3, THIS GROUND BECOMES INFRUCTUOUS, HENCE DISMISS ED. 8. IN THE LIGHT OF THE CIT(APPEALS) FOLLOWING THE A FORESAID DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL, WE ARE OF TH E VIEW THAT THERE IS NO MERIT IN GROUND NO.4 RAISED BY THE REVENUE AND ACCO RDINGLY THE SAME IS DISMISSED. CONSEQUENTLY GROUND NO.1 IS RENDERED AC ADEMIC. ITA NO.2112/BANG/2018 PAGE 7 OF 7 9. IN THE RESULT, THE APPEAL BY THE REVENUE IS DISM ISSED. PRONOUNCED IN THE OPEN COURT ON THIS 19 TH DAY OF FEBRUARY, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRE SIDENT BANGALORE, DATED, THE 19 TH FEBRUARY, 2020. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FIL E BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.