Velocity Tech-Sol India Pvt.Ltd, Pune V. Assistant Commissioner of Income-tax, Circle - 13, Pune

ITA 245/PUN/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 5755 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-02-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 15-11-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 29-01-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T VIJAYA BHASKAR REDDY
• Keywords: Transfer pricing; International transaction; Set aside
• Section: 92C; 143(3); 201; 143(2); 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, PUNE BEFORE SHRI ANIL CHATURVEDI , ACCOUNTANT MEMBER AND SHRI S.S. VISWANETHRA RAVI , J UDICIAL MEMBER . / ITA NO . 245 /PUN/201 8 / ASSESSMENT YEAR : 20 1 3 - 1 4 VELOCITY TECH - SOL INDIA PVT. LTD., S NO.8+13/1/12, CTS NO. 1409 AND 1410, DTC, 9 TH FLOOR, A WING, ERANDWANE, PUNE 411004 PAN : AA CCT7151J ....... / APPELLANT / V/S. THE ASST . COMMISSIONER OF INCOME TAX , CIRCLE 1 3 , PUNE / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SHRI T. VIJAYA BHASKAR REDDY / DATE OF HEARING : 2 7 - 0 1 - 20 20 / DATE OF PRONOUNCEMENT : 14 - 0 2 - 2020 / ORDER PER ANIL CHATURVEDI , A M : THIS APPEAL PREFERRED BY THE ASSESSEE EMANATES FROM THE ORDER OF THE LD. A CIT, CIRCLE - 13, PUNE , DATED 27 . 1 1 .201 7 , FOR THE ASSESSMENT YEAR 201 3 - 1 4 . 2 ITA NO.245/PUN/2018 VELOCITY TECH - SOL INDIA PVT. LTD. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER : - THE ASSESSEE IS A COMPANY WHICH IS FULLY OWNED SUBSIDIARY OF TTP TECHNOLOGY USA AND STATED TO BE ENGAGED IN PROVISION OF SOFTWARE DEVELOPMENT OR IT SERVICES. THE ASSESSEE FILED ITS RETURN OF INCOME FOR A.Y. 2013 - 14 ON 29.09.2013 DECLARING TOTAL INCOME OF RS.2,49,61,929/ - . THE CASE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY NOTICES U/S 143(2) AND 142( 1) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) WERE SERVED ON THE ASSESSEE. IN RESPONSE TO THE NOTICES, ASSESSEE FILED VARIOUS DETAILS. ON THE BASIS OF DETAILS FURNISHED BY ASSESSEE IT WAS NOTICED THAT ASSESSEE HAD UNDERTAKEN INTER NATIONAL TRANSACTION OF PROVISION OF IT SERVICES OF RS. 25.95 CRORES (ROUNDED OFF). THE AO ACCORDINGLY, MADE A REFERENCE TO TRANSFER PRICING OFFICER (TPO) U/S 92CA OF THE ACT ON 21.12.2015 FOR COMPUTATION OF ARMS LENGTH SERVICE (ALP). THEREAFTER, AN ORDE R WAS PASSED BY TPO U/S 92CA(3) OF THE ACT VIDE ORDER DATED 14.10.2016 WHEREIN HE SUGGESTED AN UPWARD ADJUSTMENT OF RS.2,07,88,956/ - TO THE INTERNATIONAL TRANSACTIONS PERTAINING TO SOFTWARE DEVELOPMENT SERVICES. ON RECEIPT OF TPOS ORDER, AO AFTER REJECTI NG THE SUBMISSIONS MADE BY ASSESSEE, MADE AN UPWARD ADJUSTMENT OF RS.2,07,88,956/ - AND DETERMINED THE TOTAL INCOME IN THE DRAFT ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C(1) OF THE ACT, DATED 27.12.2016 DETERMINING THE TOTAL INCOME AT RS.4,57,50,890/ - . AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE DRP VIDE DIRECTIONS U/S 144C(5) OF THE ACT, DATED 19.09.2017 GAVE CERTAIN DIRECTIONS TO THE TPO. CONSEQUENT TO DIRECTIONS OF DRP, TPO REDU CED THE AMOUNT OF TP ADJUSTMENT TO RS.96,07,527/ - AND 3 ITA NO.245/PUN/2018 VELOCITY TECH - SOL INDIA PVT. LTD. ACCORDINGLY TOTAL INCOME WAS DETERMINED AT RS.3,45,69,456/ - . AGGRIEVED BY THE ORDER OF TPO, ASSESSEE IS NOW BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS: - THE FOLLOWING GROUNDS ARE TAKEN WITHOUT PRE JUDICE TO EACH OTHER ON FACTS AND IN LAW, 1] THE LEARNED A.O. / DRP ERRED IN RECOMPUTING THE TRANSFER PRICE OF THE INTERNATIONAL TRANSACTIONS RELATING TO SOFTWARE DEVELOPMENT SERVICES, DESPITE THE FACT THAT NONE OF THE CONDITIONS AS PRESCRIBED IN SECTION 92C(3) OF THE INCOME TAX ACT, 1961 ('THE ACT') HAD BEEN VIOLATED BY THE APPELLANT. THUS, THE LEARNED ASSESSING OFFICER ('AO') ERRED IN MAKING AN ADDITION OF RS.96,07,527/ - U/S 92C ON THE BASIS OF THE ORDER OF THE TPO U/S 92CA(3) DATED 14.10.2016 IN THE CASE OF THE APPELLANT COMPANY. 2] THE LEARNED A.O. / DRP ERRED IN COMPUTING THE ARM'S LENGTH PRICE (ALP) OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE ASSESSEE COMPANY TO ITS AE BY HOLDING THAT THE ASSESSEE SHOULD HAVE EARNED OPERATING MARGIN OF AROUND 16.77% AS AGAINST 12.60% EARNED BY THE ASSESSEE COMPANY. 3] THE LEARNED A.O. / DRP ERRED IN NOT APPRECIATING THAT THE TRANSACTIONS OF SOFTWARE DEVELOPMENT SERVICES ENTERED INTO BY THE ASSESSEE COMPANY WITH ITS AE WERE AT ARM'S LENGTH PRICE (ALP) AND THUS, THERE WAS NO REASON TO MAKE ANY ADDITION IN RESPECT OF THE SAID SEGMENT. 4] THE LEARNED A.O. / DRP ERRED IN CONFIRMING THIRDWARE SOLUTIONS LTD. HARB INGER SOFTWARE PVT. LTD. AND INFOBEANS SYSTEMS INDIA LTD AS COMPARABLE ENTITIES F OR DETERMINING THE ALP IN RESPECT OF THE INTERNATIONAL TRANSACTION OF PROVISION OF SO FTWARE DEVELOPMENT SERVICES. 5] THE LEARNED A.O. / DRP ERRED IN HOLDING THAT AKSHAY SOFTWARE TECHNOLOGIES LTD., ONWARD TECHNOLOGIES LTD. AND PRISM INFORMATICS LTD. WERE RIGHTLY EXCLUDED AS COMPARABLES WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT SERVICES. 6] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE ASSESSEE SUBMITS THAT THE LEARNED A.O. / DRP ERRED IN NOT MAKING ADJUSTMENTS TO THE ALP TO ACCOUNT FOR VARIOUS DIFFERENCES ON ACCOUNT OF INTANGIBLES, R & D, RISK FACTORS, ETC. BETWEEN THE ASSESSEE COMPANY AND THE CO M PARABLES. 3. BEFORE US AT THE OUTSET, LD. AR SUBMITTED THAT HE DOES NOT WISH TO PRESS GROUND NO.5. HE SUBMITTED THAT OTHER GROUNDS ARE IN TER - LINKED AND THEREFORE, BE CONSIDERED TOGETHER. 4 ITA NO.245/PUN/2018 VELOCITY TECH - SOL INDIA PVT. LTD. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTED THAT ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTION OF PROVISION OF IT SERVICES TO TTP, USA OF RS.25,95,99,780/ - . THE ASSESSEE HAD ADOPTED COST PLUS METHOD FOR BENCHMARKING TRANSACTIONS. THE ASSESSEE INITIALLY SELECTED THE FOLLOWING FOUR COMPANIES AS COMPARABLES WITH ARITHMETIC MEAN OF OP/OC AT 8.07%: - S.NO. NAME OF THE COMPANY DATA SOURCE OP/OC 1 AKSHAY SOFTWARE TECHNOLOGIES LTD. P 4.45% 2 CG - VAK SOFTWARE & EXPORTS LTD. P 3.77% 3 E - ZEST SOLUTIONS LTD. P 14.46% 4 PRISM INFORMATICS LTD. P 9.59% ARITHMETIC MEAN 8.07% 5. THE FINAL SET OF COMPARABLE COMPANIES WHICH WERE SELECTED BY TPO AND CONFIRMED BY DRP ARE AS UNDER: - SR. NO. NAME OF COMPANY OP/TC % AFTER WORKING CAPITAL ADJ 1 CG - VAK SOFTWARE & EXPORTS LTD. 17.86% 2 E - ZEST SOLUTIONS LTD. 6.67% 3 R S SOFTWARE (INDIA) LTD. 18.52% 4 SASKEN COMMUNICATION TECHNOLOGIES LTD. 5.80% 5 THIRDWARE SOLUTIONS LTD. 36.76% 6 CIGNITI TECHNOLOGIES LTD. 7.03% 7 EXILANT TECHNOLOGIES PVT. LTD. 10.52% 8 HARBINGER SOFTWARE PVT. LTD. 20.20% 9 INFOBEANS SYSTEMS INDIA LTD. / INFOBEANS TECHNOLOGIES LTD. 33.56% 10 KALS INFORMATION SYSTEMS LTD. 10.80% ARITHMETIC MEAN 16.77% 6 . BEFORE US LD. AR SUBMITTED THAT ASSESSEE IS AGGRIEVED ONLY BY INCLUSION OF THIRDWARE SOLUTIONS LTD. AND INFOBEANS SYSTEMS INDIA LTD. AS COMPARABLES FOR DETERMINING THE ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS. WITH RESPECT TO THIRDWARE SOLUTIONS LTD., HE SUBMIT TED THAT THE SAID CONCERN IS NOT FUNCTIONALLY COMPARABLE AS IT HAS EARNED REVENUE OF 5 ITA NO.245/PUN/2018 VELOCITY TECH - SOL INDIA PVT. LTD. RS.142.25 CRORES FROM SALE OF SERVICES. FROM THE COPY OF PROFIT & LOSS ACCOUNT, WHICH IS PLACED AT PAGE 173 OF PAPER BOOK, HE POINTED TO THE PURCHASE OF STOCK - IN - TRADE AM OUNTING TO RS.24.82 CRORES MEANING THEREBY IT IS ALSO ENGAGED IN TRADING ACTIVITIES. HE SUBMITTED THAT T HE DETAILS OF THAT SEGMENT ARE NOT AVAILABLE. FURTHER, I N SUPPORT OF HIS CONTENTION THAT THIRDWARE SOLUTIONS LTD. IS ENGAGED IN VARIOUS OTHER ACTIVITIES, HE POINTED TO THE REVENUE RECOGNITION POLICY OF THE COMPANY WHICH IS PLACED AT PAGE 178 OF PAPER BOOK AND FROM THERE, HE POINTED THAT APART FROM THE SOFTWARE DEVELOPMENT AND IMPLEMENTATION, THE REVENUE RECOGNITION POLICY MENTIONS ABOUT THE RECOGNIZING OF REVENUE FROM SUBSCRIPTION CONTRACTS, SALE OF USER LICENCE FOR SOFTWARE APPLICATIONS ALSO, BUT THE DETAILS OF SEGMENT PROFITABILITY OF THOSE VARIOUS ACTIVITIES ARE NOT AVAILABLE. HE THEREAFTER SUBMITTED THAT DETAILS ARE NOT AVAILABLE FOR THE YEAR ENDED 31.03.2013 BUT HOWEVER AS A COMPARATIVE FIGURE IT IS AVAILABLE IN THE FINANCIALS AS ON 31.03.2014 WHICH IS PLACED AT PAGES 374 AND 375 OF PAPER BOOK. POINTING TO THOSE COMPARATIVE FIGURES AS AVAILABLE IN THE FINANCIALS FOR THE YEAR ENDED 31.03.2014, HE SUBMITTED THAT IT HAD EARNED REVENUE OF RS.14225.8 4 LACS , WHICH COMPRISES REVENUE FROM EXPORT OF SOFTWARE SERVICES OF RS. 13532.8 LACS, REVENUE FROM SOFTWARE SERVICE S FROM LOCAL UNIT OF RS.465.97 LACS, REVENUE FROM SUBSCRIPTION & TRAINING OF RS.112.89 LACS AND REVENUE FROM SALE OF LICENSE OF RS.114.18 LACS . HE SUBMITTED THAT THE PROFITABILITY OF ALL THE AFORESAID DIFFERENT STREAMS OF REVENUE ARE NOT AVAILABLE IN THE AUDITED BALANCE SHEET. HE ALSO SUBMITTED THAT SEGMENT REPORTING OF THOSE DIFFERENT STREAMS ARE ALSO NOT AVAILABLE IN THE BALANCE SHEET FOR THE YEAR ENDED 31.03.2014. IN SUPPORT OF HIS CONTENTION ABOUT THE SEGMENT REVENUE NOT BEING AVAILABLE, HE POINTED T O THE SEGMENT 6 ITA NO.245/PUN/2018 VELOCITY TECH - SOL INDIA PVT. LTD. REPORTING WHICH IS AT PAGE 159 OF PAPER BOOK, WHEREIN IT IS STATED THAT PRIMARY SEGMENT REPORTING IS BASED ON GEOGRAPHICAL AREA I.E. DOMESTIC AND INTERNATIONAL. HE SUBMITTED THAT THE REVENUES FROM VARIOUS STREAMS LIKE SALE OF LICENSE, REVENU E FROM SUBSCRIPTION AND TRAINING, SOFTWARE SERVICES FROM LOCAL UNITS COULD BE MEAGER AS COMPARED TO THE TOTAL REVENUE, BUT IN THE ABSENCE OF SEGMENT INFORMATION IT IS NOT POSSIBLE TO KNOW AS TO WHICH SEGMENT CONTRIBUTED TO THE HIGHER MARGIN. HE THEREFORE, SUBMITTED THAT IN THE ABSENCE OF SEGMENT REPORTING OF VARIOUS SEGMENTS , THIRDWARE SOLUTIONS LTD. CANNOT BE CONSIDERED TO BE GOOD COMPARABLE AND FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF PUNE ITAT IN THE CASE OF M/S. JOHN DEERE INDIA PVT. LTD. IN ITA NO.518/PUN/2015 AND 575/PUN/2015, FOR A.Y. 2010 - 11, ORDER DATED 25.04.2019. HE ALSO RELIED ON THE DECISION OF PUNE TRIBUNAL IN THE CASE OF M/S. PUBMATIC INDIA PRIVATE LIMITED IN ITA NO.655/PUN/2017, FOR A.Y. 2012 - 13, ORDER DATED 09.03.2018 . HE POINTE D TO THE RELEVANT OBSERVATIONS OF TRIBUNAL. HE SUBMITTED THAT IN THE CASE OF M/S. PUBMATIC INDIA PRIVATE LIMITED (SUPRA), IT HAS BEEN HELD THAT IN THE ABSENCE OF SEGMENTAL DETAILS, THE COMPANY CANNOT BE CONSIDERED TO BE A COMPARABLE. HE FURTHER SUBMITTED THAT IF THIRDWARE SOLUTIONS LTD. IS EXCLUDED, THEN THE INCLUSION OF INFOBEANS SYSTEMS INDIA LTD. BECOMES ACADEMIC AS THE ASSESSEE FALLS WITHIN +/ - 5% AND THAT THE ASSESSEE IS NOT CHALLENGING THE INCLUSION OF HARBINGER SOFTWARE PVT. LTD. AS RAISED IN GROUN D NO.5. 7. THE LD. DR ON THE OTHER HAND SUPPORTED THE ORDERS OF LOWER AUTHORITIES AND FURTHER SUBMITTED THAT IN CASE OF THIRDWARE SOLUTIONS LTD. THE REVENUE FROM SUBSCRIPTION, FROM SALE OF LICENSE FORMS LESS THAN 1% OF THE TOTAL REVENUE AND THEREFORE, NO SEGMENTAL INFORMATION IS REQUIRED. 7 ITA NO.245/PUN/2018 VELOCITY TECH - SOL INDIA PVT. LTD. WITH RESPECT TO ASSESSEES CO NTENTION OF PURCHASE OF TRADING ITEMS SHOWN IN PROFIT & LOSS ACCOUNT, HE SUBMITTED THAT SINCE THAT ITEM IS NOT CARRIED IN THE INVENTORY WOULD MEAN THAT THE ASSESSEE IS NOT TRADING IT BUT IS USING IT FOR ITS OWN PRODUCTION / CONSUMPTION . HE FURTHER SUBMITT ED THAT SAFE HARBO U R RULES SPECIFIES THAT THERE IS NO DIFFERENCE IN SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS AND BOTH ARE CLUBBED UNDER ONE HEAD. 8. THE LD. AR IN REJOINDER SUBMITTED THAT SAFE HARBO U R RULES HAVE BEEN INTRODUCED FROM 18.09.2013 AND ARE NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION AND A SIMILAR VIEW HAS BEEN TAKEN BY PUNE BENCH OF TRIBUNAL IN THE CASE OF M/S. PUBMATIC INDIA PRIVATE LIMITED (SUPRA). 9 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ASSESSE E IS AGGRIEVED BY INCLUSION OF THIRDWARE SOLUTIONS LTD. THE PERUSAL OF AUDITED BALANCE SHEET OF THIRDWARE SOLUTIONS LTD. REVEALS THAT IT HAS INCOME FROM DIFFERENT STREAMS BUT THE SEGMENTS PROFITABILITY OF THOSE DIFFERENT STREAMS ARE NOT AVAILABLE IN THE A UDITED ACCOUNTS. WE FURTHER FIND THAT ITS SEGMENT REPORTING IS BASED ON GEOGRAPHICAL AREAS NAMELY DOMESTIC AND INTERNATIONAL PRODUCTION AND NO SEGMENT INFORMATION ABOUT VARIOUS STREAMS ARE AVAILABLE. IN SUCH A SITUATION, WE FIND FORCE IN THE ARGUMENT OF LD. AR THAT THE SAID COMPANY CANNOT BE CONSIDERED TO BE FUNCTIONALLY COMPARABLE TO THE ASSESSEE. WE FIND THAT PUNE TRIBUNAL IN THE CASE OF M/S. PUBMATIC INDIA PRIVATE LIMITED (SUPRA) AND M/S. JOHN DEERE INDIA PVT. LTD. (SUPRA) HAS HELD THAT IN THE ABSENCE OF SEGMENT DETAILS OF THE COMPARABLES, THE CONCERN CANNOT BE EQUATED AS FUNCTIONALLY COMPARABLE. AS FAR AS LD. DRS RELIANCE ON SAFE HARBO U R RULES IS 8 ITA NO.245/PUN/2018 VELOCITY TECH - SOL INDIA PVT. LTD. CONCERNED , WE FIND THAT SAFE HARBOUR RULES HAVE BEEN INTRODUCED W.E.F. 18.09.2013 AND ARE THEREFORE, NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION. CONSIDERING THE TOTALITY OF THE AFORESAID FACTS, WE DIRECT THE AO TO EXCLUDE THIRDWARE SOLUTIONS LTD. AND RE - WORK THE ADDITION. BEFORE US THE ASSESSEE HAS ALSO CONTENDED THAT IF THIRDWARE SOLUTIONS LTD. IS EXC LUDED, THE INCLUSION OF INFOBEANS SYSTEMS INDIA LTD. BECOMES ACADEMIC AND ASSESSEE IS NOT CHALLENGING THE INCLUSION OF HARBINGER SOFTWARE PVT. LTD. IN VIEW OF THESE FACTS, WE SET ASIDE THE MATTER TO TPO TO DETERMINE THE ALP AFTER CONSIDERING THE EXCLUSION OF THIRDWARE SOLUTIONS LTD. THUS, THE GROUND NOS. 1 TO 5 RAISED BY THE ASSESSEE ARE PARTLY ALLOWED. 1 0 . IN THE COMBINED RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 1 4 T H DAY OF FEBR UARY , 20 20 . SD/ - SD/ - ( S.S. VISWANETHRA RAVI ) ( ANIL CHATURVEDI ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; / DATED : 1 4 T H F EBR UARY , 20 20 GCVSR / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE DRP - 3, MUMBAI . 4. THE CIT(TP/IT), PUNE. 5. , , , / DR, ITAT, C BENCH, PUNE. 6 . / GUARD FILE. / BY ORDER, // // TRUE COPY// / SR. PRIVATE SECRETARY , / ITAT, PUNE