M/s IMS Health Technology Solutions India Pvt Ltd , Bangalore V. Deputy Commissioner of Income Tax Circle-3(1)(1), Bangalore

ITA 2836/BANG/2017

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 7010 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 25-08-2021
• Assessment Year: 2013-2014
• Appeal Filed On: 22-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; International transaction; Notional interest; TDS
• Section: 143(3); 92B

Judgement Text

IT(TP)A NO.2836/BANG/2017 M/S. IMS HEALTH ANALYTICS SERVICES PVT. LTD., BANGA LORE IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A NO.2836/BANG/2017 ASSESSMENT YEAR : 2013- 14 M/S. IMS HEALTH ANALYTICS SERVICES PVT. LTD. (IMS HEALTH TECHNOLOGY SOLUTI8ONS INDIA PVT. LTD. MERGED WITH IMS HEALTH ANALYTICS SERVICES PRIVATE LIMITED) FLOOR 4, OMEGA, EMBASSY TECH SQUARE MARATHAHALLI, SARJAPUR OUTER RING ROAD KADUBEESANAHALLI, BANGALORE 560 103 PAN NO : AABCD9297J VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-3(1)(1) BANGALORE APPELLANT RESPONDENT APPELLANT BY : SHRI K.R. VASUDEVAN, A.R. RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, D.R. DATE OF HEARING : 25.08.2021 DATE OF PRONOUNCEMENT : 26.08.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ASSESSMENT ORDER DATED 27.10.2017 PASSED FOR ASSESSMENT YEAR 2 013-14 BY THE A.O. U/S 143(3) R.W.S. 144C(13) OF THE INCOME-TAX A CT,1961 ['THE ACT' FOR SHORT] IN PURSUANCE OF DIRECTIONS GIVEN BY LD. DISPUTE RESOLUTION PANEL (DRP). IT(TP)A NO.2836/BANG/2017 M/S. IMS HEALTH ANALYTICS SERVICES PVT. LTD., BANGA LORE PAGE 2 OF 8 2. THE ASSESSEE HAS FILED REVISED GROUNDS OF APPEA L WHICH CONTAINS 25 GROUNDS. HOWEVER, AT THE TIME OF HEARI NG, THE LD. A.R. SUBMITTED THAT HE IS PRESSING GROUND NOS.9, 14, 16, 17, 23 & GROUND NO.25. IN RESPECT OF GROUND NO.9 ALSO, THE LD. A.R. SUBMITTED THAT THE ASSESSEE IS PLEADING FOR EXCLUSI ON OF ONLY TWO COMPANIES, VIZ., LARSEN & TOUBRO LTD. AND PERSISTEN T SYSTEMS LTD. ACCORDINGLY, REMAINING GROUNDS URGED BY THE ASSESSE E ARE DISMISSED AS NOT PRESSED. THE GROUNDS PRESSED BY T HE ASSESSEE READ AS UNDER: GROUNDS : 9. THE LEARNED AO/LEARNED TPO/HONBLE DRP HAS GROSS LY ERRED IN NOT REJECTING THE FOLLOWING COMPANIES FROM THE LIST OF COMPARABLE COMPANIES: LARSEN & TOUBRO LTD. PERSISTENT SYSTEMS LTD. 14. THE LEARNED AO/LEARNED TPO/HONBLE DRP ERRED IN NOT CONSIDERING THE FACT THAT THE APPELLANT DOES NOT HAVE ANY WORKI NG CAPITAL RISK, THEREFORE, NO NEGATIVE WORKING CAPITAL ADJUSTMENT S HOULD BE ALLOWED. 16. THE LEARNED AO/LEARNED TPO/HONBLE DRP ERRED IN LEVYING INTEREST ON THE OUTSTANDING RECEIVABLES OF THE APPE LLANT. 16.1 THE LEARNED AO/LEARNED TPO/HONBLE DRP ERRED IN MAKING ADJUSTMENT PERTAINING TO INTEREST ON THE OUTSTANDIN G RECEIVABLES WITHOUT APPRECIATING THAT THERE IS NO REAL INCOME ARISING T O THE APPELLANT. 16.2 THE LEARNED AO/LEARNED TPO/HONBLE DRP ERRED IN NOT CONSIDERING THE FACT THAT OUTSTANDING RECEIVABLES F ROM THE ASSOCIATED ENTERPRISE IS NOT AN INTERNATIONAL TRANSACTION WITH IN THE MEANING OF SECTION 92B OF THE ACT. 16.3 THE LEARNED AO/LEARNED TPO/HONBLE DRP ERRED IN NOT APPRECIATING THAT THE APPELLANT HAD ADOPTED TNMM AT ENTITY LEVEL AND THE NET PROFIT MARGIN IS TESTED TO BE ON ARMS LENGTH P RICE WHEREIN ALL INCOME AND EXPENDITURES WOULD HAVE ALREADY BEEN CONSIDERED AND BENCHMARKED. 16.4 THE LEARNED AO/LEARNED TPO/HONBLE DRP ERRE D IN NOT APPRECIATING THAT ONCE WORKING CAPITAL ADJUSTMENT C ONSIDERING RECEIVABLES/PAYABLES TO ASSOCIATED ENTERPRISE ARE D ONE, NO SEPARATE ADJUSTMENT FOR NOTIONAL INTEREST ON OUTSTANDING REC EIVABLES CAN BE MADE. IT(TP)A NO.2836/BANG/2017 M/S. IMS HEALTH ANALYTICS SERVICES PVT. LTD., BANGA LORE PAGE 3 OF 8 16.5 THE LEARNED AO/LEARNED TPO ERRED IN COMPUT ATION OF INTEREST BY NOT FOLLOWING DIRECTIONS OF THE HONBLE DRP WHILE C OMPUTING THE TP ADJUSTMENT IN THE FINAL ASSESSMENT ORDER. 17. THE LEARNED AO/HONBLE DRP ERRED IN DISALL OWING RETENTION BONUS OF RS.22,27,500, BY CONSIDERING THE SAME TO BE IN T HE NATURE OF A CONTINGENT LIABILITY. 23. THE LEARNED AO/LEARNED TPO/HONBLE DRP HAS ER RED IN SHORT GRANT OF TDS TO THE EXTENT OF RS.861,102, WHICH THE APPEL LANT IS ELIGIBLE TO CLAIM FOR THE AY 2013-14. 25. THE LEARNED AO/LEARNED TPO/HONBLE DRP HAS ERRE D IN LEVYING INTEREST UNDER SECTION 234C OF THE ACT ON ASSESSED INCOME, EVEN THOUGH SECTION 234C IS APPLICABLE ON RETURNED INCOME OF TH E APPELLANT. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROV IDING CUSTOMISED SOFTWARE DEVELOPMENT AS REQUIRED BY ITS ASSOCIATED ENTERPRISES. THE TURNOVER OF THE ASSESSEE FROM SOF TWARE DEVELOPMENT ACTIVITY WAS RS.59.21 CRORES. THE ASSE SSEE ADOPTED TNM METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTI ONS AND ADOPTED OPERATING PROFIT BY OPERATING COST (OP/OC) AS PROFIT LEVEL INDICATOR. THE ASSESSEE DECLARED PROFIT OF 15.20%. THE ASSESSEE HAD SELECTED 11 COMPARABLE COMPANIES WHOSE AVERAGE MARGIN WAS 12.45%. ACCORDINGLY, THE ASSESSEE CLAIMED THAT ITS INTERNATIONAL TRANSACTION RELATING TO SOFTWARE DEVELOPMENT SERVIC ES IS AT ARMS LENGTH. 4. THE TPO REJECTED THE TP STUDY OF THE ASSESSEE A ND SELECTED THE FOLLOWING 7 COMPANIES: SI. NO. COMPANY NAME UNADJUSTED (OP/OC) ADJUSTED MARGIN (OP/OC) 1 C G V A K SOFTWARE & EXPORTS LTD. 20.45% 21.84% 2 I C R A TECHNO ANALYTICS LTD. 17.10% 14.78% 3 LARSEN & TOURBO INFOTECH LTD. 26.06% 27.44% 4 MIND TREE LTD. (SEGMENTAL) 20.23% 19.17% 5 PERSISTENT SYSTEMS LTD. (SEGMENTAL) 28.27% 28.77% 6 R S SOFTWARE (INDIA) LTD. 17.41% 20.19% 7 TECH MAHINDRA LTD. (SEGMENTAL) 18.72% 19.93% AVERAGE MARGIN 21.18% 21.73% IT(TP)A NO.2836/BANG/2017 M/S. IMS HEALTH ANALYTICS SERVICES PVT. LTD., BANGA LORE PAGE 4 OF 8 5. ACCORDINGLY, THE TPO MADE TRANSFER PRICING ADJU STMENT OF RS.3,36,74,644/-. LD. DRP DIRECTED FOR EXCLUSION O F M/S. TECH MAHINDRA LTD. AND CONFIRMED THE REMAINING COMPARABL E COMPANIES SELECTED BY THE TPO. 6. BEFORE US, THE ASSESSEE SEEKS EXCLUSION OF TWO COMPANIES, VIZ,M M/S. LARSEN & TOUBRO INFOTECH LTD. AND PERSIS TENT SYSTEMS LTD. ON TURNOVER CRITERIA, WHOSE TURNOVER FOR THE Y EAR UNDER CONSIDERATION WAS RS3613.42 CRORES AND RS.996.75 CR ORES RESPECTIVELY. THE LD A.R SUBMITTED THAT THE TURNO VER OF THE ASSESSEE COMPANY WAS ONLY RS.59.21 CRORES FALLING U NDER THE CATEGORY OF 1 200 CRORES AND HENCE COMPANIES HAVI NG TURNOVER EXCEEDING TWO HUNDRED CRORES HAVE BEEN HELD TO BE N OT COMPARABLE. IN THIS REGARD, THE LD. A.R. PLACED HIS RELIANCE ON THE DECISION RENDERED BY THE COORDINATE BENCH IN THE CASE OF IGE FI SOFTWARE INDIA PVT. LTD. (IT TPA NO.2614/BANG/2017 DATED 4.9 .2019). 7. WE HEARD LD. D.R. ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICE THAT BOTH THE ABOVE SAID COMPANIES HAVE BEEN EXCLUDED BY THE COORDINATE BENCH IN THE ABOVE CITED CASE BY FOL LOWING THE DECISION RENDERED BY ANOTHER COORDINATE BENCH IN TH E CASE OF GENESIS INTEGRATING SYSTEMS INDIA PVT. LTD. VS. DCI T (ITA NO.1231/BANG/2010). THE RELEVANT PORTION OF THE OR DER PASSED BY THE COORDINATE BENCH IN THE CASE OF IGEFI SOFTWARE INDIA PVT. LTD. (SUPRA) ARE EXTRACTED BELOW: 9. WE HEARD THE PARTIES AND PERUSED THE RECORD. IN TH E CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) P LTD VS. DCIT (ITA NO.1231/BANG/2010), THE CO-ORDINATE BENCH OF TRIBUN AL HAS RELIED UPON THE OPINION EXPRESSED BY DUN AND BRADST REET THAT THE GROUPING OF COMPANIES HAVING TURNOVER OF R S.1.00 CRORE TO RS.200 CRORES AS COMPARABLE WITH EACH OTHE R WAS HELD TO BE PROPER. SINCE CERTAIN DECISIONS WERE REN DERED BY OTHER CO-ORDINATE BENCHES FIXING DIFFERENT CRITERIA , THE CO- IT(TP)A NO.2836/BANG/2017 M/S. IMS HEALTH ANALYTICS SERVICES PVT. LTD., BANGA LORE PAGE 5 OF 8 ORDINATE BENCH CONSIDERED THE DIVERGENT VIEWS EXPRE SSED BY VARIOUS BENCHES IN THE CASE OF AUTODESK INDIA (P) L TD VS. DCIT (2018)(96 TAXMANN.COM 263) AND EXPRESSED THE V IEW THAT THE LD CIT(A) WAS RIGHT ON THE ISSUE OF APPLIC ATION OF TURNOVER FILTER BY FOLLOWING THE RATIO LAID DOWN IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) P LTD (SUPR A). 8. IN THE INSTANT CASE, THE ASSESSEES EXCLUSION O F TWO COMPANIES SINCE THE TURNOVER OF THE ABOVE SAID TWO COMPANIES ARE ABOVE RS.RS.200 CRORES AND HENCE AS PER THE DECISION REFE RRED SUPRA, M/S LARSEN & TOUBRO INFOTECH LTD. AND PERSISTENT SYSTEM S LTD. ON TURNOVER CRITERIA ARE LIABLE TO BE EXCLUDED ON TURN OVER CRITERIA. ACCORDINGLY, WE DIRECT THE TPO/AO TO EXCLUDE THE AB OVE SAID TWO COMPANIES 9. THE NEXT ISSUE CONTESTED BY THE ASSESSEE RELATE S TO CLAIM FOR WORKING CAPITAL ADJUSTMENT. IT IS THE CASE OF THE ASSESSEE THAT IT DOES NOT HAVE ANY WORKING CAPITAL RISK AND THEREFOR E NO NEGATIVE WORKING CAPITAL ADJUSTMENT SHOULD BE MADE. IN THIS REGARD, LD. A.R. PLACED ITS RELIANCE ON THE DECISION RENDERED B Y COORDINATE BENCH IN THE CASE OF LAM RESEARCH (INDIA) PVT. LTD. VS. DCIT (IT TPA NO.1437/BANG/2014 DATED 30.4.2015) IN SUPPORT O F HIS CONTENTIONS. 10. WE NOTICE FROM THE ABOVE SAID DECISION THAT TH E COORDINATE BENCH HAS HELD THAT A NEGATIVE WORKING CAPITAL ADJU STMENT CANNOT BE CARRIED OUT IN CASE OF CAPTIVE SERVICE PROVIDER AND IN THIS REGARD THE COORDINATE BENCH HAS FOLLOWED THE DECISION REND ERED BY HYDERABAD BENCH OF TRIBUNAL IN THE CASE OF ADAPTEC INDIA PVT. LTD. (ITA NO.206/HYD/2014 DATED 25.3.2015). ACCORDINGLY , FOLLOWING THE ABOVE SAID DECISIONS, WE HOLD THAT THERE IS NO NECESSITY TO MAKE NEGATIVE WORKING CAPITAL ADJUSTMENT IN THIS CASE AS THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER. IT(TP)A NO.2836/BANG/2017 M/S. IMS HEALTH ANALYTICS SERVICES PVT. LTD., BANGA LORE PAGE 6 OF 8 11. THE NEXT ISSUE RELATES TO TP ADJUSTMENT MADE I N RESPECT OF OUTSTANDING RECEIVABLES. THE LD. A.R. SUBMITTED TH AT AN IDENTICAL ISSUE WAS CONSIDERED BY THE COORDINATE FOR WHICH IN THE CASE OF ISG NOVA SOFT TECHNOLOGIES LTD. (IT TPA NO.3284/BANG/20 18 DATED 18.3.2021) AND THE MATTER WAS RESTORED TO THE FILE OF TPO FOR EXAMINING IT AFRESH. 12. WE HEARD LD. D.R. ON THIS ISSUE AND PERUSED TH E RECORD. WE NOTICE THAT THE COORDINATE BENCH HAS RESTORED AN ID ENTICAL ISSUE TO THE FILE OF AO/TPO IN THE CASE OF ISG NOVA SOFT TE CHNOLOGIES LTD. (SUPRA) WITH THE FOLLOWING DIRECTIONS: 24. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ID. AR FAIRLY CONCEDED THAT OUTSTANDING AMOUNT ON ACCOUNT OF SALES/SERVICES BILLED TO AE AK IN TO LOAN ADVANCED BY ASSESSEE IS AN INTERNATIONAL TRANSACTIO N. AS HELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF AVENUE ASIA BUSINESS ADVISORS (P.) LTD. V. DCIT [2017] 398 ITR 120 (DEL), THERE SHOULD BE TP ADJUSTMENT ON THIS COUNT AFTER M AKING PROPER TP STUDY BY THE TPO AFTER CONSIDERING THE PERIOD OF CREDIT ENJOYED BY THE COMPARABLES AND ALSO APPLICABLE LIBO R RATE IN THE PLACE OF AES FOR BENCHMARKING THE RATE OF INTER EST TO ARRIVE AT THE ALP. WITH THESE OBSERVATIONS, WE REMIT THE I SSUE IN DISPUTE TO THE FILE OF AO/TPO TO BENCHMARK THE INTEREST RAT E IN THE LIGHT OF THE DECISIONS CITED BY ID. DR. FURTHER, WE MAKE IT CLEAR THAT THE TPO SHOULD COMPUTE THE INTEREST ONLY FOR THE RE LEVANT ASSESSMENT YEAR AFTER GOING THROUGH THE RELEVANT AG REEMENTS ENTERED BY THE ASSESSEE WITH AES WHILE COMPUTING TH E ALP. FOLLOWING THE ABOVE SAID DECISION, WE RESTORE THIS ISSUE TO THE FILE OF AO/TPO WITH SIMILAR DIRECTIONS. 13. THE NEXT ISSUE RELATES TO DISALLOWANCE OF RETE NTION BONUS OF RS.22,27,500/- TREATING THE SAME AS CONTINGENT LIAB ILITY. IT(TP)A NO.2836/BANG/2017 M/S. IMS HEALTH ANALYTICS SERVICES PVT. LTD., BANGA LORE PAGE 7 OF 8 14. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. THE A.O. NOTICED THAT THE ASSESSEE COMPANY HAS MADE A PROVISION OF RS.22,27,500/- TOWARDS RETENTION PROVISION. IT WAS SUBMITTED THAT THE ABOVE SAID PROVISION WAS MADE ON THE BASIS OF PROMISE GIVEN TO EMPLOYEES THAT HE SHALL BE PAID BONUS IF H E CONTINUES IN SERVICE FOR A SPECIFIED PERIOD. IT WAS SUBMITTED T HAT THE ABOVE SAID AMOUNT SHALL BE PAID ON FULFILLMENT OF THE CONDITIO NS MENTIONED IN THE APPOINTMENT LETTER. HENCE, THE A.O. ASKED THE ASSESSEE TO FURNISH A COPIES OF APPOINTMENT LETTERS IN ORDER TO VERIFY THE CONDITIONS FOR PAYMENT OF RETENTION BONUS. HOWEVER , THE ASSESSEE DID NOT FURNISH ANY EVIDENCE BEFORE THE A.O. AND HE NCE HE DISALLOWED THE CLAIM. BEFORE LD. DRP ALSO THE ASSE SSEE DID NOT FURNISH ANY EVIDENCE AND HENCE LD. DRP ALSO CONFIRM ED THE DISALLOWANCE. 15. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. BEFORE US ALSO, THE ASSESSEE DID NOT FURNISH ANY EV IDENCE IN SUPPORT OF CLAIM OF PROVISION FOR RETENTION BONUS. UNDER T HESE SET OF FACTS, WE HAVE NO OTHER OPTION BUT TO CONFIRM THE DISALLOW ANCE MADE BY THE A.O. 16. THE NEXT ISSUE RELATES TO SHORT GRANT OF TDS T O THE EXTENT OF RS.8,61,102/-. SINCE THIS MATTER REQUIRES VERIFICA TION AT THE END OF THE A.O., WE RESTORE THIS ISSUE TO THE FILE OF THE A.O. TO DECIDE THE SAME IN ACCORDANCE OF LAW. 17. THE LAST ISSUE RELATES TO COMPUTATION OF INTER EST U/S 234C OF THE ACT. THE LD. A.R. SUBMITTED THAT THE A.O HAS C OMPUTED INTEREST U/S 234C OF THE ACT ON THE ASSESSED INCOME, WHILE THE PROVISIONS OF SECTION 234C OF THE ACT STATES THAT THE INTEREST SHOULD BE COMPUTED ON RETURNED INCOME. IT(TP)A NO.2836/BANG/2017 M/S. IMS HEALTH ANALYTICS SERVICES PVT. LTD., BANGA LORE PAGE 8 OF 8 18. WE FIND MERIT IN THE SAID SUBMISSION. A PE RUSAL OF THE PROVISIONS OF SEC. 234C WOULD SHOW THAT THE INTERES T IS REQUIRED TO BE COMPUTED ON TAX DUE ON RETURNED INCOME. ACCORDI NGLY, WE DIRECT THE A.O. TO COMPUTE INTEREST U/S 234C OF THE ACT ON THE RETURNED INCOME. 19. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH AUG, 2021 SD/- (GEORGE GEORGE K.) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 26 TH AUG, 2021. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.