M/s Enzen Technologies Pvt Ltd , Bangalore V. Assistant Commissioner of Income TAx Circle-2(1)(2), Bangalore

ITA 2540/BANG/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 4690 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 30-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO
• Assessee Lawyers: V CHANDRASHEKAR
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 92E

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE S HRI N.V. VASUDEVAN , JUDICIAL MEMBER AND SHRI JASON P BOAZ , ACCOUNTANT MEMBER I.T . (T.P) A. NO. 2540 /BANG/20 17 (ASSESSMENT YEAR : 20 13 - 14 ) M/S. ENZEN TECHNOLOGIES PRIVATE LIMITED, NO.9 0, MADIWALA, HOSUR ROAD, BANGALORE - 560 068 . . APPELLANT. VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(2), BANGALORE. .. RESPONDENT. APPELLANT BY : SHRI V. CHANDRASHEKAR, ADVOCATE. R E SPONDENT BY : SHRI C.H. SUNDAR RAO, CIT (D.R) DATE OF H EARING : 26.04.2018. DATE OF P RONOUNCEMENT : 4 .06 .201 8 . O R D E R PER SHRI JASON P BOAZ, A .M . : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ORDER OF ASSESSMENT PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') VIDE ORDER DT.6.10.2017, PURSUANT TO THE DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL, BANGALORE (DRP) UNDER 2 IT (TP) A NO. 2540 /BANG/201 7 SECTION 144C(5) OF THE ACT ON 21.9.2019. THE RELEVANT ASSESSMENT YEAR IS 2013 - 14. 2. BRIEFLY STAT ED, THE FACTS OF THE CASE ARE AS UNDER : 2.1 THE ASSESSEE COMPANY, IS STATED TO BE ENGAGED IN THE PROVISION OF INFORMATION TECHNOLOGY (IT) / SOFTWARE DEVELOPMENT, CONSULTANCY SERVICES TO ITS ASSOCIATED ENTERPRISE (AE) I.E. ENZEN GLOBAL LTD., UK ( ENZEN GLOBAL ). FOR ASSESSMENT YEAR 2013 - 14, THE ASSESSEE FILED ITS RETURN OF INCOME ON 29.11.2013 DECLARING INCOME OF RS.1,17,11,830. THE CASE WAS SELECTED FOR SCRUTINY AND A REFERENCE UNDER SECTION 92CA OF THE ACT WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARM S LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS A SSOCIATED E NTERPRISE (AE) . THE TPO VIDE ORDER UNDER SECTION 92CA OF THE ACT DT.31.8.2016, PROPOSED A TRANSFER P RICING ADJUSTMENT OF RS.3,84,41,881 TO THE ALP OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AES IN THE YEAR UNDER CONSIDERATION. THE DRAFT ORDER OF ASSESSMENT WAS CONCLUDED UNDER SECTION 143(3) R.W.S. 144C(1) OF THE ACT VIDE OR DER DT.26.12.2016, WHEREIN THE ASSESSEE'S INCOME WAS DETERMINED AT RS.5,61,53,710; WHICH INCLUDED AN ADDITION OF RS.3 ,84,41,881 ON ACCOUNT OF THE TRANSFER PRICING ADJUSTMENT PROPOSED BY THE TPO. 2.2 AGGRIEVED BY THE DRAFT ORDER OF ASSESSMENT FOR ASSE SSMENT YEAR 2013 - 14 DT.26.12.2016, THE ASSESSEE FILED ITS OBJECTIONS THERE TO BEFORE 3 IT (TP) A NO. 2540 /BANG/201 7 THE DRP. THE DRP AFTER CONSIDERING THE ASSESSEE'S SUBMISSIONS, ISSUED ITS DIRECTIONS THEREON UNDER SECTION 144C(5) OF THE ACT ON 21.9.2017. PURSUANT THERETO, THE ASSESSI NG OFFICER CONCLUDED THE IMPUGNED FINAL ORDER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT DT.6.10.2017, WHEREIN THE ASSESSEE'S INCOME WAS DETERMINED AT RS.5,20,90,115, WHICH INCLUDED TRANSFER PRICING ADJUSTMENT OF RS.4,03,78,305. 3. AGGRIEVED BY THE FINAL ORDER OF ASSESSMENT DT.6.10.2017 FOR ASSESSMENT YEAR 2013 - 14, THE ASSESSEE FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL, WHEREIN IT HAS RAISED THE FOLLOWING GROUNDS : 4 IT (TP) A NO. 2540 /BANG/201 7 5 IT (TP) A NO. 2540 /BANG/201 7 6 IT (TP) A NO. 2540 /BANG/201 7 4. GROUND NOS.1 TO 3, 13 AND 14 , BEING GENERA L IN NATURE, NO ADJUDICATION IS CALLED FOR THEREON. 5. GROUND NO.4(A). 5. 1 .1 AT THE OUTSET OF THE HEARING, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SOUGHT TO BE HEARD ON GROUND NO.4(A) (SUPRA). THIS GROUND RAISED BY THE ASSESSE E PUT FORTH ITS GRIEVANCE REGARDING THE ACTION OF THE TPO, THE ASSESSING OFFICER AND THE DRP I N CONSIDERING THE NATURE OF SERVICES RENDERED BY IT TO ITS AE AS SOFTWARE DEVELOPMENT SERVICES INSTEAD OF MAN POWER SUPPLY / IT CONSULTING SERVICES AS CLAIMED BY THE ASSESSEE. ACCORDING TO THE LEARNED AUTHORISED REPRESENTATIVE, THE SERVICES RENDERED / PROVIDED BY THE ASSESSEE TO ITS AES IN THE YEAR UNDER CONSIDERATION I.E. A.Y. 2013 - 14 ARE PURELY IN THE NATURE OF IT CONSULTANCY SERVICES. IT IS SUBMITTED THAT THE ASSESSEE ENTERED INTO A CONTRACT WITH ITS AE DT.1.1.2012 (COPY PLACED AT PAGES 128 7 IT (TP) A NO. 2540 /BANG/201 7 TO 152 OF PAPER BOOK) FOR PROVIDING VARIOUS SERVICES, INTER ALIA, INCLUDING MAN POWER SERVICES AND IN THIS REGARD HAD DEPLOYED VARIOUS PERSONNEL TO PROJECTS UNDERTAKEN BY TH E AE COMPANY. SUCH PERSONNEL VARY IN THEIR QUALIFICATION SKILLS, EXPERIENCE, RATE OF BILLING, ETC AND ONCE THE PERSONNEL ARE DEPLOYED, THE COMPANY RAISES INVOICES ON ITS AE TO RECOVER SALARY COST AS WELL AS THE OTHER COSTS PERTAINING TO SUCH PERSONNEL EM PLOYED. THE LEARNED AUTHORISED REPRESENTAT IVE ARGUED THAT THE NATURE OF A C TIVITY UNDERTAKEN BY THE ASSESSEE WAS SOLELY THE PROVISION / SUPPLY / DEPLOYMENT OF TECHNICAL PERSONNEL AS PART OF THEIR IT CONSULTANCY SERVICES, I.E. THE PERSONNEL DEPLOYED WOULD PERFORM THE TECHNICAL SERVICES AS REQUIRED BY THE AE, ENZEN GLOBAL, UK TO SUIT THEIR REQUIREMENTS. IT WAS FURTHER ARGUED THAT NEITHER THE ASSESSEE NOR ITS EMPLOYEES HAVE ANY RIGHT OVER THE INTELLECTUAL PROPERTY OR OTHER SIMILAR RIGHTS THAT ARISE DURING TH E COURSE OF RENDERING THE SERVICES TO ITS AES. 5.1.2 IT WAS FAIRLY SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE THAT THE WRONG CHARACTERIZATION OF ACTUAL SERVICES RENDERED BY THE ASSESSEE TO ITS AE AROSE PRIMARILY BECAUSE IN THE REPORT FURNISHED UNDER SECTION 92E OF THE ACT, THE ASSESSEE ITSELF CONDUCTED THE TP STUDY AS A PROVIDER OF SOFTWARE DEVELOPMENT SERVICES. THE LEARNED AUTHORISED REPRESENTATIVE STATED THAT THE SAME WAS PERHAPS DONE IN THAT MANNER, CONSIDERING THE ENTIRE GAMUT OF SERVICES MENTIONED IN THE AGREEMENT WITH ITS AE AND NOT BY CONFI N ING THE REPORT TO THE ACTUAL SERVICE RENDERED BY IT TO ITS AE DURING THE PREVIOUS YEAR RELEVANT TO 8 IT (TP) A NO. 2540 /BANG/201 7 ASSESSMENT YEAR 2013 - 14. THE LEARNED AUTHORISED REPRESENTATIVE ALSO FAIRLY SUBMITT ED THAT THE TPO CANNOT BE FAULTED FOR THE WRONG CHARACTERIZATION OF THE ASSESSEE'S ACTIVITIES / SERVICES RENDERED. IT WAS FURTHER POINTED OUT THAT THE ISSUE OF WRONG CHARACTERIZATION WAS BROUGHT UP BEFORE THE DRP, BUT THE DRP AT PAGES 2 & 3 OF ITS DIREC TIONS, OBSERVED THAT THIS MATTER WAS NOT BROUGHT UP BEFORE THE TPO AND FURTHER HELD THAT THE TPO HAD CORRECTLY CONSIDERED THE SERVICES RENDERED BY THE ASSESSEES AS IT CONSULTING SERVICES. 5.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE SU PPORTED THE ORDERS OF THE AUTHORITIES BELOW AND ARGUED THAT SINCE THE ASSESSEE ITSELF HAD CONDUCTED THE TP STUDY AS BEING A PROVIDER OF SOFTWARE DEVELOPMENT SERVICES TO ITS AE, IT CANNOT NOW DISPUTE THE SAME BEFORE THE TRIBUNAL. 5.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ISSUE FOR CONSIDERATION BEFORE US, IN THE LIGHT OF THE CONTENTIONS AND EVIDENCE PLACED BEFORE US BY THE ASSESSEE, I.E. COPY OF SERVICE AGREEMENT WITH ITS AE DT. 1.1.2012, COPIES OF SAMPLE INVOICES RAISED (PLACED AT PAGES 153 TO 164), ETC, IS WHETHER THE ACTIVITY OF THE ASSESSEE FALLS IN THE REALM OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES O R PROVISION OF IT CONSULTING SERVICES TO ITS AES AND THE AUTHENTICITY / CORRECTNESS OF THE TP STUDIES CONDUCTED BY BOTH THE ASSESSEE AND THE TPO IN THE CASE ON HAND. 9 IT (TP) A NO. 2540 /BANG/201 7 5.3.2 THE MAIN ARGUMENTS PUT FORTH BY THE LEARNED AUTHORISED REPRESENTATIVE IS THAT THE INVOICES RAISED BY THE ASSESSEE ON ITS AE CLEARLY ESTABLISHES THAT IT IS INTO IT CONSULTING SERVICES BY DEPLOYING MAN POWER TO ITS AE. THE ASSESSEE HAS FURNISHED COPIES OF SAMPLE INVOICES AT PAGES 153 TO 156 IN THE PAPER BOOK FILED. WE HAVE PERUSED THE INVOICES WHICH ARE PART OF THE PAPER BOOK (SUPRA) AND AFTER AN APP RECIATION THEREOF AND THE FACTS OF THE CASE ON HAND, THE FOLLOWING POINTS EMERGE : - (I) BILLING IS DONE ON MAN DAYS OF ALL EMPLOYEES TOGETHER ON A MONTHLY BASIS. (II) BILLING RATES ARE DIFFERENT FOR VARIOUS GRADES OF EMPLOYEES. (III) BILLING IS DONE IN G BP FOR ON - SITE WORK FOR RESOURCES DEPLOYED. (IV) PROJECT - WISE DETAILING OF EMPLOYEES IS PROVIDED IN THE INVOICES. (V) ACTIVITY FOR MULTIPLE EMPLOYEES ON SAME PROJECT IS PART OF INVOICE. 5.2.3 A PERUSAL OF THE SERVICE AGREEMENT DT.1.1.2012 ENTERED INTO BETWEEN THE ASSESSEE AND ITS AE, ENZEN GLOBAL (PLACED AT PAGES 128 TO 152 OF PAPER BOOK) DESCRIBES THE NATURE OF SERVICES TO BE RENDERED BY THE ASSESSEE AND THE MANNER AND METHOD OF RAISING INVOICES FOR THE SAME. IN THE SAID SERVICES AGREEMENT, ON P AGE 8 THEREOF, THE RATE CARD FOR THE DIFFERENT CATEGORIES OF EMPLOYEES HAS BEEN PROVIDED ALONG WITH TERMS AND CONDITIONS. 10 IT (TP) A NO. 2540 /BANG/201 7 ON PAGE 9 OF THE AGREEMENT, IT IS STATED AS FOLLOWS : - 10. WORK FLOW. 10.1 FOR EVERY ENGAGEMENT, EGS WILL RAISE A PROFORMA OR PURCHASE ORDER WITH THE NECESSARY DETAILS OF NUMBER OF CONSULTANTS, SKILLS REQUIRED AND THE NUMBER OF DAYS (IF KNOWN). ON AGREEMENT WITH ET, ET WILL PROVIDE NECESSARY SKILLED CONSULTANTS TO PERFORM THE ENGAGEMENT. ON PAGE 15 OF THE AGREEMEN T, IT IS STATED AS UNDER : - 18. PERSONNEL 18.1 THE SUPPLIER SHALL PROVIDE ALL PERSONNEL NECESSARY FOR THE EXECUTION OF A WORK ORDER FROM COMMENCEMENT TO ITS COMPLETION. IN THE EVENT THAT THE SUPPLIER REQUIRES ADDING OR REPLACING A MEMBER OF THE SA ID PERSONNEL FOR UNFORESEEN REASONS, THE SUPPLIER WILL PROVIDE THE CUSTOMER WITH ALTERNATIVE STAFF FOR ITS APPROVAL WHICH MUST BE SOMEONE OF EQUAL OR GREATER CALIBER WHOM IF ACCEPTABLE TO THE CUSTOMER WILL COMPLETE THE TASK. THE CUSTOMER MAY AT ITS ABSOLU TE DISCRETION REQUEST THE REMOVAL OF THE AFORESAID PERSONNEL ASSIGNED TO THIS PROJECT IN WHICH INSTANCE THE SUPPLIER WILL USE REASONABLE ENDEAVOURS TO REPLACE SUCH PERSONNEL WITH SOMEONE OF EQUAL OR GREATER CALIBER WHOM IF APPROVED BY THE CUSTOMER WILL CO MPLETE THE TASK. 11 IT (TP) A NO. 2540 /BANG/201 7 5.2.4 FROM THE ABOVE DISCUSSION OF THE FACTS AND CIRCUMSTANCES OF THE CASE ON HAND, IT APPEARS TO US THAT THERE IS SOME MERIT IN THE CONTENTIONS OF THE ASSESSEE THAT DURING THE IMPUGNED A.Y. 2013 - 14, THE SERVICES RENDERED BY THE ASSE SSEE TO ITS AE IS PROVISION OF MAN POWER / PERSONNEL AND NOT SOFTWARE DEVELOPMENT SERVICES. IN THIS VIEW OF THE MATTER, IT WOULD BE APPROPRIATE TO CONCLUDE THAT THE TP STUDY CONDUCTED BY BOTH THE ASSESSEE AS WELL AS THE TPO APPEAR TO BE BASED ON INCORR ECT APPRECIATION / APPLICATION OF FACTS. IN VIEW OF THE CONTENTIONS AND DETAILS FILED BY THE ASSESSEE THAT IT IS INTO IT CONSULTING SERVICES, AND IN THE LIGHT OF THE DISCUSSION AND OUR OBSERVATIONS ABOVE, WE DEEM IT APPROPRIATE TO SET ASIDE THE ORDERS OF THE TPO/CIT (APPEALS) SO THAT THE ENTIRE MATTER BE RE - EXAMINED IN ORDER TO DETERMINE THE EXACT NATURE OF SERVICES PROVIDED BY THE ASSESSEE. SINCE THIS ISSUE OF CLASSIFICATION OF SERVICES RENDERED BY THE ASSESSEE TO ITS AE GOES TO THE VERY ROOT OF THE MA TTER, WE REMAND THIS MATTER TO THE FILE OF THE TPO FOR FRESH EXAMINATION AND ADJUDICATION IN THE LIGHT OF OUR OBSERVATIONS AFTER AFFORDING THE ASSESSEE ADEQUATE OPPORTUNITY OF FILING DETAILS, EVIDENCES, SUBMISSIONS REQUIRED IN THIS REGARD WHICH SHALL BE DU LY CONSIDERED. WE HOLD AND DIRECT ACCORDINGLY. 6. IN VIEW OF OUR DECISION AS INDICATED ABOVE SETTING ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND REMANDING THE MATTER TO THE FILE OF THE TPO / ASSESSING OFFICER, THE OTHER GROUNDS RAISED BY THE ASSES SEE BECOME ACADEMIC IN NATURE AND ARE HENCE NOT ADJUDICATED. 12 IT (TP) A NO. 2540 /BANG/201 7 7. IN THE RESULT, THE ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2013 - 14 IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THE 4TH DAY OF JUNE, 201 8 . SD/ - (N. V. VASUDEVAN) JUDICIAL MEMBER SD/ - (JASON P BOAZ) ACCOUNTANT MEMBER BANGALORE, DT. 4 .06 .2018. *REDDY GP COPY TO : 1 APPELLANT 4 CIT(A) 2 RESPONDENT 5 DR. ITAT, BANGALORE 3 CIT 6 GUARD FILE SENIOR PRIVATE SECRETARY I NCOME TAX APPELLATE TRIBUNAL BANGALORE.