M/s. Terralogic Software Solutions Pvt. Ltd, Bengaluru V. Deputy Commissioner of Income Tax, Circle-7(1)(1), Bengaluru

ITA 2640/BANG/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 9455 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 08-05-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 07-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO
• Assessee Lawyers: NARENDRA JAIN
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 142(1); 234B; 144C; 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BENGALURU BEFORE SHRI A.K. GARODIA, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER IT(TP)A NO.2640/BANG/2017 (ASSESSMENT YEAR: 2013-14) M/S.TERRALOGIC SOFTWARE SOLUTIONS PVT. LTD. (ERSTWHILE KNOWN AS PAXTERA SOLUTIONS PVT. LTD.) NO.15, 2 ND FLOOR, 4 TH CROSS, INDUSTRIAL LAYOUT,5 TH BLOCK, KORAMANGALA, BENGALURU-560034. PAN:AAECP5573E VS. APPELLANT DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 7(1)(1), BENGALURU. RESPONDENT APPELLANT BY : SHRI NARENDRA JAIN, ADVOCATE. RESPONDENT BY : SHRI C.H.SUNDAR RAO, CIT(DR) DATE OF HEARING: 25/09/2019 DATE OF PRONOUNCEMENT: 30/09/2019 O R D E R PER PAVAN KUMAR GADALE, JM: THE ASSESSEE HAS FILED THE APPEAL AGAINST THE FINAL ASSESSMENT ORDER U/S 143(3) R.W.S. 144C(1) OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT] DATED 9/10/2017 PASSED IN PURSUANCE TO THE DIRECTIONS OF THE DRP, BENGALURU, DATED 26/9/2017. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: IT(TP)A NO.2640/BANG/2017 PAGE 2 OF 7 1. THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(1), BANGALORE (HEREINAFTER REFERRED AS 'AO' FOR BREVITY), LEARNED DEPUTY COMMISSIONER OF INCOME TAX (TRANSFER PRICING OFFICER) 2(2)(2), BANGALORE (HEREINAFTER REFERRED AS 'TPO' FOR BREVITY) AND THE HONOURABLE DRP-2 ('AO', 'TPO' AND DRP COLLECTIVELY REFERRED AS 'LOWER AUTHORITIES' FOR BREVITY) HAVE ERRED IN PASSING THE ORDERS IN THE MANNER PASSED BY THEM, THE ORDERS BEING BAD IN LAW ARE LIABLE TO QUASHED. GROUNDS RELATINZ TO TRANSFER PRICING:- 2. THE LOWER AUTHORITIES HAVE ERRED IN M AKING TRANSFER PRICING ADJUSTMENT OF RS. 2,44,05,102/-; MAKING A REFERENCE TO TRANSFER PRICING OFFICER FOR DETERMINING ARM'S LENGTH PRICE WITHOUT DEMONSTRATING AS TO WHY IT WAS NECESSARY AND EXPEDIENT TO DO SO; NOT APPRECIATING THAT THERE IS NO AMENDMENT TO THE DEFINITION OF 'INCOME' AND CHARGING OR COMPUTATION PROVISION RELATING TO INCOME UNDER THE HEAD 'PROFITS & GAINS OF BUSINESS OR PROFESSION' DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X' AND THEREFORE ADDITION UNDER CHAPTER X IS BAD IN LAW; AND PASSING THE ORDER WITHOUT DEMONSTRATING THAT THE APPELLANT HAD MOTIVE OF TAX EVASION. 3. THE LOWER INCOME TAX AUTHORITIES HAVE ERRED IN: HOLDING THAT THE CUP METHOD ADOPTED BY THE APPELLANT IS NOT THE MOST APPROPRIATE METHOD; REJECTING THE TP ANALYSIS UNDER CUP METHOD WITHOUT APPRECIATING THAT THE APPELLANT HAD RENDERED SIMILAR SERVICES TO UNRELATED PARTIES, ON TERMS AND CONDITIONS SIMILAR TO THAT OF THE AE'S AND; REJECTING THE ALTERNATE TP ANALYSIS PERFORMED BY THE APPELLANT ADOPTING INTERNAL TNMM ON UNJUSTIFIABLE GROUNDS. 4. THE LOWER AUTHORITIES HAVE ERRED IN: CONDUCTING FRESH TRANSFER PRICING ANALYSIS DESPITE ABSENCE OF ANY DEFECTS IN THE TRANSFER PRICING ANALYSIS SUBMITTED BY THE APPELLANT . ADOPTING INAPPROPRIATE FILTERS LIKE 25% RPT FILTER, ONE SIDED TURNOVER FILTER ETC IN THE PROCESS OF SELECTING COMPARABLES; ADOPTING COMPANIES AS COMPARABLES EVEN THOUGH THEY ARE NOT COMPARABLE IN RESPECT OF FUNCTIONS PERFORMED, RISKS ASSUMED, ASSETS UTILIZED, SIZE, IT(TP)A NO.2640/BANG/2017 PAGE 3 OF 7 TURNOVER, DESPITE HAVING UNUSUAL BUSINESS CIRCUMSTANCES OR HIGH MARGINS, ETC. ADOPTING THE FOLLOWING COMPANIES AS COMPARABLES: LARSEN & TOUBRO INFOTECH LTD; PERSISTENT SYSTEMS LTD. (SEG.) TECH MAHINDRA LTD. (SEG.) E. NOT CONSIDERING THE SEGMENTAL FINANCIALS SUBMITTED BY THE APPELLANT AND NOT EXCLUDING THE OPERATING REVENUE AND OPERATING COST RELATED NON-AE DOMESTIC SEGMENT WHILE COMPUTING THE ARM'S LENGTH PRICE. F. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEVEL AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. G. NOT RECOGNIZING THAT THE APPELLANT WAS INSULATED FROM RISKS, AS AGAINST COMPARABLES, WHICH ASSUME THESE RISKS AND THEREFORE HAVE TO BE CREDITED WITH A RISK PREMIUM ON THIS ACCOUNT. OTHER GROUNDS: - 5. THE LOWER AUTHORITIES HAVE ERRED IN LEVYING INTEREST OF RS 42,28,455/- UNDER SECTION 234B AND RS 80,735/- UNDER SECTION 234D. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, INTEREST UNDER SECTION 234B AND SECTION 234D ARE NOT LEVIABLE. THE APPELLANT DENIES ITS LIABILITY TO PAY INTEREST UNDER SECTION 234B AND SECTION 234D. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUNDS/ SUB-GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMIT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR AT, THE TIME OF HEARING, OF THE APPEAL, SO AS TO ENABLE THE INCOME-TAX APPELLATE TRIBUNAL TO DECIDE THE APPEAL ACCORDING TO LAW. THE APPELLANT PRAYS ACCORDINGLY. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEES EARLIER NAME WAS M/S.PAXTEERA SOFTWARE INC PRESENTLY KNOWN AS M/S.TERRALOGIC SOFTWARE SOLUTIONS PVT. LTD, ENGAGED IN THE BUSINESS OF SOFTWARE TESTING AND SUPPORT SERVICES ALSO IT ENABLED SERVICES BPO PROVIDER, FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2013-14 ON 30/8/2013 WITH TOTAL INCOME OF RS.1,35,00,940/-. SUBSEQUENTLY THE CASE WAS SELECTED FOR IT(TP)A NO.2640/BANG/2017 PAGE 4 OF 7 SCRUTINY UNDER CASS AND NOTICES U/S 143(2) AND 142(1) WERE ISSUED. THERE IS ALSO CHANGE IN THE INCUMBENT AND IN COMPLIANCE TO NOTICES, LD. AR APPEARED FROM TIME TO TIME AND SUBMITTED DETAILS AND FILED STATEMENTS ON ISSUES AS CALLED FOR BY THE AO. WHEREAS THE AO FOUND THAT THERE WERE INTERNATIONAL TRANSACTIONS. WITH THE PRIOR APPROVAL OF THE PRINCIPAL CIT HAS REFERRED THE MATTER TO THE TPO. TPO CONSIDERED THE FUNCTIONAL PROFILE, FINANCIAL PROFILE OF THE TAX-PAYER AND THE TP STUDY REPORT REFERRED AT PARA 2.3 AS UNDER: 4. TPO EXAMINED TP DOCUMENTATION AND APPLIED THE FILTER AND COMPARABLES AND SELECTED THE FINAL COMPARABLES FOR SOFTWARE DEVELOPMENT SERVICES: IT(TP)A NO.2640/BANG/2017 PAGE 5 OF 7 FURTHER TPO GAVE FUNCTIONAL ANALYSIS OF COMPARABLE SELECTED BASED ON MATERIAL AND FINALLY GRANTED WORKING CAPITAL ADJUSTMENT AND FINAL SET OF COMPARABLE WERE CONSIDERED WITH AVERAGE OF 20.90%. FURTHER TPO FOUND THAT TNMM IS THE MOST APPROPRIATE METHOD APPLIED AND ACCEPTED AND MADE COMPUTATION OF ALP WITH ADJUSTMENTS OF RS.24,405,102/- AND PASSED ORDER U/S 92CA DATED 13/10/2016. AO PASSED DRAFT ASSESSMENT ORDER WITH ADJUSTMENT ON 06/12/2016 AND THE ASSESSEE FILED OBJECTIONS WITH DRP IN FORM 35A ON 11/1/2016. WHEREAS THE DRP HAS PASSED THE DIRECTIONS REJECTING ASSESSEES OBJECTIONS BY ORDER DATED 26/9/2017 AND FINALLY AO PASSED THE ASSESSMENT ORDER WITH TP ADJUSTMENT OF RS.2,44,05,102/- AND ASSESSED THE TOTAL INCOME OF RS.244,41,040/- VIDE ORDER U/S 143(3) R.W.S. 144C DATED 9/10/2017. 5. AGGRIEVED BY THE ORDER, ASSESSEE HAS FILED APPEAL BEFORE THE TRIBUNAL. AT THE TIME OF HEARING, LD. AR ARGUED ON THE IT(TP)A NO.2640/BANG/2017 PAGE 6 OF 7 GROUNDS OF TP AND SUBMITTED THAT METHOD ADOPTED BY THE ASSESSEE IS THE APPROPRIATE METHOD AND WITHOUT APPRECIATING THAT THE ASSESSEE HAS RENDERED SIMILAR SERVICES TO UNRELATED PARTIES. LD. AR REFERRED TO SOFTWARE DEVELOPMENT SERVICES WITH ASSOCIATED ENTERPRISES AND MADE HIS SUBMISSIONS IN RESPECT OF GROUND NOS.3 AND 4 ONLY. THE CONTENTION OF THE LD. AR THAT TPO HAS NOT GIVEN REASONS FOR ADOPTION OF CUP METHOD AND DRP HAS CONFIRMED THE ACTION OF THE TPO AND REJECTED ASSESSEES OBJECTION AND PRAYED FOR ALLOWING ASSESSEES APPEAL. CONTRA, LEARNED DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES AND MADE SUBMISSIONS IN RESPECT OF CUP METHOD AND FURTHER EMPHASIZED THAT DRP WAS CORRECT IN CONSIDERING THESE SUBMISSIONS AND THE FINDING OF THE TPO IN DISMISSING ASSESSEES OBJECTIONS. 6. WE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. PRIMA FACIE, LD. AR HAS RESTRICTED HIS ARGUMENTS AND SUBMISSIONS IN RESPECT OF GROUND NOS.3 AND 4 MENTIONING THAT NO PROPER REASONING WAS PROVIDED FOR CONSIDERING FINAL SET OF COMPARABLE. WE, ON PERUSAL OF THE SUBMISSIONS MADE BEFORE THE DRP BY THE ASSESSEE AND THE PAPER BOOK FOUND THAT AT PAGE 7 OF THE TPO, FUNCTIONAL ANALYSIS OF COMPARABLE OF SOFTWARE DEVELOPMENT SERVICES WAS MADE. WE FOUND THAT THOUGH THE TPO HAS ADOPTED FINAL SET OF COMPARABLE WHICH ARE CONFIRMED BY THE DRP BUT SAID ADOPTION OF COMPARABLE ARE WITHOUT ANY IT(TP)A NO.2640/BANG/2017 PAGE 7 OF 7 REASONING AS THERE IS NO PROPER FINDING IN THE TPO ORDER. ACCORDINGLY, WE FOUND THAT THE ORDER OF THE TPO IS CRYPTIC AND NOTHING IS COMING IN RESPECT OF COMPARABLE SELECTED EXCEPT ANALAYSIS AND THERE IS NO OBSERVATIONS OF THE TPO ON FUNCTIONALITY OF COMPARABLE AND THE SAME WAS CONFIRMED BY THE DRP. WE, CONSIDERING THE SUBMISSIONS, GROUNDS OF APPEAL AND THE MATERIAL FILED BEFORE US, ARE OF THE OPINION THAT THE MATTER HAS TO BE RE-LOOKED AND ACCORDINGLY RESTORE THE DISPUTED ISSUE TO THE FILE OF THE TPO FOR PROPER OBSERVATIONS AND FINDING. TPO IS DIRECTED TO PASS A REASONED AND SPEAKING ORDER. THE ASSESSEE SHOULD ALSO BE PROVIDED ADEQUATE OPPORTUNITY OF HEARING FOR SUBMITTING INFORMATION FOR EARLY DISPOSAL OF THE CASE. 7. WE ALLOW THE GROUNDS OF APPEAL OF THE ASSESSEE FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH SEPTEMBER, 2019. SD/- SD/- (A.K.GARODIA) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : BENGALURU DATED : 30/09/2019 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)- 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME-TAX APPELLATE TRIBUNAL BANGALORE