Adobe Software India (P) Ltd., Noida V. ADdl.CIT, Noida

ITA 4061/DEL/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 6524 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-12-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 07-12-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 01-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SANAT KAPOOR S
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Application of stay; Question of law; Unabsorbed depreciation
• Section: 143(3); 92F; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A DELHI BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL ITA NO. 4061(DEL)/2010 ASSESSMENT YEAR: 2006-07 ADOBE SOFTWARE INDIA PRIVATE LTD., ADDITIONAL COMMISSIONER (NOW MERGED WITH ADOBE SYSTEMS VS. OF IN COME-TAX, NOIDA RANGE, INDIA PRIVATE LTD.), PLOT NO. 1-1A, NOIDA (U.P). CITY CENTRE, SECTOR-25A, NOIDA. PAN-AADCM8179G ADOBE SOFTWARE INDIA PRIVATE LTD. PAN-AACCA2982J ADOBE SYSTEMS INDIA PRIVATE LTD. (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI SALIL KAPOOR & SANAT KAPOOR, ADVOCATES RESPONDENT BY : SHR I ASHOK PANDEY, CIT, DR ORDER PER K.G. BANSAL : AM THIS APPEAL EMANATES FROM THE ORDER OF THE ASS ESSING OFFICER PASSED ON 12.07.2010 UNDER THE PROVISIONS OF SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961, RELATING TO ASSESSMENT YEAR 2006-07. ITA NO. 4061(DEL)/2010 2 1.1 THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. ASSESSING OFFICER (AO) HAS ERRED IN PASSIN G THE ASSESSMENT ORDER U/S 143(3) R.W.S. 144C OF THE I NCOME-TAX ACT, 1961 (THE ACT) AFTER CONSIDERING THE ADJU STMENTS PROPOSED BY THE LD. TRANSFER PRICING OFFICER (TP O) IN HIS ORDER PASSED U/S 92CA(3) OF THE ACT AND THEREBY APPROVED BY THE HONBLE DISPUTE RESOLUTION PANEL (DRP). EACH OF THE GROUND IS REFERRED TO SEPARATELY, WHIC H MAY KINDLY CONSIDERED INDEPENDENT OF EACH OTHER. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, 1. THE AO/DRP HAS ERRED IN CONFIRMING THE ORDER PA SSED U/S 92CA(3) OF THE ACT MAKING AN ADDITION OF RS. 3,00,45,367/- TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF ADJUSTMENT IN THE ARMS LENGTH PRICE OF THE INTE RNATIONAL TRANSACTION ENTERED BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISES. 2. THE DRP HAS ERRED IN CONCURRING WITH FINDINGS OF THE AO/TPO AND DISREGARDING THE ECONOMIC ANALYSIS UN DERTAKEN BY THE APPELLANT FOR ESTABLISHING THE ARMS LENG TH PRICE OF THE INTERNATIONAL TRANSACTIONS RELATED TO SOFTWARE DE VELOPMENT WITHOUT APPROPRIATE JUSTIFICATION. 3. THE TPO/AO HAS ERRED BY NOT ACCEPTING THE EC ONOMIC ANALYSIS UNDERTAKEN BY THE ASSESSEE IN ACCORDANC E WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RU LES, 1962, AND CONDUCTING A FRESH ECONOMIC ANALYSIS FOR T HE DETERMINATION OF THE ALP OF THE IMPUGNED INTERNAT IONAL TRANSACTION AND HOLDING THAT THE ASSESSEES INTERN ATIONAL TRANSACTION IS NOT AT ARMS LENGTH. 4. THE TPO/AO HAS ERRED IN DETERMINING THE A RMS LENGTH MARGIN/PRICE USING ONLY FINANCIAL YEAR 2005-06 DATA ITA NO. 4061(DEL)/2010 3 WHICH WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIM E OF COMPLYING WITH THE TP DOCUMENTATION REQUIREMENTS. 5. THE TPO/AO HAS ERRED IN REJECTING CERTAIN CO MPARABLE COMPANIES IDENTIFIED BY THE ASSESSEE WHERE CONS OLIDATED RESULTS HAD BEEN USED FOR ANALYSIS. THE ASSESSEE HAD CONSIDERED THE CONSOLIDATED RESULTS IN ONLY THOS E CASE WHERE THE SOFTWARE RELATED INCOME OF THE INDIAN OPERAT IONS CONSTITUTED MORE THAN 75 PER CENT OF THE CONSOLID ATED COMPANY-WIDE/SEGMENTAL REVENUES. 6. THE TPO/AO HAS ERRED BY REJECTING CERTAIN COM PARABLE COMPANIES IDENTIFIED BY THE ASSESSEE USING TURNO VER < RS. 1 CRORE AS A COMPARABILITY CRITERION. 7. THE TPO/AO HAS ERRED BY REJECTING CERTAIN COMPA RABLE COMPANIES IDENTIFIED BY THE ASSESSEE AS HAVING EC ONOMIC PERFORMANCE CONTRARY TO THE INDUSTRY BEHAVIOR. 8. THE TPO/AO HAS ERRED BY REJECTING CERTAIN COMPA RABLE COMPANIES IDENTIFIED BY THE ASSESSEE AS HAVING D IFFERENT ACCOUNTING YEAR (I.E., COMPANIES HAVING ACCOUNT ING YEAR OTHER THAN MARCH 31 OR COMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MON THS). 9. THE TPO/AO HAS ERRED BY REJECTING CERTAIN COMPA RABLE COMPANIES IDENTIFIED BY THE ASSESSEE USING EMPLOY EE COST GREATER THAN 25 PERCENT OF THE TOTAL REVENUES AS A COMPARABILITY CRITERION. 10. THE TPO/AO HAS ERRED BY REJECTING CERTAIN COMP ARABLE COMPANIES IDENTIFIED BY THE ASSESSEE USING ONSITE REVENUES GREATER THAN 75 PERCENT OF THE ONSITE REVENUES AS A COMPARABILITY CRITERION. 11. THE TPO/AO HAS ERRED BY EXERCISING HIS POWE RS UNDER SECTION 133(6) OF THE ACT TO OBTAIN INFOR MATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN AND RELYING ON THE SAME FOR COMPARABILITY PURPOSES. ITA NO. 4061(DEL)/2010 4 12. THE TPO/AO HAS ERRED BY NOT PROVIDING THE A SSESSEE ANY OPPORTUNITY OF BEING HEARD IN CERTAIN CASES. 13. THE TPO/AO HAS ERRED BY NOT TAKING INTO CONS IDERATION FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AND PROVI SIONS WRITTEN BACK IN COMPUTING THE OPERATING MARGINS OF THE COM PARABLE COMPANIES. 14. THE TPO/AO HAS ERRED BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RI SK PROFILE OF THE ASSESSEE VIS--VIS THE COMPARABLES. 15. THE TPO/AO HAS ERRED IN NOT PROVIDING THE B ENEFIT OF THE ARMS LENGTH RANGE AS PROVIDED UNDER PROVISO TO SECTION92C OF THE ACT FOR PURPOSES OF COMPUTING THE ARMS LENGTH PRICE UNDER SECTION 92F OF THE ACT. 16. THE AO HAS ERRED IN NOT ALLOWING SET-OFF OF UNABSORBED DEPRECIATION, TO THE EXTENT OF THE RETURNED INCO ME FOR THE ASSESSMENT YEAR 2006-07. 1.2 THE ASSESSEE MOVED AN APPLICATION FOR ADMISS ION OF TWO ADDITIONAL GROUNDS, WHICH READ AS UNDER:- (I) THE ASSESSMENT ORDER PASSED U/S 143(3) READ WIT H SECTION 144C IS ILLEGAL, BAD IN LAW AND WITHOUT JURISDICTION . (II) THE ASSESSMENT HAS BEEN COMPLETED ON THE NON-EXI STING ENTITY AND NOT ON THE AMALGAMATING/SUCCESSOR COMPANY. HE NCE, THE ASSESSMENT ORDER PASSED U/S 143(3) READ WITH SEC TION 144C IS VOID-AB-INITIO AND THE SAME IS LIABLE TO BE QUASH ED. ITA NO. 4061(DEL)/2010 5 1.3 IT MAY BE MENTIONED THAT THE ASSESSEE HAD MOVE D AN APPLICATION FOR STAY OF DEMAND ON 03.09.2010. THIS APPLICATION WAS DISPOSED OFF ON 23.09.2010 BY MAKING THE FOLLOWING INTERIM ORDER: - 5. WE HAVE GONE THROUGH THE RECORD AND H AVING REGARD TO THE ORDER OF THE DRP AND THE TPO, WE ARE CONVINCED THAT THERE IS A PRIMA FACIE CASE OF THE ASSE SSEE BEFORE THE TRIBUNAL. WE, THEREFORE, RESTRAIN THE DEPARTMENT FROM ENFORCING THE RECOVERY OF DEMAND FOR THIS ASSE SSMENT YEAR AND DIRECT THAT THE SAME BE STAYED FOR A P ERIOD SIX MONTHS OR DISPOSAL OF THE APPEAL WHICHEVER IS EARLIER. AS THE APPEAL IS ALREADY POSTED FOR HEARING ON 1.11.2010, IT SHALL BE ENSURED BY BOTH THE SIDES THAT THE MATTER DOES N OT GET UNNECESSARY ADJOURNMENT ON THE DATE OF HEARING. IN THE EVENT, THE ASSESSEE SEEKS AN ADJOURNMENT, TH E BENCH IS AT LIBERTY TO VACATE THE STAY AT THE TIME OF HEARI NG. THE PARTIES ARE DIRECTED TO FILE THE PAPER BOOKS NECESSARY FOR ARGUING THE MATTER WELL IN ADVANCE. 1.4 THE AFORESAID INTERIM ORDER CEASES TO HAVE FORCE ON PASSING THE FINAL ORDER ON THE APPEAL. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE FILED ITS RETURN ON 23.11.2006 DECLARING NIL INCOME. THE ASSESSEE HAD COMPUTED THE BUSINESS INCOME AT ` 7,33,01,097/-, WHICH WAS CLAIMED TO BE NOT INCLUDIBLE IN THE TOTAL INCOME UNDER THE PROVISI ONS OF SECTION 10A OF THE INCOME-TAX ACT, 1961. THE RETURN WAS PROCESSED U/S 143(1) AND REFUND ITA NO. 4061(DEL)/2010 6 OF ` 434,560/- WAS GRANTED TO THE ASSESSEE. THEREA FTER, THE CASE WAS SELECTED FOR SCRUTINY AND A NOTICE U/S 143(2) DATED 14.07.2008 WAS SERVED ON THE ASSESSEE. IN RESPONSE THERETO, S HRI VIKAS AGGARWAL, CHARTERED ACCOUNTANT, ATTENDED FROM TIME TO TIME . THE ASSESSEE IS ENGAGED IN DEVELOPMENT OF SOFTWARE USED IN VARI OUS FIELDS, WHICH HAS BEEN EXPORTED TO ADOBE SYSTEMS INC., USA AND MACROMEDIA IRELAND LIMITED, IRELAND, BOTH OF THEM BEING ASSOCIATED CONCERNS. THE ASSESSEE HAS ALSO PROVIDED MARKETING AND SUPPORT SERVICES TO ADOBE SYSTEMS SOFTWARE IRELAND LIMITED, MACROMEDIA NEITHERLAN D BV AND ITS SUBSIDIARIES, ALL BEING ASSOCIATED CONCERNS. IN THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS FOUND THAT THE ASSESSEE ENTER ED INTO INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED CONCERNS AND TH E AGGREGATE VALUE OF SUCH TRANSACTIONS WAS DECLARED AT ` 37,12,95,276/-. THE VALUATION OF THESE TRANSACTIONS WAS REFERRED TO THE TRANSFER PRICIN G OFFICER, WHO DETERMINED THE ARMS LENGTH PRICE AT ` 40,13,40,643/-, RESULTING IN ADJUSTMENT OF ` 3,00,45,367/-. THEREFORE, IT WAS PROPOSED TO ENH ANCE THE TOTAL INCOME OF THE ASSESSEE BY AN AMOUNT OF ` 3,00,45,367/-. THE MATTER WAS REFERRED TO THE DISPUTE RESOLUTION PANEL (DRP FOR SHORT) UN DER THE PROVISIONS OF SECTION 144C OF THE ACT. THE DRP HEARD S/SHRIVI JAY IYER AND ANUJ ITA NO. 4061(DEL)/2010 7 KHORANA, AUTHORIZED REPRESENTATIVES FROM S.R. BA TLIBOI & CO., CHARTERED ACCOUNTANTS. DETAILED SUBMISSIONS IN RESPECT OF GROUNDS OF OBJECTIONS WERE FILED. AFTER CONSIDERING THE ORDER PROPOSED BY THE AO AND THE OBJECTIONS, THE DRP DISPOSED OFF THE MATTER BY WAY OF CRYPTIC ORDER UPHOLDING THE ADJUSTMENT PROPOSED BY THE AO AND DISALLOWING THE BROUGHT FORWARD LOSSES. FOR THE SAKE OF READY REFERENCE, PARAGRAPH NO.6 OF THE ORDER IS REPRODUCED BELOW:- 6. ASSESSEE HAS FURNISHED DETAILED SUBMISSION IN SUPPORT OF GROUNDS OF OBJECTIONS. HOWEVER, AFTER GOING THROUGH THE ORDER OF ASSESSING OFFICER, SUBMISSION OF THE ASS ESSEE AND MATERIAL AVAILABLE ON RECORD, WE ARE OF THE OPINIO N THAT THE TP ADJUSTMENT MADE BY THE TPO IS BASED ON CORRECT A PPRECIATION OF FACTS AND LAW AND HAS BEEN MADE AFTER AFF ORDING REASONABLE OPPORTUNITY TO THE ASSESSEE. AS RE GARDS THE DISALLOWANCE OF BROUGHT FORWARD LOSSES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE AO. 3. THE ASSESSEE HAS TAKEN UP A PRELIMINARY OBJE CTION THAT THE AO FRAMED AN ORDER IN THE NAME OF NON-EXISTING COMPAN Y, ADOBE SOFTWARE INDIA PRIVATE LIMITED, WHICH MERGED WITH ADOBE SY STEMS INDIA PRIVATE LIMITED ON ACCOUNT OF THE ORDER OF HONBLE HIGH COURT DATED 6.9.2007, UNDER WHICH THE MERGER TOOK PLACE WITH EFFECT F ROM 01.04.2006. THEREFORE, THE COMPANY AS ASSESSED CEASED TO EX IST ON 01.04.2006. THE ASSESSMENT ORDER WAS PASSED ON 12.07.2010, MUCH AFTER THIS DATE OF ITA NO. 4061(DEL)/2010 8 MERGER. IT WAS SUBMITTED THAT ALL FACTS RELA TING TO MERGER ARE ON RECORD AND, THEREFORE, THE GROUND MAY BE ADMITTED AS IT RAISES MERELY A PURE QUESTION OF LAW. FOR THE ADMISSION OF THE GROUND , RELIANCE HAS BEEN PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CORPORATION LTD. VS. CIT (1998) 22 9 ITR 383. THE LD. DR OBJECTED TO THE ADMISSION OF THE GROUND AND I T WAS MENTIONED THAT THE DRP HAS MENTIONED THE NAME ADOBE SOFTWARE INDI A PRIVATE. LIMITED (NOW AMALGAMATED WITH ADOBE SYSTEMS INDIA PRIV ATE LIMITED). THEREFORE, MENTIONING THE NAME OF ADOBE SYSTEMS INDIA PRIVATE LIMITED IN THE ASSESSMENT ORDER IS MERELY A TYPOGRAPHI CAL ERROR. 3.1 WE HAVE CONSIDERED THE FACTS OF THE CASE. WE FIND THAT THE FACTS REGARDING THE GROUND ARE AVAILABLE ON THE FILE AND THE ISSUE IS PURELY AN ISSUE OF LAW. THEREFORE, ADDITIONAL GROUND NO . 2 IS ADMITTED, WHICH IS SUFFICIENT TO DEAL WITH THE CONTROVERSY RAISED I N BOTH THE GROUNDS. 4. AFTER CONSIDERING THE GROUNDS RAISED INITIALL Y AND IN ADDITIONAL GROUNDS, TWO MAIN QUESTIONS REMAIN FOR DECISION , WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, -(I) THE O RDER OF ASSESSMENT IS BAD IN LAW AS IT HAS BEEN FRAMED ON A NON-EXISTING EN TITY; (II) THE AO WAS ITA NO. 4061(DEL)/2010 9 RIGHT IN MAKING ADJUSTMENT OF ` 3,00,45,367/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT? 4.1 IT IS AN ADMITTED POSITION BEFORE US THAT T HE ADDITIONAL GROUND, AS ADMITTED ABOVE, WAS NOT AGITATED BEFORE THE DRP. IT IS ALSO A FACT THAT THE DRP HAS USED THE CORRECT NAME OF THE ASSESSEE. THE CASE OF THE LD. COUNSEL IS THAT THE ORDER OF THE AO IS BAD IN LAW AS IT HAS BEEN FRAMED ON A NON-EXISTING COMPANY. AS AGAINST THE AFORESAID, T HE CASE OF THE LD. DR IS THAT IT IS MERELY AN IRREGULARITY, WHICH IS CURA BLE HAVING REGARD TO THE PROVISION CONTAINED IN SECTION 292B OF THE ACT. WE HAVE CONSIDERED THE SUBMISSIONS FROM BOTH THE SIDES. WE FIND TH AT THE MATER HAS NEITHER BEEN AGITATED NOR DECIDED BY THE DRP. THEREFOR E, THE APPELLATE PROCESS WILL BE SHORT CIRCUITED IF THE MATTER IS DECID ED FOR THE FIRST TIME BY US. ACCORDINGLY, THE MATTER IS RESTORED TO THE FILE OF THE DRP TO HEAR THE ASSESSEE IN THE MATTER AND DECIDE IT AS PER LAW . 5. IN SO FAR AS ADDITION ON MERITS IS CONCERNED , WE HAVE ALREADY REPRODUCED THE OPERATIVE PORTION OF THE ORDER OF TH E DRP U/S 144C OF THE ACT. THE ORDER DOES NOT DISCLOSE THE FACTS OF TH E CASE, CONTENTIONS RAISED BY THE ASSESSEE AND THE PROCESS OF DECISION BY WH ICH IT HAS BEEN HELD THAT ITA NO. 4061(DEL)/2010 10 TP ADJUSTMENTS HAVE BEEN CORRECTLY MADE. THEREFORE , IT CAN BE SAID THAT THE ORDER HAS BEEN PASSED WITHOUT APPLICATION O F MIND AND ACCORDINGLY IT DOES NOT MEET THE REQUIREMENT OF PRINCIPLE OF NA TURAL JUSTICE. THEREFORE, WE THINK IT FIT TO RESTORE THIS MATTER ALSO TO T HE FILE OF THE DRP FOR HEARING THE ASSESSEE AGAIN AND PASSING A SPEAKING ORDER AS PER LAW. 6. IN THE RESULT, THE APPEAL IS TREATED AS ALLOW ED FOR STATISTICAL PURPOSES. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 2 7TH DECEMBER, 2010. SD/- SD/- (C.L. SETHI) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 27TH DECEMBER, 2010. SP SATIA COPY OF THE ORDER FORWARDED TO:- ADOBE SYSTEMS INDIA PRIVATE LTD.,NOIDA. ADDL. CIT, NOIDA RANGE, NOIDA. DRP, NEW DELHI. CIT THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.