Concerto Software India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 3268/DEL/2010

• Counselvise Citation: 326820114 RSA 2010
• Duration Of Justice: 1 year(s) 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 29-03-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 02-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIKAS SURYAVANSHI
• Assessee Lawyers: G C SRIVASTAVA
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B NEW DELHI) BEFORE SHRI G.D. AGRAWAL, HONBLE VICE-PRESIDENT AN D SHRI RAJPAL YADAV: HONBLE JUDICIAL MEMBER ITA NOS. 3268 & 4354/DEL/2010 ASSESSMENT YEARS: 2005-06 & 2006-07 CONCERTO SOFTWARE INDIA PVT. LTD. VS. ASSISTANT CI T, (NOW ASPECT CONTACT CENTRE SOFTWARE INCOME-TAX CIR CLE-1, INDIA PVT. LTD), 2 ND FLOOR, NEW DELHI. COMMERCIAL TOWER, NEW DELHI (PAN: AABCD4039Q) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI GC SRIVAST AVA, ADV. RESPONDENT BY: SHRI VIKAS SURYAV ANSHI, SR. DR ORDER PER RAJPAL YADAV: JUDICIAL MEMBER IN ASSESSMENT YEAR 2006-07, ASSESSEE IS CHALLENGIN G THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 ON 29.06.2010. IN ASSESSMENT YEAR 2005-06 , ASSESSEE IS CHALLENGING THE ORDER OF THE LEARNED CIT(APPEALS) D ATED 1.5.2010. WE HAVE HEARD BOTH THE APPEALS TOGETHER AND DEEM IT APPROPR IATE TO DISPOSE THEM OF BY THIS COMMON ORDER. 2. FIRST, WE TAKE THE APPEAL OF THE ASSESSEE IN ASS ESSMENT YEAR 2006-07. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE MARKETING AND SUPPORT SERVICES . IT HAS FILED ITS RETURN OF 2 INCOME ON 29.11.2006 DECLARING AN INCOME OF RS.62,4 9,160. IT WAS ACCEPTED UNDER SECTION 143(1) ON 31.10.2007. HOWEVER, SUBSEQ UENTLY, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND A NOTICE UNDER SECTION 143(2) DATED 10.10.2007 WAS ISSUED AND SERVED UPON THE ASSESSEE. ASSESSING OFFICER HAD THEREAFTER ISSUED NOTICE UNDER SEC. 142 (1) OF THE ACT. ON SCRUTINY OF ACCOUNTS, IT REVEALED TO THE ASSESSING OFFICER T HAT THE ASSESSEE IS A SUBSIDIARY OF CONCERTO INC. USA. IT HAS BEEN PROVID ING SALES SUPPORT SERVICE TO THE CLIENTS OF ITS PARENT COMPANY. IT HAD UNDERT AKEN INTERNATIONAL TRANSACTION IN RESPECT OF PURCHASE OF COMPUTER SOFT WARE HAVING VALUE OF RS.3,55,10,470 AND RENDERED SUPPORT SERVICE OF HAVI NG VALUE OF RS.268,65,264. IN ORDER TO BENCHMARK THE INTERNATIO NAL TRANSACTION, ASSESSEE HAS ADOPTED TRANSACTIONAL NET MARGIN METHOD WITH OP ERATING PROFIT EARNED ON TOTAL COST AS THE PROFIT LEVEL INDICATOR. ASSESSING OFFICER HAD MADE REFERENCE TO THE LEARNED TPO TO DETERMINE WHETHER ASSESSEE HA S ADOPTED ARMS LENGTH PRICE IN RESPECT OF ITS TRANSACTION ENTERED WITH TH E A.E. LEARNED TPO HAS PASSED AN ORDER UNDER SEC.92CA(3) ON 23.10.2009 AND OBSERVED THAT THE ASSESSEE HAS REPORTED PLI OF 12.16% (O.P. OVER TC) WHEREAS THE AVERAGE PLI OF THE COMPARABLES IS 28.82%. IN THIS WAY, LEAR NED ASSESSING OFFICER HAS OBSERVED THAT THERE IS A DIFFERENCE OF RS.92,63 ,786 WHICH REQUIRED TO BE ADDED IN THE VALUE OF INTERNATIONAL TRANSACTION. AC CORDINGLY, SHE MADE THE 3 RECOMMENDATIONS. LEARNED ASSESSING OFFICER HAS PASS ED THE DRAFT ASSESSMENT ORDER WHEREBY HE ACCEPTED THE RECOMMENDA TIONS MADE BY THE TPO. THE ASSESSEE HAS FILED OBJECTIONS. LEARNED DRP WITHOUT REFERRING THE OBJECTIONS OF THE ASSESSEE UPHELD THE DRAFT ASSESSM ENT ORDER AND ISSUED THE DIRECTIONS ACCORDINGLY. THE RELEVANT DISCUSSION IN THE ORDER OF THE LEARNED DRP READS AS UNDER: 2.3 WE HAVE CONSIDERED THE ARGUMENTS OF THE ASSESS EE COMPANY. THE TPO HAS GIVEN DETAILED REASONS IN THE ORDER U/S . 92CA(3) FOR COMPUTING THE ARMS LENGTH PRICE OF THE INTERNATION AL TRANSACTIONS. THE TPO HAS GIVEN DETAILED REASONS FOR CONSIDERING THE CURRENT YEAR DATA OF COMPARABLES. THE REASONING OF APPLYING VARI OUS FILTERS HAS BEEN DISCUSSED IN DETAIL. THE TPO HAS OBSERVED THAT THE CLAIM OF ASSESSEE FOR THE AD HOC ADJUSTMENT ON ACCOUNT OF RI SK CANNOT BE ACCEPTED BECAUSE THE ASSESSEE COULD NOT EXHIBIT DIF FERENCE IN ITS OWN RISK MATRIX AND THAT OF COMPARABLES, WHICH REQUIRE RISK ADJUSTMENTS. THE TPO HAS THEREFORE COMPUTED THE OP/TC OF THE ASS ESSEE COMPANY AT 28.82% AFTER COMPUTING THE AVERAGE OP/TC OF THE TWO COMPARABLES. THE UPWARD ADJUSTMENT OF RS.92,63,786 ON THE INTERNATIONAL TRANSACTIONS, AS COMPUTED BY THE TPO AND ASSESSING OFFICER IS QUITE REASONABLE AND WE FIND NO COMPELLI NG REASONS TO INTERFERE WITH THE SAME. 3. THE LEARNED COUNSEL FOR THE ASSESSEE AT THE VERY OUTSET SUBMITTED THAT THE ISSUE DESERVES TO BE SET ASIDE TO THE FILE OF T HE LEARNED DRP BECAUSE 4 LEARNED DRP FAILED TO LOOK INTO THE OBJECTIONS FIL ED BY THE ASSESSEE IN 55 PAGES. HE EMPHASIZED THAT THE ASSESSEE HAS FILED SP ECIFIC OBJECTIONS AS TO HOW JETKING INFOTRAIN LTD. IS NOT A COMPARABLES. HE POINTED OUT THAT THIS COMPANY IS ENTIRELY ENGAGED INTO PROVIDING COMPUTER TRAINING SERVICES, HENCE, ITS RESULT CANNOT BE COMPARED WITH THAT OF T HE ASSESSEE. SIMILARLY, ASSESSEE HAS POINTED OUT AS TO HOW RELIANCE INFRA-S TRUCTURE AND CONSULTANT LTD. COULD NOT BE COMPARED WITH THE ACTIVITIES OF THE ASSESSEE. LEARNED D.R.P. HAS NOT MADE ANY REFERENCE ABOUT THESE OBJEC TIONS OF THE ASSESSEE. ACCORDINGLY, HE PRAYED THAT THE ISSUE BE SET ASIDE TO THE FILE OF THE LEARNED D.R.P. FOR READJUDICATION. LEARNED D.R. ON THE OTHE R HAND RELIED UPON THE ORDER OF THE LEARNED TPO AND POINTED OUT THAT ALL T HESE OBJECTIONS HAVE BEEN LOOKED INTO BY THE TPO AND LEARNED D.R.P. HAS ACCEP TED THE ORDER OF THE LEARNED T.P.O. FOR THE REASONS ASSIGNED THEREIN. 4. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AN D GONE THROUGH THE RECORD CAREFULLY. ON PERUSAL OF PAGE NOS. A30 TO A3 7, WE FIND THAT THE ASSESSEE HAS FILED DETAILED OBJECTIONS ON SELECTION OF TWO COMPARABLES I.E. JETKING INFRATRAIN AND RELIANCE INFRA-STRUCTURE CON SULTANTS. LEARNED D.R.P. HAS NOT MADE ANY REFERENCE IN THE IMPUGNED ORDER EX TRACTED SUPRA ABOUT THE OBJECTIONS OF THE ASSESSEE, THUS, THE ORDER OF THE LEARNED D.R.P. CANNOT BE 5 TERMED AS A SPEAKING ORDER. THE ASSESSEE HAS SUBMIT TED OBJECTIONS RUNNING INTO MANY PAGES BUT LEARNED D.R.P. HAS JUST SUMMARI ZE THE ISSUE IN PARAGRAPH NO.2.3 IN FEW LINES. IN OTHER PARAGRAPHS, LEARNED D.R.P. HAS JUST NOTICED THE FACTS OF THE CASE. THUS, IN OUR OPINION , THE ORDER OF THE LEARNED D.R.P. DESERVES TO BE SET ASIDE. 5. IN VIEW OF THE ABOVE DISCUSSION, APPEAL OF THE A SSESSEE FOR ASSESSMENT YEAR 2006-07 IS ALLOWED FOR STATISTICAL PURPOSES AN D ALL THE ISSUES ARE RESTORED TO THE FILE OF THE LEARNED D.R.P. FOR FRES H ADJUDICATION. IT IS NEEDLESS TO SAY THAT THE OBSERVATIONS MADE BY US WILL NOT IM PAIR OR INJURE THE CASE OF A.O. OR WOULD NOT CAUSE ANY PREJUDICE TO THE DEFENC E/EXPLANATION OF THE ASSESSEE. THE ASSESSEE WILL BE AT LIBERTY TO SUBMIT ANY EXPLANATION AS WELL AS ANY MATERIAL IN SUPPORT OF ITS CONTENTIONS. LEARNED D.R.P. SHALL PROVIDE DUE OPPORTUNITY OF HEARING TO THE ASSESSEE. 6. IN THE APPEAL FOR ASSESSMENT YEAR 2005-06, THE S OLITARY GRIEVANCE OF THE ASSESSEE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN UPHOLDING THE DISALLOWANCE OF RS.1,14,51,811. 6 7. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HA S FILED ITS RETURN OF INCOME ON 31.10.2005 DECLARING AN INCOME OF RS.54,8 2,249. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND A NOTICE UNDER SEC. 143(2) DATED 12.6.2006 WAS ISSUED AND SERVED UPON THE ASSE SSEE. IN RESPONSE TO THE NOTICE OF HEARING, SHRI JS SAHNI, CA APPEARED BEFOR E THE ASSESSING OFFICER FROM TIME TO TIME AND SUBMITTED THE DETAILS. ON SCR UTINY OF THE ACCOUNTS, ASSESSING OFFICER FOUND THAT THERE IS A FALL IN THE NET PROFIT RATIO DURING THE YEAR AS COMPARED TO THE NET PROFIT IN THE EARLIER Y EARS. HE FOUND THAT IN ASSESSMENT YEAR 2004-05, ASSESSEE HAS SHOWN NET PRO FIT AT RS.66.85% WHEREAS IN THE PRESENT YEAR, NET PROFIT HAS BEEN RE PORTED AT 10.87%. ON AN ANALYSIS OF THE RECORD, LEARNED ASSESSING OFFICER F OUND THAT THOUGH TURNOVER IS DECREASED IN COMPARISON TO LAST YEAR BUT EXPENSE S ON ACCOUNT OF SALARY AND WAGES, TELEPHONE, BONUS AND CUSTOMERS SEMINARS HAVE INCREASED SIGNIFICANTLY AS COMPARED TO PREVIOUS YEAR FIGURE. HE CONFRONTED THE ASSESSEE TO EXPLAIN WHY THERE IS NO REDUCTION IN TH E EXPENDITURE. BEFORE ADVERTING TO THE EXPLANATION OF THE ASSESSEE, WE DE EM IT APPROPRIATE TO TAKE NOTE OF THE REVENUE RECOGNIZED BY THE ASSESSEE IN A SSESSMENT YEARS 2004-05, 2005-06 AND THE VARIOUS EXPENSES DEBITED IN THE P & L ACCOUNT AS WELL AS THE AMOUNTS DISALLOWED BY THE ASSESSING OFFICER. SU CH DETAILS HAVE BEEN 7 PLACED BEFORE US IN A TABULAR FORM BY THE LEARNED C OUNSEL FOR THE ASSESSEE. THEY READ AS UNDER: INCOME A.Y. 2004-05 AMOUNT (RS) A.Y. 2005-06 AMOUNT (RS) COMMISSION EARNED ON SALE OF SOFTWARE 32,486,157 29,015,048 RENDERING OF SUPPORT SERVICES 20,414,808 23,969,395 MAINTENANCE REVENUE 35,330,743 NIL TOTAL INCOME 88,231,709 52,984,443 EXPENSES A.Y. 2004- 05 (A) A.Y. 25005- 06 (B) AMOUNT DISALLOWED (B)- (A) SALARY & WAGES 7,670,073 11,621,336 3,951,263 TELEPHONE 2,715,976 6,557,519 3,841,543 BONUS NIL 2,121,551 2,121,551 CUSTOMER SEMINARS NIL 1,537,454 1,537,454 11,451,811 8. THE ASSESSEE HAS SUBMITTED BEFORE THE ASSESSING OFFICER VIDE REPLY DATED 12.12.2008 THAT ASSESSEE COMPANY WAS INCORPOR ATED ON 23.10.2001 AS A SUBSIDIARY OF CONCERTO SOFTWARE INC, USA. THE PAR ENT COMPANY IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE AND THE ASSESSEE COMPANY ACTS ITS SALE AND SUPPORT ENTITY I N INDIA. IN THIS YEAR, THERE 8 IS A CHANGE IN THE POLICY OF RECOGNIZING INCOME DUE FROM ITS PARENTS COMPANY. UP TO MARCH 31,2004, THE ASSESSEE COMPANY WAS RECOGNIZING A PART OF SALES WHICH WERE MARKETED BY THE SUPPORT TE AM OF THE ASSESSEE COMPANY. HOWEVER, TOWARDS THE END OF FISCAL YEAR 20 05 AND THEREAFTER THE PARENT COMPANY WAS IN PROCESS OF RESTRUCTURING ITS OPERATIONS AND THE ROLE PERFORMED BY THE ASSESSEE GOT RESTRICTED TO CONDUCT ING LIMITED MARKETING ACTIVITY IN INDIA AND SUPPORT IN RELATION TO IMPLEM ENTATION OF THE SOFTWARE, THUS, THERE WAS A FALL IN THE PROFITABILITY. LEARNE D ASSESSING OFFICER OBSERVED THAT ON PERUSAL OF EMPLOYEES LIST, IT REVEALS THAT CERTAIN EMPLOYEES WERE ENGAGED IN PROVIDING MAINTENANCE SERVICES. IN THIS YEAR, ALL THE EMPLOYEES WHO WERE WORKING IN THE COMPANY IN ASSESSMENT YEAR 2004-05 WERE ALSO WORKING. THE ASSESSEE HAS HIRED FOUR NEW EMPLOYEES ALSO BUT THERE IS NO REVENUE FROM MAINTENANCE SERVICES. THUS, THERE IS N O JUSTIFICATION FOR INCREASE IN THE NUMBER OF EMPLOYEES WHEN THE OPERAT IONS OF THE COMPANY ARE BEING CURTAILED. THE ASSESSING OFFICER CONFRONT ED THE ASSESSEE TO EXPLAIN THE SITUATION, THE REPLY WAS TO BE FILED UP TO 26.1 2.2008. ASSESSING OFFICER HAS OBSERVED THAT NO REPLY WAS FILED AND ACCORDINGL Y HE DISALLOWED A SUM OF RS.1,14,51,811 OUT OF THE VARIOUS EXPENSES. 9 9. APPEAL TO THE LEARNED CIT(APPEALS) DID NOT BRING ANY RELIEF TO THE ASSESSEE. 10. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD CAREFULLY. THE EXPLANATION OF THE ASSES SEE IS THAT NO PAYMENTS WERE MADE TO THE PERSONS WHO ARE SPECIFIED UNDER SE CTION 40A(2)(B) OF THE ACT. ASSESSING OFFICER NOWHERE CONCLUSIVELY HELD TH AT THE EXPENSES WERE FOUND TO BE BOGUS. THE INCOME OF THE ASSESSEE HAS B EEN ACCEPTED BY THE LEARNED TPO AS BEING ON ARMS LENGTH BASIS. THUS, T HE ASSESSING OFFICER HAS MADE THE ADDITION MERELY ON ESTIMATES. ON THE OTHER HAND, LEARNED DR POINTED OUT THAT THE DETAILS IN ITSELF SUGGESTS THA T ASSESSEE HAS NO JUSTIFICATION FOR CLAIMING SUCH HIGHER EXPENDITURE, WHEN ITS TURN OVER HAS BEEN REDUCED DRASTICALLY. WE HAVE CONSIDERED THESE SUBMISSIONS A ND PERUSED THE RECORD. IT REVEALS FROM THE ASSESSMENT ORDER THAT ASSESSING OF FICER HAS FIRST TIME CONFRONTED THE ASSESSEE ON 2 ND OF DECEMBER, 2008. IT WAS SUPPOSED TO FILE REPLY BY 10.12.2008. THE ASSESSEE HAS FILED THE REP LY ON 12.12.2008. AGAIN THE ASSESSING OFFICER RAISED THE QUERY ON 24.12.200 8 AND DIRECTED THE ASSESSEE TO EXPLAIN BY 26.12.2008. IN THIS SHORT PE RIOD, ASSESSEE COULD NOT SUBMIT THE REPLY AND THE ASSESSING OFFICER ACCORDIN GLY PASSED THE ASSESSMENT ORDER BEFORE 31.12.2012, THOUGH THE DATE OF ORDER IS NOT DISCERNIBLE FROM THE ASSESSMENT ORDER. BUT IN ANY C ASE, THE LIMITATION WAS UP 10 TO 31.12.2012. LOOKING INTO THIS ASPECT, WE ARE OF THE VIEW THAT SUFFICIENT OPPORTUNITY WAS NOT GRANTED TO THE ASSESSEE BY THE ASSESSING OFFICER. HE HAS JUST PROVIDED TWO DAYS TIME FOR EXPLAINING ITS POSI TION. THEREFORE, WE SET ASIDE THE ORDERS OF THE REVENUE AUTHORITIES BELOW A ND REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR READJUDICATION. 11. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. DECISION PRONOUNCED IN THE OPEN COURT ON 18.05.201 2 SD/- SD/- ( G.D. AGRAWAL ) ( RAJPAL YADAV ) VICE-PRESIDENT JUDICIAL MEMBER DATED: 18 /05/2012 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR