Approva Systems Pvt. Ltd., Pune V. Deputy Commissioner of Income-tax, Pune

ITA 2444/PUN/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 2826 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 7 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-06-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 06-06-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 17-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER . / ITA NO.2444/PUN/2016 / ASSESSMENT YEAR : 2012-13 APPROVA SYSTEMS PRIVATE LIMITED (NOW MERGED WITH INFOR (INDIA) PRIVATE LIMITED), C-501, PUNE IT PARK, 34, AUNDH ROAD, PUNE 411 020 PAN : AADCA4150F VS. DCIT, CIRCLE-1(1), PUNE (APPELLANT) (RESPONDENT) / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A)-13, PUNE ON 28-07-2016 IN RELATION TO THE ASSESSMENT YEAR 2012-13. 2. SUCCINCTLY, THE FACTUAL MATRIX OF THE CASE IS THAT THE ASSESS EE IS A WHOLLY OWNED SUBSIDIARY OF APPROVA, US. IT PROVIDES SOFTWARE DEVELOPMENT SERVICES AND QUALITY ASSURANCE (TESTING) SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) ON EXCLUSIVE BAS IS AS A APPELLANT BY DR. SUNIL MOTI LALA, ADVOCATE RESPONDENT BY SHRI SANDIP KUMAR R. SALUNKE DATE OF HEARING 06-06-2019 DATE OF PRONOUNCEMENT 07-06-2019 ITA NO.2444/PUN/2016 APPROVA SYSTEMS PRIVATE LIMITED 2 CAPTIVE UNIT. THE ASSESSEE FILED ITS RETURN DECLARING TOTAL INC OME OF RS.2.26 CRORE. THE INCOME-TAX RETURN WAS ACCOMPANIED BY THE AUDIT REPORT IN FORM NO.3CEB DETAILING ITS INTERNATIONAL TRANSACTION OF PROVIDING SOFTWARE SERVICES. THE ASSESSEE RECEIVED REVENUE OF RS.14.45 CRORE FROM RENDERING SOFTWARE DEV ELOPMENT SERVICES. THE TRANSACTIONAL NET MARGINAL METHOD (TNMM) WAS APPLIED AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION WITH PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO TOTAL COST (OP/TC). SUCH PROFIT RATE OF THE ASSESSEE WAS 14.72%. CERTAIN COMPARABLES WERE CHOSEN WITH AVERAGE PLI OF 15.03%. THIS IS HOW, THE ASSESSEE SHOWE D THAT ITS INTERNATIONAL TRANSACTION WAS AT ALP. THE ASSESSING OFFICER (A O) TOOK UP THE BENCHMARKING ANALYSIS AT HIS OWN. HE REJECTED CERTAIN COMPANIES FROM THE ASSESSEES LIST OF COMPARABLES AND INTRO DUCED CERTAIN FRESH COMPANIES. IN THIS MANNER, HE SHORTLISTED 4 COMPANIES WITH THEIR AVERAGE OPERATING PROFIT MARGIN AT 22.18 %. BY APPLYING THIS PROFIT RATE AS ARMS LENGTH MARGIN TO THE ASSESSEES INTERNATIONAL TRANSACTION, THE AO MADE TRANSFER P RICING ADDITION AMOUNTING TO RS.1,26,92,794/-. IN THE FIRST APPEAL, THE LD. CIT(A) MADE CERTAIN ADJUSTMENTS TO THE AVERAGE PROFIT MAR GIN OF COMPARABLES. ON THE BASIS OF THE FINDINGS GIVEN BY THE LD. CIT(A), ITA NO.2444/PUN/2016 APPROVA SYSTEMS PRIVATE LIMITED 3 THE AO PASSED A CONSEQUENTIAL ORDER COMPUTING AVERAGE PR OFIT MARGIN OF COMPARABLES AT 19.48%. BY APPLYING SUCH A PRO FIT RATE AS ARMS LENGTH MARGIN, THE AO HAS COMPUTED TRANSFER PR ICING ADDITION OF RS.88,48,944/-. THE ASSESSEE IS AGGRIEVED B Y SUSTENANCE OF SUCH AN ADDITION. 3. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD. THE FIRST ISSUE TAKEN UP BY THE LD. AR IS AGAINST THE INCLUSION OF VAMA INDUSTRIES LTD. IN THE FINAL SET OF COMPARABLES. IN FACT, THE ASSESSEE CHOSE THIS COMPANY A S COMPARABLE. HOWEVER, DURING THE COURSE OF PROCEEDINGS BEFORE THE AO, IT WAS CONTENDED THAT THE SAME SHOULD BE EXCLUDED. TH IS CONTENTION DID NOT FIND FAVOUR WITH THE AO. THE LD. CIT(A) U PHELD THE INCLUSION OF THIS COMPANY IN THE FINAL SET OF COMPARABLES. THE LD. AR SUBMITTED THAT THIS COMPANY SHOULD BE EXCLUDED FROM TH E LIST OF COMPARABLES ON SEVERAL REASONS INCLUDING DIFFERENT FUNCTIONAL PROFILE. THE LD. DR RAISED A PRELIMINARY OBJECTION FOR NON-EXCLUSION OF THIS COMPANY PUTTING FORTH THAT IT WAS A COMPARABLE CHOSEN BY THE ASSESSEE ITSELF AND HENCE IT CANN OT BE ALLOWED TO RESILE FROM ITS OWN STAND. ITA NO.2444/PUN/2016 APPROVA SYSTEMS PRIVATE LIMITED 4 4. WE ARE DISINCLINED TO SUSTAIN THE PRELIMINARY OBJECTION TAKEN BY THE LD. DR THAT THE ASSESSEE SHOULD BE PROHIBITED FROM TAKING A STAND CONTRARY TO THE ONE WHICH WAS TAKEN AT THE STAG E OF THE T.P. STUDY OR DURING THE COURSE OF PROCEEDINGS BEFORE THE AO/TPO. IT GOES WITHOUT SAYING THAT THE OBJECT OF ASSESSMENT IS TO DETERMINE THE INCOME IN RESPECT OF WHICH THE ASSESSEE IS RIGH TLY CHARGEABLE TO TAX. AS THE INCOME NOT ORIGINALLY OFFERED FOR TAXATION, IF OTHERWISE CHARGEABLE, IS REQUIRED TO BE INCLUDED IN THE TOTAL INCOME, IN THE SAME BREATH, ANY INCOME WRONGLY INCLUDED IN THE TOTAL INCOME, WHICH IS OTHERWISE NOT CHARGEABLE, SHOULD B E EXCLUDED. THERE CAN BE NO ESTOPPEL AGAINST THE PROVISIONS OF THE ACT. EXTENDING THIS PROPOSITION FURTHER TO THE CONTEXT OF THE TRANSFER PRICING, IF AN ASSESSEE FAILS TO REPORT AN OTHERWISE COMPARABLE CASE, THEN THE TPO IS OBLIGED TO INCLUDE IT IN THE LIST OF COMPARABLES, AND IN THE SAME MANNER, IF THE ASSESSEE WRO NGLY REPORTED AN INCOMPARABLE CASE AS COMPARABLE IN ITS TP DOCUMENTATION AND THEN LATER ON CLAIMS THAT IT SHOULD BE EXCLUDED , THEN, THERE SHOULD BE NOTHING TO FORBID IT FROM CLAIMING SO, PROVIDED THE COMPANY SO ORIGINALLY REPORTED AS COMPARABLE IS, IN FACT, NOT COMPARABLE. SIMPLY BECAUSE A COMPANY WAS WRO NGLY CHOSEN BY THE ASSESSEE AS COMPARABLE, CANNOT TIE ITS HAND S IN ITA NO.2444/PUN/2016 APPROVA SYSTEMS PRIVATE LIMITED 5 CONTENDING BEFORE THE TRIBUNAL THAT SUCH A COMPANY WAS WRO NGLY CHOSEN AS COMPARABLE WHICH, IN FACT, IS NOT. THERE IS NO QUALITATIVE DIFFERENCE IN A SITUATION WHERE THE ASSESSEE CLAIMS THAT A W RONG COMPANY INADVERTENTLY INCLUDED FOR THE PURPOSE OF COMPARIS ON SHOULD BE EXCLUDED AND THE SITUATION IN WHICH THE REVENUE DOE S NOT ACCEPT A PARTICULAR COMPANY CHOSEN BY THE ASSESSEE AS COMPARABLE. THE UNDERLYING OBJECT OF THE ENTIRE EXERCISE IS TO DETERMINE THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION . SIMPLY BECAUSE A COMPANY WAS WRONGLY CONSIDERED BY THE ASSESSEE AS COMPARABLE CANNOT ACT AS A DETERRENT FROM C HALLENGING THE FACT THAT SUCH A COMPANY IS ACTUALLY NOT COMPARABLE. 5. THE HONBLE BOMBAY HIGH COURT IN SEVERAL DECISIONS INCLUDING CIT VS. TATA POWER SOLAR SYSTEMS LTD. (2017) 298 CTR 0197 (BOM) HAS HELD THAT A PARTY IS NOT BARRED IN LAW FROM WITHDRAWING FROM ITS LIST OF COMPARABLES, A COMPANY INCLUDED O N ACCOUNT OF MISTAKE. SIMILAR VIEW HAS BEEN TAKEN BY THE HON' BLE DELHI HIGH COURT IN XCHANGING TECHNOLOGY SERVICES INDIA PVT LTD [TS-446-HC-2016(DEL)-TP] AND THE HONBLE PUNJAB & HARYANA HIGH COURT IN CIT VS. MERCER CONSULTING (INDIA) P. LTD. (2017) 390 ITR 615 (P&H) . IN VIEW OF THE FOREGOING DISCUSSION, ITA NO.2444/PUN/2016 APPROVA SYSTEMS PRIVATE LIMITED 6 WE DO NOT FIND ANY SUBSTANCE IN THE PRELIMINARY OBJECTION TAKE N BY THE LD. DR. 6. NOW WE TURN TO EXAMINE THE ACTUAL COMPARABILITY OF VAMA INDUSTRIES LTD. BEFORE PROCEEDING TO ANALYZE THE COMPARAB ILITY OF THIS COMPANY, IT WOULD BE BEFITTING TO CONSIDER THE FUNCTIONAL PROFILE OF THE ASSESSEE. AT THE COST OF REPETITION, IT IS NOTE D THAT THE ASSESSEE IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SER VICES AND QUALITY ASSURANCE (TESTING) SERVICES AND THE LATER ARE A LSO ADMITTEDLY IN THE NATURE OF SOFTWARE DEVELOPMENT SERVICES. TH E NATURE OF SERVICES HAS NOT BEEN DISPUTED BY THE AO. WE H AVE GONE THROUGH THE ANNUAL REPORT OF VAMA INDUSTRIES LTD. FOR THE YEAR UNDER CONSIDERATION, A COPY OF WHICH HAS BEEN PLACED ON RECORD. PROFIT AND LOSS ACCOUNT OF THIS COMPANY HAS BEEN SET OUT AT PAGE 29 OF THE ANNUAL REPORT, WHICH INDICATES REVENUE FROM OPER ATIONS AT RS.14.01 CRORE. BIFURCATION OF SUCH REVENUES IS AVAILABLE IN NOTE NO. 20 AS SALE OF PRODUCTS (DOMESTIC - RS.9,55,70,528/ - & EXPORT - RS. NIL) AT RS.9,55,70,528/- AND OTHER OPERATING REVEN UES (DOMESTIC RS.1,17,40,234/- & EXPORT RS.3,28,66,17 4/-) AT RS.4,46,06,408/-. FURTHER BIFURCATION OF `OTHER OPERATING REVENUES FROM EXPORT IS GIVEN IN NOTE NO.33 WHICH SHOWS ITA NO.2444/PUN/2016 APPROVA SYSTEMS PRIVATE LIMITED 7 REVENUE FROM EXPORT OF ENGINEERING SERVICES AT RS.3.22 C RORE AND REVENUES FROM SOFTWARE DEVELOPMENT SERVICES AT RS.6.02 LAKH. THE SEGMENTAL INFORMATION OF THIS COMPANY HAS BEEN GIVEN AT PAG E 50, WHICH DECIPHERS REVENUES FROM `SOFTWARE DEVELOPMENT SE RVICES AT RS.3.28 CRORE, REVENUE FROM `HARDWARE SALES AND SE RVICES AT RS.10.21 CRORE AND REVENUE FROM `METALS AND MINERALS A T RS.51.19 LAKH LEADING TO TOTAL CONSOLIDATED REVENUE OF RS.14.01 CRORE . THUS, IT IS CLEAR THAT THE REVENUE FROM `SOFTWARE DEVELOPMENT SERVIC E SEGMENT, WHICH HAS BEEN CONSIDERED FOR THE PURPOSES OF COMPARISON WITH THE ASSESSEES ONLY INTERNATIONAL TRANSACTION OF RENDING SOFTWARE DEVELOPMENT SERVICES, STANDS AT RS.3.28 CRORE. ON PERUSAL OF NOTE NO.33 TO THE ANNUAL ACCOUNTS OF THIS CO MPANY AS REFERRED TO ABOVE CONTAINING BREAK-UP OF REVENUE FRO M `SOFTWARE DEVELOPMENT SERVICES SEGMENT, IT EMERGES THAT REVENUE FROM SOFTWARE DEVELOPMENT SERVICES IS ONLY A SUM OF RS.6. 02 LAKH AND THE ENTIRE REMAINING REVENUE OF RS.3.22 CRORE IS FRO M ENGINEERING SERVICES. THERE CAN BE NO DISPUTE ON THE PRO POSITION THAT ENGINEERING SERVICES ARE QUITE DISTINCT FROM SOFTWARE DEVELOPMENT SERVICES IN TERMS OF SKILL, EFFORT AND EXPERTIS E ETC. AN EFFECTIVE COMPARISON OF THE ASSESSEES LONE SOFTWARE DEV ELOPMENT SERVICES CAN BE MADE ONLY WITH A COMPANY WHICH IS ALSO EITHE R ITA NO.2444/PUN/2016 APPROVA SYSTEMS PRIVATE LIMITED 8 RENDERING SOFTWARE DEVELOPMENT SERVICES ALONE OR IF IT IS DOIN G SOME OTHER ACTIVITY ALSO, THEN NECESSARY INFORMATION FOR CO MPUTING OPERATING PROFIT RATE FROM THE SOFTWARE DEVELOPMENT SERVICES, CAN BE SEPARATELY IDENTIFIED. IF A COMPANY IS RENDERING SOFTW ARE DEVELOPMENT SERVICES AND ALSO ENGINEERING SERVICES AND FU RTHER THERE IS NO INFORMATION AVAILABLE FROM ITS ANNUAL REPORT TO FIND OUT THE OPERATING PROFIT FROM THE SOFTWARE DEVELOPMENT SERVICES, THEN SUCH A COMPANY CANNOT BE CONSIDERED AS COMPARABLE WITH TH E ASSESSEE RENDERING ONLY SOFTWARE DEVELOPMENT SERVICES. 7. THE HONBLE DELHI HIGH COURT IN CIT VS. VERIZON INDIA PVT. LTD. (2014) 360 ITR 342 (DELHI) CONSIDERED A CASE IN WHICH THE ASSESSEE WAS ENGAGED IN PROVIDING MARKETING SERVICES. T HE AO SELECTED CERTAIN COMPANIES AS COMPARABLE WHICH WERE RENDER ING ENGINEERING SERVICES. THE TRIBUNALS VIEW IN UPHOLDING THE EXCLUSION OF SUCH COMPANIES RENDERING ENGINEERING SERVICE S WAS UPHELD BY OBSERVING THAT THE MARKETING SERVICES CANNOT BE COMPARED WITH ENGINEERING SERVICES. SIMILAR RATIO APPLIES TO THE FACTS OF THE INSTANT CASE AS WELL. WHEREAS THE ASSESSEE IN QUESTION IS ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES, IT CA NNOT BE COMPARED WITH A COMPANY RENDERING SOFTWARE AND TECHNIC AL ITA NO.2444/PUN/2016 APPROVA SYSTEMS PRIVATE LIMITED 9 SERVICES, MORE SO, WHEN THE PERCENTAGE OF SOFTWARE DEV ELOPMENT SERVICES IS MINUSCULE, AT JUST 1.86%. 8. IT IS FURTHER PERTINENT TO NOTE THAT THE DIRECTORS REP ORT OF THIS COMPANY CONTAINS `SEGMENT-WISE PERFORMANCE AT PAGE 11, WHICH STATES THAT : AS OF MARCH 31, 2012 OUR MAIN REPORTABLE S EGMENTS ARE SOFTWARE DEVELOPMENT & SERVICES (IT & ITES) AND PRODUCT/HARDWARE SALES & SERVICES. IT IS, THUS OVERT THAT TH E SOFTWARE DEVELOPMENT & SERVICES SEGMENT OF VAMA INDUSTR IES LTD., WHICH HAS BEEN CONSIDERED AS COMPARABLE NOT ONLY INC LUDES REVENUES FROM SOFTWARE DEVELOPMENT SERVICES BUT ALSO FROM I.T. ENABLED SERVICES AS WELL. IT GOES WITHOUT SAYING THAT I.T. SE RVICES AND I.T. ENABLED SERVICES ARE AS DISTINCT IN CONNOTATION AND NATURE AS NORTH POLE IS FROM THE SOUTH POLE. WHEREAS IT SERVICES INCLUDE SOFTWARE DEVELOPMENT SERVICES, IT ENABLED SERVICES MEANS SERVICES RENDERED WITH THE ALREADY DEVELOPED SOFTWARE. AS IT AND ITES SERVICES ARE NOT COMPARABLE, THE ASSESSEE RENDERING ON LY IT SERVICES CANNOT BE COMPARED WITH A COMPANY WHICH RENDERS BOTH IT AND ITES. IN VIEW OF THE FOREGOING DISCUSSION, WE A RE SATISFIED THAT VAMA INDUSTRIES LTD. IS NOT A FUNCTIONALLY COMPARABLE ITA NO.2444/PUN/2016 APPROVA SYSTEMS PRIVATE LIMITED 10 COMPANY AND THE SAME SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. 9. THE LD. AR SUBMITTED THAT IF VAMA INDUSTRIES LTD. IS EXCLUDED THEN ITS PROFIT MARGIN WOULD FALL WITHIN +/-5% RANGE AN D THERE WOULD BE NO NEED TO EXAMINE OTHER COMPARABLES CHALLEN GED IN THE INSTANT APPEAL. IN VIEW OF OUR DECISION ON EXCLUSION OF VAMA INDUSTRIES LTD., WE DO NOT DEEM IT APPROPRIATE TO DELVE INTO OTHER COMPANIES FROM THE ANGLE OF COMPARABILITY. 10. IN THE FINAL ANALYSIS, WE SET-ASIDE THE IMPUGNED ORDE R AND RESTORE THE MATTER TO THE FILE OF THE AO FOR RECOMPUTING THE A LP OF THE INTERNATIONAL TRANSACTION OF THE ASSESSEE OF RENDERING SO FTWARE DEVELOPMENT SERVICES BY EXCLUDING VAMA INDUSTRIES LTD. FR OM THE FINAL SET OF COMPARABLES. 11. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSE S. ORDER PRONOUNCED IN THE OPEN COURT ON 07 TH JUNE, 2019. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VI CE PRESIDENT PUNE; DATED : 07 TH JUNE, 2019 ITA NO.2444/PUN/2016 APPROVA SYSTEMS PRIVATE LIMITED 11 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13, PUNE 4. 5. THE PR.CIT-1, PUNE , , C / DR C, ITAT, PUNE; 6. / GUARD FILE. / TRUE COPY // / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRE TARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 06-06-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 06-06-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *