M/s KMG Infotech Ltd., Bangalore V. DCIT, Bangalore

ITA 286/BANG/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5556 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 19-01-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 29-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJA SHEKAR REDDY
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, B ENGALURU BEFORE SHRI GEORGE GEORGE K , JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) A NO. 286 / BANG/20 1 6 (ASSESSMENT YEAR: 2011 - 12 ) M/S.KMG INFOTECH LTD., NO.201 /201, VANGUARD RISE, 163 KONENA AGRAHARA, BENGALURU - 560017 . PAN: AABCK2065 P VS. APPELLANT DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 4(1)(1), BENGALURU. RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, CA. RESPONDENT BY : SHRI RAJA SHE KAR REDDY, CIT(DR). DATE OF HEARING : 19/01/2017 DATE OF PRONOUNCEMENT : 04 /0 4 /2017 O R D E R PER I NTURI RAMA RAO, AM : THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C INCOME - TAX AC T, 1961 ['THE ACT' FOR SHORT] DATED 04/01/2016 FOR THE ASSESSMENT YEAR 2011 - 12. IT (TP) A NO . 286 /BANG/201 6 PAGE 2 2. BRIEFLY FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY DULY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS A SUBSIDIARY OF KEY MANAGING GROUP IN C., USA. IT IS ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) AND NON AES. RETURN OF INCOME FOR THE ASSESSMENT YEAR 2011 - 12 WAS FILED ON 29/11/2012 DECLARING TOTAL LOSS OF RS.1,06,99,1 9 8/ - .THE ASSESS EE - COMPANY ALSO REPORTED THE FOLLOWING INTERNATIONAL TRANSACTIONS IN ITS FORM 3CA/3CA: I. SOFTWARE DEVELOPMENT SERVICES RS.22,93,93,247/ - II. REIMBURSEMENT OF EXPENSES RS. 8,97,06,639/ - III. COMMISSION PAID . .. RS. 4,03,35,732/ - IT IS SUBMITTED THAT KMG USA DOES EXTENSIVE MARKETING AND SECURE THE CONTRACTS WITH THIRD PARTIES AND OUTSOURCES THE SAME TO KMG INDIA ON BACK TO BACK BASIS. THE ASSESSEE - COMPANY SERVES AS AN EXECUTION CENTRE FOR CONTRACTS WON BY KMG USA. KMG USA DOES NOT R ETAIN ANY MARGINS FROM THE AMOUNT BILLED TO END CUSTOMERS. FOR THE SERVICES PERFORMED BY KMG USA, THE ASSESSEE - COMPANY PAYS COMMISSION TO KMG, USA. THE ASSESSEE - COMPANY SOUGHT TO JUSTIFY THE CONSIDERATION RECEIVED FOR INTERNATIONAL TRANSACTIONS ENTERED IN TO WITH ITS AES TO BE AT ARM S LENGTH. THE ASSESSEE - COMPANY ALSO SUBMITTED TH E TRANSFER PRICING (TP) STUDY ADOPTING MEAN OF AVERAGE RATES CHARGED TO NON - AE AS PROFIT LEVEL INDICTOR (PLI) FOR TRANSFER PRICING STUDY. THE ASSESSEE - COMPANY APPLIED CUP METHOD WHICH WAS CONSIDERED TO BE MOST APPROPRIATE METHOD FOR THE PURPOSE OF BENCH MARKING ITS IT (TP) A NO . 286 /BANG/201 6 PAGE 3 INTERNATIONAL TRANSACTIONS. THE P RICE CHARGED BY AE FOR OFFSHORE SERVICES IS 30.7 0 %, 22 .16% F OR NON - AE FOR ONSITE SERVICE. THE ASSESSING OFFICER REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER (TPO). THE TPO, BY ORDER DATED 27/01/2015 PASSED U/S 92CA OF THE ACT, SUGGESTED TP ADJUSTMENT OF RS.7,25,06,174/ - . TPO REJECTED TP STUDY REPORT SUBMITTED BY THE ASSESSEE - COMPANY AND ALSO REJECTED THE CUP METHOD ADOPTED BY THE ASSESSEE - COMPANY. THE TPO COMPUTED ALP BY ADOPTING TNMM AS THE MOST APPROPRIATE METHOD AND PROCEEDED WITH DIFFERENT SET OF COMPARABLES BY APPLYING THE FOLLOWING FILTERS: IT (TP) A NO . 286 /BANG/201 6 PAGE 4 APPLY ING THE ABOVE FILTERS, TPO PASSED ORDER U/S 92CA AND FINALLY SELECTED THE FO LLOWING 13 COMPARABLE ENTITIES WHOSE OPERATING MARGIN ON THE OPERATING COST WAS DETERMINED AT 24.82%. IT (TP) A NO . 286 /BANG/201 6 PAGE 5 ON THE ABOVE SAID METHOD, TPO COMPUTED TP ADJUSTMENT AS FOLLOWS: 3. THE AO PASSED DRAFT ASSESSMENT O R DER DATED 17/03/2015 U/S 143(3) R . W.S. 14 4C OF THE ACT INCORPORATING THE ABOVE TP ADJUSTMENTS. 4. BEING AGGRIEVED, ASSESSEE - COMPANY FILED OBJECTIONS BEFORE THE DRP CONTENDING INTER ALIA THAT VERY REFERENCE BY THE AO TO TPO FOR THE PURPOSE OF DETERM ININ G ALP IS N OT VALID IN LAW AS THE AO F AILED TO DEMONSTRATE AS TO WHY IT WAS NECESSARY AND EXPEDIENT TO DO SO. IT WAS FURTHER CONTENDED THAT SINCE THE ASSESSEE - COMPANY HAD ENTERED INTO ARRANGEMENT WITH AE ON BACK TO BACK BILLING THERE WAS NO QUESTION OF ANY ALP IN THE TRANSACTION AND ALSO CHAL LENGING REJECTION OF CUP METHOD ADOPTED BY THE ASSESSEE - COMPANY BY TPO AND REJECTION OF INTERNAL COMPARABLE AND ADOPTING OF IN - OPERATIVE FILTERS. THE ASSESSEE - COMPANY ALSO SOUGHT THE ADJUSTMENT ON ACCOUNT OF UNDER - CAPACITY UTILIZATION. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE - COMPANY, THE IT (TP) A NO . 286 /BANG/201 6 PAGE 6 DRP HELD THAT FOLLOWING 6 COMPANIES ARE NOT COM PARA BLE WITH THE ASSESSEE - COMPANY ON THE APPLICATION OF UPPER TURNOVER LIMIT OF RS.200 CRORES AND CONFIRMED THE FINDINGS OF THE TPO : 5. THE AO PASSED FINA L ASSESSMENT ORDER DATED 04/01/2016 U/S 143(3) R.W.S . 144C OF THE ACT INCORPORATING THE SAME TP ADJUSTMENT AS SUGGESTED BY THE TPO WITHOUT CONSIDERING THE FACT THAT THE 6 COMPARABLES WERE DELETED BY THE DRP. 6. BEING AGGRIEVED, ASSESSEE - COMPANY IS B EFORE US CONTENDING THAT THE DIRECTION OF THE D RP TO EXCLUDE 6 COMPANIES ON THE GROUNDS OF UPPER TURNOVER FILTER OF RS.200 CRORES HAD NOT BEEN COMPLIED WITH BY AO . AO ALSO HAD NOT CONSIDERED DIRECTIONS OF THE DRP CONTENDING THAT THE TPO WAS NOT JUSTIFIED I N REJECTING TP STUDY REPORT OF THE ASSESSEE ADOPTING CUP METHOD. DRP ALSO REJECTED ALTERNATIVE SUBMISSION OF THE ASSESSEE - COMPANY CONSIDERING INTERNAL COMPARABLE UNDER TNMM IS PREFERABLE TO IT (TP) A NO . 286 /BANG/201 6 PAGE 7 SELECTING EXTERNAL COMPANIES AS COMPARABLES. THE ASSESSEE - COMPANY RAISED THE FOLLOWING OBJECTIONS BEFORE THE DRP: 7. DURING THE COURSE OF HEARING BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT THE ASSESSEE ONLY EXPORT S IT (TP) A NO . 286 /BANG/201 6 PAGE 8 SOFTWARE DEVELOPMENT SERVICES TO AES AS WELL AS NON - AES IN USA AND DOMESTIC CLIENTS. THUS KMG USA DOES EXTENSIVE MARKETING AND SECURE CONTRACTS WITH THIRD PARTIES AND OUTSOURCES THE SAME TO KMG INDIA ON BACK TO BACK BASIS. THE ASSESSEE - COMPANY SERVES AS AN EXECUTION CENTRE FOR CONTRACTS WON BY KMG USA. KMG USA DOES NOT R ETAIN ANY MARGINS FROM THE AMOUNT BILLED TO END CUSTOMERS. FOR THE SERVICES PERFORMED BY AE, ASSESSEE - COMPANY PAYS COMMISSION AT 10% FOR OFFSHARE SERVICES AND 25% ON ONSITE REVENUE SERVICES. THUS, REVENUE EARNED BY THE ASSESSEE - COMPANY F R OM ITS AE IS ONL Y PASS THROUGH INCOME AND THEY ARE NOT AN INTERNATIONAL TRANSACTION. IT IS THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT TPO HAD NOT CONSIDERED THE SUBMISSIONS OF THE ASSESSEE - COMPANY. DRP REJECTED THE ASSESSEE - COMPANY S CONTENTIONS WITHOUT A SSIGNING R E ASONS WHATSOEVER. THE ASSESSEE ALSO CO N TENDS THAT THE TPO AS WELL AS DRP HAD NOT ASSIGNED ANY REASON AS TO WHY CUP ME T HOD IS NOT MOST APPROPRIATE METHOD IN THE NATU R E OF TRANSACTIONS ASSESSEE - COMPANY HAD WITH ITS AE. IT WAS ALSO SUBMITTED T HAT TPO HAS NOT CONSIDERED THE ALTERNATIVE SUBMISSIONS OF THE ASSESSEE - COMPANY THAT IN CASE TNMM IS ADOPTED AS THE MOST APPROPRIATE METHOD, SAME SHOULD BE APPLIED BASED ON INTERNAL COMPARABLES RATHER THAN EXTERNAL COMPARABLES. NOW, LAW IS QUITE SETTLED TH AT INTERNAL COMPARABLES ARE MORE P REFERABLE TO EXTERNAL COMPARABLES. FINALLY, LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE TPO HAD NOT CONSIDERED THE IT (TP) A NO . 286 /BANG/201 6 PAGE 9 SUBMISSIONS OF THE ASSESSEE - COMPANY FOR ADJUSTMENT TOWARDS UNUTILIZED CAPACITY. THE AO ALSO NOT FOLLOWED DIRECTIONS OF THE DRP WHILE PASSING FINAL ASSESSMENT ORDER. IN THE CIRCUMSTANCES, IT WAS PRAYED THAT THE MATTER MAY BE RESTORED BACK TO THE FILE OF THE AO FOR DE NOVO CONSIDERATION. 8. ON THE OTHER HAND, LEARNED CIT(DR) HAD NO SER IOUS OBJECTIONS FOR RESTORING THE MATTER BACK TO THE FILE OF THE AO/TPO FOR F R ESH ANALYSIS OF TP STUDY. IN THE CIRCUMSTANCES, WE REMIT THE MATTER BACK TO THE AO TO CONSIDER THE ABOVE SUBMISSIONS DE NOVO AF T ER AFFORDING DUE OPPORTUNITY OF BEING HEARD TO TH E ASSESSEE - COMPANY. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE - COMPANY IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH APRIL, 2017 S D/ - SD/ - ( GEORGE GEORGE K ) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : BENGALURU D A T E D : 04 / 0 4 /2017 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