DCIT 10(3), MUMBAI V. NOMURA STRUCTURED FIANANCE SERVICE P.LTD, MUMBAI

ITA 2130/MUM/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3194 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 04-01-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 28-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: F V IRANI
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

ITA NOS 2009 AND 2130 /MUM/14 ASSESSMEN T YEAR: 2009 - 10 PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI K BENCH, MUMBAI [CORAM : PRAMOD KUMAR AM AND PAWAN SINGH JM] ITA NO 2009/MUM/14 AS SESSMENT Y EAR : 2009 - 10 NOMURA STRUCTURED FINANCE SERVICES PVT LTD . ....... .APPELLANT 9 TH FLOOR, NOMURA HIRANANDANI BUSI NESS PARK, POWAI MUMBAI 400 076 [PAN: AABCL4233E] VS. DY. COMMISSIONER OF INCOME TAX CIRCLE 10(3), MUMBAI ... RESPONDENT ITA NO 2130/MUM/14 ASSESSMENT Y EAR : 2009 - 10 DY. COMMISSIONER OF INCOME TAX CIRCLE 10(3), MUMBAI . ....... .APPELL ANT VS. NOMURA STRUCTURED FINANCE SERVICES PVT LTD ..... RESPONDENT 9 TH FLOOR, NOMURA HIRANANDANI BUSINESS PARK, POWAI MUMBAI 400 076 [PAN: AABCL4233E] APPEARANCES BY: F V IRANI , FOR THE ASSESSEE N K CHAND F OR THE ASSESSEE DATE OF CONCLUDING THE HEARING : JANUARY 4 , 201 6 DATE OF PRONOUNCING THE ORDER : MARCH 31 ST , 201 6 O R D E R PER PRAMOD KUMAR AM : 1. THESE CROSS APPEALS ARE, IN ESSENCE, DIRECTED AGAINST THE DIRECTIONS DATED 24 TH DECEMBER 2013 ISSUED BY THE DISPUTE RESOLUTION PAN EL - II MUMBAI, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2009 - 10. ITA NOS 2009 AND 2130 /MUM/14 ASSESSMEN T YEAR: 2009 - 10 PAGE 2 OF 5 2. GRIEVANCES RAISED BY THE PARTIES ARE AS FOLLOWS: ITA NO.2009/MUM/2014 GROUNDS OF APPEAL TAKEN BY THE ASSESSEE) BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, NOMURA STRUCTURED FINANCE SERVICES PRIVATE LIMITED (HEREINAFTER REFERRED TO AS THE 'APPELLANT') RESPECTFULLY PREFERS AN APPEAL UNDER SECTION 253 OF THE INCOME - TAX ACT, 1961 (ACT) AGAINST THE ORDER DATED 3 0 JANUARY 2014 PASSED BY THE DEPUTY COMMISSIONER OF THE INCOME - TAX - 10(3), MUMBAI (HEREINAFTER REFERRED TO AS THE 'LEARNED AO') IN PURSUANCE OF THE DIRECTIONS ISSUED BY DISPUTE RESOLUTION PANEL - II, MUMBAI (DRP) ON THE FOLLOWING GROUNDS. THE LEARNED AO/DR P HAVE ERRED IN LAW AND FACTS. EACH OF THE BELOW GROUNDS OF APPEAL IS WITHOUT PREJUDICE TO AND INDEPENDENT OF ONE ANOTHER. 1. IN MAKING AN UPWARD ADJUSTMENT OF RS.3,46,97,005/ - TO THE INTERNATIONAL TRANSACTION FOR PROVISION OF INFORMATION TECHNOLOGY ENABL ED SERVICES (ITES) BY THE APPELLANT ON THE FOLLOWING GROUNDS: A. REJECTING THE FUNCTIONAL ANALYSIS, SEARCH PROCESS ADOPTED AND DOCUMENTATION MAINTAINED BY THE APPELLANT FOR THE INTERNATIONAL TRANSACTION OF PROVISION OF ITES TO ASSOCIATED ENTERPRISES (AES ) B. INCLUDING ADDITIONAL COMPANIES WHICH ARE NOT COMPARABLE TO THE APPELLANT, INTER - ALIA DUE TO FUNCTIONAL INCOMPARABILITY, DIFFERENT BUSINESS MODEL, TURNOVER, FOREIGN EXCHANGE EARNINGS, SUPER NORMAL PROFITS, EXCEPTIONAL/ABNORMAL YEAR OF OPERATIONS. C. REJECTING COMPARABLE COMPANIES SELECTED BY THE APPELLANT IN THE TRANSFER PRICING STUDY, WHICH INTER - ALIA ARE FUNCTIONALLY COMPARABLE, INCURRING LOSSES IN TWO OUT OF THREE YEARS UNDER CONSIDERATION, D. USING NON - CONTEMPORANEOUS DATA FOR CALCULATING A RM'S LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION OF PROVISION OF ITES TO AES. E. REJECTING THE MULTIPLE YEAR DATA AND RELYING ONLY ON DATA FOR THE YEAR ENDED MARCH 2009 FOR THE COMPARABLE COMPANIES. F. NOT GRANTING THE WORKING CAPITAL ADJUSTM ENT AS DETERMINED BY THE APPELLANT AND NOT CONSIDERING THE LEVEL OF RISK ASSUMED IN THE CASE OF APPELLANT VIS - A - VIS RISK ASSUMED BY THE IDENTIFIED COMPARABLE COMPANIES 2. IN COMPUTING THE ALP WITHOUT CONSIDERING THE +/ - 5% VARIATION FROM THE ALP AS PERMITT ED TO THE APPELLANT UNDER THE PROVISIONS OF SECTION 92C(2) OF THE ACT. ITA NO.2130/MUM/2014 GROUND OF APPEAL TAKEN BY THE ASSESSING OFFICER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DISPUTE RESOLUTION PANEL ERRED IN REINSTATING C OMPARABLE NAMELY M/S C G VAK SOFTWARE & EXPORT LTD. ON THE GROUND THAT IT WAS NOT A LOSS MAKING COMPANY FOR THE PAST THREE CONSECUTIVE YEARS ALTHOUGH THE TPO HAS GIVEN FACTUAL FINDING IN THE ORDER THAT IT WAS A LOSS MAKING COMPANY AT LEAST FOR 2 YEARS (F.Y . 2007 - 08 & F.Y. 2008 - 09 THOUGH FOR F.Y. 2008 - 09 THERE IS MARGINAL OPERATING PROFIT). ITA NOS 2009 AND 2130 /MUM/14 ASSESSMEN T YEAR: 2009 - 10 PAGE 3 OF 5 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING INFORMATION TECHNOLOGY ENABLED SERVICES TO ITS AES. DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO, IT WAS NOTICE D THAT THE ASSESSEE HAS BENCHMARKED ITS INCOME FROM SERVICES RENDERED TO THE AES, ON THE BASIS OF TRANSACTIONAL NET MARGIN METHOD (TNMM) WITH OPERATING PROFIT DIVIDED BY OPERATING COST (OP/OC) AS THE PROFIT LEVEL INDICATOR (PLI). WHILE THE ASSESSEE S PLI W AS 16.25%, WHEREAS, AS PER THE TPP STUDY, THE ARITHMETIC MEAN OF THE PLI OF ITS COMPARABLES WAS 16.22%. HOWEVER, THE TPO NOTED THAT THE MARGINS TAKEN BY THE ASSESSEE ARE NOT UPDATED ONES, THAT (A)ALLSEC TECHNOLOGIES LIMIED, (B)CG - VAK SOFTWARE & EXPORTS LT D AND (C)R SYSTEMS INTERNATIONAL LTD ARE REQUIRED TO BE EXCLUDED AS A AND B ARE CONSISTENTLY LOSS MAKING COMPANIES AND AS DATA IS NOT AVAILABLE IN RESPECT OF C , AND THAT FOUR NEW COMPARABLES, I.E. DATA MATICS FINANCIAL SERVICES LTD, ADITYA BIRLA MINA CS WORLDWIDE LIMITED , ACCENTIA TECHNOLOGIES LIMITED AND E4E HEALTHCARE BUSINESS SERVICES PVT LTD, ARE REQUIRED TO BE ADDED TO THE COMPARABLE. THE REVISED PLI WAS THUS WORKED OUT AT 29.16% AND, ACCORDINGLY, AN ALP ADJUSTMENT OF RS 6,34,65,878 WAS HELD TO B E REQUIRED. WHEN ASSESSEE RAISED THE GRIEVANCE BEFORE THE DRP, THE DRP HELD THAT CG - VAK SOFTWARE COULD NOT BE EXCLUDED FROM THE LIST OF COMPARABLES AS IT HAS MADE PROFITS IN FINANCIAL YEAR 2008 - 09 AND THAT ACCENTIIA WAS REQUIRED TO BE EXCLUDED IN VIEW OF DECISIONS OF THE TRIBUNAL. NONE OF THE PARTIES IS SATISFIED WITH THIS. WHILE THE AO IS AGGRIEVED OF THE DRP HOLDING THAT CG - VAAK SOFTWARE IS NOT EXCLUDED, THE ASSESSEE IS AGGRIEVED OF HIS CONTENTIONS BEING REJECTED. 4 . WHEN THIS AP PEAL WAS CALLED OUT FO R HEARING, LEARNED COUNSEL STATED THAT HE WOULD ONLY WISH TO PRESS , FOR THE TIME BEING, HIS GRIEVANCE TO THE LIMITED EXTENT OF SEEKING EXCLUSION OF VISHAL INFORMATION TECHNOLOGY LTD (VISHAL, IN SHORT) FROM THE LIST OF COMPARABLES. HE SUBMITS THAT THE EXCLU SION OF VISHAL IS SOUGHT ON THE GROUND THAT THIS COMPARABLE S BUSINESS MODEL IS RADICALLY DIFFERENT FROM THE INDUSTRY NORMS, AS EVIDENT FROM THE FACT THAT HIS EMPLOYEE COST IS AS LOW AS 2% OF TOTAL COSTS - WHICH ESSENTIALLY IMPLIES THAT THE WORK IS BEING OU TSOURCED BY THE COMPARABLE, RATHER THAN DOING IT ON HIS OWN, AND THAT THERE ARE NOW NUMBER OF DECISIONS BY THE COORDINATE BENCHES HOLDING THAT VISHAL IS NOT A GOOD COMPARABLE BECAUSE OF ITS OWN PECULIARITIES. HE, HOWEVER, HASTENED TO ADD THAT THE FACT THAT HE HAS GIVEN UP THE ITA NOS 2009 AND 2130 /MUM/14 ASSESSMEN T YEAR: 2009 - 10 PAGE 4 OF 5 MATTER ON OTHER ISSUES, AND THIS FACT SHOULD NOT BE HELD AGAINST HIM IN OTHER PROCEEDINGS. AS FOR THE REVENUE S APPEAL, HE SUBMITTED IT IS A SQUARELY COVERED MATTER BY COORDINATE BENCH DECISIONS. 5 . LEARNED DEPARTMENTAL REPRESENTATIV E DID JUSTIFY THE STAND OF THE AUTHORITIES BELOW AD SUBMITTED THAT EACH COMPARABLE HAS ITS OWN PECULIARITIES, AND THAT IS THE REASON AVERAGING IS DONE FOR THE COMPARABLES SO AS TO MINIMIZE THE IMPACT OF THESE PECULIARITIES, AND THAT THERE IS NO GOOD REASON TO EXCLUDE THIS COMPARABLE. HE RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND URGED US TO DECLINE TO INTERFERE IN THE MATTER. AS FOR THE POINT RAISED IN THE APPEAL BY THE ASSESSING OFFICER, HE SIMPLY PLACED HIS RELIANCE ON THE ORDERS OF THE TRANSFER PRICING OFFICER. 6 . WE ARE INCLINED TO ACCEPT THE PLEA OF THE ASSESSEE. THERE ARE NUMBER OF DECISIONS OF THE COORDINATE BENCHES, INCLUDING IN THE CASE OF MAERSK GLOBAL SERVICE CENTRE VS DCIT (ITA NO 2492 AND2594/MUM/14), WHEREIN VISHAL HAS BEEN HELD TO BE NOT A GOOD A COMPARABLE, INTER ALIA, ON THE GROUND THAT IT HAS OUTSOURCED ITS ITES WORK. VISHAL HAS, THUS, ACTED MORE LIKE AN INTERMEDIARY THAN A ITES SERVICE PROVIDER IN ITS OWN RIGHT. RESPECTFULLY FOLLOWING THE VIEWS OF THE COORDINATE BENCHES, THEREFORE , WE DIRECT THE ASSESSING OFFICER TO EXCLUDE VISHAL FROM THE FINAL LIST OF COMPARABLES. AS FOR THE PLEA RAISED BY THE REVENUE, WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE, AND, NO INTERFERENCE IN THE WELL REASONED FINDINGS OF THE CIT(A) IS THUS CALLED FOR. IT IS NOT EVEN IN DISPUTE THAT CG VAK SOFTWARE HAS MADE PROFITS IN THE SUBSEQUENT YEAR, AND THAT IS THE REASON THE DRP HAS HELD IT TO BE INCLUDIBLE IN THE LIST OF COMPARABLES. WE APPROVE THE STAND OF THE DRP ON THIS POINT, AND DECLINE TO I NTERFERE IN THE MATTER. WE, HOWEVER, MAKE IT CLEAR THAT OUR AFORESAID DECISION FOR THIS YEAR SHALL ACT TO THE PREJUDICE OF THE ASSESSEE TO RAISE OTHER GRIEVANCE S ON THE COMPARABLES, WHICH ARE, ACCORDING TO THE ASSESSEE, WRONGLY INCLUDED IN THE FINAL LIST O F COMPARABLES, OR THE COMPARABLES, WHICH HAVE NOT BEEN INCLUDED IN THE FINAL LIST OF COMPARABLES BUT WHICH, ACCORDING TO THE ASSESSEE, SHOULD HAVE BEEN INCLUDED IN THE LIST OF COMPARABLES. THIS DECISION IS ONLY A PRECEDENT FOR WHAT IT HAS DECIDED, AND NOT ON WHAT, FOR WHATEVER REASONS, THE ASSESSEE HAS NOT PRESSED BEFORE US FOR THIS YEAR. ITA NOS 2009 AND 2130 /MUM/14 ASSESSMEN T YEAR: 2009 - 10 PAGE 5 OF 5 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE AND THE APPEAL FILED BY THE ASSESSING OFFICER IS DISMISSED. PRONOUNCED I N THE OPEN COURT TODAY ON THE 31 ST DAY OF MARCH, 2016. SD/ - SD/ - PAWAN SINGH PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) DATED: THE 31 ST DAY OF MARCH , 2016 . PBN/* COPIES TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI B ENCHES, MUMBAI