DCIT, New Delhi V. M/s Tech Books Electronics Services Pvt. Ltd., New Delhi

ITA 2375/DEL/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6921 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 26-09-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 10-05-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: C S AGARWAL; R P MALL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.2375/DEL/2011 ASSESSMENT YEAR : 2005-06 DCIT, CIRCLE 16(1), NEW DELHI. VS. TECH BOOKS ELECTRONICS SERVICES PVT. LTD., A-28, MOHAN COOPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI. PAN: AAACT6050A (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI C.S. AGARWAL, SR. ADVOCATE & SHRI R.P. MALL, ADVOCATE DEPARTMENT BY : SHRI NEERAJ KUMAR, SR. DR DATE OF HEARING : 26.09.2016 DATE OF PRONOUNCEMENT : 28.09.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE REVENUE EMANATES FROM THE ORDER DATED 25.2.2011 PASSED BY THE CIT(A) IN RELATION TO THE A SSESSMENT YEAR 2005- 06. ITA NO.2375/DEL/2011 2 2. THE ONLY ISSUE RAISED BY THE REVENUE THROUGH VAR IOUS GROUNDS IS AGAINST THE DELETION OF TRANSFER PRICING ADDITION O F RS.1,14,27,114/- BY DIRECTING TO INCLUDE M/S DATAMATICS LTD. WITH CALI BRATED OP/TC MARGIN OF 1.76% FROM THE LIST OF COMPARABLES. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A 100% SUBSIDIARY OF TECH BOOKS, US. IT IS ENGAGED IN PROV IDING IT ENABLED DATA CONVERSION SERVICES AND ALSO PROVIDING MARKETI NG, BUSINESS DEVELOPMENT/PRODUCT SELLING SERVICES ETC. TO ITS A SSOCIATED ENTERPRISES (AES). THE ASSESSEE REPORTED AN INTERNATIONAL TRAN SACTION WITH RECEIPT OF A SUM OF RS.19,96,58,147/- ON ACCOUNT OF `SOFTWARE DEVELOPMENT AND CUSTOMIZED ELECTRONIC DATA. THE ASSESSEE APPLIED T RANSACTIONAL NET MARGIN METHOD (TNMM) IN ITS TRANSFER PRICING STUDY AS THE MOST APPROPRIATE METHOD FOR DEMONSTRATING THAT THE INTER NATIONAL TRANSACTION OF RENDERING THE SERVICES WAS AT ARMS LENGTH PRICE (ALP). FOR DOING SO, THE ASSESSEE SHORTLISTED 22 COMPANIES AS COMPARABLE AND USED MULTIPLE YEAR DATA. THE AO REFERRED THE MATTER OF DETERMINA TION OF ALP OF THE INTERNATIONAL TRANSACTION TO THE TRANSFER PRICING O FFICER (TPO). DURING ITA NO.2375/DEL/2011 3 THE COURSE OF PROCEEDINGS BEFORE THE TPO, THE ASSES SEE SUBMITTED A FRESH LIST OF 29 (SIC 27) COMPARABLE COMPANIES WITH AN AV ERAGE OPERATING PROFIT/TOTAL COSTS (OP/TC) AT 18.79%. THE TPO ACCE PTED THE OTHER COMPARABLES CITED BY THE ASSESSEE EXCEPT FOR TWO CO MPANIES, NAMELY, M/S TATA SERVICES LTD. AND M/S DATAMATICS LTD. THE MEAN MARGIN OF THE REMAINING COMPARABLE COMPANIES WAS DETERMINED A T 20.51%. BY APPLYING THIS PROFIT MARGIN AS A BENCHMARK, THE TPO DETERMINED THE AMOUNT OF TRANSFER PRICING ADJUSTMENT AT RS.1,14,27 ,144/-. THIS AMOUNT WAS ADDED BY THE AO IN THE FINAL ASSESSMENT ORDER. IN THE FIRST APPEAL, THE LD. CIT(A) DELETED THE ADDITION BY AGREEING WIT H THE ASSESSEES CONTENTION FOR THE INCLUSION OF DATAMATICS LTD. WIT H PROFIT MARGIN OF 1.76%, WHICH, IF INCLUDED IN THE PROFIT MARGIN OF O THER COMPARABLE COMPANIES, WOULD BRING THE OVERALL ARITHMETIC MEAN OP/TC WITHIN THE PERMISSIBLE LIMIT OF THE ASSESSEES PROFIT MARGIN. THE REVENUE IS AGGRIEVED AGAINST THE INCLUSION OF DATAMATICS LTD. IN THE LIST OF COMPARABLES. ITA NO.2375/DEL/2011 4 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE TPO EX CLUDED TATA SERVICES LTD. AND M/S DATAMATICS LTD. FROM THE LIST OF COMPA RABLES GIVEN BY THE ASSESSEE. THE LD. CIT(A) DIRECTED THE INCLUSION OF DATAMATICS LTD. BY HOLDING THAT THE REJECTION OF DATAMATICS LIMITED BY THE TPO ON THE GROUND THAT IT FOLLOWED AN IRREGULAR ANNUAL PATTERN , WAS NOT TENABLE PARTICULARLY WHEN THE FINANCIAL RESULTS COULD HAVE BEEN CALIBRATED SO AS TO COINCIDE WITH THE FINANCIAL YEAR OF THE APPELLAN T. HE FOUND THAT THE ASSESSEE HAD SUITABLY ADJUSTED FINANCIAL RESULTS OF DATAMATICS LIMITED BY WHICH THE OPERATING RESULTS FOR THE FINANCIAL YEAR 2004-05 WERE DETERMINED FOR A PERIOD OF 12 MONTHS. THIS WAS HELD TO HAVE BEEN DONE SO AS TO COINCIDE WITH THE FINANCIAL YEAR OF DATAMA TICS LTD. WITH THAT OF THE APPELLANT. HE ALSO NOTICED THAT THE ASSESSEE CO MPUTED OP/TC OF 1.76% OF THIS COMPANY, WHICH WAS FAIR AND REASONABL E AND IN HARMONY WITH THE ESTABLISHED NORMS AND PRINCIPLES. HE STILL FURTHER HELD THAT THE CONTENTION OF THE TPO THAT THE DATA OF DATAMATICS L IMITED WAS NOT CONTEMPORANEOUS BECAUSE OF IRREGULAR ANNUAL PATTERN , WAS NOT CORRECT. ITA NO.2375/DEL/2011 5 CONTEMPORANEOUS DATA AS REFERRED TO IN RULE 10D(4), IN HIS OPINION, DID NOT NECESSARILY MEAN DATA PERTAINING EXACTLY TO THE SAME FINANCIAL YEAR AND COVERING THE SAME PERIOD AS THE INTERNATIONAL T RANSACTION UNDER CONSIDERATION. HE HELD THAT `CONTEMPORANEOUS SIMPL Y MEANT RELATING TO THE SAME PERIOD OF TIME AND DID NOT NECESSARILY MEA N DURING THE SAME TAX YEAR/MONTH. THE LD. DR, INTER ALIA, RAISED OBJECTION TO THIS FINDING RETURNED BY THE LD. CIT(A) THAT THE CONTEMPORANEOUS DATA CAN BE A PERIOD OF 12 MONTHS EVEN OTHER THAN THE FINANCIAL Y EAR, WHEN THE ASSESSEE IS FOLLOWING THE FINANCIAL YEAR. WITHOUT D ISPUTING THE FUNCTIONAL SIMILARITY OF DATAMATICS LTD. WITH THE ASSESSEE, HE MAINLY HARPED ON THE ARGUMENT THAT WHEN DATA FOR THE SAME PERIOD OF AN OTHERWISE COMPARABLE COMPANY IS NOT AVAILABLE OR THE SAME CAN NOT BE DEDUCED FROM THE AUDITED FINANCIAL ACCOUNTS WITHOUT CARRYIN G OUT ANY ADJUSTMENT TO SUCH ANNUAL ACCOUNTS, THEN SUCH A COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. 5. ADMITTEDLY, DATAMATICS LTD. DREW ITS ACCOUNT ON THE BASIS OF CALENDAR YEAR, WHEREAS THE ASSESSEE MADE ITS ACCOUN T ON THE BASIS OF ITA NO.2375/DEL/2011 6 FINANCIAL YEAR. A VALID COMPARISON, IN OUR CONSIDE RED OPINION, CAN BE MADE ONLY IF THE COMPARABLE COMPANY HAS ALSO THE SA ME FINANCIAL YEAR. IN THIS REGARD, WE CONSIDER IT APPROPRIATE TO NOTE THE RELEVANT PART OF SUB- RULE (4) OF RULE 10B WHICH PROVIDES THAT: THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRAN SACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAD BEEN ENT ERED INTO . IT IS OBVIOUS FROM THE LANGUAGE OF SUB-RULE (4) THAT THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION CAN BE ANALYZED ONLY WITH THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. IN OTHER WORDS, IF THE TESTED PARTY HAS MARCH AS YEAR ENDING, THEN, THE COMPARABLES MUST ALSO HAVE THE DA TA RELATING TO THE FINANCIAL YEAR ENDING 31 ST MARCH ITSELF. THE REASONING GIVEN BY THE LD. CIT(A) IN PARA (V) OF THE IMPUGNED ORDER THAT THE C ONTEMPORANEOUS DATA DID NOT NECESSARILY MEAN DATA PERTAINING EXACTLY TO THE SAME TAX YEAR/MONTH, IN OUR OPINION, IS AN INCORRECT INTERPR ETATION OF RULE 10D(4). WE FEEL THAT FOR MAKING A VALID COMPARISON , IT IS SINE QUA NON ITA NO.2375/DEL/2011 7 THAT THE DATA OF THE COMPARABLES MUST BE FOR THE SA ME PERIOD AS THAT OF THE ASSESSEE COMPANY. IN OTHER WORDS, FOR THE ASSES SEE HAVING ACCOUNTS ON FINANCIAL YEAR BASIS, THE COMPARABLES ALSO MUST HAVE THE DATA FOR THAT FINANCIAL YEAR ALONE. IF SUCH A DATA IS NOT READIL Y AVAILABLE, THEN, THE COMPANY ALBEIT FUNCTIONALLY COMPARABLE, DISQUALIFIES FOR INCLUSIO N IN THE LIST OF COMPARABLES. SIMILAR VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF MERCER CONSULTING (I) PVT. LTD. VS. DCIT VIDE ITS ORDER DATED 6 TH JUNE, 2014 (ITA NO.966/DEL/2014). WE, ERGO, VACATE THE VIEW POINT OF THE LD. CIT(A) ON THIS SCO RE. 6. THE LD. AR CONTENDED THAT THOUGH THE YEAR ENDING OF DATAMATICS LTD. IS DIFFERENT, YET, THE ASSESSEE COLLATED ITS DATA FOR THE FINANCIAL YEAR 1.4.2004 TO 31.3.2005, GIVING OP/TC AT 1.76% FROM T HEIR ANNUAL ACCOUNTS ONLY, WHICH WAS PLACED BEFORE THE LD. CIT (A). IT WAS CLAIMED THAT THIS FIGURE WAS DETERMINED BY ADOPTING THE FIG URES OF QUARTERLY DATA FROM THE ANNUAL REPORTS OF THIS COMPANY, WHICH WERE ADJUSTED FOR THE FINANCIAL YEAR ENDING 31.3.2005. ITA NO.2375/DEL/2011 8 7. WE WANT TO DEAL WITH THE APPREHENSION EXPRESSED BY THE LD. DR ABOUT THE DIFFICULTY IN WORKING THE RELEVANT FIGURE S FOR THE YEAR ENDING 31ST MARCH, 2005 ON THE BASIS OF DATA GIVEN BY THIS COMPANY. AT THE COST OF REPETITION, WE REITERATE THAT ONLY WHEN COR RECT FIGURES OF AN OTHERWISE FUNCTIONALLY COMPARABLE COMPANY ARE POSSI BLE TO DEDUCE FOR THE YEAR ENDING MATCHING WITH THE ASSESSEE, WITHOUT CARRYING OUT ANY ADJUSTMENTS TO SUCH ACCOUNTS BY ANY INTERPOLATION O R EXTRAPOLATION, THAT IT WOULD MERIT INCLUSION IN THE LIST OF COMPARABLES . IN THE OTHERWISE SCENARIO, SUCH A COMPANY WOULD AUTOMATICALLY GO OUT OF THE RECKONING. 8. THERE IS NO DISPUTE THAT THE CALCULATION OF O P/TC OF DATAMATICS LTD. FOR THE CURRENT YEAR WAS ENTERTAINED BY THE LD. CIT (A) FOR THE FIRST TIME, WHO DID NOT SEEK COMMENTS OF THE AO/TPO ON SUCH CAL CULATION. IT IS FURTHER MANIFEST THAT THIS CALCULATION WAS NEVER PU T UP BY THE ASSESSEE BEFORE THE TPO/AO. AS SUCH, WE CANNOT COUNTENANCE THE CORRECTNESS OF SUCH A CALCULATION. UNDER SUCH CIRCUMSTANCES, IT WO ULD BE JUST AND FAIR IF THE TPO/AO ARE GIVEN OPPORTUNITY TO ASCERTAIN THE C ORRECTNESS OF SUCH A FIGURE. WE ORDER ACCORDINGLY. THE IMPUGNED ORDER IS , THEREFORE, SET ITA NO.2375/DEL/2011 9 ASIDE AND THE MATTER IS REMITTED TO THE FILE OF THE AO/TPO FOR CHECKING THE VERACITY OF THE OP/TC OF DATAMATICS LTD. IT IS CLARIFIED THAT ONLY IF THE ASSESSEE SUCCEEDS IN PROVIDING THE RELEVANT DAT A OF THIS COMPANY FOR THE CONCERNED FINANCIAL YEAR ON THE BASIS OF THE IN FORMATION AVAILABLE FROM THEIR ANNUAL REPORTS WITHOUT MAKING ANY CALC ULATIONS AT ITS OWN, THAT THE TPO SHOULD INCLUDE THIS COMPANY IN THE LI ST OF COMPARABLES BY CONSIDERING ITS OP/TC ON THE BASIS OF THE FINANCIAL YEAR ENDING 31.3.2005. IF HOWEVER, EVEN THOUGH ITS QUARTERLY D ATA IS AVAILABLE AND CAN BE COMPILED FOR THE RELEVANT FINANCIAL YEAR, BU T THE AMOUNTS OF OPERATING PROFIT OR OPERATING COST ETC. FOR THE REL EVANT FINANCIAL YEAR ARE NOT DIRECTLY AVAILABLE WITHOUT ANY APPORTIONMENT OR TRUNCATION, THEN THIS COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. SI MILAR VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF THE TRIBUNAL IN MACQUARIE GLOBAL SERVICES PVT. LTD. VS. DCIT VIDE ITS ORDER DATED 22.01.2015 IN ITA NO. 6803/DEL/2013. 9. RELYING ON THE MANDATE OF RULE 27 OF THE ITAT RU LES, THE LD. AR CONTENDED THAT THE ASSESSEE CHALLENGED BEFORE THE L D. CIT(A) THE ITA NO.2375/DEL/2011 10 EXCLUSION OF TATA SERVICES LTD., ALONG WITH DATAMAT ICS LTD. APART FROM THAT, THE ASSESSEE ALSO RAISED CERTAIN OTHER GROUND S QUA THE TRANSFER PRICING ADJUSTMENT. SINCE THE ASSESSEES PROFIT MA RGIN CAME WITHIN THE ELIGIBLE RANGE WITH THE INCLUSION OF DATAMATICS LTD ., THE LD. CIT(A) STOPPED THERE AND DID NOT DEAL WITH OTHER ISSUES CH ALLENGED BEFORE HIM. THE LD. AR ARGUED THAT IF ON A FRESH EXAMINATION BY TPO/AO, IT EMERGES THAT DATAMATICS LTD. CANNOT BE INCLUDED IN THE LIS T OF COMPARABLES, THEN THE ENTIRE EXERCISE OF THE TRANSFER PRICING BE REST ORED TO THE FILE OF THE TPO/AO, WHO WILL BE OBLIGED TO DETERMINE THE ALP AF RESH WITHOUT HAVING ANY REGARD TO THE EXERCISE DONE EARLIER. THE LD. AR CONTENDED THAT IN SUCH FRESH PROCEEDINGS, THE ASSESSEE SHOULD BE MADE FREE TO ASK FOR THE INCLUSION OF NEW COMPANIES AND ALSO THE EXC LUSION OF THE EXISTING COMPANIES. THIS WAS OPPOSED BY THE LD. DR. 10. THE LD. AR HAS INVOKED RULE 27 OF THE ITAT RU LES, 1963 FOR THE ARGUMENT THAT IF DATAMATICS LTD. IS FOUND BY THE TP O TO BE NOT INCLUDIBLE IN THE LIST OF COMPARABLES OR IF DESPITE ITS INCLUSION, THE AVERAGE PROFIT OF ALL THE COMPARABLES WARRANTS THE TRANSFER PRICING ITA NO.2375/DEL/2011 11 ADJUSTMENT, THEN THE ENTIRE EXERCISE OF BENCHMARKIN G BE DONE AFRESH. THIS RULE WITH THE CAPTION `RESPONDENT MAY SUPPORT ORDER ON GROUNDS DECIDED AGAINST HIM PROVIDES THAT : ` THE RESPONDENT, THOUGH HE MAY NOT HAVE APPEALED, MAY SUPPORT THE ORDER APPEALED AGAINST ON ANY OF TH E GROUNDS DECIDED AGAINST HIM. WHEN WE CONSIDER THE LANGUAGE OF THE RULE, IT BECOMES VIVID THAT THERE IS NO WARRANT FOR THE SETTING ASIDE OF THE ENTIRE PROCEEDINGS FOR DOING A DE NOVO DETERMINATION. THE LANGUAGE OF THE RULE IS UNAMBIGUOUS IN PROVIDING THAT THE RESPO NDENT HAS THE RIGHT TO SUPPORT THE ORDER ON THE GROUNDS DECIDED AGAINST HI M. NO DECISION ON AN ISSUE CHALLENGED BEFORE THE CIT(A) ALSO AMOUNTS TO A DECISION AGAINST THE APPELLANT. IT IS BUT NATURAL THAT IF THE CIT(A) DELETES THE ADDITION ON ONE GROUND OUT OF SEVERAL GROUNDS CHALLENGED BEFORE HIM, THERE CAN BE NO REASON WITH THE ASSESSEE TO FILE AN APPEAL AGAIN ST THE ORDER OF THE CIT(A) ON THE ISSUES NOT DECIDED, WHEN THE ULTIMAT E ADDITION HAS BEEN DELETED. SUPPOSE THE DECISION OF THE CIT(A) ON THE GROUND DECIDED IN FAVOUR OF THE ASSESSEE IS REVERSED IN SUBSEQUENT PR OCEEDINGS, THE ASSESSEE CANNOT BE RENDERED WITHOUT REMEDY. IN SUC H A SITUATION, THE ITA NO.2375/DEL/2011 12 ASSESSEE CAN ARGUE BEFORE THE TRIBUNAL THAT THE ISS UES CHALLENGED BEFORE THE CIT(A), WHICH REMAINED UNDECIDED, BE ADJUDICATE D UPON. THEN, THE TRIBUNAL WILL BE DUTY BOUND TO EITHER DECIDE SUCH I SSUES DIRECTLY OR REMIT THE MATTER TO THE LOWER AUTHORITIES FOR ADJUDICATIO N. IN NO CASE, THE ENTIRE ASSESSMENT CAN BE DIRECTED TO BE REDONE EVEN ON THE ISSUES WHICH ATTAINED FINALITY AND REMAINED UNDISPUTED BEFORE TH E CIT(A). 11. ADVERTING TO THE FACTS OF THE INSTANT CASE, W E FIND THAT THE ASSESSEE SIMPLY CHALLENGED A FEW ISSUES OF TRANSFER PRICING ADJUSTMENT BEFORE THE LD. CIT(A) AS IS APPARENT FROM FORM NO. 35. SOME O F SUCH ISSUES WERE NOT DECIDED BY THE AUTHORITY FOR THE REASON OF RELI EF ALLOWED ON THE INCLUSION OF DATAMATICS LTD. UNDER SUCH CIRCUMSTANC ES, WHEN WE ARE SENDING THE EXAMINATION OF DATAMATICS LTD. TO THE T PO/AO AND SUPPOSE IF DUE TO ONE REASON OR THE OTHER, THIS COMPANY IS EITHER NOT INCLUDED OR AFTER INCLUSION OF ITS OP/TC, THE RELIEF AS ALLOWED BY THE LD. CIT(A) IS WIPED OUT OR REDUCED, THEN THE SCOPE OF THE PROCEED INGS BE EXTENDED TO ENCOMPASS THE CONSIDERATION OF OTHER ISSUES WHICH W ERE CHALLENGED BY THE ASSESSEE BEFORE THE FIRST APPELLATE AUTHORITY, BUT REMAINED UNDISPOSED ITA NO.2375/DEL/2011 13 OFF . THE AMBIT OF FRESH PROCEEDINGS CANNOT BE EXTE NDED BEYOND THAT. WE, ERGO, REFUSE TO ACCEPT THE CONTENTION PUT FORTH ON BEHALF OF THE ASSESSEE FOR AN ALTOGETHER DE NOVO DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION. IT IS HEREBY DIRECTED IN THE ULTIMATE ANALYSIS THAT THE FRESH EXAMINATION IN THE CASE OF EVENTUALI TY AS DISCUSSED ABOVE, BE CONFINED ONLY TO THE ISSUES AGITATED BEFORE THE LD. CIT(A), WHICH WERE NOT DEALT WITH BY HIM. WITH THESE OBSERVATIONS , WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO FOR DOING THE NEEDFUL AS INDICATED ABOVE, AFTER ALLOWING A REASON ABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 12. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 28.09.20 16. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 28 TH SEPTEMBER, 2016. DK COPY FORWARDED TO: ITA NO.2375/DEL/2011 14 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.