Altair Engineering India (P) Ltd., Bangalore V. DCIT, Bangalore

ITA 290/BANG/2011

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 6931 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 11-10-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 21-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIIIDR
• Assessee Lawyers: H V GOWTHAMA
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SMT. P. MADHAVI DEVI, JUDICIAL MEMBER ITA NO.290/BANG/2011 ASSESSMENT YEAR : 2007-08 ALTAIR ENGINEERING INDIA (P) LTD., MERCURY 2B BLOCK, 5 TH FLOOR, PRESTIGE TECH PARK, SARJAPUR, MARATHAHALLI OUTER RING ROAD, BANGALORE 560 087. PAN : AABCA 1860A VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI H.V. GOWTHAMA, C.A. RESPONDENT BY : SHRI ETWA MUNDA, CIT-III(DR) DATE OF HEARING : 11.10.2011 DATE OF PRONOUNCEMENT : 11.10.2011 O R D E R PER N.K. SAINI, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 8.2.2011 OF THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(1) , BANGALORE PASSED U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS THE ACT IN SHORT]. ITA NO.290/BANG/11 PAGE 2 OF 6 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEA L: 1.A) THE LEARNED MEMBERS OF DISPUTE RESOLUTION PAN EL (DRP) ERRED IN CONFIRMING THE ORDER PASSED BY DCIT (TP) I V, BANGALORE DETERMINING SHORTFALL OF ALP ADJUSTMENT OF RS.1,76, 01,861/-. B) THE LEARNED MEMBERS OF DRP FAILED TO UNDERSTAND THAT THE DEPUTY COMMISSIONER OF INCOME TAX (TP) DID NOT APPRECIATE THE FACT THAT, NATURE OF SOFTWARE SERVICES RENDERED BY THE APPELLANT COMPANY DOES NOT REQUIRE ANY ADDITIONS TO ARMS LENGTH PRICE BECAUSE, THE SERVICES RENDERED BY THE APPELLANT ARE ONLY BASIC SERVICES TO APPELLANTS HOLDING COMPANY AND UNLESS THE VALUE ADDITION BY APPELLANTS HOLDING COMPANY A RE CONSIDERED, THE PRODUCT DEVELOPED BY THE APPELLANT COMPANY IS NOT FULL & FINAL AND ARE NOT AN END PRODUCT. C) FURTHER, THE LEARNED DCIT (TP) WAS WRONG IN COM PARING COMPANIES, WHICH ARE NOT COMPARABLE WITH THE APPELL ANT COMPANY BECAUSE OF NATURE OF WORK, TYPE OF COMPANIE S, TYPE OF SOFTWARE DEVELOPED, ETC. AND THEREFORE, THE ADDITIO NS MADE BY DCIT (TP) AS SHORTFALL ADJUSTMENT U/S. 92CA IS REQU IRED TO BE DELETED. D) THE APPELLANT SUBMITS THAT, ENTIRE WORK CARRIED OUT BY THE APPELLANT COMPANY IS FURTHER PROCESSED BY APPELLANT S HOLDING COMPANY BEFORE THE SAME IS MARKETED TO THE PUBLIC. THEREFORE, THE PRODUCT DEVELOPED BY THE APPELLANT CAN NOT BE C OMPARED WITH OTHER SOFTWARE DEVELOPERS. 2.A) THE LEARNED MEMBERS OF DRP ERRED IN CONFIRMIN G THE DISALLOWANCE OF CLAIM U/S. 10A OF THE IT ACT, AMOU NTING TO RS.2,69,38,846/-. B) THE APPELLANT SUBMITS THAT ALL THE PROVISIONS U NDER SUB- SEC.2 OF SEC.10A ARE COMPILED BY THE APPELLANT AND THE APPELLANT BEING APPROVED STPI UNIT, IS ENTITLED FOR DEDUCTION U/S. 10A OF THE IT ACT. C) THE HONBLE DRP MEMBERS FAILED TO APPRECIATE TH E FACT THAT IN THE APPELLANTS OWN CASE, THE HONBLE INCOM E TAX APPELLATE TRIBUNAL FOR ASSESSMENT YEAR 2004-05, HAS ANNULLED THE ORDER U/S. 263 DIRECTING THE A.O. TO WITHDRAW T HE BENEFIT U/S. 10A OF IT ACT, 1961 PASSED BY THE LEARNED COMMISSIO NER OF INCOME TAX, ON MERIT DIRECTED THE ASSESSING OFFICER TO ALLOW THE DEDUCTION U/S. 10A OF IT ACT. ITA NO.290/BANG/11 PAGE 3 OF 6 D) THE APPELLANT SUBMITS THAT AS PER CIRCULAR NO.1 /2005 DT. 6.1.2005, ISSUED BY CENTRAL BOARD OF DIRECT TAXES, AS LONG AS THE APPELLANT HAS COMPLIED WITH ALL THE REQUIREMENT OF SEC.10A, THE APPELLANT IS ENTITLED FOR DEDUCTION U/S 10A OF IT A CT. 3. FOR THE ABOVE GROUNDS AND ANY OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE APPELLANT PRAYS T HAT THE APPEAL BE ALLOWED. 3. DURING THE COURSE OF HEARING, THE LD. COUNSEL FO R THE ASSESSEE WAS FAIR ENOUGH TO CONCEDE THAT GROUND NO. 1(A) TO (D) RELATING TO SHORTFALL OF ALP ADJUSTMENT IS COVERED AGAINST THE ASSESSEE VIDE ORDER DATED 14.3.2011 OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.1184/BANG/2010 FOR THE A.Y. 2006-07. COPY OF TH E SAID ORDER WAS FURNISHED. 4. IN HIS RIVAL SUBMISSIONS, THE LD. DR SUPPORTED T HE ORDER OF THE ASSESSING OFFICER I.E., DEPUTY COMMISSIONER OF INCO ME TAX, CIRCLE 11(1), BANGALORE. 5. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PA RTIES AND MATERIAL ON RECORD, IT IS NOTICED THAT SIMILAR ISSUE HAVING IDE NTICAL FACTS WAS INVOLVED IN THE ASSESSEES OWN CASE IN THE PRECEDING YEAR, WHIC H HAS BEEN ADJUDICATED BY THE ITAT, BANGALORE BENCH B, BANG ALORE IN ITA NO.1184/BANG/2010 AND THE RELEVANT FINDINGS ARE GIV EN IN PARAS 4 TO 7 OF THE ORDER DATED 14.3.2011, WHICH READ AS UNDER: 04. WE CONSIDERED THE CONTENTIONS IN THE LIGHT OF THE DETAILS SUBMITTED BY THE ASSESSEE'S REPRESENTATIVE, ASSESSM ENT ORDER, THE DIRECTIONS OF THE DISPUTES RESOLUTION PANEL AND THE ORDER OF THE TRANSFER PRICING OFFICER. WITH REFERENCE TO THE INT ERNATIONAL TRANSACTIONS OF SOFTWARE, THE ASSESSEE HAS AGREED W ITH ITS ASSOCIATE CONCERN'S FORMULA OF COST + PROFIT. THE P ROFIT FACTOR HAS BEEN AGREED TO BE 10%. BUT ON A DETAILED STUDY OF T HE ACTIVITIES ITA NO.290/BANG/11 PAGE 4 OF 6 CARRIED ON BY THE ASSESSEE COMPANY AND ITS WORKING RESULTS AND THE RESULTS OF THE COMPARABLE CASES, THE TPO CAME T O A FINDING THAT THE OPERATING MARGIN (ALP MARGIN) WORKED OUT T O 20.68% OF THE OPERATING COST. ON THE BASIS OF THE PROFIT LEVE L INDICATOR (PLI), THE TPO COMPUTED THE ALP AT RS.5,95,33,962/- AGAINST THE INTERNATIONAL TRANSACTIONS PRICE SHOWN BY THE ASSES SEE AT RS.5,48,98,928/-. SHORTFALL OF RS.46,35,034/- HAS B EEN ADDED BY WAY OF ADJUSTMENT U/S.92CA. 05. ON EXAMINATION OF THE CASE, WE FIND THAT THERE IS NO VERIFIABLE BASIS FOR DETERMINING THE PROFIT FACTOR AT 10% OF THE COST AS EMBODIED IN THE AGREEMENT ENTERED BY THE AS SESSEE AND ITS ASSOCIATE CONCERN. THE ARGUMENT OF THE ASSESSEE TH AT THE SERVICES RENDERED BY THE ASSESSEE ARE ONLY BASIC SERVICES TO ITS HOLDING COMPANY AND THEREFORE THE PRICES DECLARED BY THE AS SESSEE ARE TO BE TREATED AS REASONABLE, AS THE ARMS LENGTH PRICE CANNOT BE ACCEPTED AS AN OVERWHELMING PROPOSITION FOR THE REA SON THAT THE ASSESSEE HAS NOT PLACED BEFORE US ANY COST MODEL AN D MARKET POTENTIAL OF THE PRODUCTS SO AS TO ACCEPT OR REJECT THE BENCH MARK PROFIT OF 10%. IT IS THE CASE OF THE ASSESSEE THAT THE REAL IMPACT OF THE SERVICES RENDERED BY THE ASSESSEE WOULD BE KNOW N ONLY AFTER CONSIDERING THE VALUE ADDITIONS/CONTRIBUTIONS MADE BY ASSESSEE'S HOLDING COMPANY. BUT IT IS TO BE SEEN THAT THE ASSE SSEE HAS NOT FURNISHED ANY DETAILS OF SUCH VALUE ADDITION CONTRI BUTED BY ITS HOLDING COMPANY. THEREFORE, AN EFFECTIVE EVALUATION OF THE MARKET PRICE OF THE FINAL PRODUCT AND THE SHARE OF THE CONTRIBUTION OF THE ASSESSEE IN THAT MARKET PRICE CANNOT BE COMP UTED FOR WANT OF DETAILS, FOR WHICH THE ASSESSEE ALONE IS RESPONS IBLE. 06. FOR THE REASONS ALREADY STATED ABOVE, ALONG WI TH THE FINDINGS OF THE TRANSFER PRICING OFFICER AND THE DI SPUTE RESOLUTION PANEL, WE FIND THAT THE PRICE DECLARED B Y THE ASSESSEE FOR ITS INTERNATIONAL TRANSACTIONS CANNOT BE ACCEPT ED AS ARMS LENGTH PRICE. THEREFORE, THE ADDITION IS CALLED FOR AND IT IS JUSTIFIED. 07. NOW REGARDING THE QUANTUM OF ADDITION, THE TRA NSFER PRICING OFFICER HAS WORKED OUT THE OPERATING PROFIT AT 20.68% OF THE OPERATING COST. WE FEEL THAT A NOMINAL MODIFICA TION IS CALLED FOR IN THIS RATE OF OPERATING PROFIT, ACCEPTING CER TAIN VALID CONTENTIONS OF THE LEARNED REPRESENTATIVE REGARDING THE COMPETENCE LEVEL OF ITS EMPLOYEES; THE REMUNERATION PAYABLE TO THEM AND THE EFFECT OF THE SAFE ENVIRONMENT IN WHIC H THE ASSESSEE WAS FUNCTIONING. THEREFORE, AS A FAIR MEASURE OF PR ICE DIFFERENCE, WE MODIFY THE ARMS LENGTH PRICE ADJUSTMENT FACTOR T O 20% OF THE OPERATING COST IN PLACE OF 20.68% OF THE OPERAT ING COST ITA NO.290/BANG/11 PAGE 5 OF 6 ADOPTED BY THE LOWER AUTHORITIES. WITH THIS NOMINAL MODIFICATION, THE FIRST ISSUE OF TRANSFER PRICING IS DISPOSED OFF . 6. SO RESPECTFULLY FOLLOWING THE AFORESAID REFERRED TO ORDER IN THE ASSESSEES OWN CASE, THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 7. THE NEXT ISSUE VIDE GROUNDS NO.2(A) TO (D) RELAT ES TO THE CONFIRMATION OF DISALLOWANCE OF CLAIM U/S. 10A OF T HE ACT. THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE RELATING TO THIS I SSUE WAS THAT IT IS COVERED IN FAVOUR OF THE ASSESSEE BY THE EARLIER ORDER DATE D 14.3.2011 OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.1184/BANG /2010 FOR THE A.Y. 2006-07. THE AFORESAID CONTENTION OF THE LD. COUNS EL FOR THE ASSESSEE WAS NOT CONTROVERTED BY THE LD. DR. 8. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PA RTIES AND THE MATERIAL ON RECORD, IT IS NOTICED THAT AN IDENTICAL ISSUE HAVING SIMILAR FACTS WAS A SUBJECT MATTER OF ASSESSEES APPEAL IN ITA NO .1184/BANG/2010 FOR THE A.Y. 2006-07 AND THE ITAT BANGALORE BENCH B, BANGALORE, VIDE PARA 8 OF THE ORDER DATED 14.3.2011 OBSERVED AS UNDER: 08. THE SECOND ISSUE RAISED BY THE ASSESSEE IS THAT DISALLOWANCE OF ASSESSEE'S CLAIM OF RS.1,52,58,201/- MADE U/S.10 A IS NOT JUSTIFIED. THE VERY SAME ISSUE WAS CONSIDERED IN AS SESSEE'S OWN CASE FOR ASSESSMENT YEAR 2005-06 BY ITAT, 'B' BENCH , BANGALORE, THROUGH THEIR ORDER DATED.21.01.2011 IN ITA.762/BAN G/2010. THE VERY SAME ISSUE WAS DECIDED IN FAVOUR OF THE ASSESS EE FOR ASSESSMENT YEAR 2004-05 AS WELL BY ITAT, BANGALORE BENCH. IN VIEW OF THAT, THE SAID DISALLOWANCE OF RS.1,52,58,2 01/- IS DELETED AND THE ASSESSING AUTHORITY IS DIRECTED TO GIVE CON SEQUENTIAL BENEFITS. ITA NO.290/BANG/11 PAGE 6 OF 6 9. SO RESPECTFULLY FOLLOWING THE AFORESAID REFERRED TO ORDER OF THE TRIBUNAL, THIS ISSUE IS DECIDED IN FAVOUR OF THE AS SESSEE. 10. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 11 TH DAY OF OCTOBER, 2011. SD/- SD/- ( SMT. P. MADHAVI DEVI ) ( N.K. SAIN I ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 11 TH OCTOBER, 2011. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.