Synechron Technologies Pvt. Ltd., Pune V. ACIT, Circle-6, Pune

ITA 2518/PUN/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7181 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-02-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 16-11-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 20-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E , , !'#'' $ , % & BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 2518/PUN/2012 %' ( ')( / ASSESSMENT YEAR : 2008-09 SYNECHRON TECHNOLOGIES PRIVATE LIMITED, IT TOWERS, MIDC KNOWLEDGE PARK, KHARADI IT PARK, PUNE-411014 PAN : AAICS2894R ....... / APPELLANT ' /VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 6, PUNE / RESPONDENT ASSESSEE BY : SHRI M.P. LOHIA REVENUE BY : SHRI AVADESH KUMAR / DATE OF HEARING : 15-12-2016 / DATE OF PRONOUNCEMENT : 01-02-2017 * / ORDER PER VIKAS AWASTHY, JM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASSE SSMENT ORDER DATED 30-11-2012 PASSED U/S. 144C R.W.S. 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR ASSESSMENT YEAR 2008-09. 2 ITA NO. 2518/PN/2012, A.Y. 2008-09 2. THE APPEAL OF THE ASSESSEE WAS DECIDED BY THE TRIBUN AL VIDE ORDER DATED 21-10-2015. AT THE TIME OF HEARING OF APPE AL THE LD. AR OF THE ASSESSEE HAD STATED AT THE BAR THAT HE IS NOT PR ESSING GROUND NOS. 1, 2, 9 AND 10. THUS, ONLY GROUND NOS. 3 TO 8 AND 11 WE RE BEFORE THE TRIBUNAL FOR ADJUDICATION. THE MAIN GROUNDS OF APPEAL WERE GROUND NOS. 3 TO 6 WHICH WERE ADJUDICATED BY THE CO-ORDINATE B ENCH OF THE TRIBUNAL. IN GROUND NOS. 7 AND 8 THE ASSESSEE HAS RAISE D CONTENTIONS WHICH WERE APPARENTLY ALTERNATE SUBMISSIONS. SINCE, THE C ONTENTIONS RAISED BY THE ASSESSEE IN GROUND NOS. 3 TO 6 WERE PAR TLY ACCEPTED, THE GROUND NOS. 7 AND 8 WERE NOT ADJUDICATED BEING ALTERNAT E CONTENTIONS. THE ASSESSEE FILED MISCELLANEOUS APPLICATION I.E. MA NO. 13/PN/ 2016 TO RECALL THE ORDER OF TRIBUNAL DATED 21-10-2015 FOR ADJUDICA TING GROUND NOS. 7 AND 8 BEING MAIN GROUNDS WHICH ACCORDING TO THE LD . AR GO TO THE ROOT OF CASE AND NOT ALTERNATE GROUNDS FOR SEEKING RELIEF. THE SAID MISCELLANEOUS APPLICATION OF THE ASSESSEE WAS ALLOWED ON 30- 06-2016. THE TRIBUNAL RECALLED THE ORDER IN ITA NO. 2518/PN/2012 D ATED 21-10- 2015 FOR THE LIMITED PURPOSE OF ADJUDICATING GROUND NOS. 7 AND 8. 3. THE GROUND NOS. 7 AND 8 RAISED BY THE ASSESSEE IN T HE APPEAL ARE AS UNDER : GROUND NO. 7 NOT ACCEPTING THE ALTERNATIVE CONTE NTION THAT THE REVENUES OF THE US AE IS NOT ENOUGH TO ABSORB THE A RMS LENGTH MARGIN PROPOSED BY THE TPO. ERRED IN MAKING THE TRANSFER PRICING ADJUSTMENT WITH OUT CONSIDERING THE FACT THAT THE REVENUE OF US AE IS NOT ENOUGH TO ABS ORB THE ARMS LENGTH MARGIN PROPOSED BY THE TPO. GROUND NO. 8 NOT APPRECIATING THE COMPENSATION SH ARING BETWEEN THE APPELLANT AND ITS AES IS COMMENSURATE W ITH THE FUNCTIONS PERFORMED, RISKS ASSUMED AND ASSETS UTILI ZED BY THEM. 3 ITA NO. 2518/PN/2012, A.Y. 2008-09 ERRED IN NOT APPRECIATING THE COMPENSATION SHARING BETWEEN THE APPELLANT AND ITS AES IS COMMENSURATE WITH THE FUNC TIONS PERFORMED, RISKS ASSUMED AND ASSETS UTILIZED BY THEM RESPECTIV ELY. 4. SHRI M.P. LOHIA APPEARING ON BEHALF OF THE ASSESSEE SUBM ITTED THAT FOR BENCHMARKING INTERNATIONAL TRANSACTIONS THE ASS ESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPR OPRIATE METHOD. THERE IS NO DISPUTE REGARDING THE APPLICATION OF T NMM BY THE ASSESSEE. THE ASSESSEE SELECTED 27 COMPANIES AS COMPA RABLES IN THE TRANSFER PRICING (TP) STUDY. THE TRANSFER PRICING OFFICER (T PO) APPLIED CERTAIN MORE FILTERS FOR SELECTION OF THE COMPARABLES AND M ADE THE FINAL LIST OF COMPARABLES BY SELECTING 8 COMPANIES. THE SAME ARE AS UNDER : SR. NO. NAME OF THE COMPARABLE OP/OC (%) 1 BODHTREE CONSULTING LTD. 19.14 2 E - INFOCHIP LTD. 30.32 3 EZEST SOLUTIONS LTD. 28.58 4 F C S SOFTWARE SOLUTION LTD. 57.02 5 GOLDSTONE TECHNOLOGIES LTD. 27.06 6 HELIOUS & MATHESON INFORMATION TECHNOLOGY LTD. 36.05 7 KALS INFORMATION SYSTEMS LTD. (APPLICATION SOFTWARE SEG) 30.92 8 L G S GLOBAL LTD. 26.33 ARITHMETIC MEAN 31.93 4.1 THE TPO MADE ADJUSTMENT OF ` 16,91,68,595/- IN THE INTERNATIONAL TRANSACTION RELATING TO PROVISION OF SOFTWARE D EVELOPMENT 4 ITA NO. 2518/PN/2012, A.Y. 2008-09 SERVICES. AGGRIEVED BY THE ORDER OF TPO/DRAFT ASSESSME NT ORDER, THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PAN EL (DRP) INTER ALIA ASSAILING INCLUSION OF 3 COMPANIES IN THE LIST OF COMP ARABLES I.E. QUINTEGRA SOLUTIONS LTD., R S SOFTWARE (INDIA) LTD. AND R S YSTEMS INTERNATIONAL LTD. AND EXCLUSION OF CERTAIN COMPANIES FROM T HE FINAL LIST OF COMPARABLES. THE DRP REJECTED ASSESSEES CONTENTION S FOR INCLUDING THE COMPANIES AS SUGGESTED. HOWEVER, THE DRP EXCLUDED F C S SOFTWARE SOLUTION LTD. FROM THE FINAL LIST OF COMPARABLES ON A CCOUNT OF FUNCTIONAL DIFFERENCE AND ABNORMAL RISE IN PROFITS IN THE LAST YEAR. THE LD. AR SUBMITTED THAT THE AUTHORITIES BELOW HAVE ERRED IN MAKING TRANSFER PRICING ADJUSTMENT TO THE TUNE OF MORE THAN ` 16 CRORES WITHOUT CONSIDERING THE FACT THAT THE REVENUES OF US AE IS NOT EN OUGH TO ABSORB THE ARMS LENGTH MARGIN AS PROPOSED BY THE TPO. THE R EVENUE RETAINED BY THE AES IS MERELY 10% I.E. APPROXIMATELY ` 7.75 CRORES. THE ADDITION CANNOT IN ANY CASE BE MORE THAN THE REVENUE RETAINED BY THE AES. THE LD. AR IN SUPPORT OF HIS SUBMISSIONS PLACED RELIANCE ON THE FOLLOWING DECISIONS : I. M/S. LI & FUNG (INDIA) PVT. LTD. VS. DCIT IN ITA NO. 5156/DEL/2010 FOR ASSESSMENT YEAR 2006-07 DECIDED ON 3 0-09- 2011; AND II. GLOBAL VANTEDGE P. LTD. VS. DCIT IN ITA NOS. 2763 & 2764/DEL/2009 FOR ASSESSMENT YEARS 2003-04 AND 2004-0 5 DECIDED ON 17-12-2009. THE LD. AR POINTED THAT THE DECISION OF TRIBUNAL IN THE CAS E OF GLOBAL VANTEDGE P. LTD. VS. DCIT (SUPRA) HAS BEEN UPHELD BY THE HONBLE SUPREME COURT OF INDIA. 5 ITA NO. 2518/PN/2012, A.Y. 2008-09 4.2 THE LD. AR SUBMITTED THAT THE ASSESSEE HAD PROPOSE D REVERSE ANALYSIS BY MAKING AE AS TESTED PARTY. IN ASSESSMENT YEAR 2006-07 THE ASSESSING OFFICER ACCEPTED THE ANALYSIS AND MADE NO ADDITION. HOWEVER, IN THE ASSESSMENT YEAR UNDER APPEAL THE TPO R EJECTED THE CONTENTIONS OF THE ASSESSEE ON THE SAME SET OF FACTS. T HE LD. AR CONTENDED THAT THE AUTHORITIES BELOW HAVE ERRED IN NOT APPRECIATING THE FACT THAT COMPENSATION SHARING RATIO BETWEEN THE ASSESS EE AND ITS AE IS COMMENSURATE TO FUNCTIONS PERFORMED, RISKS ASSUMED AND A SSETS UTILIZED BY THEM RESPECTIVELY. 5. ON THE OTHER HAND SHRI AVADESH KUMAR REPRESENTING THE DEPARTMENT SUBMITTED THAT THE ISSUES RAISED BY THE ASS ESSEE IN GROUND NOS. 7 AND 8 WERE NOT RAISED BY THE ASSESSEE IN OBJECT IONS FILED BEFORE THE DRP. ON MERITS THE LD. DR SUPPORTED THE FINDINGS OF T PO IN REJECTING THE CONTENTIONS OF THE ASSESSEE. THE LD. DR POINTED THAT EVEN BEFORE TPO THE ASSESSEE HAD NOT FURNISHED THE REQUISITE INFORMATION IN SUPPORT OF HIS CONTENTIONS. 6. CONTROVERTING THE SUBMISSIONS OF LD. DR, THE LD. AR SUBMIT TED THAT THE ISSUE WAS RAISED BEFORE THE DRP, AS WELL AS TPO . THE LD. AR REFERRED TO PARA 15 OF THE ORDER OF TPO. THE LD. AR FURT HER SUBMITTED THAT THE ASSESSEE HAD ENTERED INTO MASTER SERVICE AGR EEMENT WITH ITS AES AT USA AND UK. BOTH THE AGREEMENTS ARE IDENTICALL Y WORDED. THE CLAUSE 4 OF THE AGREEMENT CONTAINS FINANCIAL TERMS. THE CLAUSE 4 SPECIFICALLY STATES THAT IN CASE OF OUTSOURCING CONTRACTS INDIAN COMPANY I.E. THE ASSESSEE SHALL BE ENTITLED TO 90% OF THE REVENUE R ECEIVABLE IN RESPECT OF OUTSOURCED PROJECTS. 6 ITA NO. 2518/PN/2012, A.Y. 2008-09 7. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESEN TATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIE S BELOW. THE GROUNDS BEFORE US FOR ADJUDICATION ARE GROUND NOS. 7 AND 8 RAISED IN THE APPEAL BY THE ASSESSEE. A PERUSAL OF THE DRP DIREC TIONS DATED 05- 09-2012 REVEAL THAT THE ASSESSEE HAD TAKEN FOUR OBJEC TIONS BEFORE THE DRP. THE SAME READS AS UNDER : I. GROUND OF OBJECTION 1 -THE LEARNED DCIT, (TRANSFER PRICING - IV) AND ACIT, CIRCLE 6, PUNE ERRED IN LAW AND ON FACTS IN PROPOSING ADDITION OF RS.16,91,68,595/- U/S 92CA OF THE ITA, 1961 TO THE TAXABLE INCOME OF THE ASSESSEE COMPANY. II. GROUND OF OBJECTION 2 - THE LEARNED AO ERRED IN LAW AND ON FACTS IN ACCEPTING THE TPO'S ALLEGATION THAT TRANSFER PRICE FOR SOFTWARE DEVELOPMENT SERVICES SHOULD BE WORKED OUT BY CONSID ERING 31.93% MARGIN OVER COSTS INSTEAD OF 9.85% AS PER THE RESULTS OF THE ASSESSEE COMPANY. III. GROUND OF OBJECTION 3 - THE LEARNED AO & TPO ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT REVENUE ATTRIBUTABLE TO THE FARS ASSUMED BY THE ASSESSEE COMPANY IS FETCHED IN INDIA. THE AU THORITIES FURTHER ERRED IN NOT APPRECIATING THE FACT THAT INCURRENCE OF EXTRA OVERHEADS/COSTS (LEADING TO LOWER MARGIN) DOES NOT VITIATE THE TRANSFER PRICE BETWEEN THE TWO AES. IV. GROUND OF OBJECTION 4 - THE LEARNED AO & TPO ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE IMPACT AND SCOPE OF PROVISO TO SECTION 92C(2) AS PER WHICH, SUITABLE ADJUSTMENT UPTO 5% OF THE TRANSFER PRICE OUGHT TO HAVE BEEN GRANTED TO THE ASSESSEE COMPANY. 8. WHILE ADDRESSING THE ABOVE OBJECTIONS OF THE ASSESSEE THERE IS NO DISCUSSION WITH RESPECT TO THE ISSUES RAISED BY THE ASS ESSEE IN GROUND NOS. 7 AND 8 OF THE APPEAL BEFORE THE TRIBUNAL. THE LD. AR OF THE ASSESSEE HAS ALSO NOT BEEN ABLE TO POINT OUT FROM THE D IRECTIONS OF THE 7 ITA NO. 2518/PN/2012, A.Y. 2008-09 DRP, THE SUBMISSIONS MADE BY THE ASSESSEE IN RESPECT OF THE AFORESAID GROUNDS. THE ENTIRE EMPHASIS OF THE DRP WHILE DISPOSING OF THE OBJECTIONS IS IN RESPECT OF INCLUSION/EXCLUSION OF CERTAIN COM PANIES FORM THE LIST OF COMPARABLES ON THE BASIS OF FILTERS APPLIED BY THE TPO AND ALLOWABILITY OF BENEFIT OF 5% TO THE ASSESSEE IN THE LIGH T OF CBDT CIRCULAR NO. 5/10 DATED 03-06-2010. 9. A PERUSAL OF ORDER PASSED BY TPO SHOWS THAT SUBMISS IONS WERE MADE WITH RESPECT TO ALTERNATE APPROACH I.E. CHANGE OF TE STED PARTY. THE DISCUSSION IN THIS REGARD HAS BEEN MADE BY THE TPO IN PARA 15. THE TPO HAS SUMMARILY REJECTED THE CONTENTIONS OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS NOT PROVIDED ANY JUSTIFIC ATION FOR CHANGE IN TESTED PARTY AND NO FRESH SEARCH FOR COMPARABLES HAS BEEN MADE IN VIEW OF AE BEING ADOPTED AS TESTED PARTY. THE TPO HAS PLACED RELIANCE ON CERTAIN DECISIONS OF THE TRIBUNAL TO REJECT THE CONTEN TIONS OF THE ASSESSEE. 10. THUS, IN VIEW OF THE FACT THAT THIS ISSUE HAS NOT BEEN PROPERLY ADDRESSED BY THE AUTHORITIES BELOW, WE ARE OF THE CONSIDE RED VIEW THAT IN ALL FAIRNESS IT NEEDS A REVISIT TO THE FILE OF TPO/ASSESSING OFFICER. THE ASSESSEE SHALL FURNISH THE REQUISITE DETAILS IN SUPPORT OF HIS SUBMISSIONS BEFORE THE TPO. THE TPO AFTER CONSIDERING TH E SAME SHALL RE-ADJUDICATE THE ISSUES RAISED BY THE ASSESSEE IN GROU ND NOS. 7 AND 8 IN THE PRESENT APPEAL, AFTER AFFORDING OPPORTUNITY OF HEARING TO THE ASSESSEE, IN ACCORDANCE WITH LAW. ACCORDINGLY, GROUND NOS . 7 AND 8 RAISED IN THE APPEAL BY ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSE. 8 ITA NO. 2518/PN/2012, A.Y. 2008-09 AFTER ADJUDICATION OF GROUND NOS. 7 AND 8 RAISED IN THE G ROUNDS OF APPEAL, THERE IS NO CHANGE IN THE FINAL OUTCOME OF THE A PPEAL OF ASSESSEE. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON WEDNESDAY, THE 01 ST DAY OF FEBRUARY, 2017. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) #' / ACCOUNTANT MEMBER $ % #' / JUDICIAL MEMBER / PUNE; &# / DATED : 01 ST FEBRUARY, 2017 RK *+,%-.#/#)- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE DISPUTE RESOLUTION PANEL, PUNE 4. THE DIRECTOR OF INCOME TAX (TP), PUNE 5. !'( %%)* , )* , + +,- , / DR, ITAT, B BENCH, PUNE. 6. ( . /0 / GUARD FILE. // ! % // TRUE COPY// #1 / BY ORDER, 2 3 / ASSISTANT REGISTRAR, )* , / ITAT, PUNE