M/s. RMSI Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 3478/DEL/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3446 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 19-04-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 02-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T M SHIVA KUMAR L
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Additional evidence
• Section: 92C; 92E; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL , DELHI I - 2 BENCH , NEW DELHI BEFORE SHRI R.K. PANDA ACCOUNTANT MEMB E R AND SHRI SUD H ANSHU SRIVASTAVA , JUDICIAL MEMBER ITA NO. 3478 /DEL /201 2 [ ASSESSMENT YEAR: 20 06 - 07 ] M/ S RMSI PVT. LTD NO. 29, SECOND FLOOR DEFENCE COLONY MARKET DEFENCE COLONY, NEW DELHI (PAN: AA ACR 0680 C ) VS. THE AC I T CIRCLE 15( 1) NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI ANIL BHALLA , CA REVENUE BY: SH RI T.M. SHIVA KUMAR L , CIT - DR DATE OF HEARING : 19 .0 4 .2017 DATE OF PRONOUNCEMENT : 21 .0 4 .2017 ORDER PER R.K. PANDA , ACCOUNTANT MEMBER : - THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 31 .0 5 .201 2 OF THE CIT (A) - X X, NEW DELHI RELATING TO A.Y. 200 6 - 07 . 2 ITA NO. 3478 /DEL/201 2 2. GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED BOTH ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS. 4,705,995 (BEING 21.84% OF THE TOTAL COST OF THE INTERNATIONAL TRANSACTIONS AMOUNTING TO RS. 86,190,384 AS THE MEAN ARM'S LENGTH MARGIN OF THE COMPARABLES) IN RESPECT OF SOFTWARE DEV ELOPMENT SERVICES REPRESENTING THE ALLEGED DIFFERENCE IN ARM'S LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTIONS AS RETURNED BY THE APPELLANT COMPANY. 1.1 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (A) HAS FURTHER ERRED IN NOT ACCEPTING THE ALTERNATIVE SUBMISSION OF THE APPELLANT COMPANY THAT IF LOSS MAKING' COMPANIES WERE TAKEN OUT BY THE LEARNED TPO FROM THE FINAL SET OF COMPARABLES, THE COMPANIES SHOWING 'SUPER PROFITS' SHOULD HAVE ALSO BEEN EXCLUDED OUT OF THE SAID FINAL SET OF COMPARABLES WHILE DET ERMINING THE MEAN OF ARM'S LENGTH PRICE (ALP) OF COMPARABLES. 1.2 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (A) HAS FURTHER ERRED IN NOT ANALYZING THE CHARACTERISTICS OF THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED (HEREINAFTER REFERRED TO AS THE FAR ANALYSIS) WHILE MAKING THE EXCLUSIONS OUT OF THE SAID FINAL SET OF COMPARABLES FOR DETERMINING THE MEAN OF ARM'S LENGTH PRICE (ALP) OF COMPARABLES. 3 ITA NO. 3478 /DEL/201 2 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED BOTH ON FACTS AND IN LAW IN WR ONGLY INCREASING THE BOOK PROFITS AS COMPUTED U/S 115JB OF THE INCOME TAX ACT, 1961, CONSEQUENT TO THE IMPUGNED ADDITION AS AFORESAID IN GROUND 1) AND 1.1) SUPRA. 2.1 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (APPEALS) HAS FURTHER ERRED BOTH ON FACTS AND IN LAW IN WRONGLY APPLYING THE PROVISIONS AS CONTAINED IN SECTION 92C (4) BY REDUCING THE DEDUCTION AVAILABLE U/S 10A OF THE ACT TO THE EXTENT OF SUCH IMPUGNED ADDITION (AS STATED ABOVE) IN COMPUTING THE PROFITS UNDER THE NORMAL PROVISIONS OF THE INCOME TAX ACT. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A COMPANY PROVIDING SOFTWARE AND ENGINEERING SOLUTIONS IN THE AREAS OF GEOGRAPHICAL INFORMATION SYSTEMS, DIGITAL MAPPING, AUTOMATED MAPPING/FACILITIES MANAGEMENT [AM/FM], REMOTE SE NSING, BUSINESS GEOGRAPHIC AND NATURAL H AZARD RISK MANAGEMENT . RMSI WAS EARLIER KNOWN AS RM SOFTWARE INDIA PVT LTD AND IT STARTED ITS BUSINESS OPERATION IN 1992. RISK MANAGEMENT SOLUTIONS INC., USA BECAME THE PARENT COMPANY IN AUGUST, 1992 BY ACQUIRING EQ UITY IN THE COMPANY. FURTHER, BOTH RMSI AND RMS, USA ARE SUBSIDIARIES OF DGM INFORMATION INC., USA WHICH IS ALSO A SUBSIDIARY OF DAILY MAIL AND GENERAL TRUST [DMGT] A UK BASED MEDIA COMPANY. 4 ITA NO. 3478 /DEL/201 2 4. THE ASSESSEE FILED I T S RETURN OF INCOME ON 15 . 11 .200 6 DECLAR ING A LOSS OF RS. 1,30,87,240/ - . IT HAS COMPUTED BOOK PROFIT AT RS. 4,21,67,290/ - U/S 115JB OF THE INCOME - TAX ACT, 1961. THE ASSESSEE HAD FILED DETAILS OF INTERNATIONAL TRANSACTIONS IN FORM NO. 3CEB OF SECTION 92E OF THE ACT . THE A.O MADE A REFERENCE TO THE TPO U/S 92CA IN RESPECT OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. THE TPO DIRECTED TO ENHANCE THE TOTAL INCOME OF THE ASSESSEE BY RS. 68,39,635/ - . IN THE SAID ORDER THE TPO HELD THAT ONLY 14 COMPANIES CAN BE TREATED AS COMPA RABLES WHOSE AVERAGE OP/TC MARGIN WORKS OUT TO RS. 24.32% WHICH HE TOOK AS THE ARMS LENGTH MARGIN FOR CALCULATION OF ALP. EXEMPTION U/S 10A OF THE ACT WAS ALSO HELD TO BE NOT ADMISSIBLE ON SUCH ADJUSTMENT IN ACCORDANCE WITH PROVISO TO SUB - SECTIO N (4) OF SECTION 92C OF THE ACT. THE A.O ACCORDINGLY DETERMINED THE TOTAL INCOME OF THE ASSESSEE AT RS. 4,90,06,925/ - 5 . IN APPEAL, THE LD. CIT(A) DIRECTED THE A.O TO CONSIDER FOUR MORE COMPANIES AS COMPARABLE WHICH WERE REJECTED BY THE TPO IN ADDITION T O WHAT WAS TAKEN BY THE TPO. THE MEAN ARMS LENGTH MARGIN OF THE COMPARABLES WAS DIRECTED TO BE COMPUTED AT 21.84% AS AGAINST 24.32% . ADOPTED BY THE A.O. 5 ITA NO. 3478 /DEL/201 2 6. AGGRIEVED WITH SUCH ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 7 . THE LD. COUNSEL OF THE ASSESSEE, AT THE OUTSET, MADE A REQUEST TO THE BENCH UNDER RULE 29 OF THE ITAT RULES FOR FILING OF ADDITIONAL EVIDENCE. THE CONTENTS OF THE REQUEST READ AS UNDER: 1. WE SEEK YOUR PERMISSION TO FILE ADDITIONAL EVIDENCE BY FILING CER TIFIED SEGMENTAL PROFITABILITY STATEMENT OF THE BUSINESS OF THE COMPANY. 2. THE COMPANY IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES IN TWO BUSINESS SEGMENTS GEOGRAPHIC INFORMATION SYSTEM (GIS) AND APPLICATION SOFTWARE SERVICES. 2.1 PLI IN G - 1 5 SEGMENT WAS HELD TO BE COMPARABLE BY TPO AND THE AO 3. IN THESE SEGMENTS THE COMPANY UNDERTAKES BUSINESS TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AE) AND NON ASSOCIATED ENTERPRISES (NON AE). 4. THIS CERTIFIED SEGMENTAL PROFITABILITY STATEMENT IS BEING FILED TO SUBSTANTIATE THE APPELLANT'S CONTENTION THAT THE PROFITABILITY OF THE APPELLANT FROM BUSINESS TRANSACTION WITH AES IS BETTER THAN THE APPELLANT BUSINESS TRANSACTIONS WITH THIRD PARTIES. 6 ITA NO. 3478 /DEL/201 2 5. IN THE TP STUDY BECAUSE OF THE THEN PROFESSIONAL ADVICE AVAILABLE AND IN VIEW OF THE FACT THAT THE TRANSFER PRICING PROVISIONS WERE GOING THROUGH EVOLUTION, THE TWO SEGMENTS WERE NOT ANALYSED BETWEEN TRANSACTION TO AE AND THIRD PARTIES (NON AE). 5.1 T HE ENTIRE TRANSFER PRICING PROCEEDINGS WERE IN A VERY NASCENT STAGE. THE ANALYTICAL SKILLS WERE STILL EVOLVING, AND NEW DIMENSIONS AND METHODS WERE BEING STUDIED IN ORDER TO DETERMINE THE MAM FOR FINDING OUT 5.2 THESE WERE INITIAL YEARS FOR IMPLEMENTATION OF TRANSFER PRICING PROVISIONS IN INDIA AND THE ASSESSEE COMPANY HAD RESTRICTED KNOWLEDGE WITH REGARD TO PRACTICAL EXECUTION OF THE PROVISIONS OF TRANSFER PRICING. 5.3 IN THIS CONTEXT, AND BECAUSE OF NON AVAILABILITY OF EXPERIENCED IN - HOUSE STAFF, THE ASS ESSEE COMPANY COULD NOT CARRY OUT A PROPER TRANSFER PRICING ANALYSIS. 5.4 THE TRANSFER PRICING PROCEEDINGS HAVE SO EVOLVED THAT IT'S AN ACCEPTED PROPOSITION, THAT INTERNAL TNMM IS PREFERRED OVER EXTERNAL TNMM IN ORDER TO DETERMINE THE ARMS LENGTH PRICE O F INTERNATIONAL CONTROLLED TRANSACTIONS. 5.5 THE FACT THAT THE COMPANY DID NOT DISTINGUISH ITS GIS AND APPLICATION SOFTWARE BUSINESS TRANSACTIONS BETWEEN CONTROLLED TRANSACTION AND UNCONTROLLED TRANSACTIONS HAS RESULTED IN TRANSFER PRICING ADJUSTMENTS ON THE ENTIRE BUSINESS TURNOVER OF THE COMPANY IN THE TWO SEGMENTS WITHOUT DISTINGUISHING BUSINESS TRANSACTIONS WITH AES AND NON AES WHEREAS THE ADJUSTMENTS 7 ITA NO. 3478 /DEL/201 2 SHOULD HAVE BEEN RESTRICTED ONLY TO THE INTERNATIONAL CONTROLLED TRANSACTIONS. 5.6 THIS IS THE SITUA TION WHERE CORRECT PROFIT LEVEL INDICATOR ('PLI') CANNOT BE DETERMINED AS PER PROVISIONS OF THE ACT AND THE RULES THEREON, SO AS TO APPROPRIATELY DETERMINE ALP OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. 6. WE, THEREFORE, PLEAD THAT THE ADDITIONAL EVIDENCE BE ADMITTED UNDER RULE 29 OF THE INCOME TAX APPELLATE TRIBUNAL RULES TO ENABLE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL TO PASS AN ORDER FOR ANY OTHER SUBSTANTIAL CAUSE. 7. YOUR GOODSELF MAY KINDLY NOTE THAT IN THE APPELLANT COMPANY OWN CASE FOR AY 2005 - 06 ON SAME FACTS AND CIRCUMSTANCES ADDITIONAL EVIDENCE IN THE FORM OF CERTIFIED SEGMENTAL ACCOUNTS HAS BEEN ADMITTED AND MATTER REMANDED BACK TO FILE 8. REFERENCE IS FURTHER INVITED TO T HE DECISION OF COORDINATE BENCH OF THE INCOME TAX APPELLATE TRIBUNAL - PUNE BENCH B IN THE MATTER OF REITER INDIA PVT LTD. ITA NO. 1374/2010 [COPY ENCLOSED]. 9. REFERENCE IS FURTHER INVITED TO THE DECISION OF COORDINATE BENCH OF THE INCOME TAX APPELLATE TRIBUNAL - DELHI BENCH II IN THE MATTER OF M/S. FLEXTRONICS SOFTWARE SYSTEMS - ITA NO.5550/DEL/2011 - COPY ATTACHED PARA 15 AND 16. ADMITTING ADDITIONAL EVIDENCE SO AS TO DETERMINE THE MOST APPROPRIATE METHOD - CUP - NOT DONE EARLIER. 8 ITA NO. 3478 /DEL/201 2 10. WE SUBMIT THAT THIS ADDITIONAL EVIDENCE BE ADMITTED AS IT IS RELEVANT AND GERMANE TO APPROPRIATELY DETERMINE THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE. THE ADMISSION OF THIS EVIDENCE WIL L BE IN THE INTEREST OF JUSTICE AND FOR ANY OTHER SUBSTANTIAL CAUSE. IT WILL ENSURE DETERMINATION OF ASSESSEE'S TAX LIABILITY IN MOST SATISFACTORY MANNER. 11. IT IS A TRITE LAW THAT IT IS NECESSARY FOR THE AUTHORITIES TO ENSURE THAT THE ASSESSEE HAS BEEN MADE ON A CORRECT INCOME. IT IS NECESSARY FOR THE APPELLATE AUTHORITIES TO CORRECT ALL ERRORS IN THE PROCEEDINGS UNDER APPEAL SO AS TO ACHIEVE A FINAL OBJECTIVE OF ASSESSING THE CORRECT INCOME. THIS PROPOSITION HAS BEEN SO HELD BY THE HON'BLE SUPREME COURT IN KAPURCHAND SHRIMAL 131ITR 451 (SC). QUOTE 'IT IS WELL KNOW N THAT AN APPELLATE AUTHORITY H AS THE JURISDICTION AS WELL AS THE DUTY TO CORRECT ALL ERRORS IN THE PROCEEDINGS UNDER APPEAL AND TO ISSUE, IF NECESSARY, APPROPRIATE DIRECTIONS TO THE AUTHORITY AGAINST WHOSE DECISION THE APPEAL IS PREFERRED TO DISPOSE OF THE WHOLE OR ANY PART OF TIRE MATTER AFRESH, UNLESS FORBIDDEN FROM DOING SO BY STATUTE.' UNQUOTE 8 . HE ACCORDINGLY SUBMITTED THAT ADDITIONAL EVIDENCE FILED BY THE ASSESSEE SHOULD BE ADMITTED. REFERRING TO THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y 2005 - 06 IN ITA NO. 1631/DEL/2012 ORDER DATED 10.03.2016, HE SUBMITTED THAT THE TRIBUNAL HA S RESTORED THE 9 ITA NO. 3478 /DEL/201 2 MATTER BACK TO THE FILE OF THE LD. CIT(A) WITH CERTAIN DIRECTIONS. THEREFORE, HE HAS NO OBJECTION IF THIS MATTER IS ALSO RESTORED TO THE FILE OF THE LD. CIT(A) FOR FRESH ADJUDICATION. 9 . AFTER HEARING BOTH THE SIDES AND CONSIDERING THE CON TENTS OF THE REQUEST FOR ADMISSION OF ADDITIONAL EVIDENCE, WE ADMIT THE SAME AND RESTORE THE MATTER TO THE FILE OF THE LD. CIT(A) WITH THE DIRECTION TO ADJUDICATE THE ISSUE AFRESH AND IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO TH E ASSESSEE. WHILE DOING SO, THE LD. CIT(A) SH ALL KEEP IN MIND THE DIRECTION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING A.Y 2005 - 06 IN ITA NO. 1631/DEL/2012 ORDER DATED 10.03.2016. GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY A LLOWED FOR STATISTICAL PURPOSES. 10 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCE D IN THE OPEN COURT 2 1 .0 4 .2017. SD/ - SD/ - ( SUD H ANSHU SRIVASTAVA ) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMB E R DATED: 2 1 . 0 4 .2017 V. LAKSHMI 10 ITA NO. 3478 /DEL/201 2 COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT (APPEALS) 5) DR: ITAT ASSISTANT REGISTRAR DATE DRAFT DICTATED ON 19 .0 4 .2017 DRAFT PLACED BEFORE AUTHOR 2 0 .0 4 .2017 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 2 0 .0 4 .2017 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. APPROVED DRAFT COMES TO THE SR.PS/PS KEPT FOR PRONOUNCEMENT ON FILE SENT TO THE BENCH CLERK DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.