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ITA 4504/DEL/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6765 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 27-04-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 29-07-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

I.T.A. NO.4504/DEL/13 ASSESSMENT YEAR: 2006 - 07 PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI I - 1 BENCH, NEW DELHI [CORAM: PRAMOD KUMAR AM AND BEENA A. PILLAI JM ] I.T.A. NO. 4504 /DEL/1 3 ASSESSMENT YEAR: 2006 - 07 EXL SERVICE S .COM INDIA PVT LTD ............. .APPELLANT 103A, ASHOKA ESTATE, BARAKHAM BA ROAD NEW DELHI 110 001 [PAN: AAACE5174C] VS. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE LTU, NEW DELHI .. . . RESPONDENT APPEARANCES BY: TARUN ARORA AND DEEPA NANDA THE APPELLANT AMRENDRA KUMAR , FOR RESPONDENT DATE OF CONCLUDING THE HEARI NG : APRIL 27 , 2016 DATE OF PRONOUNC ING THE ORDER : JULY 25 TH , 2016 O R D E R PER PRAMOD KUMAR , AM : 1. THIS APPEAL IS DIRECTED AGAINST THE ORDER DATED 19 TH JULY 2010 PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) R.W.S 144C OF THE INCOME TAX ACT, 1 961, FOR THE ASSESSMENT YEAR 2006 - 07. 2. GRIEVANCES OF THE ASSESSEE, AS SET OUT IN THE GROUNDS OF APPEAL, ARE AS FOLLOWS: THAT , ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW; 1. THE LD. DRP HAS ERRED IN UPHOLDING THE ORDER PASSED BY T HE LD. TPO/ AO HOLDING THAT THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT DO NOT I.T.A. NO.4504/DEL/13 ASSESSMENT YEAR: 2006 - 07 PAGE 2 OF 5 SATISFY THE ARM'S LENGTH PRINCIPLE AND IN UPHOLDING THE ADJUSTMENT MADE BY THE LD. TPO/ AO. 2. THE LD. DRP ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE LD. AO/ TPO'S ACTION OF MAKING AN ADJUSTMENT OF RS.13,49,73,854 TO THE INCOME OF THE APPELLANT BY HOLDING THAT ITS INTERNATIONAL TRANSACTIONS OF PROVISION OF IT ENABLED SERVICES DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. IN DOING SO, THE LD. DRP HAS GROSSLY ERRED IN: 2.1 NOT APPROPRIATELY CONSIDERING THE FUNCTIONS, ASSETS AND RISK PROFILE OF THE COMPANIES USED FOR COMPARISON WITH THE APPELLANT, THEREBY INCLUDING IN THE FINAL COMPARABLE SET CERTAIN COMPANIES WITH DIFFERENT FUNCTIONAL PROFILE; 2. 2 IGNORING/DISREGARDING THE APPELLANT'S CONTENTIONS ON THE ERRONEOUS OPERATING MARGIN COMPUTATION OF ONE COMPARABLE COMPANY, VIZ., WIPRO BPO LTD. SELECTED IN THE FINAL COMPARABLE SET; 2.3 EXCLUDING FORTUNE INFOTECH LIMITED AS A VALID COMPARABLE O NLY ON ACCOUNT OF THE FACT THAT THE SAID COMPANY HAS A DIFFERENT FINANCIAL YEAR ENDING; 2.4 AGREEING WITH THE LD. TPO'S ACTION OF HOLDING THAT ONLY CURRENT YEAR (I.E FY 2005 - 06) DATA FOR COMPARABLE COMPANIES SHOULD BE USED FOR COMPARABILITY ANALYSIS DESPITE THE FACT THAT THE SAME WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION; 2.4.1 WITHOUT PREJUDICE TO THE ABOVE, IN CASE THE CURRENT YEAR DATA IS TO BE USED TO ADJUDICATE ON THE APPELLANT'S TRANSFER PRICES, THEN THE LD. DRP OUGHT TO HAVE ALSO CONSIDERED THE RESULTS OF THE FRESH SEARCH CARRIED OUT BY THE APPELLANT USING DATA FOR FY 2005 - 06, PRESENTED DURING THE PROCEEDINGS BEFORE THE DRP; 2.5 ERRONEOUSLY RETAINING IN THE FINAL COMPARABLE SET CERTAIN COMPANIES WHIC H HAVE EARNED EXTRAORDINARILY HIGH OPERATING MARGINS, THUS SIGNIFYING A HIGH ELEMENT OF ENTREPRENEURIAL RISK AS OPPOSED TO THE LIMITED RISK BEARING CAPTIVE IT ENABLED SERVICES PROVIDED BY THE APPELLANT; 2.6 FOLLOWING A CONTRADICTORY APPROACH IN CONSI DERING COMPANIES DEMONSTRATING SUPERNORMAL GROWTH IN REVENUE /PROFIT WHILE REJECTING COMPANIES WITH DECLINING PROFITS/DECLINING PHASE; 2.7 DENYING THE BENEFIT OF A WORKING CAPITAL ADJUSTMENT TO THE APPELLANT; 2.8 IN NOT ALLOWING THE BENEFIT OF RISK ADJUSTMENT TO THE APPELLANT. I.T.A. NO.4504/DEL/13 ASSESSMENT YEAR: 2006 - 07 PAGE 3 OF 5 2.9 NOT APPRECIATING THE FACT THAT IN THE RELEVANT ASSESSMENT YEAR THE APPELLANT WAS ENTITLED TO A TAX HOLIDAY ON ITS PROFITS FROM PROVISION OF IT ENABLED SERVICES AND THEREFORE DID NOT HAVE ANY MOTIVE OF DERIVING ANY TAX ADVANTAGE BY MANIPULATING THE TRANSFER PRICES OF ITS INTERNATIONAL RELATED PARTY TRANSACTIONS. 3. WITHOUT PREJUDICE TO THE GROUND 2.8 STATED HEREINABOVE, THE LD. DRP/TPO/AO ERRED IN NOT APPRECIATING THAT IF THE APPELLANT IS HELD TO BE A RISK BEARIN G ENTITY, THE PROFITS THEREOF SHOULD BE BASED ON RISK - REWARD MATRIX IN REFERENCE TO THE OVERALL GLOBAL PROFIT/LOSS EARNED BY THE EXL GROUP. 3. WHEN THIS APPEAL WAS CALLED OUT FOR HEARING, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS APPEAL CAN BE DISPOSED ON THE BASIS OF TWO SHORT POINTS - FIRST, GRANT OF WORKING CAPITAL ADJUSTMENT, AND SECOND, EXCLUSION OF VITL (VISHAL INFORMATION TECHNOLOGIES LIMITED) AS A COMPARABLES. BOTH OF THESE ISSUES, ACCORDING TO THE LEARNED COUNSEL, ARE COVERED ISSUES. AS FOR THE WORKING CAPITAL ADJUSTMENT, IT IS POINTED OUT THAT THE CIT (A) HIMSELF HAD ALLOWED THE SAME IN THE ASSESSMENT YEARS 2003 - 04 AND 2004 - 05 AND BY THE TPO HIMSELF IN T HE ASSESSMENT YEAR 205 - 06, YET THESE ADJUSTMENTS HAVE BEEN DISALLOWED IN THE PRESE NT YEAR. LEARNED COUNSEL FURTHER POINTS THAT IN THE SUBSEQUENT YEARS 2007 - 08, 2009 - 210 AND 2010 - 11 THESE ADJUSTMENTS HAVE BEEN ALLOWED BY THE DRP THOUGH THERE WERE CERTAIN COMPUTATIONAL ERRORS WHICH WERE POINTED OUT AT THE TRIBUNAL. IN THE ASSESSMENT YEAR 2011 - 12, THE WORKING CAPITAL ADJUSTMENT HAS BEEN ALLOWED BY THE DRP. ON THE STRENGTH OF THESE SUBMISSIONS, IT WAS POINTED OUT THAT THE WORKING CAPITAL ADJUSTMENT PRAYED BY THE ASSESSEE BE ALLOWED IN THE PRESENT YEAR. AS FOR THE PRAYER FOR EXCLUSION OF VIT L AS A COMPARABLE, LEARNED COUNSEL SUBMITS THAT THERE IS NO DISPUTE THAT THE ASSESSEE IS ENGAGED IN IT ENABLED SERVICES, BUT THE VITL, AS EVIDENT FROM A PLAIN LOOK AT THE ANNUAL REPORT OF VITL, IS ALSO ENGAGED IN THE PROVIDING TECHNICAL SOLUTIONS AND SERVI CES. IT WAS ALSO POINTED OUT THAT VITL HAS SIGNIFICANT PAYMENTS TO THE VENDORS WHICH SUGGESTS THAT THE VITL IS OUTSOURCING THE SERVICES THROUGH THIRD PARTY VENDORS, AND IS ONLY ACTING AS AN INTERMEDIARY. IT IS SUBMITTED THAT SUCH A BUSINESS MODEL IS SIGNIF ICANTLY DIFFERENT FROM BUSINESS MODEL OF THE ASSESSEE. HE THEN MAKES AN INTERESTING MENTION ABOUT THE CONCEPT OF SERVICES DISTRIBUTOR , WHICH IS WHAT VITL SEEMS TO BE PURSUING, WHICH IS FUNCTIONALLY DIFFERENT FROM THE CONTRACT SERVICE PROVIDER. A REFERE NCE IS THEN MADE TO HON BLE I.T.A. NO.4504/DEL/13 ASSESSMENT YEAR: 2006 - 07 PAGE 4 OF 5 DELHI HIGH COURT S JUDGMENT IN THE CASE OF RAMPGREEN SOLUTIONS PVT LTD VS CIT [(2015) 377 ITR 533 (DEL)] WHICH HAS, INTER ALA, HELD THAT BUSINESS MODEL OF VITL WAS COMPLETELY DIFFERENT VIS - - VIS BUSINESS MODEL NORMALLY EMPLOYED BY IT ENABLED SERVICES PROVIDER, AND IT CANNOT, THEREFORE, BE NORMALLY COMPARED TO BE A VALID COMPARABLE. LEARNED COUNSEL THEN SUBMITS THAT IN THE EVENT OF THE ASSESSEE BEING ALLOWED THE WORKING CAPITAL ADJUSTMENT, COUPLED WITH EXCLUSION OF VITL FROM THE L IST OF COMPARABLES, THE TRANSACTION PRICE WILL BE WELL WITHIN THE ARM S LENGTH PRICE. 4. LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE BOTH THE POINTS SO RAISED BY THE LEARNED COUNSEL, RELIED UPON THE STAND OF THE ASSESSING OFFICER AS ALSO THE DRP. HE SUBM ITS THAT EACH YEAR BEING INDEPENDENT, AND THE RES - JUDICATA NOT BEING APPLICABLE TO THE INCOME TAX PROCEEDINGS, THE MATTER SHOULD BE CONSIDERED ON STANDALONE BASIS ON MERITS - RATHER THAN THE LEGITIMATE CASE OF THE REVENUE BEING PREJUDICED BY WRONG STAND OR INERTIA OF THE REVENUE AUTHORITIES IN THE OTHER ASSESSMENT YEARS. 5. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND HAVING CONSIDERED THE MATERIAL ON RECORD, WE FIND THAT THE PLEA OF THE LEARNED COUNSEL IS INDEED WELL TAKEN. ONCE A WORKING CAPITAL ADJUSTM ENT IS HELD TO BE APPLICABLE FOR EARLIER AS ALSO SUBSEQUENT YEARS, THERE CANNOT BE ANY GOOD REASON TO DECLINE THE SAME FOR THIS PARTICULAR ASSESSMENT YEAR. WE HAVE NOTED THAT IN THE ASSESSMENT YEAR 2011 - 12, ON MATERIALLY IDENTICAL FACTS, THE DRP HAS HELD T HAT, FOLLOWING DECISION OF A COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SUNLIFE INDIA SERVICE CENTRE PVT LTD VS DCIT [(2015) TII - 420 - ITST - DEL - TP] , THAT THE WORKING CAPITAL ADJUSTMENT IS REQUIRED TO BE GIVEN IN ACCORDANCE WITH THE DECISION SO RELIED U PON. IN THIS VIEW OF THE MATTER, AND THE MATTER SO RECEIVING FINALITY IN ASSESSEE S OWN CASE, WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW TAKEN BY THE COORDINATE BENCH IN THE CASE OF SUNLIFE INDIA (SUPRA). THE TPO IS ACCORDINGLY D IRECTED TO GIVE THE SAME RELIEF IN THIS ASSESSMENT YEAR AS WELL, AND THE OBSERVATIONS MADE BY THE DRP IN THE ASSESSMENT YEAR 2011 - 12 WILL APPLY MUTATIS MUTANDIS IN THIS ASSESSMENT YEAR AS WELL. AS REGARDS EX CLUSION OF VITL, RESPECTFULLY FOLLOWING THE BINDI NG VIEWS OF HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS (SUPRA), WE HAVE TO HOLD THAT THE BUSINESS MODEL OF THE VITL BEING UNIQUE AND INCOMPARABLE WITH THAT OF THE I.T.A. NO.4504/DEL/13 ASSESSMENT YEAR: 2006 - 07 PAGE 5 OF 5 ASSESSEE, VITL IS REQUIRED TO BE EXCLUDED FROM THE LIST OF COMPARAB LES. THE PECULIARITIES OF VITL, AS A COMPARABLE, HAVE ALSO BEEN NOTED BY A SERIES OF DECISIONS OF THE COORDINATE BENCHES AS WELL. IN VIEW OF THESE DISCUSSIONS, VITL IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THE TPO SHALL RECOMPUTE THE ALP IN THE LIGHT OF THE ABOVE DIRECTIONS. THE PLEA OF THE ASSESSEE IS UPHELD ON BOTH THE COUNTS. 6. IN VIEW OF THE ABOVE DISCUSSIONS, AND AS T HE TRANSACTION VALUE IS CLAIMED TO BE WELL BELOW THE ALP IN THE EVENT OF THE TWO PLEAS SET OUT ABOVE BEING UPHELD, WE S EE NO NEED TO DEAL WITH THE OTHER ISSUES RAISED IN THIS APPEAL AT THIS STAGE. THESE ASPECTS OF THE MATTER ARE WHOLLY ACADEMIC AS ON NOW. 7. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 25 TH JULY , 2016. SD/ - SD/ - BEENA A. PILLAI PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) DATED: 2 5 TH DAY OF JULY , 2016. COPIES TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPA RTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI