ITO, New Delhi V. M/s ICC India (P) Ltd., New Delhi

ITA 2630/DEL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97192 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 28-06-2017
• Assessment Year: 2002-2003
• Appeal Filed On: 23-05-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Corroborative evidences
• Section: 92E; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I - 1 : NEW DELHI BEFORE SMT. DIVA SINGH , JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA NO: 2630/DEL/2011 ASSTT. YEAR : 2002 - 03 INCOME TAX OFFICER VS. M/S ICC INDIA PVT. LTD., WARD 11(3), NEW DELHI 4 TH FLOOR, NSIC - STP, OKHLA INDUSTRIAL ES TATE, NEW DELHI (PAN:AAACI1843G ) (APPELLANT) (RESPONDENT) ASSESSEE BY : MS. VANDANA BHANDARI DEPARTMENT BY : SH. AMRENDRA KUMAR, CIT,DR DATE OF HEARING : 02.09.2015 DATE OF PRONOUNCEMENT : 09 .09 . 2015 O R D E R PER INTURI RAMA RAO, AM THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED AGAINST THE ORDER OF THE CIT(A) - XX, NEW DELHI, DATED 22.03.2011 FOR THE ASSESSMENT YEAR 2002 - 03 . THE REVENUE RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE ORDER OF THE LD. CIT(A) IS WRONG, AND THE AGAINST THE PROVISIONS OF LAW WHICH IS LIABLE TO BE SET ASIDE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE & IN LAW, THE ORD ER OF DELETING THE ADDITION OF R S. 53,23,591/ - ON ACCOUNT OF UPWARD ADJUSTMENT OF ARM S LENGTH PRICE OF THE INTERNATION TRANSACTION IGNORING THE FACTS THAT...... (A) THE UPWARD ADJUSTMENT WAS MADE BY THE TPO BASED UPON THE DATE OF COMPARABLES. 2 (B) THE CIT(A) HAS SIMPLY ACCEPTED THE CONTENTION OF THE ASSESSEE WITHOUT DISCUSSING THE RELEVANT DATE BASED ON M/S DATAMATICS TECHNOLOGIES LTD. AND INFOTECH ENTERPRISES LTD., FOR WHICH HE HAS DIRECTED TO EXCLUDE THE NAMES OF THESE COMPANIES TO ARRIVE AT THE MEAN OF OP/TC RATIO. (C) THE CIT(A) HAS NOT ESTABLISHED THAT THE ABOVE TWO COMPANIES IN FACT HAD THE INTERNATIONAL TRANSACTIONS OF MORE THAN 15 - 20% WITH THE RELATED PARTIES. 3. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARING. 2. B RIEF FACTS OF THE CASE ARE THAT THE RESPONDENT ASSESSEE - COMPANY IS A COMPANY DULY INCORPORATED UNDER THE PROVISION OF THE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINESS OF PROVIDING INFORMATION TECHNOLOGY ENABLED SERVICES TO ITS PA RENT COMPANY INTERACTIVE COMPOSITION CORPORATION (ICC). THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2002 - 03 WAS FILED ON 07.01.2003 DISCLOSING NIL INCOME. THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT. SINCE THE RESPONDENT ASSESSEE - COMPANY REPORTED INTERN ATIONAL TRANSACTION IN ITS REPORT IN FORM 3CEB , A REFERENCE UNDER SECTION (3) WAS MADE TO TRANSFER PRICING OFFICE R (TPO) - 1 , NEW DELHI. 3. IT IS REPORTED THAT DURING THE YEAR UNDER CONSIDERATION, THE RESPONDENT ASSESSEE - COMPANY ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES: S. NO. INTERNATIONAL TRANSACTION METHOD VALUE (IN RS. ) 1. EXPORT OF SOFTWARE/IT SERVICES CPM 6,98,47,580 2. IMPORT OF COMPUTER HARDWARE CUP 14,62,516 4. IN SUPPORT OF THE RESPONDENT ASSESSEE - COMPANY S CLAIM THAT THE PRICE CHARGED BY IT FOR THE SERVICE RENDERED TO ITS AE WAS AT ARM S LENGTH, THE 3 RESPONDENT ASSESSEE - COMPANY FILED A REPORT IN FORM 3CEB AS REQUIRED UNDER THE PROVISIONS OF SECTION 92E OF THE ACT. THE RESPONDENT ASSESSEE - CO MPANY ALSO MADE A DETAILED ANALYSIS OF INTERNATIONAL TRANSACTIONS . THE RESPONDENT ASSESSEE - COMPANY HAD ADOPTED COST PLUS METHOD ( CPM ) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM S LENGTH PRICE. THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY IT ARE AT ARM S LENGTH. DUE TO AVAILABILITY OF RELIABLE DATA, THE RESPONDENT ASSESSEE - COMPANY HAS MADE ITSELF AS THE TESTED PARTY , I.E., ASSESSEE S OPERATING PROFIT MARGIN OVER THE COST HAS BEEN COMPARED WITH THE MARGIN OF OTHER COMPARABLE COMPANIES IN INDIA ENGAGED IN SIMILAR FUNCTION. THE OPERATING PROFITS TO TOTAL COST WAS ADOPTED AS THE PROFIT LEVEL INDICATE ( PLI ). IN THE TRANSFER PRICING STUDY , THE RESPONDENT ASSESSEE - COMPANY HAD CHOSEN THE FOLLOWING 12 COMPARABLES AND THEIR WEIGHTED AVERAGE OPERATING P ROFIT MARGIN WAS WORKED OUT AT 4 .82% AS BELOW: NAME OF THE COMPANY OP/TC ALLSOFT CORPORATION LTD. 5.80% FORTUNE INFORMATICS LTD. - 1.90% INTELLIVISIONS SOFTWARE LTD. 2.03% OASIS INFOTECH LTD. 6.73% SRIVEN MULTITECH LTD. 7.29% NEILSOFT LTD. 5.07% EASTERN SOFTWARE SYSTEMS LTD. 6.29% CUMMINS INFOTECH SYSTEMS LTD. - 0.90% C S SOFTWARE ENTERPRISE LTD. 8.74% AGENDA METMARKETING LTD. 8.93% SAVVION INDIA LTD. 6.11% D C ELCOT SOFTWARE LTD. 3.69% AVERAGE OP/TC 4.82% 4 5. COMPUTATION OF ARM S LENGTH PRICE BY THE ASSESSEE SINCE THE OP/TC RATIO OF THE ASSESSEE AS WORKED OUT BY IT WAS - 2.68% AS COMPARED TO 4.82% OF THE COMPARABLES, IT MADE AN ADJUSTMENT OF RS. 53,82,342/ - IN THE INCOME AND OFFERED THE SAME FOR TAXATION. THE ADJUSTMENT HAS BEEN WOR KED OUT AS UNDER: TOTAL COST RS. 7,18,19,973 (THE ASSESSEE HAS REMOVED FOREIGN EXCHANGE FLUCTUATION LOSS AND INTEREST EXPENSE BEING NON OPERATING EXPENSES FROM THE TOTAL COST TO ARRIVE AT THE ADJUSTED TOTAL EXPENDITURE) ARM S LENGTH CONSIDERATION (A) RS. 7,52,29,922 (APPLYING 4.82% OP/TC RATIO) CONSIDERATION ACTUALLY RECEIVED (B) RS. 6,98,47,580 DIFFERENCE (A - B) RS. 53,82,342 6. THE LEARNED TRANSFER PRICING OFFICER WHILE ACCEPTING THE MOST APPROPRIATE METHOD USED BY THE RESPONDENT ASSESSEE - C OMPANY FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS REJECTED THE TRANSFER PRICING