Aithent Technologies Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 4419/DEL/2011

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 8926 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 29-01-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 04-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARE DIRECTED A GAINST
• Assessee Lawyers: AND OTHER
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY , JM ITA NO. 4419 /DEL/20 1 1 ASSESSMENT YEAR : 200 4 - 05 A ITHENT TECHNOLOGIES PVT. LTD., A - 16/9, VASANT VIHAR , NEW DELHI , PAN : AAACS2319H ( APPELLANT ) VS. DCIT, CIRCLE - 1(1) C.R. BUILDING, NEW DELHI ( RESPONDENT ) ITA NO.4323/DEL/2011 ASSESSMENT YEAR : 2004 - 05 DCIT, CIRCLE - 1(1) CIRCLE 1(1), C.R. BUILDING , NEW DELHI. VS. AITHENT TECHNOLOGIES PVT. LTD., A - 16/9, VASANT VIHAR, NEW DELHI . PAN : AAACS2319H ( APPELLANT ) ( RESPONDENT ) ORDER PER R.S. SYAL, AM : TH E S E TWO CROSS APPEALS , ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE ARE DIRECTED AGAINST THE ORDER PASSED THE CIT(A) ON 29.07.2011 IN RELATION TO THE AY 2004 - 05 . ASSESSEE BY : SHRI AKHILESH GUPTA, CA DEPARTMENT BY : SHRI PEEYUSH JAIN, CIT, DR ITA NOS. 4419/DEL/2011 & 4323/DEL/2011 2 2 . THE FIRST THREE GROUNDS IN THE ASSESSEE S APPEAL ABOUT THE ADDITION ON ACCOUNT OF NOTIONAL INTEREST, ETC., WERE NOT PRESSED BY THE LD. AR. THESE, THEREFORE, STAND DISMISSED. 3 . THE ONLY ISSUE WHICH SURVIVES THROUGH THE REMAINING TWO GROUNDS IS AGAINST THE ADDITION OF RS.2,82,56,450/ - ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 4 . BRIEFL Y STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A N INDIAN SOFTWARE CONSULTING COMPANY PROVIDING SOFTWARE SOLUTIONS TO GLOBAL CLIENTS. IT HAS A SUBSIDIARY COMPANY IN NEW YORK , NAMELY, AITHENT INC., WHICH IDENTIFIES THE CUSTOMERS AND, THEREAFTER, THE WORK IS ASSIGNED TO THE ASSESSEE. THE ASSESSEE IS PRIMARILY ENGAGED IN TWO TYPES OF SOFTWARE DEVELOPMENT ACTIVITIES, VIZ., OFF - THE - SHELF SOFTWARE DEVELOPMENT AND SPECIFIED TECHNICAL SOFTWARE SPECIFICATIONS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE REPORTED FOUR INTERNATIONAL TRANSACTIONS. THE DISPUTE IN THE PRESENT APPEAL BY THE ASSESSEE CONCERNS ONLY WITH THE FIRST INTERNATIONAL TRANSACTION, NAMELY, S OFTWARE DEVELOPMENT SERVICES WITH THE REPORTED TRANSACTIONAL V ALUE OF RS.6 . 46 CRORE . THE ASSESSEE ADOPTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH P ROFIT L EVEL I NDICATOR (PLI) OF O PERATING P ROFIT TO T OTAL C OST (OP/TC) . CERTAIN COMPARABLES WERE CHOSEN WHOSE OPERATING MARGIN WAS COMPUTED AT 7.15% AS AGAINST THE ASSESSEE S OWN MARGIN AT ( - ) 49.47%. THE TRANSFER PRICING OFFICER ITA NOS. 4419/DEL/2011 & 4323/DEL/2011 3 (TPO) CONDUCTED SEARCH AT HIS LEVEL AND IDENTIFIED FEW COMPANIES AS COMPARABLES WITH T HEIR AVERAGE PROFIT MARGIN COMPUTED AT 8.76%. THE ASSESSEE S TOTAL COST WAS TAKEN AT RS.14.36 CRORE. BY APPLYING THE OPERATING PROFIT MARGIN OF COMPARABLES AT 8.76% ON THIS COST BAS E , THE TPO WORKED OUT A TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.2.82 CRORE. A DDITION SO MADE BY THE A SSESSING O FFICER (AO) WAS ULTIMATELY UPHELD IN THE FIRST APPEAL. THE ASSESSEE IS AGGRIEVED AGAINST THE SUSTENANCE OF THIS ADDITION. 5 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE WANT TO MAKE IT CLEAR THAT THE LD. AR HAS NOT DISPUTED ANY ASPECT OF THE DETERMINATION OF ALP BY THE TPO UNDER THIS SEGMENT OTHER THAN THE APPLICATION OF AVERAGE PROFIT MARGIN OF COMPARABLES TO THE TOTAL COST S INCURRED BY THE ASSESSEE ON ENTITY LEVEL AS AGAINST THE COST OF INTERNATIONAL TRANSACTIONS. 6. IT IS UNCONTROVERTED, AS IS ALSO APPARENT FROM THE TPO S ORDER, THAT THE ADDITION HAS BEEN MADE BY CONSIDERING THE TOTAL COSTS INCURRED BY THE ASSESSEE IN RESPECT OF BOTH THE CONTR OLLED AND UNCONTROLLED TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES (AE) AND NON - AES. A DDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT CAN BE MADE BY COMPARING THE ASSESSEE S PROFIT RATE FROM THE INTERNATIONAL TRANSACTION WITH TH AT OF COMPARABLE UNCONTR OLLED TRANSACTIONS. UNDER THE TNMM, THE PROCESS IS SIMPLE IN INITIALLY FIND ING OUT THE AVERAGE OF THE OPERATING PROFIT ITA NOS. 4419/DEL/2011 & 4323/DEL/2011 4 MARGIN OF THE COMPARABLE CASES. THIS BENCHMARKED MARGIN IS THEN COMPARED WITH THE OPERATING PROFIT MARGIN FROM THE ASSESSEE S INTERNATIO NAL TRANSACTIONS WITH ITS AE. IT IS NOT P ERMISSIBLE TO MAKE TRANSFER PRICING ADJUSTMENT BY APPLYING THE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLES ON THE ASSES SEE S TRANSACTIONS WITH BOTH THE AE AND NON - AES WITH. AS THE ENTIRE EXERCISE UNDER CHAPTER - X IS CONFINED TO COMPUTING TOTAL INCOME OF THE ASSESSEE FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO THE ARM S LENGTH PRICE (ALP), THERE IS NO WARRANT FOR COMPUTING TOTAL INCOME EVEN FROM NON - INTERNATIONAL TRANSACTI ONS HAVING REGARD TO THE ALP . AS THE TPO HAS COMPUTED THE TRANSFER PRICING ADJUSTMENT QUA ALL THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH REFERENCE TO THE BASE OF T OTAL COST S INCURRED BY THE ASSESSEE, ALSO INCLUSIVE OF COSTS RELEVANT FOR TRANSACTI ONS WITH NON - AES, WE VACATE THE IMPUGNED ORDER ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF AO/TPO FOR RECALCULATING THE AMOUNT OF ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT BY TAKING INTO CONSIDERATION THE ASSESSEE S PROFIT MARGIN ONLY FROM THE INTERNATIONAL TRANSACTIONS UNDER THIS SEGMENT . NEEDLESS TO SAY , THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD. 7. THE ONLY ISSUE TAKEN BY THE REVENUE IN ITS APPEAL IS AGAINST THE DIRECTION GIVEN BY THE LD. CIT(A) THAT THE INTEREST BE RECALCULATED AT 5.1595% AS AGAINST 10% APPLIED BY THE AO ON THE OUTST ANDING AMOUNT OF LOAN TO THE AE . ITA NOS. 4419/DEL/2011 & 4323/DEL/2011 5 8. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE CONTINUED WITH THE OLD UNSECURED INTEREST FREE LOAN GIVEN TO ITS AE IN USA . A FURTHE R SUM OF RS.11.21 CRORE WAS CONVERTED INTO UNSECURED INTEREST FREE LOAN TO THE AE. THE TPO OBSERVED THAT THE ASSESSEE HAD INCURRED INTEREST EXPENDITURE TO THE TUNE OF RS.1.30 CRORE AND, AS SUCH, IT OUGHT TO HAVE CHARGED INTEREST FROM THE LOANS GIVEN TO IT S AE. AFTER CONSIDERING THE OBJECTIONS RAISED BY THE ASSESSEE, THE TPO CALCULATED INTEREST ON SUCH INTEREST - FREE LOAN @ 10%. THE LD. CIT(A) REDUCED SUCH RATE OF INTEREST TO 5.1595% , BEING T HE L IBOR RATE PLUS 400 BASIS POINTS. THE REVENUE IS AGGRIEVED AGA INST THE REDUCTION IN THE RATE OF INTEREST. 9 . AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS IS A RECURRING ISSUE COMING FROM THE EARLIER YEARS, WHICH HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE PRECEDING YEARS. IN ITS ORDER FOR THE AY 2002 - 03, THE TRIBUNAL HAS RESTORED THIS MATTER FOR A FRESH CONSIDERATION IN THE LIGHT OF CERTAIN DIRECTIONS. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL VIDE PARA 9 O N PAGE 12 OF ITS ORDER FOR T HE IMMEDIATELY PRECEDING ASSESSMENT YEAR, NAMELY, 2002 - 03 BY RESTORING THE MATTER. IN TH E ABSENCE OF ANY DISTINGUISHING FACTS FOR THIS YEAR VIS - - VIS THE EARLIER YEARS, RESPECTFULLY FOLLOWING THE PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MA TTER TO THE FILE OF ITA NOS. 4419/DEL/2011 & 4323/DEL/2011 6 AO/TPO FOR A FRESH DETERMINATION OF THE TRANSFER PRICING ADJUSTMENT, ON THE BASIS OF THE DIRECTIONS GIVEN BY THE TRIBUNAL FOR SUCH EARLIER YEARS. 10 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE S AND THAT OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRON OUNCED IN THE OPEN COURT ON 03 .02 .2015. SD/ - SD/ - [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 3 RD FEBRUARY , 2015. D K RK/ - COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.