M/s Yokogawa IA Technologies India Pvt Ltd , Bangalore V. Deputy Commissioner o Income TAx Circle-7(1)(2), Bangalore

ITA 2500/BANG/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6478 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 24-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; Rectification of order; International transaction
• Section: 143(3); 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.2500/BANG/2017 ASSESSMENT YEAR: 2010-11 M/S YOKOGAWA IA TECHNOLOGIES INDIA PVT. LTD., UMIYA BUSINESS BAY, TOWER-1, 6 TH FLOOR, OUTER RING ROAD, MARATHAHALLI, BENGALURU-560 037. PAN AAACY 2823 L VS. THE DY. COMMISSIONER OF INCOME-TAX CIRCLE-7(1)(2), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI PADAM CHAND KHINCHA, C.A RESPONDENT BY : SHRI PRADEEP KUMAR, CIT (DR) DATE OF HEARING : 01.08.2019 DATE OF PRONOUNCEMENT : .10.2019 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING TH E ASSESSMENT ORDER PASSED BY THE AO U/S 143(3) R.W.S. 144C(13) OF THE ACT FOR ASSESSMENT YEAR 2010-11 IN PURSUANCE OF DIRECTIONS GIVEN BY LD DISPUTE RESOLUTION PANEL (DRP). 2. THOUGH THE ASSESSEE HAS RAISED SEVERAL GROU NDS, AT THE TIME OF HEARING, THE LD A.R RESTRICTED HIS ARGUMENTS ON THE TRANSFER PRICING ADJUSTMENT OF RS.1,08,58,381/-. IT(TP)A NO.2500/BANG/2017 PAGE 2 OF 9 3. THE ASSESSEE IS A 100% EXPORT ORIENTED UNIT SET UP UNDER THE SOFTWARE TECHNOLOGY PARK OF INDIA SCHEME FRAMED BY GOVERNMENT OF INDIA. THE ASSESSEE IS PROVIDING SOFTWARE DEVEL OPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES (AE). THUS IT IS A C APTIVE SERVICE PROVIDER. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS:- A. INCOME FROM SOFTWARE DEVELOPMENT SERVICES - RS.13,93,05,662 B. SOFTWARE LICENSE FEE RECEIVED - RS. 22,13,911 C. PURCHASE OF FIXED ASSETS - R S. 7,07,266 D. REIMBURSEMENT OF EXPENSES - RS . 2,15,85,030 THE INTERNATIONAL TRANSACTIONS LISTED AS (B) TO (D) HAVE BEEN ACCEPTED TO BE AT ARMS LENGTH. THE T.P ADJUSTMENT WAS MADE IN RESPECT OF ITEM (A) ONLY. 4. THE ASSESSEE ADOPTED TNMM AS MOST APPROPRIA TE METHOD AND THE PROFIT LEVEL INDICATOR (PLI) WAS TAKEN AS OPERA TING PROFIT/OPERATING COST (OP/OC). THE ASSESSEE SELECT ED 14 COMPARABLE COMPANIES, WHOSE AVERAGE MARGIN WAS 6.63 %. ACCORDINGLY, THE ASSESSEE SUBMITTED THAT ITS INTERN ATIONAL TRANSACTIONS ARE AT ARMS LENGTH. 5. THE TPO, HOWEVER, SELECTED FOLLOWING ELEVEN COMPARABLE COMPANIES: - IT(TP)A NO.2500/BANG/2017 PAGE 3 OF 9 THE AVERAGE MARGIN OF THE ABOVE SAID ELEVEN COMPANI ES WAS 22.71%. EVEN THOUGH, THE TPO DID NOT GIVE CREDIT T OWARDS WORKING CAPITAL ADJUSTMENT IN THE ORIGINAL ORDER, YET HE GAVE CREDIT OF 1.98% IN THE RECTIFICATION ORDER PASSED U /S 154 OF THE ACT. ACCORDINGLY THE TPO PROPOSED TRANSFER PRICING ADJUS TMENT OF RS.1,08,58,381/-. 9. THE LD DRP CONFIRMED ALL THE COMPARABLE COMP ANIES SELECTED BY THE TPO. 10. THE LD A.R SUBMITTED THAT THE TURNOVER OF T HE ASSESSEE COMPANY FOR THE YEAR UNDER CONSIDERATION WAS RS.13. 97 CRORES ONLY. HENCE THE ASSESSEE COMPANY FALLS UNDER THE C ATEGORY OF 1 200 CRORES CATEGORY. THE CO-ORDINATE BENCH OF TRIB UNAL HAS HELD IN THE CASE OF AUTODESK INDIA (P) LTD VS. DCIT (2018)( 96 TAXMANN.COM 263)(BANG.) THAT HIGH TURNOVER WAS ALSO A RELEVANT CRITERIA FOR EXCLUDING COMPARABLE COMPANIES. THE TRIBUNAL REFERR ED TO THE DECISION RENDERED BY ANOTHER CO-ORDINATE BENCH IN T HE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT LTD VS. DCI T (ITA NO.1231/BANG/2010), WHEREIN THE GROUPING OF COMPANI ES FOLLOWING IT(TP)A NO.2500/BANG/2017 PAGE 4 OF 9 DUN AND BRADSTREETS ANALYSIS WAS HELD TO BE PROPER . THE CO- ORDINATE BENCH ALSO EXAMINED THE CONTRARY DECISIONS RENDERED BY OTHER BENCHES OF TRIBUNAL (INCLUDING THE DECISION R ENDERED BY MUMBAI BENCH OF TRIBUNAL IN THE CASE OF WILLIS PROC ESSING SERVICES (I) (P) LTD (2013)(57 SOT 339), WHICH WAS RELIED ON BY LD. DRP) AND HELD THEM TO BE PER-INCURIUM AS THEY IGNORED THE DE CISION RENDERED IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. FINALLY, THE TRIBUNAL HELD IN THE CASE OF AUTODESK INDIA (P) LTD (SUPRA) THAT THE APPLICATION OF TURNOVER FILTER AS PER THE RATIO LAID DOWN IN THE CASE OF GENESYS INTEGRATING SYSTEMS (INDIA) PVT. LT D (SUPRA) WAS JUSTIFIED. 11. THE LD A.R SUBMITTED THAT THE ASSESSEE FALL S UNDER THE CATEGORY OF A COMPANY HAVING TURNOVER BETWEEN 1 TO 200 CRORES. ACCORDINGLY, IT SHOULD BE COMPARED WITH THE COMPANI ES HAVING TURNOVER WITHIN THE ABOVE SAID RANGE. HE SUBMITTED THAT THE FOLLOWING COMPARABLE COMPANIES SELECTED BY THE TPO ARE REQUIRED TO BE EXCLUDED, AS THE TURNOVER OF THESE COMPANIES DO NOT FALL UNDER THE CATEGORY OF 1 TO 200 CRORES:- (A) INFOSYS LTD - 21,140 CRORES (B) LARSEN & TOUBRO INFOTECH LTD - 1,7 76.76 CRORES (C) MINDTREE LTD - 698.02 CRORES (D) PERSISTENT SYSTEMS LTD - 504.41 CRORES (E) SASKEN COMMUNICATION TECHNOLOGIES 401. 50 CRORES (F) TATA ELXSI (SEG) - 336.94 CRORES IT(TP)A NO.2500/BANG/2017 PAGE 5 OF 9 THE LD A.R FURTHER SUBMITTED THAT THE FOLLOWING COM PANIES ARE FUNCTIONALLY NOT COMPARABLE AND HENCE THEY SHOULD A LSO BE EXCLUDED:- (11) ICRA TECHNO ANALYTICS LTD (SEG) (12) KALS INFORMATION SYSTEMS LTD THE LD A.R FURTHER SUBMITTED THAT ALL THE ABOVE SAI D EIGHT COMPARABLE COMPANIES HAVE BEEN EXCLUDED IN THE CASE OF DCIT VS. M/S ELECTRONICS FOR IMAGING INDIA P LTD (IT(TP)A NO.212/BANG/2015 AY 2010-11). 12. ON THE CONTRARY, THE LD D.R SUPPORTED THE O RDER PASSED BY THE ASSESSING OFFICER. 13. WE HAVE NOTICED THAT THE TURNOVER OF THE A SSESSEE HEREIN FOR THE YEAR UNDER CONSIDERATION WAS RS.13.97 CRORES AN D HENCE IT FALLS UNDER THE CATEGORY OF 1 200 CRORES AS PER DUN AND BRADSTREETS ANALYSIS. HENCE THE ASSESSEE SHOULD BE COMPARED WI TH THE COMPANIES HAVING TURNOVER IN THE ABOVE SAID RANGE A S PER THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN THE C ASE OF GENESIS INTEGRATING SYSTEMS INDIA P LTD (SUPRA). SINCE THE TURNOVER OF FOLLOWING COMPANIES ARE MORE THAN 200 CRORES, THEY ARE LIABLE TO BE EXCLUDED UNDER TURNOVER FILTER:- (A) INFOSYS LTD - 21,140 CRORES (B) LARSEN & TOUBRO INFOTECH LTD - 1,776 .76 CRORES (C) MINDTREE LTD - 698.02 CRORES (D) PERSISTENT SYSTEMS LTD - 504.41 CRORES (E) SASKEN COMMUNICATION TECHNOLOGIES - 401. 50 CRORES (F) TATA ELXSI (SEG) - 336.94 CRORES IT(TP)A NO.2500/BANG/2017 PAGE 6 OF 9 ACCORDINGLY, WE DIRECT THE AO/TPO TO EXCLUDE ABOVE SAID COMPANIES. 14. IN THE CASE OF ELECTRONICS FOR IMAGING INDI A P LTD (SUPRA), THE FOLLOWING COMPANIES HAVE BEEN EXCLUDED FOR THE REAS ONS THAT THEY ARE NOT FUNCTIONALLY COMPARABLE. THE OBSERVATIONS MADE BY THE TRIBUNAL IN THE ABOVE SAID CASE ARE EXTRACTED BELOW :- (A) ICRA TECHNO ANALYTICS LTD (SEG.):- 14. AT THE OUTSET, WE NOTE THAT APART FROM HAVING THE RELATED PARTY REVENUE AT 20.94% OF THE TOTAL REVENU E, THE COMPANY WAS ALSO FOUND TO BE FUNCTIONALLY NOT COMPARABLE WITH SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE. THE DRP HAS GIVEN ITS FIN DING AT PAGES 13 TO 14 AS UNDER:- HAVING HEARD THE CONTENTION, ON PERUSAL OF THE ANN UAL REPORT, IT IS NOTICED BY US THAT THE SEGMENTAL INFORMATION IS AVAILABLE FOR TWO SEGMENTS, I.E., SE RVICES AND SALES. HOWEVER IT IS EVIDENT FROM THE ANNUAL R EPORT THAT THE SERVICE SEGMENT COMPRISES OF SOFTWARE DEVELOPMENT, SOFTWARE CONSULTANCY, ENGINEERING SERVICES, WEB DEVELOPMENT, WEB HOSTING ETC., FOR WH ICH NO SEGMENTAL INFORMATION IS AVAILABLE AND THEREFORE , THE OBJECTION OF THE ASSESSEE IS FOUND ACCEPTABLE. ACCORDINGLY, ASSESSING OFFICER IS DIRECTED TO EXCLU DE THE ABOVE COMPANY FROM THE COMPARABLES. 15. WE FIND THAT THE FACTS RECORDED BY THE DRP IN RESPECT OF BUSINESS ACTIVITY OF THIS COMPANY ARE NO T IN DISPUTE. THEREFORE, WHEN THIS COMPANY IS ENGAGED I N DIVERSIFIED ACTIVITIES OF SOFTWARE DEVELOPMENT AND CONSULTACY, ENGINEERING SERVICES, WEB DEVELOPMENT & HOSTING AND SUBSTANTIALLY DIVERSIFIED ITSELF INTO D OMAIN IT(TP)A NO.2500/BANG/2017 PAGE 7 OF 9 OF BUSINESS ANALYSIS AND BUSINESS PROCESS OUTSOURCI NG THEN THE SAME CANNOT BE REGARDED AS FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE WHO IS RENDERI NG SOFTWARE DEVELOPMENT SERVICES TO ITS AE. 16. IN VIEW OF THE ABOVE FACTS, WE DO NOT FIND AN Y ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THAT OF A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. (B) KALS INFORMATION SYSTEMS LTD (SEG.) 23. WE HAVE HEARD LD D.R AS WELL AS LD A.R AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD DR HAS NOT DISPUTED THE FACT THAT COMPARABILITY OF THI S COMPANY HAS BEEN EXAMINED BY THIS TRIBUNAL IN A SERIES OF DECISION INCLUDING IN THE CASE OF TRIOLOG Y E- BUSINESS SOFTWARE INDIA LTD (ITA NO.1054/BANG/2011 DATED 23.11.2012). WE FURTHER NOTE THAT IN THE BAL ANCE SHEET OF THIS COMPANY AS ON 31.3.2010, THERE ARE INVENTORIES OF RS.60,47,977. THEREFORE, WHEN THIS COMPANY IS IN THE BUSINESS OF SOFTWARE PRODUCTS, TH E SAME CANNOT BE COMPARED WITH A PURE SOFTWARE DEVELOPMENT SERVICES PROVIDER. ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED FINDIN GS OF THE DRP. ACCORDINGLY, FOLLOWING THE DECISION OF THE CO-ORDIN ATE BENCH RENDERED IN THE CASE OF ELECTRONICS FOR IMAGING IND IA P LTD (SUPRA), WE DIRECT THE AO/TPO TO EXCLUDE ABOVE SAID TWO COMP ANIES ALSO. IT(TP)A NO.2500/BANG/2017 PAGE 8 OF 9 15. THE LD A.R SUBMITTED THAT THE LD DRP HAD D IRECTED THE AO, VIDE PARAGRAPH 6.4 OF ITS ORDER, TO CONSIDER FOREIG N EXCHANGE FLUCTUATION IN RESPECT OF THE ASSESSEE AS WELL AS T HE COMPARABLES AS OPERATING IN NATURE WHILE DETERMINING THE ALP IN TH E CASE OF THE ASSESSEE. HE SUBMITTED THAT THE AO HAS NOT FOLLOWE D THE ABOVE SAID DIRECTIONS. ACCORDINGLY HE PRAYED THAT THE AO MAY BE DIRECTED TO FOLLOW THE DIRECTIONS GIVEN BY THE LD DRP ON THE AB OVE MATTER. WE FIND MERIT IN THE PRAYER OF THE ASSESSEE AND ACCORD INGLY DIRECT THE AO TO COMPUTE MARGINS BY TAKING FOREIGN EXCHANGE FL UCTUATIONS GAINS/LOSS AS PART OF OPERATING INCOME BOTH IN THE CASE OF THE ASSESSEE AND COMPARABLE COMPANIES. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH OCTOBER, 2019. SD/ - (BEENA PILLAI) JUDICIAL MEMBER SD/ - (B.R BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED, 25 TH OCTOBER, 2019. / VMS / 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.2500/BANG/2017 PAGE 9 OF 9 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 .