M/s KBACE Technologies Private Limited , Chennai V. The Deputy Commissioner of Income Tax Circle-4(1)(1), Bangalore

ITA 233/BANG/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 5638 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 29-01-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.233/BANG/2018 ASSESSMENT YEAR : 2013-14 KBACE TECHNOLOGIES PVT. LTD., 6 TH FLOOR, NEW NO.165, OLD NO.110, MENON ETERNITY BUILDING, ST. MARYS ROAD, ALWARPET, CHENNAI-600 018. PAN AACCK 3468 K VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-4(1)(1), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI NAGESWAR RAO, ADVOCATE RESPONDENT BY : SHRI PRADEEP KUMAR, CIT (DR) DATE OF HEARING : 31.07.2019 DATE OF PRONOUNCEMENT : 20.09.2019 O R D E R PERB.R BASKARAN,ACCOUNTANT MEMBER THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ASSESSMENT ORDER DATED 11.10.2017 PASSED BY THE ASSESSING OFFI CER U/S 143(3) R.W.S. 144C OF THE ACT FOR ASSESSMENT YEAR 2013-14 PURSUANT TO THE DIRECTIONS GIVEN LD DISPUTE RESOLUTION PANEL (DRP). 2. THOUGH THE ASSESSEE HAS RAISED MANY GROUNDS, THE LD A.R RESTRICTED HIS ARGUMENTS TO THE SELECTION OF COMPAR ABLE COMPANIES RELATING TO THE ADDITION MADE ON ACCOUNT OF TRANSFE R PRICING ADJUSTMENT. ACCORDINGLY, WE HAVE RESTRICTED OURSEL VES TO THE IT(TP)A NO.233/BANG/2018 PAGE 2 OF 8 SELECTION OF COMPARABLE COMPANIES. ACCORDINGLY, AL L OTHER GROUNDS ARE NOT ADJUDICATED. 3. THE FACTS RELATING TO THE ABOVE SAID ISSUE ARE DISCUSSED IN BRIEF. THE ASSESSEE HEREIN IS A WHOLLY OWNED SUBSI DIARY OF KBACE TECHNOLOGIES INC., USA. IT IS ENGAGED IN THE BUSIN ESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES TO KBACE, USA. DURIN G THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS ENTERED FOLLO WING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISE (AE):- SERVICE INCOME - RS.1619.69 LAKHS DEFERRED RECEIVABLES - RS.1630.28 LAKHS THE ASSESSEE ADOPTED TNMM METHOD AS MOST APPROPRIAT E METHOD AND THE PROFIT LEVEL INDICATOR (PLI) WAS TAKEN AS O PERATING MARGIN/OPERATING COST. THE PLI OF THE ASSESSEE WAS WORKED OUT TO 14.16%. THE ARITHMETIC MEAN OF PLI OF COMPARABLE C OMPANIES SELECTED BY THE ASSESSEE WORKED OUT TO 12.16%. ACC ORDINGLY, THE ASSESSEE SUBMITTED THAT ITS INTERNATIONAL TRANSACTI ONS WITH AE WERE AT ARMS LENGTH. 4. THE TPO REJECTED THE TRANSFER PRICING STUDY OF THE ASSESSEE BY POINTING OUT VARIOUS TYPES OF DEFICIENCIES WITH REGARD TO THE COMPANIES SELECTED BY THE ASSESSEE. THE TPO SELECT ED HIS OWN SET OF COMPARABLE COMPANIES CONSISTING OF 7 COMPANIES A S DETAILED BELOW, WHOSE AVERAGE MARGIN (OP/OC) WORKED OUT TO 2 0.90%:- 1. C G-VAK SOFTWARE & EXPORTS LTD 20.54% 2. ICRA TECHNO ANALYTICS LTD 17.10% 3. LARSEN & TOUBRO INFOTECH LTD 26.06% 4. MINDTREE LTD (SEG.) 18.19% 5. PERSISTENT SYSTEMS LTD (SEG) 28.27% IT(TP)A NO.233/BANG/2018 PAGE 3 OF 8 6. R.S SOFTWARE (INDIA) LTD 17.41% 7. TECH MAHINDRA LTD (SEG) 18.72% ----------- AVERAGE 20.90% ======== THE TPO ALLOWED WORKING CAPITAL ADJUSTMENT OF 0.57% AND ACCORDINGLY ADJUSTED MARGIN WAS ARRIVED AT 21.47%. ACCORDINGLY, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT OF RS. 96.62 LAKHS. 5. THE LD DRP EXCLUDED ONE COMPARABLE COMPANY NA MED ICRA TECHNO ANALYTICS LTD AND CONFIRMED THE REMAINING SI X COMPARABLE COMPANIES SELECTED BY THE TPO. 6. THE LD A.R SUBMITTED THAT THE TURNOVER OF T HE ASSESSEE COMPANY IS RS.16.19 CRORES DURING THE YEAR UNDER CO NSIDERATION. ACCORDINGLY IT FALLS IN THE CATEGORY OF RS.1 TO 200 CRORES. HE FURTHER SUBMITTED THAT THE TURNOVER OF FOLLOWING COMPARABLE COMPANIES SELECTED BY TPO EXCEEDS RS.200 CRORES AND ACCORDING LY SUBMITTED THAT THESE COMPANIES ARE REQUIRED TO BE EXCLUDED ON TURNOVER FILTER. NAME OF COMPANY TURNOVER (A) LARSEN & TOUBRO INFOTECH LTD - 3613.42 CRORES (B) MIND TREE LIMITED - 1640.80 CRORES (C) PERSISTENT SYSTEMS LTD - 996.50 CRORES (D) R.S. SOFTWARE INDIA LTD - 293.22 CRORES (E) TECH MAHINDRA LTD - 6001.90 CRORES 7. THE LD D.R ALSO CONCURRED WITH THE VIEW OF L D A.R THAT THE ABOVE SAID FIVE COMPANIES ARE REQUIRED TO BE EXCLUD ED ON THE IT(TP)A NO.233/BANG/2018 PAGE 4 OF 8 CRITERIA OF TURNOVER FILTER. THE LD A.R SUBMITTED THAT AN IDENTICAL VIEW HAS BEEN TAKEN BY THE CO-ORDINATE BENCH IN THE CASE OF MOBILITY INFOTECH INDIA P LTD (IT(TP)A NO.2055/BANG /2016). ACCORDINGLY, WE DIRECT THE AO/TPO TO EXCLUDE ABOVE CITED FIVE COMPANIES. 8. THE LD A.R SUBMITTED THAT THE FOLLOWING THRE E COMPANIES SELECTED BY THE ASSESSEE IN ITS T.P STUDY HAS BEEN WRONGLY REJECTED BY THE TPO:- (A) COGNITI TECHNOLOGIES LTD:- THE TPO HAD REJE CTED THIS COMPANY BY HOLDING THAT THIS COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE TESTING SERVICES AND HENCE FUNCTIONALLY DIFFERENT. IT IS THE SUBMISSION OF LD A.R THAT THIS COMPANY HAS BEEN ACC EPTED AS COMPARABLE COMPANY BY THE TPO HIMSELF IN AY 2014-15 . (B) LUCID SOFTWARE LIMITED :- THE TPO HAD REJECT ED THIS COMPANY ON THE REASONING THAT NO DATA IS AVAILABLE IN THE DATABASE. THE LD A.R SUBMITTED THAT THE DATA WAS FURNISHED BY THE ASSESSEE. (C) SANKHYA INFOTECH LTD :- THE TPO HAD REJECTED THIS COMPANY ON THE REASONING THAT IT FAILS IN FOREX FIL TER, ENGAGED IN SOFTWARE PRODUCT DEVELOPMENT AND POSSESSES SIGNIFIC ANT INTANGIBLE ASSETS. BEFORE US, THE LD A.R SUBMITTED THAT THE TPO HAD REJECTED THIS COMPANY ON THE REASONING THAT THIS COMPANY IS INVOLVED IN SOFTWARE PRODUCT DEVELOPMENT. HE FURTHER SUBMITTED THAT THIS COMPANY WAS NOT INVOLVED IN SOFTWARE PRODUCT DEVELO PMENT ACTIVITIES DURING THE YEAR UNDER CONSIDERATION AND IT HAS DERIVED ITS REVENUE FROM SOFTWARE SERVICES ONLY. IT(TP)A NO.233/BANG/2018 PAGE 5 OF 8 9. WE HEARD LD D.R AND PERUSED THE RECORD. WIT H REGARD TO COGNITI TECHNOLOGIES LTD AND LUCID SOFTWARE LTD, WE ARE OF THE VIEW THAT THEY SHOULD BE RESTORED TO THE FILE OF AO/TPO FOR EXAMINING THEM AFRESH IN THE LIGHT OF NEW FACTS BROUGHT BEFOR E US. ACCORDINGLY, WE RESTORE BOTH THE COMPANIES TO THE F ILE OF AO/TPO. 10. WITH REGARD TO SANKHYA INFOTECH LTD, THE CLA IM PUT FORTH BEFORE US BY THE ASSESSEE IS CONTRADICTORY TO THE F INDINGS GIVEN BY TPO. HENCE WE ARE OF THE VIEW THAT THIS COMPANY AL SO REQUIRES EXAMINATION AFRESH. ACCORDINGLY, WE RESTORE THIS C OMPANY ALSO TO THE FILE OF AO/TPO. 11. THE LD A.R PRAYED THAT THE FOLLOWING THREE CO MPANIES MAY ALSO BE TAKEN AS COMPARABLE COMPANIES. (A) CALIBER POINT BUSINESS SOLUTIONS LTD (SEG) (B) CAT TECHNOLOGIES LTD (C) EVOKE TECHNOLOGIES P LTD HE SUBMITTED THAT THE ASSESSEE HAD PRAYED FOR INCLU SION OF ABOVE SAID THREE COMPANIES BEFORE LD DRP. HOWEVER, LD DRP REJECTED THE PRAYER OF THE ASSESSEE ON THE REASONING THAT THE CL AIM TO INCLUDE THESE THREE COMPANIES WAS NOT MADE BEFORE TPO. THE LD A.R SUBMITTED THAT THE PURPOSE OF T.P STUDY WAS TO DETE RMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS AND THERE IS NO BAR UNDER THE ACT THAT THE ASSESSEE CANNOT MAKE SUCH CL AIMS BEFORE THE APPELLATE AUTHORITIES. 12. WE HEARD LD D.R ON THIS ISSUE. WE NOTICE T HAT THE SPECIAL BENCH OF TRIBUNAL HAS HELD IN THE CASE OF DCIT VS. QUARK SYSTEMS P LTD (42 DTR 414) THAT THE NON-COMPARABLE COMPANIES, EVEN IF IT IT(TP)A NO.233/BANG/2018 PAGE 6 OF 8 WAS SELECTED BY THE ASSESSEE IN TP STUDY, COULD BE EXCLUDED, SINCE THERE IS NO ESTOPPELS AGAINST LAW. THERE SHOULD NO T BE ANY DISPUTE THAT THE ULTIMATE PURPOSE OF THE TRANSFER PRICING A NALYSIS IS TO DETERMINE THE ARMS LENGTH PRICE OF INTERNATIONAL TR ANSACTIONS, WHICH IS SOUGHT TO BE PROVED BY COMPARING THE FINAN CIALS OF COMPARABLE COMPANIES. IN THE INSTANT CASE, THE ASS ESSEE HAS PRAYED FOR CONSIDERATION OF ABOVE SAID THREE COMPAN IES BEFORE LD DRP, I.E., DURING THE COURSE OF ASSESSMENT PROCEEDI NGS ITSELF. ACCORDINGLY, WE ARE OF THE VIEW THAT CONSIDERATION OF ABOVE SAID COMPANIES WOULD HELP TO DETERMINE THE ALP OF THE IN TERNATIONAL TRANSACTIONS. ACCORDINGLY, WE ADMIT THE CLAIM OF T HE ASSESSEE. HOWEVER, SINCE THE ABOVE SAID THREE COMPANIES REQUI RE EXAMINATION AT THE END OF AO/TPO, WE RESTORE THESE THREE COMPAN IES TO THE FILE OF AO/TPO FOR EXAMINING THEM. 13. NEEDLESS TO MENTION THAT THE ASSESSEE SHOULD BE PROVIDED WITH ADEQUATE OPPORTUNITY OF BEING HEARD. AFTER EX AMINING THE CONTENTIONS OF THE ASSESSEE, THE TAX AUTHORITIES MA Y TAKE APPROPRIATE DECISION IN ACCORDANCE WITH LAW. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH SEPTEMBER, 2019. SD/ - (BEENA PILLAI) JUDICIAL MEMBER SD/ - (B.R BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED, 20 TH SEPTEMBER, 2019. / VMS / IT(TP)A NO.233/BANG/2018 PAGE 7 OF 8 COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE. IT(TP)A NO.233/BANG/2018 PAGE 8 OF 8 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 .. DICTATION NOTE ENCLOSED . 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. 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 .