DCIT, Bangalore V. M/s Telelogic India Private Limited, Bangalore

ITA 30/BANG/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8619 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 19-10-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 10-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; Principle of natural justice; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary
• Section: 143(3); 234B; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) A NO. 22 / BANG/20 1 2 (ASSESSMENT YEAR: 2005 - 06) M/S.TELELOGIC INDIA PVT., LTD. C/O IBM INDIA PVT. LTD. III FLOOR, SUBRAMANYA ARCADE, 12, BANNERGHATTA ROAD, BANGALORE - 5600029. PAN: AABCT 3727 D VS. APPELLANT ASST. COMMISSIONER OF INCOME - TAX, CIRCLE 12(4), BANGALORE. RESPONDENT AND IT (TP) A NO. 30/ BANG/20 12 (ASSESSMENT YEAR: 2005 - 06 (BY THE REVENUE) **** ASSESSEE BY : SHRI PADAMCHAND KHINCHA, CA. REVENUE BY : SHRI G.R. REDDY, CIT(DR). O R D E R PER I NTURI RAMA RAO, AM : TH ESE ARE CROSS APPEAL S BY THE ASSESSEE - COMPANY AS WELL AS REVENUE AND ARE DIRECTED AGAINST THE ORDER OF THE LD.CIT(APPEALS) - IV, BANGALORE, DATED 08/11/2011 FOR THE ASSESSMENT YEAR 2005 - 06. DATE OF HEARING : 0 8 /03/2016 DATE OF PRONOUNCEMENT : 16 /03/2016 IT(TP)A NO. 22 & 30/B/2012 PAGE 2 OF 21 2. THE REVENUE RAISED THE FOLLOWING GROUNDS OF APPEAL: 1) THE ORDER OF THE LEARNED CIT(A) IN SO FAR AS IT RELATES TO THE FOLLOWING GROUNDS IS OPPOSED TO LAW AND FACTS OF THE CASE. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN HOLDING THAT THE TPO ERRED IN NOT EXCLUDING COMPARABLES HAVING ANY RELATED PARTY TRANSACTIONS. 3) THE LEARNED CIT(A) ERRED IN HOLDING THAT THE SIZE AND TURNOVER BRAND OF THE COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS A COMPARABLE, AND ACCORDINGLY ERRED IN EXCLUDING M/S WIPRO BPO SOLUTIONS LTD. AS A COMPARABLE. 4) THE L D. CIT(A) ERRED IN HOLDING THAT THE ASSESSEE IS ELIGIBLE FOR A STANDARD DEDUCTION OF 5% FROM THE ARM'S LENGTH PRICE (ALP) UNDER THE PROVISO TO SECTION 92C(2) OF THE IT ACT, 1961. 5) FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING OFFIC ER MAY BE RESTORED. 6) THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND/OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 3. THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF APPEAL: THE GROUNDS STATED HERE UNDER ARE INDEPENDENT OF, AND WITHOUT PREJUDICE TO ONE ANOTHER: 1 . ASSESSMENT AND REFERENCE TO TRANSFER PRICING OFFICER (`TP0') ARE BAD IN LAW A) THE ASSESSMENT ORDER PASSED BY THE ACIT UNDER SECTION 143(3) OF THE INCOME - TAX ACT, 1961 ('THE ACT') AND THE ORDER PASSED BY THE COMMISSIONER OF INCOME - TAX (APPEALS) - IV, ('THE CIT(A)') UNDER SECTION 250 OF THE ACT, ARE BAD ON FACTS AND IN LAW, AND IS IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE. B) THE CIT(A) ERRED IN LAW IN NOT APPRECIATING THE MEANING OF THE ERSTWHILE PHRASE 'HAVING IT(TP)A NO. 22 & 30/B/2012 PAGE 3 OF 21 REGARD TO' IN SECTIONS 92 AND 92CA(4) OF THE ACT. C) THE CIT(A) ERRED IN LAW IN CONFIRMING THAT THE AMENDMENT MADE TO SECTION 92CA(4) RIDE THE FINANCE ACT, 2007 WAS TO SET RIGHT THE LACUNA IN THE SAID SECTION. 2 . THE FRESH COMPARABLE SEARCH UNDERTAKEN BY THE TPO IS BAD IN LAW A) THE CIT(A) ERRED IN DETERMINING A TRANSFER PRICING ADJUSTMENT TO INFORMATION TECHNOLOGY (`IT') ENABLED SERVICES, BY SUBSTITUTING THE TPO'S ARM'S LENGTH PRICE AND NOT THAT DETERMINED BY THE APPELLANT. B) THE C1T(A) ERRED IN REJECTING THE VALUE OF INTERNATIONAL TR ANSACTION AS RECORDED IN THE BOOKS OF ACCOUNT, AS THE ARM'S LENGTH PRICE. C) THE CIT(A) ERRED IN LAW IN HOLDING THAT THE FRESH COMPARABILITY ANALYSIS USING NON - CONTEMPORANEOUS DATA CONDUCTED BY THE TPO AND FURTHER SUBSTITUTING THE APPELLANT'S ANALYSIS WITH FRESH BENCHMARKING ANALYSIS BY THE TPO ON HIS OWN CONJECTURES AND SURMISES. THUS, THE APPELLANT PRAYS THAT THE FRESH BENCHMARKING ANALYSIS CONDUCTED BY THE TPO IS LIABLE TO BE QUASHED. D) THE TPO ERRED IN NOT SHARING THE FRESH COMPARABILITY ANALYSIS CONDUCTE D BY HIM AT THE TIME OF ASSESSMENT AND THE CIT(A) ERRED IN NOT COMMENTING ON THE SAME IN THE ORDER. E) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TPO ERRED AND THE CIT(A) FURTHER ERRED IN NOT DEMONSTRATING THAT THE MOTIVE OF THE APPELL ANT WAS TO SHIFT PROFITS OUTSIDE OF INDIA BY MANIPULATING THE PRICES CHARGED IN ITS INTERNATIONAL TRANSACTION WHICH IS A PRE - REQUISITE CONDITION TO MAKE ANY ADJUSTMENT UNDER THE PROVISION OF CHAPTER X OF THE ACT. 3 . COMPARABILITY ANALYSIS ADOPTED BY THE TPO FOR DETERMINATION OF ARM'S LENGTH PRICE A) THE AO/TPO GROSSLY ERRED ON FACTS AND THE CIT(A) FURTHER ERRED IN CONFIRMING THE BENCHMARKING OF IT ENABLED SERVICES OF THE APPELLANT WITH COMPANIES OPERATING AS FULL - FLEDGED ENTREPRENEURS WITHOUT IT(TP)A NO. 22 & 30/B/2012 PAGE 4 OF 21 CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK UNDERTAKEN BY THE APPELLANT VIS - A - VIS COMPARABLE COMPANIES. B) THE TPO ERRED ON FACTS IN APPLYING ARBITRARY FILTERS TO ARRIVE AT A FRESH SET OF COMPANIES AS COMPARABLES TO THE APPELLANT, WITHO UT ESTABLISHING FUNCTIONAL COMPARABILITY. C) THE CIT(A) ERRED IN FACTS IN CONFIRMING THE COMPARABILITY ANALYSIS CONDUCTED BY THE TPO, WITHOUT ANALYSING THE FUNCTIONAL AND RISK PROFILE OF APPELLANT VIS - - VIS COMPARABLES SELECTED IN THE TRANSFER PRICING ORDER. D) THE AO/TPO ERRED ON FACTS IN REJECTING MOST OF THE COMPARABLE COMPANIES ARRIVED AT IN THE TRANSFER PRICING STUDY. 4 . ERRONEOUS DATA USED BY THE AO/TPO A) THE AO/TPO HAS ERRED IN LAW AND THE CIT(A) FURTHER ERRED IN CONFIRMING THE USE OF DATA, WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF CONDUCTING THE TRANSFER PRICING STUDY BY THE APPELLANT. B) THE AO/TPO ERRED IN LAW AND THE CIT(A) FURTHER ERRED IN NOT APPLYING MULTIPLE - YEAR DATA WHILE COMPUTING THE MARGIN OF ALLEGED COMPARABLE COMPANIES. 5. NON - ALLOWANCE OF APPROPRIATE ADJUSTMENTS TO THE COMPARABLE COMPANIES, BY THE A0/TPO A) THE AGTPO ERRED IN LAW AND ON FACTS IN NOT ALLOWING APPROPRIATE ADJUSTMENTS UNDER RULE 10B TO ACCOUNT FOR, INTER ALIA, DIFFERENCES IN (A) ACCOUNTING PRACTICES, (B) MARKETING EXPENDITURE, (C) RESEARCH AND DEVELOPMENT EXPENDITURE AND (D) RISK PROFILE BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. B) THE AO/TPO ERRED IN LAW AND ON FACTS IN NOT ALLOWING APPROPRIATE ADJUSTMENT FOR THE SPECIFI C NON - OPERATING COSTS INCURRED BY THE APPELLANT (DURING FY 2004 - 05. 6 INTEREST LEVIED UNDER SECTION 234B OF THE ACT THE CIT (A) HAS ERRED IN CONFIRMING CONSEQUENTIAL INTEREST UNDER SECTION 2348 OF THE ACT AMOUNTING TO RS 394,163. IT(TP)A NO. 22 & 30/B/2012 PAGE 5 OF 21 7 INTEREST UNDER SECTION 234D THE CIT (A) HAS ERRED IN CONFIRMING, INTEREST UNDER SECTION 234D OF THE ACT AMOUNTING TO RS. 383,684. 8 INITIATION OF PENALTY PROCEEDINGS THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF TH E ACT. 9 RELIEF A) THE APPELLANT PRAYS THAT DIRECTIONS BE GIVEN TO GRANT ALL SUCH RELIEF ARISING FROM THE ABOVE GROUNDS AND ALSO ALL RELIEF CONSEQUENTIAL THERETO. B) THE APPELLANT CRAVES LEAVE TO ADD TO OR ALTER, BY DELETION, SUBSTITUTION OR OTHERWISE, THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR DURING THE HEARING OF THE APPEAL. C) FURTHER, THE APPELLANT PRAYS THAT THE ADJUSTMENT IN RELATION TO TRANSFER PRICING MATTERS MADE BY THE AO/TPO AND UPHELD BY THE CIT(A) IS BAD IN LAW AND IS LIABLE TO BE DELETED . 4. BRIEFLY FACTS OF THE CASE ARE THAT ASSESSEE - COMPANY IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS A 100% SUBSIDIARY OF M/S.TELELOGI C AB . IT IS ENGAGED IN THE BUSINESS OF TELE - MARKETING TO ITS AES ABROAD. IT IS ALS O ENGAGED IN THE BUSINESS OF SUB - LICENSING SOFTWARE LICENSES, RENDERING SUPPORT SERVICES, RENDERING MAINTENANCE SERVICES, TRAINING AND CONSULTANCY SERVICES AND PROVISION OF SOFTWARE DEVELOPMENT TO ITS AES. THE ASSESSEE - COMPANY PAYS ROYALTY OF 50% OF TOTAL VALUE OF SUB - LICENSES AS A ROYALTY TO ITS AE. IN RESPECT OF TELE - MARKETING SERVICES RENDERED BY THE ASSESSEE - COMPANY TO ITS AES, THE ASSESSEE - COMPANY IS REMUNERATED AT COST + MARKUP OF 12% ON COST. 4.1 THE ASSESSEE - COMPANY HAD THE FOLLOWING FOUR SEGMENTS. IT(TP)A NO. 22 & 30/B/2012 PAGE 6 OF 21 DESCRPTION/AMOUNT IN RS. PRODUCT SALES SOFTWARE DEVELOPMENT GSB & TELE MAREKTING OPERATING REVENUES 8,36,22,887 73,11,315 3,91,21,016 OPERATING EXPENSES 8,13,86,739 1,15,83,999 4,28,95,765 OPERATING PROFIT 22,36,148 ( - )42,72,684 ( - )37,74,749 OPERATING PROFIT ON COST/SALES 2.67% ON SALES ( - ) 3.69% ON COST ( - ) 8.80% ON COST 4. 2 RETURN OF INCOME FOR THE ASSESSMENT YEAR 20 05 - 06 WAS FILED DECLARING LOSS OF RS.28,53,770/ - ON 28/10/2005. THE ASSESSEE - COMPANY ALSO REPORTED THE FOLLOWING INTERNATIONAL TRANSACTION S: I) PAYMENT OF ROYALTIES RS.2,35,87,653/ - II) TRAINING AND CONSULTANCY RS. 5,08,342/ - III) GLOBAL SUPPORT SERVICES RS.3,06,54,204/ - IV) TELEMARKETING RS. 84,66,812/ - V) SOFTWARE DEVELOPMENT RS. 73,11,315/ - VI) REIMBURSEMENT OF EXPENSES RS. 1 6,60,433/ - 4.3 THE ASSESSEE - COMPANY SOUGHT TO JUSTIFY CONSIDERATION RECEIVED FOR THE INTERNATIONAL TRANSACTION S ENTERED WITH ITS AE TO BE AT ARM S LENGTH PRICE [ALP]. THE ASSESSEE - COMPANY HAD ALSO SUBMITTED TRANSFER PRICING STUDY REPORT ADOPTING THE OPERATING PROFIT ON COST (OP/TC) AS A PROFIT LEVEL INDICATOR FOR THE TRANSFER PRICING STUDY. THE ASSESSEE - COMPANY APPLIED TRANSACTIONAL NET MARGIN METHOD [TNMM] WHICH WAS CONSIDERED TO BE THE MOST APPROPRIATE METHOD FOR P URPOSES OF BENCH MARKING THE INTERNATIONAL TRANSACTIONS. THE ASSESSEE - COMPANY S PROFIT MARGIN WAS COMPUTED AT 8.82% AND THE ASSESSEE - COMPANY CLAIMED THAT THE SAME WAS COMPARABLE WITH IT(TP)A NO. 22 & 30/B/2012 PAGE 7 OF 21 OTHER COMPANIES RENDERING THE IT ENABLED SERVICES (ITES) . FOR THE PURPOSE OF TRANSFER PRICING STUDY, THE COMPANY HAD CHOSEN 9 COMPARABLE ENTITIES AND ARITHMETIC AVERAGE OF OPERATING PROFIT MARGINS OF SAID COMPARABLES WAS COMPUTED AT 7.46 %. ACCORDING TO THE ASSESSEE - COMPANY, ITS PLI WAS WITHIN THE ACCEPTABLE RA NGE AS INDICATED UNDER SECOND PROVISO TO SEC.92C. THE ASSESSEE - COMPANY HAD CHOSEN THE FOLLOWING 9 ENTITIES AS COMPARABLES WHOSE AVERAGE PROFIT MARGIN WAS COMPUTED AT 7.46%. SL. NO. COMPANY NAME MARGIN AS TAKEN BY TAXPAYER 1. ACE SOFTWARE EXPORTS LTD. 14.66% 2. FORTUNE INFOTECH LTD. 15.10% 3. GENESYS INTERNATIONAL CORP LTD. - 2.06% 4. INTELNET GLOBAL SERVICES LTD. - 5.01% 5. NETVISTA INFORMATION SOLUTIONS LTD. 12.94% 6. NORTHGATE BPO SERVICES LTD. 17.71% 7. ONLINE MEDIA SOLUTIONS LTD. 4.71% 8. ONTRACK SYSTEMS LTD. 4.44% 9. R T OUTSOURCING SERVICES LTD. 4.44% ARITHMETIC MEAN 7.46% THE ASSESSEE - COMPANY COMPUTED ITS OPERATING MARGIN EXCLUDING EXTRA - ORDINARY EXPENSES TO THE EXTENT OF RS.70,47,361/ - . 5. THE ASSESSING OFFICER (AO) REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER (TPO). THE TPO, BY AN ORDER DATED 31 / 1 0/2008 PASSED U/S 92CA(3) OF THE IT ACT, 1961 COMPUTED THE TRANSFER PRICING ADJUSTMENT AT RS. 5,17,19,424/ - . THE TRANSACTIONS RELATING TO ROYALTY, TRAINING, RENDERING OF SOFTWARE IT(TP)A NO. 22 & 30/B/2012 PAGE 8 OF 21 DEVELOPMENT SERVICES AND REIMBURSEMENT OF EXPENSES WERE CONSIDERED TO BE AT ARM S LENGTH BY THE TPO. THE SUPPORT SERVICES AND TELEMARKETING SERVICES HAVE BEEN MERGED BY THE ASSESSEE - COM PANY AND THE TPO FOR THE PURPOSE OF TP ANALYSIS. THE TPO ACCEPTED THE TNMM ADOPTED BY THE ASSESSEE - COMPANY BUT REJECTED THE TRANSFER PRICING STUDY REPORT. THE TPO PROCEEDED TO IDENTIFY A DIFFERENT SET OF COMPARABLE ENTITIES FOR THE PURPOSE OF DETERMINING T HE ALP. WHILE DOING SO, THE LD. TPO HAD APPLIED THE FOLLOWING FILTERS: A. COMPANIES WHOSE TURNOVER WHILE DOING SO,