STUDY CONDUCTED BY THE RESPONDENT ASSESSEE - COMPANY AND CHOSEN HIS OWN COMPARABLES, WHICH ARE AS FOLLOWS : NAME OF THE COMPANY ADJUSTED OP/TC% ACE SOFTWARE EXPORTS LTD. 11.66% ALLSEC TECHNOLOGIES LTD. 2.79% DATAMATICS TECHNOLOGIES LTD. 30.93% GENESYS INTERNATION CORP. LTD. 29.45% INFOTECH ENTERPRISES LTD. 26.65% KARVY CONSULTANTS LTD. 8.03% MCS LTD. 1.62% MAX HEALTHSCRIBE LTD. 1.77% ASK ME INFO HUB LTD. ( - )6.28% AVERAGE OP/TC 11.85% 5 THE TPO COMPUTED THE ARM S LENGTH PRICE AS FOLLOWS: 13. COMPUTATION OF THE ARM S LENGTH PRICE (ALP): IN THE MANNER DISCUSSED ABOVE, THE ARITHMETIC MEAN OF OPERATING PROFIT OVER THE TOTAL COST MARGINS OF THE COMPARABLES FOR THE FINANCIAL YEAR 2001 - 02 WORKS OUT TO 11.85%. THE ARM S LENGTH PRICE OF THE INTERNATION TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE IS WORKED OUT AS UNDER: TOTAL COST OF PROVISION OF SERVICES BY THE ASSESSEE: RS. 7,20,21,767/ - (ADJUSTED TOTAL COST OF THE SERVICES PROVIDED TO AE AS PROVIDED BY THE ASSESSEE INCREASED BY THE FINANCIAL EXPENSES OF RS. 2,51,187/ - SINCE THE MARGINS OF THE COMPARABLES ARE ON TOTAL COST BASIS WHICH INCLUDES FINANCIAL CHARGES ALSO.) MARGIN @ 11.85% OF THE ABOVE RS. 85,32,246 ARM S LENGTH PRICE TO BE CHARGED FROM THE AE: RS. 8,05,53,513/ - 13.1 IN THE MANNER DISCUSSED ABOVE THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS AE IS DETERMINED AT RS. 8,05,53,513/ - IN PLACE OF RS. 6,98,47,580/ - . ACCORDINGLY, AN ADJUSTMENT OF RS. 1,07,05,933/ - IS TO BE MADE TO THE INCOME OF THE ASSESSEE BEING THE DIFFERENCE BETWEEN THE ARM S LENGTH PRICE AND THE PRICE CHARGED BY THE ASSESSEE FROM ITS AES FOR RENDERING SERVICES TO THE M. SINCE THE ASSESSEE HAS ITSELF OFFERED RS. 53,82,342/ - FOR TAXATION ONLY THE BALANCE AMOUNT OF RS. 53,23,591/ - SHALL BE ADDED TO THE INCOME OF THE ASSESSEE. 7. THE ASSESSING OFFICER PASSED THE CONSEQUENTIAL FINAL ASSESSMENT ORDER DATED 21 ST MARCH, 2005 AFTER TAKING INTO CONSIDERATION THE ORDER OF TPO PASSED UNDER SECTION 92CA(3) OF THE ACT. BEING AGGRIEVED BY THIS ASSESSMENT ORDER, AN APPEAL WAS FILED BEFORE THE CIT(A) - XX, NEW DELHI, WHO VIDE ORDER DATED 22 ND MARCH, 2011 DELETED TWO COMPARABLES CHOSEN BY TPO I.E. (1) DATAMATICS TECHNOLOGIES LTD, AND (2) INFOTECH ENTERPRISES LTD. ON THE GROUND THAT THESE PARTIES HAD SUBSTANTIAL RELATED PARTY TRANSACTIONS. THE RELEVANT PARAGRAPH OF THE 6 CIT(A) S ORDER IS REPRODUCED BELOW: I HAVE CAREFULLY CONSIDERED THE FACTS AND SUBMISSIONS FILED BY THE APPELLANT. AFTER CONSIDERING THE FACTS, DOCUMENTARY EVIDENCES PLACED ON RECORDS AND ARGUMENTS PRESENTED BY THE AR, I AM SATISFIED THAT THE TWO COMPARABLES USED BY THE TPO I.E. 1) DATAMATICS TECHNOLOGIES LTD.; AND 2) INFOTECH ENTERPRISES LIMITED HAVE SUBSTANTIAL RELATED PARTY TRANSACTIONS AND THEREFORE CANNOT BE USED FOR DETERMINATION OF ARMS S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. HON BLE ITAT HAS HELD IN THE CASE OF SONY INDIA (P.) LTD. VS. DCIT [2008] 114 ITD 448 (DELHI) THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED IF ITS RELATED PARTY TRANSACTION DO NOT EXCEED 10 TO 15 PER CENT OF TOTAL REVENUE. WITHIN THE ABOVE LIMIT, TRANSACTIONS CANNOT BE HELD TO BE SIGNIFICANT TO INFLUENCE THE PROFITABILITY OF COMPARABLES. AFTER ELIMINATING THE ABOVE TWO COMPANIES FROM THE COMPARABLES; ARITHMETICAL MEAN MARGIN BASED ON THE REMAINING COMPANIES IS ARRIVED AT 7.01% AND THE ARM S LENGTH PRICE BASED ON ARITHMETICAL MEAN MARGIN COMES TO RS. 76,801,6 93/ - . SINCE THE PRICE OF INTERNATIONAL TRANSACTION OFFERED TO TAX BY THE APPELLANT I.E. RS. 75,229,922/ - IS WITHIN THE PERMISSIBLE +/ - 5% RANGE OF THE PRICE (UPPER LIMIT 80,641,783/ - , AND LOWER LIMIT 72,961,613/ - ) BASED ON ARITHMETIC MEAN AS ALLOWED UNDER P ROVISO TO SUB SECTION 2 OF SECTION 92C, I HOLD THE APPELLANT S INTERNATIONAL TRANSACTION OF EXPORT OF SOFTWARE/IT SERVICES WITH AES DURING THE YEAR TO BE AT ARM S LENGTH. KEEPING IN VIEW THE ABOVE, THIS GROUND OF APPEAL OF THE APPELLANT IS ALLOWED. THE ASSESSE OFFICER IS DIRECTED TO MAKE NECESSARY MODIFICATIONS. BEING AGGRIEVED BY THE ABOVE FINDINGS OF THE CIT(A), THE REVENUE HAD COME UP WITH THE PRESENT APPEAL BEFORE US. 8. THE LEARNED CIT - DR VEHEMENTLY ARGUED THAT THE CIT(A) WAS NOT JUSTIFIED IN DELETING THE TWO COMPARABLES CHOSEN BY THE TPO, INASMUCH AS, NO EVIDENCE WAS BROUGHT ON RECORD ESTABLISHING THAT THESE TWO COMPARABLES HAD SUBSTANTIAL RELATED PARTY TRANSACTIONS. 7 9. ON THE OTHER HAND, THE LD. AUTHORIZED REPRESENTATIVE RELIED UPON THE ORDER OF THE CIT(A). 10. WE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD. THE CIT(A) DELETED THE TWO COMPARABLES, NAMELY, M/S DATAMATICS TECHNOLOGIES LTD. AND INFOTECH ENTERPRISES LTD. ON THE GROUND THAT THESE COMPANIES HAD SUBSTANTIAL RELATED PARTY TRANSACTIONS. THE PROVISIONS OF SECTION 92 PROVIDES THAT INCOME ARISING FROM INTERNATIONAL TRANSACTION IS TO BE COMPUTED HAVING REGARD TO ALP. SECTION 92F(I I) DEFINES ARM S LENGTH PRICE TO MEAN A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN ASSOCIATED ENTERPRISES, IN UNCONTROLLED CONDITIONS. TO COMPUTE ALP THE RESULTS OF THE INTERNATIONAL TRANSACTION ARE BENCH MARKED AGAINST COMPARABLE UNCONTROLLED TRANSACTION. THE MANDATE OF S. 92F(II) IS THAT ALP SHALL BE COMPUTED CONSIDERING PRICE APPLIED OR PROPOSED TO BE APPLIED IN TRANSACTIONS BETWEEN NON - AE S. 11. WHEN SELECTION OF EXTERNAL COMPARABLES, ONE NEEDS TO ENSU RE THAT SUCH EXTERNAL COMPARABLES ARE UNCONTROLLED. THE COMPANIES HAVING CONTROLLED TRANSACTIONS THEREFORE NEEDS TO BE ELIMINATED. THEN THE ISSUE THAT CROPS UP IS WHAT SHOULD BE THE RELATED PARTY TRANSACTION RATIO FOR EXCLUDING AS COMPARABLE . THIS ISSUE HA D COME UP BEFORE THE TRIBUNAL IN NUMEROUS CASES. THE DELHI COORDINATE BENCH IN THE CASE OF M/S SONY INDIA PVT. LTD. VS. DCIT [2008] 114 ITD 448 (DEL), HELD THAT THE COMPANIES HAVING RELATING PARTY TRANSACTIONS OF NOT 8 EXCEEDING 15% CAN BE TAKEN AS A COMPAR ABLE. THIS RATIO WAS FOLLOWED BY THE COORDINATE BENCHES OF THE TRIBUNAL IN THE FOLLOWING DECISIONS: I. CUSTOMER.COM PVT. LTD. VS. DCIT, [2012] 28 TAXMANN.COM 258 (BANG.) : [2013] 140 ITD 344 (BANG.) : [2013] 21 ITR (TRIB.) 514 (BANG.) II. ITO VS. CRM SERVICES INDIA (P.) LTD. [2011] 14 TAXMANN.COM 96 (DEL) : [2011] 48 SOT 41 (DEL) (URO). III. CSR INDIA (P) LTD. VS. ITO [2013] 31 TAXMANN.COM 265 (BANG.) IV. LOGICA PVT. LTD. VS. ACIT, IT(TP)A NO. 1129/BANG/2011: TS - 131 - ITAT - 2013 - BANG - TP. V. AVAYA INDIA (P.) LTD. VS ACIT [2013 ] 33 TAXMANN.COM 569 (DEL - TRIB.) : [2012] 15 ITR (T) 237 (DEL - TRIB.) VI. ACIT VS. SAKATA INX. (INDIA) LTD. [2012] 21 TAXMANN.COM 37 (JP.) :[2012] 53 SOT 165 (JP.) VII. HUAWEI TEHNOLOGIES INDIA PVT. LTD. VS. ITO, IT(TP) NO. 1338/BANG/2010. VIII. WILLS PROCESSING SERVICES (INDIA) (P.) LTD. VS. DCIT, TS - 49 - OITAT - 2013 (MUM.) - TP 12. THUS, THE LAW IS FAIRLY WELL SETTLED TO THE EXTENT THAT THE COMPANIES HAVING IN RELATED PARTY TRANSACTIONS MORE THAN 15% CANNOT BE CONSIDERED AS COMPARABLE. BUT IN THE PRESENT CASE, THOUGH THE CIT(A) ADOPTED THE SAME PARITY OF REASONING WHILE DELETING THE TWO COMPARABLES CHOSEN BY TPO, HE HAD NOT REFERRED TO ANY EVIDENCE ON THE RECORD IN SUPPORT OF THE CONCLUSION DRAWN THAT THESE COMPARABLES HAD RELATED PARTY TRANSACTIONS EXCEEDING 15%, NOR THE AUTHORIZED REPRESENTATIVE OF THE RESPONDENT ASSESSEE COMPANY COULD ESTABLISH THIS FACT CONCLUSIVELY BEFORE US . NO RELIEF CAN BE GRANTED BASED ON MERE RELIANCE ON THE LEGAL PROPOSITION WITHOUT SUPPORTING EVIDENCE ON RECORD. THEREFORE, WE ARE OF THE CONSIDE RED OPINION THAT THE INTEREST OF JUSTICE WOULD BE MET, IF THE MATTER IS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR THE VERIFICATION OF THIS ISSUE , AFTER AFFORDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE - 9 COMPANY. IF IT IS FOUND ON VERIFICATION THAT THE RATIO OF RELATED PARTY TRANSACTIONS IS MORE THAN 15%, THESE COMPANIES MAY BE EXCLUDED AS COMPARABLES. 13. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN C OURT ON 9 T H SEPTEMBER, 2015 S D / - S D / - ( DIVA SINGH ) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBE DATED: 9 T H SEPTEMBER, 2015 RK (D.COM) COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR 6. GUARD FILE BY ORDER DY. REGISTRAR , ITAT, NE W DELHI