Asst.C.I.T., Bangalore V. Metric Stream Infotech India (P) Limited, Bangalore

ITA 424/BANG/2015

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 6267 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-02-2020
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 03-02-2020
• Assessment Year: 2010-2011
• Appeal Filed On: 23-03-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; International transaction; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B, BANGALORE BEFORE SHRI A.K.GARODIA, AM & SMT.BEENA PILLAI, JM IT(TP)A NO.424/BANG/2015 : ASST.YEAR 2010-2011 THE ASST.COMMISSIONER OF INCOME-TAX, CIRCLE 4(1)(2) BANGALORE. VS. M/S.METRIC STREAM INFOTECH (INDIA) PRIVATE LIMITED, ZED SQUARE, NO.92, JYOTHI NIVAS, COLLEGE ROAD, 7 TH BLOCK, KORAMANGALA INDUSTRIAL AREA, BANGALORE 560 034 PAN : AACCM4991K. (APPELLANT) (RESPONDENT) IT(TP)A NO.383/BANG/2015 : ASST.YEAR 2010-2011 M/S.METRIC STREAM INFOTECH (INDIA) PRIVATE LIMITED, ZED SQUARE, NO.92, JYOTHI NIVAS, COLLEGE ROAD, 7 TH BLOCK, KORAMANGALA INDUSTRIAL AREA, BANGALORE 560 034 VS. THE ASST.COMMISSIONER OF INCOME-TAX, CIRCLE 4(1)(2) BANGALORE. (APPELLANT) (RESPONDENT) REVENUE BY : SRI.MUZAFFAR HUSSAIN, CIT-DR ASSESSEE BY : SRI.PADAMCHAND KHINCHA, CA DATE OF HEARING : 03.12.2020 DATE OF PRONOUNCEMENT : 07.02.2020 O R D E R PER SMT.BEENA PILLAI, JM : PRESENT CROSS APPEALS HAS BEEN FILED BY ASSESSEE AS WELL AS REVENUE AGAINST ORDER DATED 16/01/15 PASSED BY LD.ACIT CIRCLE 4 2. ASSESSEE IS A COMPANY AND FILED ITS RETURN OF INCOME FOR YEAR UNDER CONSIDERATION ON 09/05/11 DECLARING TOTAL INCOME OF RS.92,09,880/-. IT HAS BEEN OBSERVED BY AUTHORITIES BELOW THAT COMPANIES ENGAGED IN BUSINESS OF DEVELOPMENT OF SOFTWARE AND RENDERING RELATED SERVICES. THE RETURN WAS PROCESSED UNDER SECTION 143 (1) OF THE ACT AND THE CASE WAS SELECTED FOR SCRUTINY, CONSEQUENTIALLY NOTICES UNDER SECTION 143 (2) AND 142 (1) WERE IT(TP)A NOS.424 & 383/BANG/2015 M/S.METRIC STREAM INFOTECH (INDIA) PVT. LTD. 2 ISSUED TO ASSESSEE. IN RESPONSE TO THE STATUTORY NOTICES, REPRESENTATIVE OF ASSESSEE FILED REQUISITE DETAILS AS CALLED FOR. 2.1. LD.AO HAD OBSERVED THAT ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES EXCEEDING SUM OF RS. 15 CRORES AND ACCORDINGLY THE CASE WAS REFERRED TO TRANSFER PRICING OFFICER. LD.TPO UPON RECEIPT OF REFERENCE ISSUED NOTICE TO ASSESSEE CALLING FOR ECONOMIC DETAILS OF INTERNATIONAL TRANSACTION IN FORM 3 CEB. FROM THE RECORDS FILED, LD.TPO OBSERVED THAT, ASSESSEE HAD FOLLOWING INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES: PARTICULARS AMOUNT RECEIVED SOFTWARE DEVELOPMENT RS.12,16,75,946/ - SALES AND MARKETING SERVICES RS. 5,98,41,623/ - REIMBURSEMENT OF GRATUITY AND INTEREST COST RS. 13,09,272/ - 2.2. ONLY DISPUTED SEGMENT BY LD.TPO WAS IN RESPECT OF SOFTWARE DEVELOPMENT SEGMENT AND SALES AND MARKETING SERVICES SEGMENT. IT WAS OBSERVED THAT ASSESSEE USED TNMM AS MOST APPROPRIATE METHOD AND OP/OC AS PLI. ASSESSEE COMPUTED ITS MARGIN UNDER SOFTWARE DEVELOPMENT SERVICE SEGMENT AT 8.02% AND 5% FOR SALES AND MARKETING SEGMENT. ASSESSEE USED FOLLOWING 14 COMPARABLES UNDER SOFTWARE DEVELOPMENT SERVICE SEGMENT WITH AN AVERAGE MARGIN OF 6.63% AND UNDER SALES AND MARKETING SERVICE SEGMENT ASSESSEE USED FOLLOWING 7 COMPARABLES WITH AVERAGE MARGIN AT 9.5%. IT(TP)A NOS.424 & 383/BANG/2015 M/S.METRIC STREAM INFOTECH (INDIA) PVT. LTD. 3 SOFTWARE DEVELOPMENT SERVICE SEGMENT S.NO. PARTICULARS MARGIN 1. ACCEL TRANSMATIC LTD 17.89% 2. AKSHAY SOFTWARE TECHNOLOGIES LTD 12.41% 3. CG - VAK SOFTWARE AND EXPORTS LTD 5.47% 4. COMPULINK SYSTEMS LTD 2.67% 5. GOLDSTONE TECHNOLOGIES LTD 6.36% 6. INDIUM SOFTWARE (INDIA) LTD (9.33%) 7. LGS LTD 20.61% 8. QUINTENGRA SOLUTIONS LTD (0.62%) 9. R S SOFTWARE (INDIA) LTD 10.58% 10. SERVIONT GLOBAL SOLUTIONS LTD 13.51% 11. TVS INFOTECH LTD (13.55) 12. THINK SOFTWARE GLOBAL SERVICES LTD 19.02% 13. THIRDWARE SOLUTIONS LTD 22.33% 14. VGL SOFTECH LTD (14.54) AVERAGE MARGIN 6.63% SALES & MARKETING SERVICE SEGMENT S.NO. PARTICULARS MARGIN 1. AMRIT INTERNATIONAL LTD (1.07%) 2. ICRA MANAGEMENT CONSULTING SERVICES LTD (3.46%) 3. ICC INTERNATIONAL AGENCIES LTD 19.50% 4. IDC (INDIA) LTD 10.34% 5. KILLICK AGENCIES & MARKETING LTD 29.48% IT(TP)A NOS.424 & 383/BANG/2015 M/S.METRIC STREAM INFOTECH (INDIA) PVT. LTD. 4 6. PRIYA INTERNATIONAL LTD 26.41% 7. SK CONSULTANTS LTD (14.69%) AVERAGE MARGIN 9.50% 2.3. AS MARGIN OF COMPARABLE WAS BETWEEN RANGE OF +/- 5%, ASSESSEE HELD ITS TRANSACTION TO BE AT ARMS LENGTH. DISAGREEING WITH TRANSFER PRICING DETAILS FILED BY ASSESSEE, LD.TPO SHORTLISTED FOLLOWING COMPARABLES FOR PURPOSES OF DETERMINING ARMS LENGTH PRICE OF THE TRANSACTIONS. TPOS COMPARABLES UNDER SOFTWARE DEVELOPMENT SEGMENT S.NO. PARTICULARS MARGIN 1. ICRA TECHNOANALYTICS LTD (SEG) 24.94% 2. INFOSYS LTD 44.98% 3. KALS INFORMATION SYSTEMS LTD (SEG) 34.41% 4. LARSEN AND TOUBRO INFOTECH LTD 19.33% 5. MINDTREE LTD (SEG) 14.83% 6. PERSISTENT SYSTEMS AND SOLUTIONS LTD 15.38% 7. PERSISTENT SYSTEMS LTD 30.35% 8. R S SOFTWARE (INDIA) LTD 10.29% 9. SASKEN COMMUNICATION TECHNOLOGIES 17.36% 10. TATA ELXSI LTD 20.93% 11. THINK SOFTWARE GLOBAL SERVICES LTD 17.05% AVERAGE MARGIN 22.71% IT(TP)A NOS.424 & 383/BANG/2015 M/S.METRIC STREAM INFOTECH (INDIA) PVT. LTD. 5 TPOS COMPARABLES FOR SALES AND MARKETING SEGMENT S.NO. PARTICULARS MARGIN 1. ASIAN BUSINESS EXHIBITION AND CONFERENCES LTD 58.64% 2. CYBER MEDIA RESEARCH LTD (EARLIER IDC INDIA PRIVATE LIMITED) 19.52% 3. HCCA BUSINESS SERVICES PRIVATE LTD (EARLIER HSG BUSINESS SERVICES PRIVATE LIMITED 19.11% 4. HINDUSTAN HOSING COMPANY LTD 19.59% 5. ICC INTERNATIONAL AGENCIES LTD 13.27% 6. KILLICK AGENCIES & MARKETING LTD 16.77% AVERAGE MARGIN 24.48 % 2.3. LD.TPO THUS COMPUTED THE SHORTFALL IN ARMS LENGTH PRICE FOR BOTH SEGMENTS AND PROPOSED ADJUSTMENT AS UNDER: PARTICULARS ADJUSTMENT PROPOSED SOFTWARE DEVELOPMENT SERVICE SEGMENT 1,65,61,434/ - SALES AND MARKETING SERVICE SEGMENT 1,11,00,553/ - 2.4. AGAINST THE PROPOSED ADJUSTMENT ASSESSEE RAISED OBJECTIONS BEFORE DRP CHALLENGING VARIOUS FILTERS APPLIED BY LD.TPO. DRP WHILE ADJUDICATING OBJECTIONS RAISED BY ASSESSEE, EXCLUDED CERTAIN COMPARABLES UNDER BOTH SEGMENT FOR HAVING TURNOVER MORE THAN RS. 200 CRORES. IT(TP)A NOS.424 & 383/BANG/2015 M/S.METRIC STREAM INFOTECH (INDIA) PVT. LTD. 6 2.5. LD.AO WHILE GIVING ORDER EFFECT TO THE DIRECTIONS OF DRP MADE ADDITION AT RS.2,54,77,812/- AGGRIEVED BY ORDER PASSED BY LD. AO, ASSESSEE AS WELL AS REVENUE ARE IN APPEAL BEFORE US NOW. AT THE OUTSET BOTH SIDES AGREE THAT DRP HAS NOT DEALT WITH COMPARABLES INDEPENDENTLY ALLEGED BY ASSESSEE BEFORE US AND HAS MERELY EXCLUDED CERTAIN COMPARABLES ON HIGH TURNOVER. AGAINST EXCLUSION OF SUCH COMPARABLES REVENUE IS IN APPEAL BEFORE US. 2.6. LD. CIT DR SUBMITTED THAT EXCLUSION OF COMPARABLES ON TURNOVER BASIS HAS BEEN DONE WITHOUT ANALYSING FUNCTIONAL SIMILARITY/DISSIMILARITY OF COMPARABLES WITH THAT OF ASSESSEE. 2.7. LD.AR. OUT OF BALANCE COMPARABLES POST DRP DIRECTION, SEEKS EXCLUSION/INCLUSION OF CERTAIN COMPARABLES FOR FUNCTIONAL DISSIMILARITIES/SIMILARITIES. LD.AR SEEKS EXCLUSION OF KILLICK AGENCIES AND MARKETING LTD., UNDER SALES AND MARKETING SERVICE SEGMENT. 2.8. AT THE OUTSET, LD.CIT-DR SUBMITTED THAT, EXCLUSION/INCLUSION OF COMPARABLES SOUGHT BY ASSESSEE AT THIS STAGE CANNOT BE ANALYSED, AS THIS EXERCISE HAS NOT BEEN CARRIED OUT BY DRP. ALSO THAT BEFORE DRP AS WELL AS BEFORE THIS TRIBUNAL . ASSESSEE RAISED GROUNDS ONLY ON FILTERS, INSTEAD OF SPECIFIC GROUNDS ALLEGING EXCLUSION/INCLUSION OF COMPARABLES BEFORE DRP AS WELL AS BEFORE THIS TRIBUNAL . HE THUS REQUESTED FOR THESE ISSUES TO BE SET-ASIDE TO DRP TO CONSIDER THE OBJECTIONS OF ASSESSEE QUA COMPARABLES. 2.9. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. IT(TP)A NOS.424 & 383/BANG/2015 M/S.METRIC STREAM INFOTECH (INDIA) PVT. LTD. 7 AS RIGHTLY POINTED OUT BY PARTIES BEFORE US, DRP HAS NOT DEALT WITH OBJECTIONS QUA COMPARABLES AND EXCLUDED CERTAIN COMPARABLES ONLY ON TURNOVER FILTER. BEFORE US ASSESSEE IS SEEKING SPECIFIC EXCLUSION/INCLUSION OF COMPARABLES UNDER BOTH SEGMENTS. KILLICK AGENCIES AND MARKETING LTD., NEITHER OBJECTED BEFORE LD.TPO, NOR IS SPECIFICALLY ALLEGED FOR EXCLUSION ON FUNCTIONAL DISSIMILARITY BEFORE DRP, HOWEVER LD. A.R. ARGUED FOR ITS EXCLUSION BEFORE US. 2.10. UNDER SUCH CIRCUMSTANCES WE DEEM IT FIT AND PROPER TO SET ASIDE THIS ISSUE BACK TO DRP WITH A DIRECTION TO ADJUDICATE/VERIFY COMPARABLES QUA FILTERS FINALLY SELECTED BY LD.TPO RECORDED HEREIN ABOVE INDIVIDUALLY. IT IS ALSO BEEN SUBMITTED BY LD.AR THAT, MARGIN OF CERTAIN COMPARABLE HAVE BEEN WRONGLY CONSIDERED BY LD.TPO WHICH NEEDS CORRECTION. WE DIRECT DRP TO CONSIDER ALL THE OBJECTIONS AFRESH QUA COMPARABLES. DRP IS DIRECTED TO ANALYSE EACH COMPARABLES ALLEGED BY ASSESSEE FOR EXCLUSION/INCLUSION ON FUNCTIONAL SIMILARITIES/DISSIMILARITY AND TO PASS DETAILED ORDER. ACCORDINGLY GROUNDS RAISED BY ASSESSEE AND REVENUE STANDS ALLOWED FOR STATISTICAL PURPOSES. IN THE RESULT APPEAL IS FILED BY ASSESSEE AS WELL AS REVENUE STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 07 TH DAY OF FEBRUARY, 2020 . SD/- SD/- (A.K.GARODIA) ( SMT.BEENA PILLAI ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE ; DATED : 07 TH FEBRUARY, 2020. IT(TP)A NOS.424 & 383/BANG/2015 M/S.METRIC STREAM INFOTECH (INDIA) PVT. LTD. 8 COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE DRP-II, BENGALURU. 4. THE CIT, BENGALURU. 5. THE DR, ITAT, BENGALURU. 6. GUARD FILE. ASST. REGISTRAR/ITAT, BANGALORE DATE INITIAL 1. DRAFT DICTATED ON 03.02.2020 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 03.02.2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. FILE SENT TO THE BENCH CLERK SR.PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. 11. DRAFT DICTATION SHEETS ARE ATTACHED SR.PS