FIRSTSOURCE SOLUTIONS LTD, MUMBAI V. DCIT 11(2), MUMBAI

ITA 3095/MUM/2014

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2407 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2004-2005
• Appeal Filed On: 02-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: IN CIRCUMSTANCES OF CA SE; LEARNED
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 92C; 92D; 142(1); 10B; 6; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI B. R. BASKARAN , AM AND SHRI AMARJIT SINGH , JM I.T.A. NO S . 3095 /M/ 20 1 4 & 3096 /M/201 4 ( ASSESSMENT YEAR S : 2003 - 04 & 2004 - 05 ) M/S. FIRST SOURCE SOLUTIONS LTD. (FORMERLY CUSTOMER ASSET INDIA P. LTD) MINDSPACE, PARADIGM TOWER, B WING, 5 TH FLOOR, LINK ROAD, MALAD(W), MUMBAI - 400064 . VS. DCIT - CIRCLE 11(2) BANGALORE ./ ./ PAN/GIR NO. : AAACI 8904 N ( APPELLANT ) .. ( RESPONDENT ) DATE OF HEARING : 10 .0 9 .201 8 DATE OF PRONOUNCEMENT : 12. 11 . 2018 O R D E R PER AMARJIT SINGH, JM: THE ASSESSEE HAS FILED THE ABOVE MENTIONS A PPEAL S AGAINST THE ORDER DATED 28 . 02 .201 4 PASSED BY THE COMMISS IONER OF INCOME TAX (APPEALS) - IV, BANGALORE [HEREINAFTER REFERRED TO AS THE CIT(A)] R ELEVAN T TO THE ASSESSMENT YEAR 200 3 - 04 & 2004 - 05 . 2 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - 1. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TRANSFER PRICING OFFICER (TPO'} AND THE LEARNED ASSESSEE BY: SHRI AJIT KUMAR JAIN/SIDDHESH CHAUGALE DEPARTMENT BY: SHRI JAYANT KUMAR (DR) ITA NOS. 3095 /MUM/201 4 3096/MUM/2014 A.Y. 2003 - 04 - & 2004 - 05 2 ASSESSING OFFICER ('AO'( ERRED IN LEVYING ADJUSTMENT OF RS 2,56,90,938/ - BY DISALLOWING PAYMENT OF MARKETING SUPPORT FEES PAID TO ITS ASSOCIATED ENTERPRISE S ('AES') UNDER PROVISIONS OF CHAPTER X OF THE INCOME - TAX ACT, 1961 (''THE ACT') AND THE HON'BLE COMMISSIONER OF INCOME TAX (APPEALS) (CIT - A) FURTHER ERRED IN CONFIRMING THE SAME. 2 . ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO/AO ERRED IN NOT PROVIDING ANY REASONS TO SHOW THAT THE CONDITIONS MENTIONED IN CLAUSES (A) TO (D) OF SECTION 92C(3) OF THE ACT WERE SATISFIED BEFORE MAKING AN ADJUSTMENT TO THE INCOME OF THE APPELLANT AND THE HONBLE CIT - A FURTHER ERRED IN CONFIRMING THE SAME. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO/AO ERRED IN DISREGARDING THE VARIOUS SUBMISSIONS MADE BY/ THE APPELLANT WITHOUT ASSIGNING ANY COGENT REASONS THEREOF AND ALSO REJECTED THE BENCHMARKING ANALYSIS AND COMPARABLE COMPANIES SELECTED BY THE APPELLANT WITHOUT APPRECIATING THE FACT THAT THE SELECTION WAS BASED ON CONTEMPORANEOUS DATA AND THE TRANSFER PRICING STUDY REPORT PREPARED AND MAINTAINED AS PER SECTION 92D OF THE ACT READ WITH RULE IOD OF THE INCOME TAX RULES, 1962 ('THE RULES') AND THE HON'BLE CLT - A FURTHER ERRED IN CONFIRMING THE SAME. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPQ/AO ERRED IN NOT PROVIDING DETAILED REASONING ON THE SEARCH PROCESS ADOPTED AND FILTERS USED AND THE HON'BLE CLT - A FURTHER ERRED IN CONFIRMING THE SAME. THE APPELLANT PRAYS THAT THE COMPARABILITY ANALYSIS UNDERTAKEN BY THE TPO BEREJECTED AS THE SAME IS BASED ON USING NON - CONTEMPORANEOUS DATA, IS N OT BASED ON A METHODICAL SEARCH PROCESS AND IS MORE OF A 'CHERRY PICKING' OF COMPARABLES 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO/AO ERRED AND THE HON'BLE CLT - A FURTHER ERRED IN CONFIRMING THE ACTION OF THE TPO/AO OF MAKING AN ADJUSTMENT ON ME GENUINE THIRD PARTY EXPENSES INCURRED BY THE ASSOCIATED ENTERPRISES. THE APPELLANT PRAYS THAT THE MATTER OF DISPUTE CAN ONLY BE THE ARM'S LENGTH NATURE OF THE 5 PERCENT MARK - UP BEING PAID BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LA \ V, THE LEARNED TPO/AO ERRED IN CALCULATING THE ARM'S LENGTH PRICE ITA NOS. 3095 /MUM/201 4 3096/MUM/2014 A.Y. 2003 - 04 - & 2004 - 05 3 OF THE INTERNATIONAL TRANSACTION ON THE BASIS OF ARBITRARY METHODOLOGIES, INCLUDING SELECTION OF AN I NAPPROPRIATE PROFIT LEVEL INDICATOR IN VIOLATION OF RULE IOD OF THE RULES AND THE HON'BLE CIT - A FURTHER ERRED CONFIRMING THE SAME. 7 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO/AO ERRED AND THE HON'BLE CIT - A FURTHER ERRED IN NOT APPRECIATING THE TACT THAT THERE WAS NO INTENTION WHATSOEVER ON THE PART OF THE APPELLANT TO SHIFT PROFIT 1 ; OUTSIDE INDIA. 8 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO/AO ERRED AND THE HONBLE CIT - A FURTHER ERRED IN CONFIRMING THE ACTION OF THE TPO/AO OF' NOT ALLOWING THE VARIATION/REDUCTION OF 5 PERCENT FROM THE ARITHMETIC MEAN WHILE DETERMINING THE ARM'S LENGTH PRICE AS PROVIDED UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT. 9. ON THE FACTS AND CIRCUMSTA NCES OF THE CASE AND IN LAW, THE LEARNED TPO/AO ERRED AND THE HONBLE CIT - A FURTHER ERRED IN UPHOLDING THE ACTION OF THE TPO/AO BY REJECTING: THE USE OF MULTIPLE YEAR DATA AS PERMITTED UNDER THE PROVISIONS OF RULE 10D(4) OF THE RULES AS ELABORATED IN THE TRANSFER PRICING STUDY REPORT THE APPELLANT PRAYS THAT THE ADJUSTMENT IN RELATION TO TRANSFER PRICING MATTERS MADE BY THE LEARNED AO/TPO AND UPHELD BY THE HON'BLE CIT' (A) BE DELETED. THE APPELLANT CRAVES LEAVE LO ADD OR ALTER, BY DELETION, SUBST ITUTION, MODIFICATION OR OTHERWISE, THE ABOVE S OF APPEAL, EITHER BEFORE OR DURING THE HEARING OF THE APPEAL. 3 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY FILED I TS RETURN OF INCOME FOR THE A.Y. 2004 - 05 ON 01 . 11 .20 14 DECLARING TOTAL INCOME TO THE TUNE OF RS. 28,51,491 / - . THE RETURN WAS PROCESSED U/S 143(1) OF THE ACT ON 28.12.2005. THEREAFTER, THE CASE WAS SELECTED FOR SCRUTINY , HENCE , NOTICES U/S 143(2) AND 142(1) OF THE ACT WERE ISSUED AND SERVED UPON THE ASSESSEE. THE ASSESSEE COMPANY WAS ITA NOS. 3095 /MUM/201 4 3096/MUM/2014 A.Y. 2003 - 04 - & 2004 - 05 4 ENGAGED IN THE BUSINESS OF PROVIDING CONTACT CENTRE SERVICES. SINCE THE ASSESSEE FAILED TO APPEAR BEFORE THE AO, THEREFORE, THE ASSESSMENT WAS CONCLUDED EXPARTE U/S 144 OF THE ACT. DURING THE YEAR UNDE R CONSIDERATION, THE ASSESSEE HAD INTERNATIONAL TRANSACTION EXCEEDING OF RS.5 CRORES. THEREAFTER, THE APPROVAL OF THE CIT(A) BANGALORE - 1 WAS TAKEN AND REFERENCE MADE TO THE TPO DETERMINING THE ARMS LENGTH PRICE AS PER THE PROVI SIONS OF SECTION 92C OF THE ACT IN RESPECT OF SUCH TRANSA CTIONS. THE ADDL. DIRECTOR (TPO - 1) VIDE HER ORDER DATED 15.12.2006 HAS OBSERVED THAT AN AMOUNT OF RS.8,76,17,374/ - WAS REQUIRED TO BE ADJUS TED U/S 92C R.W.S. 92CA OF THE ACT ON ACCOUNT OF ARMS LENGTH PRICE COMPUTED BY ASSESSEE. THE NOTICE WAS GIVEN AND TH E ASSESSEE REPLIED VIDE LETTER DATED 27.12.2006. THEREAFTER, THE INCOME OF THE ASSESSEE WAS ASSESSED TO THE TUNE OF RS.4,15,23,041/ - . THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A) - IV BANGALORE WHO DISM ISSED THE APPEAL VIDE ORDER DATED 28.02.2014 IN QUESTI ON. FEELING AGGRIEVED, THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFORE US. ISSUE NO S . 1 TO 6 & 8 TO 12 : - 4 . AT THE TIME OF ARGUMENT, THE LD. REPRESENTATIVE OF THE ASSESSEE DID NOT PRESS THE ABOVE MENTIONED ISSUE S , THEREFORE, THESE ISSUES ARE BEING DECIDED IN FAVOUR OF THE REVENUE AGAINST THE ASSESSEE BEING NOT PRESSED. ISSUE NO . 7 : - ITA NOS. 3095 /MUM/201 4 3096/MUM/2014 A.Y. 2003 - 04 - & 2004 - 05 5 5 . UNDER TH IS ISSUE THE ASSESSEE HAS CHALLENGED THE CONFIRMATION OF THE ORDER OF AO/TPO IN WHICH THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION WAS CALCULATE D BY SELECTING OF PROFIT LEVEL INDICATOR IN VIOLATION OF RULE 10 D OF THE RULES BY TAKING THE ARBITRARY METHODOLOGIES. AT THE VERY OUTSET, THE LD. REPRESENTATIVE OF THE ASSESSEE HAS ARGUED THAT THE CIT(A) HAS WRONGLY CONFIRMED THE ORDER OF THE TPO BASED UPON THE ACCOU NT OF PROFIT LEVEL INDICATOR(PLI ). THE LD. REPRESENTATIVE OF THE ASSESSEE HAS ARGUED THAT THIS ISSUE HAS BEEN DECIDED BY HONBLE ITAT IN THE ASSESSEES OWN CASE IN ITA. NO.3094/M/2014 FOR THE A.Y. 2003 - 04 IN WHICH THE ISSUE HAS BEEN RE STORED BEFORE THE FILE OF THE AO TO DECIDE THE MATTER OF CONTROVERSY AFRESH IN AC CORDANCE WITH LAW, T HEREFORE, IN THE SAID CIRCUMSTANCES, THE ISSUE IS LIABLE TO BE REMANDED BEFORE THE AO. THE COPY OF ORDER PASSED BY HONBLE ITAT IN THE ASSESSEES OWN CASE IN ITA. NO.3094/M/2014 FOR THE A.Y. 2003 - 04 DATED 01.06.2018 IS ON THE FILE IN WHICH THE RELEVANT FINDING HAS BEEN GIVEN IN PARA 7 WHICH IS REPRODUCED BELOW.: - 7. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. AT THE OUTSET, IT IS NECESSARY TO OBSERVE, THE LIMITED ISSUE WHICH IS CONTESTED BEFORE US IS WHAT SHOULD BE THE APPROPRIATE PLI IN THE CONTEXT OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS A.E. INVOLVING PAYMENT OF MARKETING SERVICE FEES. IT IS A FACT ON RECORD THAT BOTH THE ASSESSEE AS WELL AS THE TRANSFER PRICING OFFICER HAVE NO QUARREL THAT TNMM IS THE MOST APPROPRIATE METHOD TO DETERMINE THE ARM'S LENGTH PRICE OF THE MARKETING COST. RULE 10B OF THE INCOME TAX RULES PROVIDES THE METHODOLOGY OF COMPUTING THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION UNDER DIFFERENT PRESCRIBED METHODS. RULE 10B(1)(E) PRESCRIBES THE METHODOLOGY FOR COMPUTATION OF ARM'S LENGTH ITA NOS. 3095 /MUM/201 4 3096/MUM/2014 A.Y. 2003 - 04 - & 2004 - 05 6 PR ICE OF INTERNATIONAL TRANSACTION UNDER TNMM. AS PER CLAUSE (I) OF RULE 10(B)(1)(E), THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION WITH THE A.E. IS TO BE COMPUTED IN RELATION TO EITHER COST INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED. PLI IS A MEASURE OF COMPANYS PROFITABILITY THAT IS USED TO COMPARE COMPARABLES WITH THE TESTED PARTY. THUS, A PLI MAY EXPRESS PROFITABILITY IN RELATION TO SALES OR COSTS OR ASSETS. THUS, A READING OF THE AFORESAID RULE MAKES IT CLEAR THAT WHILE THE NUMERATOR IN PLI UNDER TNMM IS ALWAYS NET PROFIT MARGIN THE DENOMINATOR CAN EITHER BE COST INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR ANY OTHER RELEVANT BASE. THE DENOMINATOR VARIES FROM CASE TO CASE DEPENDING UPON NATURE OF TRANSACTION AND HOST OF OTHER RELEVANT FACTORS. IN THE PRESENT CASE, UNDISPUTEDLY, THE ARM'S LENGTH PRICE TO BE DETERMINED IS THAT OF THE MARKETING COST PAID BY THE ASSESSEE TO A.ES. THAT BEING THE CASE, THE MARKETING COST, OR, FOR THAT MATTER COST ITSELF, CANNOT BE CONS IDERED AS THE DENOMINATOR. THEREFORE, IN PRINCIPLE WE AGREE WITH THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE PLI OF NET MARGIN (OPERATING PROFIT) / MARKETING COST ADOPTED BY THE TRANSFER PRICING OFFICER WILL NOT BE PROPER TO DETERMINE THE ARM'S LENGTH PRICE. IT IS ALSO PERTINENT TO OBSERVE THAT THE WORKING OF MARGIN OF ASSESSEE AND COMPARABLES BY ADOPTING THE PLI OF NET MARGIN / OPERATING REVENUE AS SUBMITTED IN THE WORKING AT PAGE 182 AND 183 OF THE PAPER BOOK, THOUGH, FORMED PART OF THE SUBMISSIONS MADE BEFORE THE TRANSFER PRICING OFFICER ON 15TH FEBRUARY 2006, AS IT APPEARS, HE HAS NOT AT ALL CONSIDERED EITHER THE SUBMISSIONS OF THE ASSESSEE OR THE WORKING OF THE MARGIN OF THE ASSESSEE AND COMPARABLES. THOUGH, DETAIL SUBMISSIONS HAVE BEEN MADE BEFORE THE LEARNED COMMISSIONER (APPEALS), HE HAS ALSO COMPLETELY IGNORED THEM AND SIMPLY ADOPTED THE REASONING OF THE TRANSFER PRICING OFFICER WITHOUT ANY DELIBERATION ON THE ISSUE. IN VIEW OF THE AFORESAID, WE ARE INCLINED TO RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING AFRESH AFTER CONSIDERING ASSESSEES CLAIM OF ADOPTING THE PLI OF NET MARGIN / OPERATING REVENUE AND ALSO EXAMINING WORKING OF MARGINS SUBMITTED BY THE ASSESSEE AT PAGE 182 AND 183 OF THE PAPER BOOK. THE ASS ESSING OFFICER SHALL DECIDE THE ISSUE KEEPING IN VIEW OUR OBSERVATIONS HEREINABOVE AND ONLY AFTER EXTENDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUNDS RAISED BY THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES . 6 . IN VIEW OF THE SAID DECISION BY HONBLE ITAT IN THE ASSESSEES OWN CASE IN ITA. NO.3094/M/2014 FOR THE A.Y.2003 - 04 DATED 01.06.2018 , W E SET ASIDE THE FINDING OF THE CIT(A) ON THIS ISSUE AND ITA NOS. 3095 /MUM/201 4 3096/MUM/2014 A.Y. 2003 - 04 - & 2004 - 05 7 REMAND THIS ISSUE BEFORE THE AO TO DECIDE THE MATTER OF CONTROVERSY AFRESH ON THE BASIS OF SAME GUIDELINES WHICH HAS BEEN GIVEN BY HONBLE ITAT IN THE SAID CASE. ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. I TA NO . 3096 /M/201 4 : - 7 . THE F ACTS OF THE PRESENT CASE ARE QUITE SIMILAR TO THE FACTS OF THE CASE AS NARRATED ABOVE IN ITA. NO.3095 /M/201 4 ABOVE, H OWEVER, THE FIGURE IS DIFFERENT, THERE IS NO NEED TO REPEAT THE SAME . THE MATTER OF CONTROVERSY IN THIS APPEAL IS ALSO THE SAME . THE FINDING GIVEN IN THE ABOVE MENTIONED APPEALS IS QUITE APPLICABLE TO THE FACTS OF THE PRESENT CASE . THEREFORE, THE PRESENT APPEAL IS ALSO BEING HEREBY PARTLY ALLOWED ACCORDINGLY. 8 . IN THE RESULT ALL THE APPEALS FILED BY THE ASSESSEE ARE HEREBY ORDERED TO BE PARTLY ALLOWED . ORDER P RONOUNCED IN THE OPEN COURT ON 12. 11 . 201 8 . SD/ - SD/ - ( B. R. BASKARAN ) (AMARJIT SINGH) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; DATED : 12. 11 . 2 018 . ITA NOS. 3095 /MUM/201 4 3096/MUM/2014 A.Y. 2003 - 04 - & 2004 - 05 8 V IJAY / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. / BY ORDER, //TRUE COPY// SR. PRIVATE SECRETARY ) , / ITAT, MUMBAI