Appeal details
Counselvise Citation
[2020] 111 COUNSELVISE.COM (IT) 4064 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 3 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
26-02-2020
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Assessment Year
2014-2015
Appeal Filed On
26-11-2018
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SMT.BEENA PILLAI, JUDICIAL MEMBER AND SHRI. O. P. MEENA, ACCOUNTANT MEMBER IT(TP)A 3136/BANG/2018 ASSESSMENT YEAR : 2014 15 M/S. TRAINZ HOLDINGS PVT. LTD., # 165/2, 6 TH FLOOR, KALYANI MAGNUM, DORAISANIPALYA, IIM POST, BANNERGHATTA ROAD, BENGALURU 560 076. PAN NO : AAFCA8051P VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 7 (1) (1), 80 FT. ROAD, BMTC BUILDING, 2 ND FLOOR, KORAMANGALA, 8 TH BLOCK, BENGALURU 560 095. APPELLANT RESPONDENT APPELLANT BY : SHRI. K. R. VASUDEVAN, ADVOCATE RESPONDENT BY : MR. MUZAFFAR HUSSAIN, CIT - DR DATE OF HEARING : 22 - 0 1 - 2020 DATE OF PRONOUNCEMENT : 26 - 02 - 2020 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST ORDER DATED 26/09/18 PASSED BY LD. ACIT CIRCLE 7(1)(1), BANGALORE FOR ASSESSMENT YEAR 2014 15 ON FOLLOWING GROUNDS OF APPEAL: PAGE 2 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 PAGE 3 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 PAGE 4 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 PAGE 5 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 PAGE 6 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 BRIEF FACTS OF THE CASE ARE AS UNDER: 2. ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROVIDING INFORMATION TECHNOLOGY SERVICES. IT FILED ITS RETURN OF INCOME FOR YEAR UNDER CONSIDERATION ON 29/11/14 DECLARING TOTAL INCOME AT NIL. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143 (2) WAS ISSUED. SUBSEQUENTLY NOTICE UNDER SECTION 142 (1) ALONG WITH QUESTIONNAIRE WAS ISSUED UPON ASSESSEE IN RESPONSE TO WHICH REPRESENTATIVES OF ASSESSEE APPEARED BEFORE LD.AO AND FILED REQUISITE DETAILS AS CALLED FOR. LD.AO OBSERVED THAT ASSESSEE HAD INTERNATIONAL TRANSACTION WITH ASSOCIATED ENTERPRISES EXCEEDING RS.15 CRORES, AND ACCORDINGLY CASE WAS REFERRED TO TRANSFER PRICING OFFICER FOR DETERMINING ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION. 3. UPON RECEIPT OF REFERENCE, LD.TPO CALLED UPON ASSESSEE TO FILE ECONOMIC DETAILS OF INTERNATIONAL TRANSACTION IN FORM 3 CEB. LD.TPO OBSERVED THAT, ASSESSEE IS PROVIDING INFORMATION TECHNOLOGY SERVICES TO GLOBAL CLIENTELE TO HIGH TECHNOLOGY, BANKING, HEALTHCARE, INSURANCE, TELECOM MANUFACTURING CLIENTS. IT WAS OBSERVED THAT ASSESSEE HAS ITS OPERATIONS IN USA, JAPAN AND INDIA. IN USA ASSESSEE OPERATES THROUGH ITS SUBSIDIARIES. 4. LD.TPO OBSERVED THAT, ASSESSEE HAD FOLLOWING TRANSACTION WITH ASSOCIATED ENTERPRISES: PAGE 7 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 5. IT HAS BEEN SUBMITTED BY LD.AR THAT LD.TPO CARRIED OUT ANALYSIS OF INTERNATIONAL TRANSACTION WITHOUT UNDERSTANDING BUSINESS MODEL OF ASSESSEE. 6. LD.TPO REJECTED ANALYSIS CARRIED OUT BY ASSESSEE AND OBSERVED THAT FUNCTIONS OF ASSESSEE WAS TO DEVELOP SOFTWARE/PROVIDING SOFTWARE SERVICES, AS WAS IN PREVIOUS YEAR. LD.TPO OBSERVED THAT IN PREVIOUS YEAR, ASSESSEE CHOSE TNMM AS MOST APPROPRIATE METHOD IN TRANSFER PRICING ANALYSIS, WHEREAS FOR CURRENT YEAR, THOUGH THERE IS NO CHANGE IN BUSINESS SCENARIO, AND THAT ASSESSEE WAS PROVIDING SAME KIND OF SERVICES TO BOTH AE AND NON-AE, CUP HAS BEEN USED. LD.TPO THEREFORE REJECTED CUP, INSTEAD, CONSIDERED TNMM FOR DETERMINING ALP OF THE TRANSACTION. LD.TPO APPLIED FILTERS FOR DETERMINING SET OF FOLLOWING 8 COMPARABLES, WITH AN AVERAGE MARGIN OF 29.40%: SL. NO. COMPARABLES SELECTED MARGIN 1. INFOSYS LTD 36.13% 2. LARSEN AND TOUBRO INFOTECH LTD 27.36% 3. MINDTREE LTD 20.43% DESCRIPTION PAYABLE (RS.) RECEIVABLE (RS.) MAM LOAN 64,21,010/ - CUP PURCHASE OF SERVICES AND PRODUCTS 12,06,78,01,00/ - CUP THIRD - PARTY BILLING 1,83,38,86,422/ - CUP TOTAL 1,20,67,80,100/- 1,84,03,07,432/- PAGE 8 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 4. PERSISTENT SYSTEMS LTD 35.10% 5. R S SOFTWARE (INDIA) LTD 24.23% 6. CIGNITI TECHNOLOGIES LTD 27.62% 7. SQS INDIA BSFI LTD 22.25% 8. THIRDWARE SOLUTIONS LTD 50.45% TOTAL 29.40% 7. LD.TPO COMPUTED AVERAGE MARGIN OF COMPARABLES AT 29.48% AS AGAINST 7.80% OF ASSESSEE, THEREBY PROPOSING AN ADJUSTMENT BEING SHORTFALL AMOUNTING TO RS.41,00,84,082/-. 8. LD.TPO ALSO MADE FOLLOWING OBSERVATIONS: THAT OPERATIONAL ARRANGEMENT OF ASSESSEE WITH ITS ASSOCIATED ENTERPRISE AE IS OF A ROUTINE CONTRACT SOFTWARE DEVELOPMENT SERVICE PROVIDER: LD.TPO REJECTED TNMM AS MOST APPROPRIATE METHOD AS AGAINST CUP, AND DISREGARDED SUBMISSIONS OF ASSESSEE IN THIS REGARD; LD.TPO CONCLUDED THAT ASSESSEE OPERATES ON A COST-PLUS MARKUP BASIS, AND OBSERVED THAT TURNOVER IS NOT RELEVANT, SINCE THERE IS NO IMPACT OF TURNOVER ON COST PLUS MARGIN EARNED BY ASSESSEE; LD.TPO REJECTED SUBMISSIONS OF ASSESSEE REGARDING INFOSYS BEING FUNCTIONALLY DIFFERENT AND FAILING UPPER TURNOVER FILTER; LD.TPO REJECTED SUBMISSIONS OF ASSESSEE REGARDING COMPARABLES ALLEGED FOR EXCLUSION ON FUNCTIONAL DISSIMILARITY; LD.TPO REJECTED COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING AND REJECTED COMPANIES HAVING SOFTWARE DEVELOPMENT SERVICE INCOME LESS THAN 75% OF THE TOTAL TURNOVER; PAGE 9 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 LD.TPO REJECTED ASSESSEES CONTENTION TREATING PROVISION FOR DOUBTFUL DEBTS AS OPERATING EXPENSES, INSTEAD, TREATED IT NON- OPERATING ITEM WHILE CALCULATING MARGINS OF COMPARABLE COMPANIES. LD.TPO REJECTED CERTAIN COMPARABLES ALLEGED FOR INCLUSION BY ASSESSEE. 9. LD.AO WHILE PASSING DRAFT ASSESSMENT ORDER COMPUTED DISALLOWANCE UNDER SECTION 14 A AT RS.23,90,960/-, AND ALSO DID NOT GRANT DEDUCTION UNDER SECTION 10AA OF THE ACT TO THE EXTENT OF CERTAIN EXPENDITURE IN FOREIGN CURRENCY AMOUNTING TO RS.19,92,074/- IN CHENNAI UNIT AND HYDRABAD UNIT FROM EXPORT TURNOVER. 10. AGGRIEVED BY ADDITIONS MADE BY LD.AO/TPO IN DRAFT ASSESSMENT ORDER, ASSESSEE RAISED OBJECTIONS BEFORE DRP. DRP SIMPLY UPHELD FINDINGS OF LD.TPO IN RESPECT OF TRANSFER PRICING ISSUES, HOWEVER EXCLUDED ICRA TECHNO ANALYTICS LTD. DRP ALSO HELD THAT, SINCE ASSESSEE DID NOT HAVE ANY PROVISION FOR DOUBTFUL DEBTS DURING THE YEAR UNDER CONSIDERATION, OBJECTION IN RELATION TO TREATING IT AS OPERATING ITEM IN RESPECT OF COMPARABLES WAS REJECTED. 11. UPON RECEIPT OF DIRECTIONS FROM DRP, LD.AO PASSED IMPUGNED ASSESSMENT ORDER, AGAINST WHICH ASSESSEE IS IN APPEAL BEFORE US. LD.AR SUBMITTED THAT ASSESSEE DO NOT WISH TO PRESS GROUNDS 1, 2.1, 2.2., 2.3 . ACCORDINGLY, THESE GROUND STANDS DISMISSED AS NOT PRESSED. PAGE 10 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 12. AT THE OUTSET, LD.AR SUBMITTED THAT ENTIRE TRANSFER PRICING ANALYSIS CARRIED OUT BY LD.TPO IS WITHOUT UNDERSTANDING THE BUSINESS MODEL OF ASSESSEE. HE NARRATED THE BUSINESS MODEL OF ASSESSEE AS UNDER: 13. AT THE OUTSET, LD.AR SUBMITTED THAT ASSESSEE IS THE HOLDING COMPANY OF ITS SUBSIDIARIES LOCATED IN USA AND JAPAN. FOR ALL PART PRACTICAL PURPOSES, THE SUBSIDIARY COMPANIES IN USA AND JAPAN ENTERED INTO CONTRACTS WITH THE 3 RD PARTIES FOR RENDERING SERVICES, AND THE REVENUE GENERATED THEREIN IS REMITTED TO INDIA. LD.AR SUBMITTED THAT, ASSESSEE ENTERED INTO AGREEMENTS WITH ITS SUBSIDIARIES IN USA, WHEREIN IT IS AGREED THAT REVENUE GENERATED FROM THIRD-PARTY CUSTOMER CONTRACTS IN USA FOR WHICH WORK IS DONE OUT OF INDIA WILL BE PAID TO THE ASSESSEE IN ENTITY. IT IS ALSO SUBMITTED THAT THE CUSTOMER WHO ARE BASED IN USA PREFERS TO ENGAGE LOCALLY AND HENCE THE AE IS ENTER INTO CONTRACTS WITH THE CUSTOMERS FOR PROVISION OF SERVICES. HE PLACED RELIANCE ON THE AGREEMENTS WITH ITS SUBSIDIARY AES PLACED IN PAPER BOOK. 14. LD.AR SUBMITTED THAT, OBSERVATIONS OF LD.TPO REGARDING ASSOCIATED ENTERPRISES BARING ALL RISK RELATED TO SERVICES RENDERED AND THAT ASSESSEE IS WORKING ON COST PLUS MARK-UP BASIS IS NOT IN ACCORDANCE WITH FACTS. LD.AR SUBMITTED THAT, IT IS INCORRECT TO SAY THAT ASSESSEE IN PRECEDING YEAR USED CUP AS MAM IN RELATION TO INCOME EARNED FOR RENDITION OF SOFTWARE DEVELOPMENT SERVICES. HE SUBMITTED THAT FOR ASSESSMENT YEAR 201314 TNMM WAS CONSIDERED ONLY IN RESPECT OF SERVICES AVAILED FROM U.S. ASSOCIATED ENTERPRISES AND NOT FOR SERVICES RENDERED TO SUBSIDIARY AES. IT HAS BEEN SUBMITTED THAT IN CURRENT YEAR AS WELL AS IN EARLIER YEAR, PAGE 11 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 ASSESSEE USED CUP FOR SOFTWARE SERVICES RENDERED TO SUBSIDIARY AES. 15. LD.AR THUS BEEN SUBMITTED THAT, LD.TPO ON WRONG ASSUMPTION OF FACTS, CARRIED OUT TRANSFER PRICING ANALYSIS, AND SELECTED INAPPROPRIATE COMPARABLES WHICH DO NOT MATCH WITH THE FUNCTIONAL PROFILE OF ASSESSEE. HE SUBMITTED THAT EVEN DRP ALSO FAILED TO APPRECIATE CONTENTIONS OF ASSESSEE, AND SIMPLY UPHELD OBSERVATIONS OF LD.TPO WITHOUT DEALING WITH OBJECTIONS RAISED. 16. LD.CIT DR THOUGH REFERRED TO ORDERS PASSED BY AUTHORITIES BELOW, COULD NOT CONTROVERT FUNCTIONAL PROFILE OF ASSESSEE, HAVING REGARDS TO AGREEMENTS ENTERED INTO BY ASSESSEE WHICH IS PLACED IN THE PAPER BOOK. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES AND HAVING REGARDS TO THE RECORDS BEFORE US. 17. ADMITTEDLY, ONGOING THROUGH AGREEMENTS ENTERED INTO BY ASSESSEE AT PAGE 659 OF PAPER BOOK, IT IS CLEAR THAT ASSESSEE HAS 2 SEGMENTS BEING AE SEGMENT AND NON-AE SEGMENT. ASSOCIATED ENTERPRISES ARE SUBSIDIARIES OF ASSESSEE, AND IN ORDER TO HAVE THE EASE OF BUSINESS, ASSOCIATED ENTERPRISES ENTER INTO CONTRACT WITH 3 RD PARTIES FOR PROVIDING SERVICES. FROM THESE AGREEMENTS IT IS CLEAR THAT ASSESSEE BARES ALL RISK RELATED TO SERVICES RENDERED, WHEREAS SUBSIDIARY AES ONLY. ON THE CONTRARY, AUTHORITIES BELOW ASSUMED THAT ASSESSEE IS WORKING ON A COST-PLUS MODEL WITH ASSOCIATED ENTERPRISES AND THAT ASSOCIATED ENTERPRISES UNDERTAKES ALL RISK RELATED TO SERVICE PROVIDED BY ASSESSEE. 18. WE OBSERVE THAT, LD.TPO CONSIDERED ASSESSEE TO BE A CONTRACT SERVICE PROVIDER, ASSUMING MINIMAL RISK, WHICH IS CONTRARY TO THE PAGE 12 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 BUSINESS MODEL OF ASSESSEE. WE AGREE WITH CONTENTION OF LD.AR THAT LD.TPO CONDUCTED TP ANALYSIS ON ERRONEOUS UNDERSTANDING OF BUSINESS MODEL OF ASSESSEE, AND COMPARABLES SELECTED BY LD.TPO CANNOT BE LOOKED INTO. 19. WE ARE THEREFORE OF OPINION THAT, ADJUSTMENT MADE BY LD.AO ON THE PROPOSED ADJUSTMENT BY LD.TPO SHOULD BE REVISITED DE NOVO . ACCORDINGLY, WE SET ASIDE ALL ISSUES RAISED BY ASSESSEE ON TRANSFER PRICING ISSUES TO LD.AO/TPO. LD.AO/TPO IS DIRECTED TO CARRY OUT TRANSFER PRICING ANALYSIS HAVING REGARD TO THE BUSINESS MODEL OF ASSESSEE. IT IS ALSO DIRECTED THAT COMPARABLES SELECTED SHOULD BE FUNCTIONALLY SIMILAR WITH ASSESSEE, HAVING SIMILAR BUSINESS MODEL LIKE ASSESSEE. 20. ASSESSEE IS DIRECTED TO PRODUCE ALL RELEVANT DOCUMENTS TO BRING OUT ITS ROLE IN PROVIDING SERVICES TO THE PARTIES SITUATED OUTSIDE INDIA. LD.TPO IS ALSO DIRECTED TO GRAND WORKING CAPITAL ADJUSTMENTS IN COMPARABLES IN ACTUAL WHERE EVER NECESSARY, FOR COMPUTING CORRECT MARGINS OF COMPARABLES. NEEDLESS TO SAY, THAT ASSESSEE SHALL BE GRANTED PROPER OPPORTUNITY OF BEING REPRESENTED. ACCORDINGLY, WE SET ASIDE GROUNDS 2.4- 2.6 TO LD.AO/TPO FOR STATISTICAL PURPOSES. CORPORATE TAX ISSUES: 21. LD.AR SUBMITTED THAT, ASSESSEE DO NOT WISH TO PRESS GROUND NO. 3.2 ACCORDINGLY THESE GROUND WITH ITS SUB GROUNDS RAISED STANDS DISMISSED. GROUND NO.3.3 ALONG WITH ITS SUB GROUNDS ARE AGAINST 14 A DISALLOWANCE. PAGE 13 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 22. IT IS SUBMITTED THAT ASSESSEE DID NOT HAVE ANY EXEMPT INCOME DURING THE YEAR UNDER CONSIDERATION. ONLY DIVIDEND EARNED BY ASSESSEE IS FROM INVESTMENT IN FOREIGN BANKS, WHICH ARE SUBJECTED TO TAX. GROUND NO.3.4 IS IN RESPECT OF NON-GRANTING OF CARRY FORWARD AND SET OFF OF UNABSORBED DEPRECIATION. IT HAS BEEN SUBMITTED THAT GROUND NO. 3.5 IS IN RESPECT OF INTEREST U/S. 234 A/B. 24. DRP HAD DIRECTED LD.AO TO VERIFY SUBMISSIONS OF ASSESSEE, WHICH HAS NOT BEEN DONE BY LD.AO. BOTH SIDES SUBMIT THAT THESE ISSUES MAY BE SENT BACK TO LD.AO FOR DUE VERIFICATION. BASED UPON THE SUBMISSIONS BY BOTH SIDES, WE DIRECT LD.AO TO CALL FOR NECESSARY DETAILS FOR VERIFYING THE CONTENTIONS OF ASSESSEE, AND IF FOUND CORRECT TO ALLOW THE CLAIM AS PER LAW. NEEDLESS TO SAY, THAT ASSESSEE SHALL BE GRANTED PROPER OPPORTUNITY OF BEING HEARD IN ACCORDANCE WITH LAW. ACCORDINGLY, CORPORATE ISSUES ARGUED BY LD.AR ARE SET ASIDE TO LD.AO FOR STATISTICAL PURPOSES. IN THE RESULT, APPEAL IS SET ASIDE TO LD.AO/TPO PARTLY FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH FEBRUARY, 2020. SD/- SD/- (O. P. MEENA) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 26 TH FEBRUARY, 2020. /MK/ PAGE 14 OF 14 IT(TP)A 3136/BANG/2018 A. Y : 2014 15 COPY TO: 1. APPELLANT 4. CIT(A) 2. RESPONDENT 5. DR, ITAT, BANGALORE 3. CIT 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL. BANGALORE. DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR 10-02-2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON SR.PS 9. FILE SENT TO THE BENCH CLERK SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS
