Deputy Commissioner of Income tax, V. M/s. SAS Research And Development Pvt Ltd, Pune

ITA 2792/PUN/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3708 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 09-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S B PRASAD
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , , . , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO , AM . / ITA NO. 2792 /P U N/201 6 / ASSESSMENT YEAR : 20 1 1 - 1 2 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 6, PUNE . / APPELLANT VS. M/S. SAS RESEARCH AND DEVELOPMENT (I) PVT. LTD., 2 ND & 3 RD FLOOR, TOWER - 5, MAGARPATTA CITY, HADAPSAR, PUNE 411013 . / RESPONDENT PAN: AAECS8099L . / ITA NO. 2766 /P U N/201 6 / ASSESSMENT YEAR : 2011 - 12 M/S. SAS RESEARCH AND DEVELOPMENT (I) PVT. LTD., 2 ND & 3 RD FLOOR, TOWER - 5, MAGARPATTA CITY, HADA PSAR, PUNE 411013 . / APPELLANT PAN: AAECS8099L VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 6, PUNE . / RESPONDENT ASSESSEE BY : SHRI RAJENDRA AGIWAL REVENUE BY : SHRI S.B. PRASAD, CIT / DATE OF HEARING : 22 . 0 1 .201 9 / DATE OF PRONOUNCEMENT: 21 . 0 2 .201 9 ITA NO. 2766 /P U N/20 1 6 ITA NO.2792/PUN/2016 2 / ORDER PER SUSHMA CHOWLA, J M : THE CROSS APPEAL S FILED BY REVENUE AND ASSESSEE ARE AGAINST ORDER OF CIT (A) - 1 3 , PUNE , DATED 30 . 0 9 .20 1 6 RELATING TO ASSESSMENT YE AR 20 1 1 - 1 2 AGAINST ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2. THE CROSS APPEALS FILED BY REVENUE AND ASSESSEE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE REVENUE IN ITA NO.2792/PUN/2016 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DIRECTING THE A.O. TO EXCLUDE INFOSYS TECHNOLOGIES LTD. AND MINDTREE LTD. FROM THE LIST OF COMPARABLE COMPANIES. 2. FOR THIS AND SUCH OTHER REASONS AS MAY BE URGED AT THE TIME OF HEARING, THE ORDER OF THE CIT(A) ON ABOVE ISSUE MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 4. THE ASSESSEE IN IT A NO.2766/PUN/2016 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - GROUNDS OF APPEAL PERTAINING TO TRANSFER PRICING ADJUSTMENT: 1 . INAPPROPRIATE TRANSFER PRICING ADJUSTMENT EVEN THOUGH THE PRICING OF ALL INTERNATIONAL TRANSACTIONS OF THE APPELLANT WAS AT ARM'S LENGTH ERRED IN MAKING/ CONFIRMING TRANSFER PRICING ADJUSTMENT BY REJECTING THE ANALYSIS UNDERTAKEN BY THE APPELLANT TO DETERMINE ARM'S LENGTH PRICE FOR ITS INTERNATIONAL TRANSACTIONS PERTAINING TO RENDERING OF SOFTWARE DEVELOPMENT SUPPORT SERVICES TO THE AES. 2 . INAPPROPRIATE USE OF SINGLE YEAR AND NON - CONTEMPORANEOUS FINANCIAL DATA OF COMPARABLE COMPANIES FOR TRANSFER PRICING ANALYSIS ITA NO. 2766 /P U N/20 1 6 ITA NO.2792/PUN/2016 3 ERRED IN CONSIDERING THE OPERATING MARGINS ON OPERATING COST OF THE COMPARABLE COMPANIES BASED ON THE FINANCIAL DATA PERTA INING ONLY TO FINANCIAL YEAR ENDED 31 MARCH 2011 AND REJECTING USE OF FINANCIAL DATA OF COMPARABLE COMPANIES FOR MULTIPLE I.E. INCLUDING 31 MARCH 2010 AND 31 MARCH 2009. FURTHER, ERRED IN COMPUTING THE ARM'S LENGTH PRICE USING THE FINANCIAL INFORMATION OF COMPARABLE COMPANIES AVAILABLE AT THE TIME OF ASSESSMENT PROCEEDINGS, ALTHOUGH SUCH INFORMATION WAS NOT AVAILABLE AT THE TIME WHEN THE APPELLANT COMPLIED WITH THE TRANSFER PRICING REGULATIONS. 3 . INAPPROPRIATE MODIFICATION OF EXPORT EARNING FILTER APPLIED B Y THE APPELLANT ERRED IN INAPPROPRIATE MODIFICATION OF EXPORT EARNINGS FILTER APPLIED BY THE APPELLANT BY REJECTING COMPANIES HAVING EXPORT EARNINGS LESS THAN 75 % OF OPERATING REVENUE AS AGAINST THE FILTER OF 25 % APPLIED BY THE APPELLANT. 4 . INAPPROPRIATE R EJECTION OF THE TURNOVER FILTER APPLIED BY THE APPELLANT ERRED IN INAPPROPRIATELY REJECTING THE TURNOVER FILTER OF RS . 1 CRORE TO RS . 100 CRORES APPLIED BY THE APPELLANT WHILE CONDUCTING ITS TRANSFER PRICING STUDY FOR FY 2010 - 11. 5 . INAPPROPRIATE REJECTION OF CERTAIN COMPARABLE COMPANIES IDENTIFIED IN THE TRANSFER PRICING STUDY REPORT ERRED BY REJECTING CERTAIN COMPARABLE COMPANIES FROM THE SET OF COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY REPORT FOR BENCHMARKING ITS INTERNA TIONAL TRANSACTION PERTAINING TO RENDERING OF SOFTWARE DEVELOPMENT SUPPORT AND CONSULTANCY SERVICES EVEN THOUGH THE COMPANIES SATISFIED ALL THE COMPARABILITY CRITERIA/ FILTERS APPLIED WHILE CONDUCTING THE TRANSFER PRICING STUDY. 6 . INAPPROPRIATELY CONSIDERIN G NEW COMPARABLE COMPANIES AS COMPARABLE TO THE APPELLANT ERRED IN ADOPTING AN INCOHERENT APPROACH AND IDENTIFYING CERTAIN INAPPROPRIATE ADDITIONAL NON - COMPARABLE COMPANIES AS COMPARABLE TO THE APPELLANT ON AN AD - HOC BASIS (CHERRY PICKING). 7 . INAPPROPRIATE LY REJECTING CERTAIN FUNCTIONALLY COMPARABLE COMPANIES MERELY ON ACCOUNT OF HAVING DIMINISHING REVENUES ERRED IN REJECTING FUNCTIONALLY COMPARABLE COMPANIES MERELY ON THE GROUND THAT THE COMPANIES HAVE DIMINISHING REVENUES 8 . INAPPROPRIATELY REJECTING ADJUS TMENT TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS - A - VIS THE COMPARABLE COMPANIES ERRED IN COMPARING FULL - FLEDGED RISK BEARING ENTITIES WITH THE APPELLANT'S CAPTIVE OPERATIONS WITHOUT MAKING ANY RISK ADJUSTMENT FOR DIFFERENCES BETWE EN THE RISK PROFILE OF COMPARABLE COMPANIES CONSIDERED AS COMPARABLE VIS - A - VIS THE RISK PROFILE OF THE APPELLANT. 9 . ERRONEOUSLY COMPUTING THE TRANSFER PRICING ADJUSTMENT FROM THE ARITHMETIC MEAN OF ARM'S LENGTH PRICE INSTEAD OF LOWER 5 % ARITHMETIC MEAN ITA NO. 2766 /P U N/20 1 6 ITA NO.2792/PUN/2016 4 ERR ED IN COMPUTING THE ARMS - LENGTH PRICE, WITHOUT TAKING INTO ACCOUNT THE LOWER 5 % VARIATION FROM THE MEAN ARMS - LENGTH PRICE DETERMINED, WHICH IS PERMITTED TO AND WHICH HAS BEEN OPTED FOR BY THE APPELLANT UNDER THE PROVISIONS OF SECTION 92C(2) OF THE ACT. OT HER GROUNDS OF APPEAL: 10 . INAPPROPRIATE LEVY OF PENALTY AND INTEREST ERRED IN INITIATING PENALTY PROCEEDING UNDER SECTIONS 271( 1 )(C) OF THE ACT AND LEVYING INTEREST UNDER SECTION 234B OF THE ACT. 5 . THE ONLY ISSUE RAISED IN THE PRESENT APPEAL FILED BY THE REVENUE IS AGAINST EXCLUSION OF INFOSYS TECHNOLOGIES LTD. AND MINDTREE LTD. HAVING VERY HIGH TURNOVER AS AGAINST THE TURNOVER OF ASSESSEE AT 62.50 CRORES. 6. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD POINTED OUT THAT IF TURN OVER FILTER WAS APPLIED AT 1 CRORE TO 200 CRORES AGAINST TURNOVER OF ASSESSEE AT 62.50 CRORES , THE TWO CONCERNS INFOSYS TECHNOLOGIES LTD. AND MINDTREE LTD. COULD NOT BE TAKEN AS COMPARABLE HAVING HIGH TURNOVER OF 25,385 CRORES AND 1509 CRORES, RE SPECTIVELY. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ALSO POINTED OUT THAT SIMILAR RELIEF WAS GIVEN BY THE CIT(A) IN EARLIER YEARS AND NO DISPUTE WAS RAISED BY THE REVENUE ON THIS GROUND. HE FURTHER POINTED OUT THAT IN CASE APPEAL OF REVENU E IS DISMISSED, THEN THE APPEAL OF ASSESSEE WOULD BECOME ACADEMIC AS THE MARGINS SHOWN BY THE ASSESSEE WERE WITHIN +/ - 5% RANGE OF THE MEAN MARGINS OF COMPARABLES. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF ASSESSING OFFICER / TPO . 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND CONSULTANCY. THE ASSESSING OFFICER MADE REFERENCE UNDER SECTION 92CA(1) OF THE ACT TO THE TPO T O BENCHMARK THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY ITA NO. 2766 /P U N/20 1 6 ITA NO.2792/PUN/2016 5 THE ASSESSEE. THE ASSESSEE HAD SELECTED CERTAIN CONCERNS AS COMPARABLES. HOWEVER, THE TPO IN FINAL ANALYSIS PICKED UP DIFFERENT SET OF COMPARABLES, WHICH INCLUDED TWO COMPARABLES I.E. INFOSYS TECHN OLOGIES LTD. AND MINDTREE LTD. THE PLEA OF ASSESSEE BEFORE THE TPO WAS THAT MARGINS OF SAID TWO CONCERNS HAVING HIGH TURNOVER COULD NOT BE COMPARED WITH THE MARGINS OF ASSESSEE AS ITS TOTAL TURNOVER FOR THE YEAR WAS 62.50 CRORES. THE TPO HOWEVER, PROPOSED AN UPWARD ADJUSTMENT OF 7,44,48,631/ - , WHICH WAS APPLIED BY THE ASSESSING OFFICER IN FINAL ASSESSMENT ORDER. THE CIT(A) HOWEVER, DIRECTED THE EXCLUSION OF INFOSYS TECHNOLOGIES LTD. AND MINDTREE LTD. ON THE GROUND OF THEIR HIGH TURNOVER, AGAINST WHICH THE REVENUE IS IN APPEAL. WE FIND NO MERIT IN THE GROUNDS OF APPEAL RAISED BY THE REVENUE SINCE THE TURNOVER OF ASSESSEE FOR THE ASSESSEE WAS ONLY 62.50 CRORES, WHILE BENCHMARKING THE INTERNATIONAL TRANSACTIONS . O NE OF THE FILTERS WHICH IS TO BE APPLIED IS THE TURNOVER FILTER AND IN SUC H CASES, WHERE THE TURNOVER IS LOW, THE FILTER WHICH IS TO BE APPLIED IS TURNOVER BETWEEN 1 CRORE TO 200 CRORES. HOWEVER, WE FIND THAT INFOSYS TECHNOLOGIES LTD. FOR THE YEAR UNDER CONSIDERATION HAD SHOWN TURNOVER OF 25,385 CRORES AND MINDTREE LTD. H AD SHOWN TURNOVER OF 1509 CRORES. THE MARGINS OF SAID TWO CONCERNS I.E. INFOSYS TECHNOLOGIES LTD. AND MINDTREE LTD. COULD NOT BE APPLIED IN THE FINAL SET OF COMPARABLES IN ORDER TO BENCHMARK INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. ACCORDINGLY, THE SAME HAVE TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. UPHOLDING THE ORDER OF CIT(A) IN THIS REGARD, WE DISMISS THE GROUNDS OF APPEAL RAISED BY REVENUE. 9. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASS ESSEE HAS FAIRLY CONCEDED THAT IN CASE THE APPEAL OF REVENUE IS DISMISSED, THEN THE ASSESSEES APPEAL WOULD BECOME ACADEMIC AS THE MARGINS SHOWN BY THE ASSESSEE AND ITA NO. 2766 /P U N/20 1 6 ITA NO.2792/PUN/2016 6 THE MEAN MARGINS OF COMPARABLES AFTER EXCLUSION OF MARGINS OF INFOSYS TECHNOLOGIES LTD. AND MINDTREE LTD. WOULD BE WITHIN +/ - 5% RANGE. ACCORDINGLY, WE DO NOT ADJUDICATE THE ISSUES RAISED BY THE ASSESSEE IN ITS APPEAL . THE GROUNDS OF APPEAL RAISED BY REVENUE AND ASSESSEE ARE THUS, DISMISSED. 10 . IN THE RESULT, BOTH THE APPEALS OF REVENUE AND ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON THIS 21 ST D AY OF FEBRUARY , 201 9 . SD/ - SD/ - ( D.KARUNAKARA RAO ) (SUSHMA CHOWLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 21 ST FEBRUARY , 201 9 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT(A) - 1 3 , PUNE ; 4. THE CI T (IT/TP), PUNE / PCIT - 3, PUNE ; 5. 6. , , / DR A , ITAT, PUNE ; / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE