QAD INDIA P.LTD, MUMBAI V. ASST CIT CIR 9(3), MUMBAI

ITA 341/MUM/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3618 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 21-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIVEK A PERAMPURNA
• Keywords: Transfer pricing; International transaction; Question of law; Difference of opinion; Corroborative evidences
• Section: 271(1)(c); 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J , BENCH MUMBAI BEFORE SHRI SAKTIJIT DEY, JM & SHRI M.BALAGANESH , AM ITA NO. 341 / MUM/20 1 6 ( ASSESSMENT YEAR : 2011 - 12 ) M/S. QAD INDIA PRIVATE LIMITED 301, 3 RD FLOOR, TECHNIPLEX - I TECHNIPLEX COMPLEX OFF. VEER SAVARKAR FLYOVER GOREGAON (W) MUMBAI 400 062 VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 9(3) MUMBAI PAN/GIR NO. AAACQ1307K ( APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY SHRI DHANESH BAFNA & MS. CHANDNI SHAH REVENUE BY SHRI VIVEK A PERAMPURNA DATE OF HEARING 11 / 02 /201 9 DATE OF PRONOUNCEMENT 22 / 02 /201 9 / O R D E R PER M. BALAGANESH (A.M) : THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - 21, [HEREINAFTER REF ERRED TO AS THE LD CITA] , MUMBAI DATED 01/10/2015 FOR A.Y.2011 - 12 IN THE MATTER OF IMPOSITION OF PENALTY U/S.271(1)(C) OF THE INCOME TAX ACT, 1961. ITA NO. 341/MUM/2016 M/S. QAD INDIA PRIVATE LIMITED 2 2. THE ONLY ISSUE TO BE DECIDED IS AS TO WHETHER THE LD. CIT(A) WAS JUSTIFIED IN UPHOLDING LEVY OF PENALTY O F RS.45,74,664/ - U/S.271(1)(C) OF THE ACT IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE BRIEF FACTS OF THIS ISSUE ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE A.Y.2011 - 12 ON 30/11/2012 [ON THE DUE DATE U/S.139(1) OF THE ACT] DECLARING TOTA L INCOME OF RS.2 ,54,66,907/ - . THE ASSESSEE COMPANY IS PRIMARILY ENGAGED IN RENDERING SOFTWARE SUPPORT, DEVELOPMENT AND RELATED SERVICES TO ITS ASSOCIATED ENTERPRISES (AES). IT PROVIDES THE SERVICES IN ACCORDANCE WITH THE SPECIFICATIONS AS PROVIDED BY THE A ES. THE ASSESSEES AES ARE RESPONSIBLE FOR IDENTIFYING AND RETAINING THE CLIENTS. THE ASSESSEE IS CHARACTERISED AS A LOW RISK CAPTIVE SOFTWARE SERVICE PROVIDER TO ITS AFFILIATES AROUND THE GLOBE AND PROVISION OF SUCH SERVICES IS GOVERNED BY INTER - COMPANY A GREEMENTS BETWEEN THE ASSESSEE AND ITS AES. THE ASSESSEE HAS FURNISHED AUDIT REPORT IN THE F ORM NO.3CE B REFLECTING THE LIST OF INTERNATIONAL TRANSACTIONS CARRIED OUT BY IT AFTER DULY BENCHMARKING THE SAME BY WAY OF AN INDEPENDENT TRANSFER PRICING STUDY REP ORT AND CONDUCTED BY AN INDEPENDENT EXPERT. THE ASSESSEE EARNED NET OPERATING PROFIT BASED ON COST OF 9.4% FOR PROVI SION OF SOFTWARE SUPPORT AND RELATED SERVICES TO ITS AES. THE ASSESSEE IDENTIFIED 9 COMPARABLES AND ARRIVED AT THE MEAN MARGIN OF 8.87% THER EON AND SINCE THE ASSESSEES MARGIN WAS MORE THAN COMPARABLES MARGINS, IT CONCLUDED THAT THE TRANSACTIONS WERE CARRIED OUT AT ARMS LENGTH PRICE [ALP]. THE LD. TPO REJECTED TWO OUT OF 9 COMPARABLES CHOSEN BY THE ASSESSEE I.E., M/S. ITA NO. 341/MUM/2016 M/S. QAD INDIA PRIVATE LIMITED 3 MAS C ON GLOBAL LTD., AND M/S. BELLS SOFTECH LTD. IN ADDITION, THE LD. TPO INCLUDED 5 FRESH COMPARABLES TO THE EXISTING REMAINING 7 COMPARABLES AND ACCORDINGLY, DETERMINED THE COMPARABLES MARGIN IN RESPECT OF 12 COMPARABLES AT 18.66% AS AGAINST THE ASSESSEES MARGIN OF 9.40%. THE F INAL COMPARABLES CHOSEN BY THE TPO ARE AS UNDER: - S NO. NAME OF THE COMPARABLES PROPOSED BY YOUR GOODSELF MARGIN (OP/TC) 1 ACROPETAL TECH LTD 22.06% 2 E - INFOCHIPS LTD. 62.60% 3 KALS INFORMATION SYSTEMS LTD 8.88% 4 MINDTREE LTD. 10.28% 5 R SYSTEMS INTERNATIONAL LTD 6.50% 6 SASKEN COMM TECH LTD 24.30% 7 T HIRDWARE SOLUTIONS LTD 17.86% 8 C G VAK SOFTWARE & EXPORTS LTD 1.66% 9 SONATA SOFTWARE LTD. 30.76% 10 ONWARD TECHNOLOGIES LTD 15.21% 11 SPRY RESOURCES INDIA PRIVATE LTD 18.40% 12 MAXIMAA SYSTEMS LTD 5.46% TOTAL NO. OF COMPARABLES 12 ARITHMETIC MEAN 18.66% 3.1 . THE LD. AO ACCORDINGLY MADE A TRANSFER PRICING ADJUSTMENT OF RS.1,48,04,738/ - AND COMPLETED THE ASSESSMENT. IT IS PERTINENT TO NOTE ITA NO. 341/MUM/2016 M/S. QAD INDIA PRIVATE LIMITED 4 THAT NO OTHER ADDITIONS / DISALLOWANCE WERE MADE BY LD. AO IN THE ASSESSMENT. THE LD. AO INITIATED PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT IN RESPECT OF AFORESAID TP ADDITION. THE ASSESSEE IN VIEW OF THE SMALLNESS OF THE AMOUNT DID NOT PREFER ANY APPEAL AGAINST SA ID ASSESSMENT ORDER IN QUANTUM ASSESSMENT. ACCORDINGLY, THE LD. AO PASSED AN ORDER U/S.271(1)(C) OF THE ACT ON 30/09/2014 LEV YING PENALTY U/S.271(1)(C) OF THE ACT R.W.EXPLANATION - 1 THEREON TO THE TUNE OF RS.45,74,664/ - , IGNORING THE SUBMISSIONS OF THE ASSE SSEE THAT ASSESSEE HAD NOT PREFERRED THE APPEAL ONLY IN VIEW OF THE SMALLNESS OF THE AMOUNT INVOLVED THEREON AND TO AVOID LITIGATION. THE ACTION OF THE LD. AO LEVYING PENALTY WAS UPHELD BY THE LD. CIT(A). 4. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. 5. W E HAVE HEARD RIVAL SUBMISSIONS. AT THE OUTSET, WE FIND THAT THE TRANSACTION NET MARGIN METHOD (TNMM) USED AS THE MOST APPROPRIATE METHOD (MAM) BY THE ASSESSEE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS IS NOT IN DISPUTE. THE P ROFIT L EVEL I NDICATOR (PL I) USED BY THE ASSESSEE IS OPERATION PROFIT DIVIDED BY OPERATION COST (OO /OC) IS N OT IN DISPUTE . THE ONLY DISPUTE WHICH EVENTUALLY LEAD TO THE FRAMING OF ADDITION WAS ONLY ON THE CHOICE OF COMPARABLES. FOR THE SAKE OF CONVENIENCE, FOLLOWING ARE THE COMPAR ABLES REJECTED BY THE LD TPO : - 1. M/S. MASCON GLOBAL LTD., 2. M/S. BELLS SOFTECH LTD. ITA NO. 341/MUM/2016 M/S. QAD INDIA PRIVATE LIMITED 5 5.1. FOLLOWING ARE THE COMPARABLES INCLUDED BY THE TPO IN HIS TRANSFER PRICING ORDER: - 1. ACROPETAL TECH LTD., 2. E - INFOCHIPS LTD., 3. KALS INFORMATION SYSTEMS LTD., 4. R.SYSTEMS INTERNATIONAL LTD., 5. THIRDWARE SOLUTIONS LTD., 5.2. THE LD. AR STATED BEFORE US THAT IF ONE OF THE COMPARABLES CHOSEN BY THE LD. TPO I.E., M/S. E - INFO CHIPS LTD., HAVING A HIGH MARGIN OF 62.60% IS REMOVED, THEN ASSESSEES MARGIN WOULD BE THROUG H WITH +/ - 5% AND THAT NO ADJUSTMENT TO ALP WOULD BE WARRANTED. IN THIS REGARD, THE LD. AR PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF NESS TECHNOLOGIES INDIA PVT. LTD., VS. DCIT IN ITA NO.696/MUM/2016 AND IT(TP )A NO.1006/MUM/2016 DATED 11/11/2016 FOR THE A.Y.2011 - 12 WHEREIN M/S. E - INFOCHIPS LTD., WERE HELD TO BE NOT A GOOD COMPARABLE DUE TO FUNCTIONAL DISSIMILARITIES AND ALSO FOR THE REASON THAT SEGMENTAL BREAK - UP IS NOT AVAILABLE WITH RESPECT TO PRODUCTION AND SALE OF SOFTWARE PRODUCTS UNDERTAKEN BY IT. THE LD. AR ALSO FURTHER PLEADED THAT ANOTHER COMPARABLE CHOSEN BY THE LD. TPO I.E., THIRDWARE SOLUTIONS LTD., HAVING MARGIN OF 17.86% WAS ALSO HELD TO BE NOT A GOOD COMPARABLE BY VARIOUS DECISIONS OF THIS TRIBUNA L. SIMILARLY, HE ALSO STATED THAT TWO OTHER COMPARABLES CHOSEN BY THE TPO M/S. ACROPETAL TECH LTD., AND M/S.KALS INFORMATION SYSTEMS LTD., WERE ALSO HELD TO BE ITA NO. 341/MUM/2016 M/S. QAD INDIA PRIVATE LIMITED 6 NOT A GOOD COMPARABLE BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y.2009 - 10 IN ITA NO.1683 /MUM/2013 DATED 30/09/2016. IN THIS REGARD, HE REFERRED TO PARA 11 OF THE SAID JUDGMENT WHEREIN M/S. ACROPETAL TECH LTD., HAS BEEN STATED TO BE INVOLVED INTO MANUFACTURING ACTIVITIES AND ALSO IS A PRODUCT COMPANY AND NOT ENGAGED IN SOFTWARE DEVELOPMENT ALO NE. 5.3. SIMILARLY, HE DREW OUR ATTENTION TO PARA 17 OF THE SAID JUDGMENT DATED 30/09/2016 OF THIS TRIBUNAL IN ASSESSEES OWN CASE WHEREIN M/S. KALS INFORMATION SYSTEMS LTD., HAS BEEN DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES FOR ABSENCE OF SEG MENTAL DATA AND ALSO FOR THE REASON THAT THE SAID COMPANY IS INVOLVED IN PRODUCT DEVELOPMENT. THE LD. AR FINALLY PLEADED THAT THOUGH THE ASSESSEE HAS GOT A STRONG CASE ON MERITS AS FAR AS THE QUANTUM ADDITION IS CONCERNED, WHICH IS BASED ON VARIOUS AVAILAB LE DECISIONS OF THIS TRIBUNAL ON THE CHOICE OF COMPARABLES STATED SUPRA, MERELY BECAUSE AN APPEAL HAS NOT BEEN FILED BY THE ASSESSEE BEFORE THE LD CIT(A) / DRP OR BEFORE THIS TRIBUNAL ON QUANTUM ADDITION, WOULD NOT AUTOMATICALLY RESULT IN CONCEALMENT PENAL TY U/S.271(1)(C) OF THE ACT. THE LD. AR ALSO STATED THAT TO PROVE THE BONAFIDE OF THE ASSESSEE , THE ADDITIONAL COMPARABLES CHOSEN BY THE LD. TPO HAD BEEN THE SUBJECT MATTER OF CONSIDERATION BY THE ASSESSEE IN ITS ACCEPT/REJECT MATRIX OF THE LIST OF COMPAR ABLES IN ITS TP STUDY REPORT. HE DREW OUR ATTENTION TO THE RELEVANT PAGES OF TP STUDY REPORT WHEREIN ASSESSEE HAD INDEED CONSIDERED FIVE ADDITIONAL COMPARABLES CHOSEN BY ITA NO. 341/MUM/2016 M/S. QAD INDIA PRIVATE LIMITED 7 THE LD. TPO IN ITS ACCEPT/REJECT MATRIX AND REJECTED THE SAME BASED ON PROPER REASONIN G. 5.4. THE LD. AR ALSO PLACED RELIANCE ON THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A.YRS 2009 - 10 AND 2010 - 11 WHEREIN THE SAID COMPARABLES CHOSEN BY THE TPO HAD BEEN DIRECTED TO BE EXCLUDED ON VARIOUS REASONS STATED SUPRA. 5.5. I N RESPONSE THERETO, THE LD. DR STATED THAT ONCE THERE IS AN ADJUSTMENT MADE TO TRANSFER PRICING ADJUSTMENT, THE E XPLANATION 7 TO SECTION 271(1)(C) OF THE ACT WOULD COME INTO OPERATION WHEREIN THE EXTENT OF ADJUSTMENT TO ALP WOULD BE DEEMED TO REPRESENT THE CONCEALMENT OF INCOME OR FURNISHING OF INACCURATE PARTICULARS OF INCOME ON THE PART OF THE ASSESSEE WARRANTING LEVY OF PENALTY U/S.271(1)(C) OF THE ACT. 5.6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE P APER BOOK CONTAINING THE TRANSFER PRICING STUDY REPORT, TRANSFER PRICING AUDIT REPORT. VARIOUS STATEMENTS MADE BY THE ASSESSEE BEFORE THE LD. TPO IN RESPONSE TO SHOW - CAUSE NOTICE, SUBMISSIONS MADE BEFORE THE LD. AO DURING THE PENALTY PROCEEDINGS U/S.271(1) (C) OF THE ACT ETC., AMONG OTHERS. THE FACTS NARRATED HEREINABOVE REMAIN UNDISPUTED AND HENCE, THE SAME ARE NOT REITERATED FOR THE SAKE OF BREVITY. THE ARGUMENTS ADVANCED BY THE LD. AR ABOVE BEFORE US REMAIN TOTALLY UN CONTROVERTED BY THE LD. DR BEFORE US. THE ONLY ARGUMENT OF THE LD. DR WAS THAT EXPLANATION 7 OF SECTION ITA NO. 341/MUM/2016 M/S. QAD INDIA PRIVATE LIMITED 8 271(1)(C) DEEMS CONCEALMENT OF INCOME ON THE PART OF THE ASSESSEE THE MOMENT, ADJUSTMENT TO ALP IS MADE AND THAT THE LEVY OF PENALTY THEREON IS AUTOMATIC . 5.7. WE FIND THAT THE ADJUSTMENT TO ALP HAD AROSE ONLY ON THE LIMITED ASPECT OF CHOICE OF COMPARABLE CHOSEN BY THE ASSESSEE UPON LD. TPO. WE FIND THAT EVEN THE 5 ADDITIONAL COMPARABLES CHOSEN BY THE LD. TPO HAD BEEN THE SUBJECT MATTER OF CONSIDERATION BY THE ASSESSEE IN THE ACCEPT/REJECT MATRIX OF COMPARABLES IN THE TP STUDY REPORT IN PAGES 160,173,139,168 AND 152. WE FIND THAT ASSESSEE HAD SOME REASONING WITH IT FOR REJECTING THE SAID COMPARABLES WHICH STANDS RATIFIED / STRENGTHENED BY THE SUBSEQUENT DECISION S OF THIS TRIBUNAL HOLDING THO SE COMPANIES TO BE NOT GOOD COMPARABLES FOR THE PURPOSE OF BENCHMARKING INTERNATIONAL TRANSACTIONS. HENCE, IT COULD BE SAFELY CONCLUDED THAT THERE IS ONLY A DIFFERENCE OF OPINION ON THE INCLUSION AND EXCLUSION OF COMPARABLES BETWEEN ASSESSEE AND THE LD. TP O. THERE CANNOT BE ANY CONCEALMENT OF INCOME OR FILING OF INACCURATE PARTICULARS OF INCOME THAT COULD BE ALLEGED ON THE PART OF THE ASSESSEE IN THE FACTS OF THE INSTANT CASE. IT IS NOT IN DISPUTE THAT ALL THE NECESSARY DETAILS THAT ARE REQUIRED FOR THE PUR POSE OF COMPLETION OF TP A SSESSMENT AS WELL AS REGULAR A SSESSMENT WERE DULY FURNISHED BY THE ASSESSEE WITH ADEQUATE SUPPORTING EVIDENCES. WE FIND THAT THE DECISION OF HONBLE DELHI HIGH COURT RELIED UPON BY THE LD. AR IN THE CASE OF PCIT VS. VERIZON INDIA PVT. LTD., IN ITA NO.460/2016, C.M.APPEAL 26591/16 DATED 22/08/2016 IS VERY ITA NO. 341/MUM/2016 M/S. QAD INDIA PRIVATE LIMITED 9 WELL FOUNDED AND IS DIRECTLY APPLICABLE TO THE ISSUE UNDER DISPUTE BEFORE US. THE SAID ORDER IS REPRODUCED HEREIN FOR THE SAKE OF CONVENIENCE: THE PRESENT APPEAL AGAINST THE ORDER DATED 08.08.2016 OF INCOME TAX APPELLATE TRIBUNAL IS BARRED BECAUSE THE REVENUE HAS REFILED IT WITH A DELAY OF 550 DAYS. ON THIS GROUND ALONE, THE APPEAL IS LIABLE TO BE REJECTED. THIS COURT HAS CONSIDERED THE MERITS OF THE APPEAL AS WELL. THE BRIEF FACTS ARE THAT DURING THE RELEVANT PERIOD, I.E. AY 2007 - 08, THE ASSESSEE HAD, IN THE COURSE OF ITS RETURN, RELIED UPON A TRANSFER PRICING REPORT. THE REPORT INTER ALIA SOUGHT BENEFIT OF SIX COMPARABLES, BY APPLYING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) UND ER SECTION 92C OF THE INCOME TAX ACT, 1961. THE REPORT HAD RELIED UPON TWELVE COMPARABLES; THE TRANSFER PRICING OFFICER (TPO) REJECTED NINE OF THEM AND BASED UPON THE SURVIVING DATA, DETERMINED THE ARMS LENGTH PRICING (ALP) AND MADE ADJUSTMENTS IN THE FINA L RETURN. THE ASSESSING OFFICER (AO), WHILE ACCEPTING TPOS DETERMINATION, WAS OF THE OPINION THAT AS PER EXPLANATION 7 TO SECTION 271(1)(C), THE ADDITION WAS TO BE DEEMED TO REPRESENT INCOME AND WAS, THEREFORE, LIABLE, AND CONSEQUENTLY PENALTY WAS LEVIABL E. THE AOS ORDER WAS SET - ASIDE BY THE ITAT. WE HAVE CONSIDERED THE CIRCUMSTANCES. THE ASSESSEE IN THIS CASE COULD NOT, IN THE OPINION OF THIS COURT, VISUALIZE THAT OUT OF THE TWELVE COMPARABLES FURNISHED, NINE WOULD BE REJECTED AND THE MATRIX OF CALCULATI ONS, AS IT WORKED, WOULD RADICALLY UNDERGO CHANGE. PERTINENTLY, FOR THE PREVIOUS YEAR 2006 - 07, THE ASSESSEES COMPARABLES INCLUDING SOME OF THOSE WHICH WERE REJECTED IN THE PRESENT ORDER, WERE IN FACT ACCEPTED WHEN THE MATTER REACHED FINALITY. IN THESE C IRCUMSTANCES, THE INTERPRETATION ADOPTED BY THE AO WAS PLAINLY ERRONEOUS. THE COURT IS ALSO OF THE OPINION THAT IN THE ABSENCE OF ANY OVERT ACT, WHICH DISCLOSED CONSCIOUS AND MATERIAL SUPPRESSION, INVOCATION OF EXPLANATION 7 IN A BLANKET MANNER COULD NOT O NLY BE INJURIOUS TO THE ASSESSEE BUT ULTIMATELY WOULD BE CONTRARY TO THE PURPOSE FOR WHICH IT WAS ENGRAFTED IN THE STATUTE. IT MIGHT LEAD TO A RATHER PECULIAR SITUATION WHERE THE ASSESSEES WHO MIGHT OTHERWISE ACCEPT SUCH DETERMINATION MAY BE FORCED TO LITI GATE FURTHER TO ESCAPE THE CLUTCHES OF EXPLANATION 7. FOR THE ABOVE REASONS, WE ARE ALSO SATISFIED THAT NO SUBSTANTIAL QUESTION OF LAW ARISES. THE APPEAL IS ACCORDINGLY DISMISSED ALONG WITH THE PENDING APPLICATION. 5.8. RESPECTFULLY FOLLOWING THE SAID DE CISION, WE HOLD THAT IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, IT IS NOT A FIT CASE FOR LEVYING PENALTY U/S.271(1)(C) OF THE ACT AND ACCORDINGLY, WE HAVE NO HESITATION IN ITA NO. 341/MUM/2016 M/S. QAD INDIA PRIVATE LIMITED 10 DIRECTING THE AO TO CANCEL THE SAME. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE ARE ALLOWED. 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 22 / 02 /201 9 SD/ - ( SAKTIJIT DEY ) SD/ - ( M. BALAGANESH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 22 / 02 /201 9 KARUNA SR. PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//