Flextronics Software Systems Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 415/DEL/2013

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 2710 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 06-07-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 23-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHASHI KAJLE
• Keywords: Transfer pricing; International transaction
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI [THROUGH VIDEO CONFERENCE] BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI KULDIP SINGH, JUDICIAL MEM BER ITA NO. 415/DEL/2013 [ASSESSMENT YEAR: 2005-06] ARICENT TECHNOLOGIES HOLDINGS LTD., ERSTWHILE FLEXTRONICS SOFTWARE SYSTEMS, LTD, 5, JAIN MANDIR MARG [ANNEXE] CONNAUGHT PLACE NEW DELHI. PAN: AACCK 8280 B VS. THE ADDL. CIT, RANGE-11, NEW DELHI. [APPELLANT] [RESPONDENT] DATE OF HEARING : 10.06.2021 DATE OF PRONOUNCEMENT : 10.06.2021 ASSESSEE BY : SHRI NEERAJ JAIN, ADV SHRI RAMIT KATYAL, ADV REVENUE BY : MS. SHASHI KAJLE, SR. DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER:- THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST T HE ORDER OF THE LD. CIT(A)-XX, NEW DELHI DATED 31.10.2012 PERTAININ G TO A.Y 2005-06. 2 2. THE GRIEVANCE OF THE ASSESSEE READ AS UNDER: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE COMMISSIONER OF INCOME- TAX (APPEALS) ERRED ON FACT S AND IN LAW IN CONFIRMING THE ADJUSTMENT OF RS 6,66,23,138 MADE BY THE TRANSFER PRICING OFFICER UNDER SECTION 92CA(3) OF THE ACT ON ACCOUNT OF ALLEGED DIFFERENCE IN THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF PROVISION OF BUSINESS PROCESS OUTS OURCING SERVICES 1.1 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN DISREGARDING THE COMPARABLE UNC ONTROLLED TRANSACTIONS PLACED ON RECORD FOR DEMONSTRATING THE INTENTIONAL TRANSACTION OF PROVISION OF BPO SERVICES UNDERTAKEN BY THE APPELLANT, AS THE MOST APPROPRIATE METHOD. 1.2 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN REJECTING THE COMPARABLE UNCONT ROLLED TRANSACTIONS PLACED ON RECORD BY THE APPELLANT HOLD ING THAT AVERAGING OF HOURLY CHARGES IS INAPPROPRIATE FOR TH E PURPOSE OF APPLYING THE COMPARABLE UNCONTROLLED PRICE METHOD 1.3 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN REJECTING THE INTERNAL BENCHMAR KING UNDERTAKEN BY THE APPELLANT FOR DETERMINING THE ARMS LENGTH P RICE OF THE INTERNATIONAL TRANSACTIONS APPLYING TNMM ON THE BAS IS THAT COST ALLOCATION BETWEEN THE SEGMENTS IS ARTIFICIAL, HOLD ING THAT THERE ARE LARGE AMOUNTS WHICH HAVE NOT BEEN ALLOCATED ON THE GROUND THAT 3 THEY ARE ABNORMAL 1.4 THAT THE CIT(A) ERRED ON FACTS AND IN LAW IN EV ALUATING THE INTERNATIONAL TRANSACTIONS APPLYING TNMM BY COMPARI NG THE NET OPERATING PROFIT MARGIN OF THE APPELLANT WITH NET O PERATING PROFIT MARGIN OF EXTERNAL COMPARABLE UNCONTROLLED ENTERPRI SES 1.5 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON UPHOLDING THE SELECTION OF FOLLOWING COMPANIES AS C OMPARABLES BY THE TPO FOR THE PURPOSE OF BENCHMARKING THE INTERNA TIONAL TRANSACTIONS OF THE APPELLANT: (I) ALLSEC TECHNOLOGIES LIMITED (II) SAFFRON GLOBAL (III) WIPRO BPO SOLUTIONS LIMITED (IV) AIRLINE FINANCIAL SUPPORT SERVICES (I) LTD. (V) TRANSWORKS INFORMATION SERVICES LTD. 1.6 WITHOUT PREJUDICE THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND INLAW IN NOT APPRECIAT ING THAT PROFITABILITY OF THE APPELLANT WAS LOWER DUE TO UND ERUTILIZATION OF CAPACITY DURING THE RELEVANT PREVIOUSYEAR AND DISRE GARDING THE APPELLANTS CONTENTION OF MAKING AN APPROPRIATE COM PARABILITY ADJUSTMENT FOR UNDER UTILIZATION OF CAPACITY HOLDIN G THAT RELIABLE DATA IS NOT AVAILABLE IN THIS REGARD. 1.7 THAT THE COMMISSIONER OF INCOME-TAX (APPEAL S) ERRED ON FACTS AND IN LAW IN APPRECIATING THAT APPROPRIATE A DJUSTMENTS ARE 4 REQUIRED TO BE MADE ON ACCOUNT OF THE APPELLANT BEI NG A START UP ENTERPRISE HAVING INCURRED SUBSTANTIAL START UP COS T / ESTABLISHMENT COST DURING THE RELEVANT FINANCIAL YE AR. 1.8 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED ON FACTS AND IN LAW IN DISREGARDING THE RISK IMMUNE PR OFILE OF THE APPELLANT AND REJECTING THE CLAIM TOWARDS ADJUSTMEN T FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VI S-A-VIS THE COMPARABLE COMPANIES. 1.9 THAT THE COMMISSIONER OF INCOME-TAX (APPEAL S) ERRED ON FACTS AND IN LAW IN DISALLOWING DEDUCTION UNDER SEC TION 10B OF THE ACT TO THE EXTENT OF RS 37,02,996 ALLEGEDLY HOLDING THAT EXPORT PROCEEDS HAVE NOT BEEN REALIZED WITHIN THE PRESCRIB ED PERIOD. 1.10 WITHOUT PREJUDICE, THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIA TING THAT EXPORT TURNOVER WAS REQUIRED TO BE REDUCED TO THE EXTENT O F UNREALIZED EXPORT PROCEEDS OF RS 37,02,996 FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT. 5 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE COMPANY DEVELOPS PACKAGED SOFTWARE PRODUCTS, PROVID ES SOFTWARE CONSULTING SERVICES AND OTHER ANCILLARY PRODUCTS AN D SERVICES, PRIMARILY FOR USE IN TELE-COMMUNICATIONS INDUSTRY. THE COMPA NY ALSO PROVIDES BUSINESS PROCESS OUTSOURCING SERVICES, PRIMARILY IN THE AREAS OF ON-LINE CUSTOMER CARE. 4. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E HAD ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES [AE] FOR RS. 101.64 CRORES AND ACCORDINGLY, REFERENCE WAS MA DE U/S 92CA(3) OF THE INCOME TAX ACT, 1961 [HEREINAFTER REFERRED TO A S 'THE ACT' FOR SHORT] FOR DETERMINING THE ARMS LENGTH PRICE. 5. DURING THE TRANSFER PRICING ASSESSMENT PROCEEDIN GS, THE TPO ANALYSED THE APPLICATION OF CUP FOR INTERNATIONAL T RANSACTIONS RELATING TO BPO SEGMENT. THE RELEVANT OBSERVATIONS OF THE T PO READ AS UNDER: 5.2 ANALYSIS OF APPLICATION OF CUP FOR INTERNATIONA L TRANSACTIONS RELATING TO BPO SEGMENT:- I HAVE CAREFULLY EXAMINED APPLICABILITY OF CUP, A METHOD SELECTED BY THE ASSESSEE TO BENCHMARK INTERNATIONAL TRANSACT ION AND HAVE HELD THAT METHOD IS NOT SUITABLE TO BENCHMARK INTER NATIONAL 6 TRANSACTION FOR THE FOLLOWING REASONS: 5.2.1 THE ISSUE OF APPLICABILITY OF CUP WAS DISCUSS ED IN THE TP ORDER FOR AY 2004- OS AND IT WAS CONCLUDED THAT CUP IS NOT THE MOST APPROPRIATE METHOD FOR BENCHMARKING OF THE INT ERNATIONAL TRANSACTIONS. THE EXTRACTS OF THE ORDER ARE AS UNDE R- ANALYSIS OF CUP IN BPO SEGMENT 4.0 AS MENTIONED ABOVE SINCE THE ASSESSEE HAS CONSI DERED COMPARABLE UNCONTROLLED PRICE METHOD AS MOST APPROP RIATE METHOD TO BENCHMARK INTERNATIONAL TRANSACTION OF PROVIDING BPO SERVICES TO ITS ASSOCIATED ENTERPRISE, THE VERACITY OF COMPA RATIVE PRICES NEED TO BE EXAMINED. THE RELEVANT INFORMATION IS AP PEARING AT PAGE 89 OF THE TRANSFER PRICING DOCUMENTATION WHERE THE ASSESSEE HAS BENCHMARKED THIS INTERNATIONAL TRANSACTION BY MENTI ONING THAT THE ASSESSEE HAS BEEN CHARGING RATES OF USD 19.20 PER H OUR FROM HNS, USA AS COMPARED TO USD 14 PER HOUR FOR SIMILAR SERVICES BEING CHARGED FROM THE UNRELATED PARTY. IT IS ON TH IS PREMISE THAT THE TRANSACTION IN BPO SEGMENT HAS BEEN CONSIDERED TO BE AT ARMS LENGTH. THIS KIND OF COMPARABLE UNCONTROLLED PRICE IS KNOWN AS INTERNAL CUP. NO INFORMATION ABOUT THE PARTICULARS OF UNRELATED PARTY, TERMS & CONDITIONS OF SERVICE, AND OTHER DET AILS WERE MADE AVAILABLE IN THE DOCUMENTATION SO AS TO DEMONSTRATE THAT THE TRANSACTIONS WHICH ARE BEING COMPARED DO NOT VARY F ROM EACH OTHER. 7 6. FROM THE ABOVE OBSERVATIONS, IT IS ABUNDANTLY CL EAR THAT WHILE PROPOSING THE ADJUSTMENT IN ALP, THE TPO HAS FOLLOW ED THE FINDINGS EVEN IN A.Y 2004-05. IN A.Y 2004-05, THIS QUARREL TRAVELLED UPTO THE TRIBUNAL AND THE TRIBUNAL IN ITA NO 2881/DEL/2011, VIDE ORDER DATED 23.04.2021, HELD AS UNDER: 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IT IS PERTINENT TO NOTE THAT T HE COMPARABILITY ADJUSTMENT ON ACCOUNT OF ABNORMAL COST WAS CLAIMED BY THE ASSESSEE BEFORE THE TPO AND THE ADJUSTED MARGIN AF TER MAKING THE ADJUSTMENTS WAS WORKED OUT AT 4.08%. THE SAID C LAIM OF THE ASSESSEE WAS REJECTED BY THE TPO. THE ASSESSEE IN A PPEAL BEFORE THE CIT(A) FILED REVISED CALCULATION OF ADJUSTED MA RGIN AND ADJUSTED MARGIN WAS CALCULATED AT 12.71%. THUS, THE CLAIM OF COMPARABILITY ADJUSTMENT WAS NOT MADE FOR THE FIRST TIME BEFORE THE CIT(A) AND ONLY THE CALCULATION OF THE AMOUNT OF ADJUSTMENT WAS REVISED. THIS CONTENTIONS OF THE ASSESSEE ARE T ENABLE AND EMERGES FROM THE SUBMISSIONS MADE BEFORE THE CIT(A) . THE CIT(A) HELD AS UNDER:- 9.5 SINCE THE APPELLANT WAS IN THE START-UP PHASE A ND THE ABNORMAL EXPENSES, AS AFOREMENTIONED, WERE INCURRED BY THE APPELLANT, COMPARING THE OPERATING PROFIT MARGIN OF THE APPELLANT WITHOUT ANY APPROPRIATE ADJUSTMENT, WITH THE OPERA TING PROFIT MARGIN OF THE COMPARABLE COMPANIES IDENTIFIED BY TH E TPO, IN MY CONSIDERED VIEW, WOULD GO AGAINST THE TRUE INTENTIO N OF THE 8 TRANSFER PRICING REGULATIONS. SUCH ADJUSTMENTS TO THE OPERATING MARGIN OF THE APPELLANT ARE, THUS, REQUIRED SO AS T O ELIMINATE THE DIFFERENCE BETWEEN THE APPELLANT AND THE COMPARABL ES. 9.6 CONSIDERING THE OPERATING PROFIT MARGIN OF THE APPELLANT COMPUTED AFTER EXCLUDING THE ABNORMAL COST / LOSS, AT 12.71% AS AGAINST THE OPERATING PROFIT MARGIN OF THE COMPARAB LE COMPANIES IDENTIFIED BY THE TPO (AFTER CORRECTLY COMPUTING T HE OPERATING PROFIT MARGIN) AT 9.66%, THE ADJUSTMENT MADE BY THE TPO, ON ACCOUNT OF THE DIFFERENCE IN THE ARMS LENGTH PRINC IPLE OF THE INTERNATIONAL TRANSACTIONS DOES NOT SURVIVE. IN MY CONSIDERED VIEW, EVEN IF THE OPERATING PROFIT MARGIN COMPUTED BY TH E TPO AT 15.49% IS CONSIDERED THE OPERATING PROFIT MARGIN OF THE APPELLANT COMPUTED AFTER EXCLUDING THE ABNORMAL COST / LOSS, AT 12.71% FALLS WITHIN THE RANGE OF +/(-)5% PROVIDED AS PER PROVISO TO SECTION 92C(2) OF THE ACT AND HENCE NO ADJUSTMENT CALLS FOR BEING MADE. 9.7 IN MY CONSIDERED VIEW THE ADJUSTMENT OF RS. 7.32,39,369 MADE BY THE TPO, THEREFORE, IS LIABLE TO BE DELETED . THE ISSUE ON THIS GROUND, ACCORDINGLY, IS DECIDED IN FAVOR OF T HE APPELLANT. 9.8 SINCE THE AFORESAID ISSUE HAS BEEN DECIDED IN FAVOR OF THE ASSESSEE, ADJUDICATION ON THE OTHER GROUNDS BECOMES WHOLLY ACADEMIC AND HENCE REQUIRES NO SEPARATE ADJUDICATIO N. 9 THUS, THE CIT(A) HAS GIVEN A DETAILED FINDING ON TH E TP ADJUSTMENT AND THERE IS NO OTHER GROUND IN RESPECT OF CORPORAT E ISSUES BY THE REVENUE. IN THE TRANSFER PRICING DOCUMENTATION, TH E ASSESSEE DETERMINED ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF RENDERING BPO SERVICES APPLYING CUP METHOD. SINCE T HE PRICES CHARGED BY THE ASSESSEE AT USD 19.20 PER HOUR FROM THE AE EXCEED THE PRICES CHARGED FROM THE UNRELATED PARTY, I.E., ALP @ USD 14.00 PER HOUR, THE INTERNATIONAL TRANSACTION S OF BPO SERVICES WERE CONSIDERED BEING AT ARMS LENGTH, IN THE TRANSFER PRICING DOCUMENTATION. THERE IS NO DISPUTE ON PART OF THE REVENUE THAT IN THE BPO INDUSTRY THE PREVALENT RATE FOR SER VICES WAS IN THE RANGE OF USD 8 TO USD 15 PER HOUR AND WAS COMPARABL E/LOWER TO THE RATE OF USD 19 CHARGED BY THE ASSESSEE FROM THE AE AND WAS AT ARMS LENGTH APPLYING CUP METHOD. THUS, THE ADJ USTMENT MADE BY THE TPO IS NOT SUSTAINABLE EVEN APPLYING THE CUP METHOD. HENCE, THERE IS NO NEED TO INTERFERE WITH THE FIND INGS OF THE CIT(A). HENCE, THE APPEAL OF THE REVENUE IS DISMISS ED. 7. AS NO DISTINGUISHING FACTOR HAS BEEN BROUGHT TO OUR NOTICE AND SINCE THE TPO FOLLOWED THE FINDINGS OF A.Y 2004-05, THEREFORE, RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO-ORDIN ATE BENCH [SUPRA] WE DIRECT THE ASSESSING OFFICER/TPO TO DELETE THE IMPU GNED ADDITION. 10 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO. 415/DEL/2013 IS ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 10.06.2021. SD/- SD/- [KULDIP SINGH] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 10 TH JUNE, 2021 VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI 11 DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER