ITO, Bangalore V. M/s Nextlink India Pvt. Ltd., Bangalore

ITA 454/BANG/2011

• Counselvise Citation: 45421114 RSA 2011
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 11-07-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 21-04-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: FARHAT HUSSAIN QURESHI
• Assessee Lawyers: SRINIVASAN
• Keywords: Transfer pricing; International transaction; Retrospective amendment
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SMT. P MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NO.4 54/BANG/2011 (ASST. YEAR - 2005-06) THE INCOME-TAX OFFICER, WARD-12(1), BANGALORE. . APPELLANT PAN AAACN 8528M. VS. M/S NEXTLINX INDIA PVT. LTD., NITON, NO.11, PALACE ROAD, BANGALORE-560 052. . RESPONDENT APPELLANT BY : SHRI FARHAT HUSSAIN QURESHI, CI T RESPONDENT BY : SHRI SRINIVASAN, C.A DATE OF HEARING : 03-10-2012 DATE OF PRONOUNCEMENT : -10-2012 O R D E R PER P MADHAVI DEVI, JUDICIAL MEMBER : THIS APPEAL IS FILED BY THE REVENUE. THE RELEVANT ASSESSMENT YEAR IS 2005-06. THE APPEAL IS DIRECTED AGAINST TH E ORDER OF THE COMMISSIONER OF INCOME-TAX - (APPEALS) IV AT BANGA LORE DATED ITA NO. 454/B/11 2 19.01.2011. THE APPEAL ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME-TAX ACT, 1961. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: I. THE CIT(A) ERRED IN DIRECTING THE AO TO EXCLUDE THE COMMUNICATION EXPENSES AMOUNTING TO RS.10,05,350/-, TRAVEL AND ONSITE EXPENSES AMOUNTIN G TO RS.4,01,009/- AND SUBSCRIPTION FEES AMOUNTING TO RS.61,905/- FROM TOTAL TURNOVER FOR THE PURPOSES OF COMPUTATION OF DEDUCTION U/S 10A OF THE IT ACT, 196 1. II. THE CIT(A) ERRED IN REJECTING VISHAL INFORMATION TECHNOLOGY AND NUCLEAR NETSOFT AND GIS AS COMPARABLES STATING THAT THESE COMPANIES EARNED SUP ER PROFITS WITHOUT MENTIONING THE BENCH MARK FOR PROFITABILITY ABOVE WHICH A COMPANY CAN BE CONSIDER ED AS EARNING SUPER PROFITS IN THE IT ENABLED SERVICE INDUSTRY IN WHICH THE TAX PAYER IS OPERATING. III. THE CIT(A) ERRED IN REJECTING VISHAL INFORMATION TECHNOLOGY AND NUCLEAR NETSFOT AND GIS LTD., AS COMPARABLES HOLDING THAT THESE ARE SUPER P ROFIT COMPANIES WITHOUT MENTIONING ANY PECULIAR ECONOMIC CIRCUMSTANCES THAT RESULTED IN SO CALLED SUPER PROF ITS, ITA NO. 454/B/11 3 WHEN THE COMPANIES ARE FUNCTIONALLY SIMILAR TO THE ASSESSEE. IV. THE CIT(A) ERRED IN ALLOWING ADHOC DEDUCTION OF 2% FROM ARITHMETICAL MEAN OF ALP DETERMINED AFTER EXCLUDING THREE COMPARABLE CASES O N THE GROUND THAT NEXTLINX, USA, AN ASSOCIATE ENTERPR ISE OF THE ASSESSEE HAS INCURRED LOSSES IN THE YEARS 20 02, 2003 AND 2004, WHICH IN FACT WOULD PROVE THAT THE ASSESSEES PRICING OF THE INTERNATIONAL TRANSACTION IS NOT GUIDED PURELY BY COMMERCIAL CONSIDERATIONS AND AS A N INDEPENDENT COMPANY. V. THE CIT(A) ERRED IN ALLOWING A STANDARD DEDUCTION OF 5% FROM THE ARITHMETICAL MEAN PRICE DETERMINED AFTER EXCLUDING THREE COMPARABLES, BASED ON THE JUDGMENT OF THE HONBLE ITAT IN SAP LABS INDIA PVT. LTD., IN ITA NO.298/418/BANG/2008 WITHOUT APPRECIATING THE FACT THAT THE DEPARTMENT HAS ASSAI LED THE SAID ITATS ORDER BEFORE THE HONBLE HIGH COURT IN AN APPEAL U/S 260A. VI. THE CIT(A) ERRED IN CONCLUDING THAT ALP ADJUSTMENT IS TO BE MADE ONLY AFTER ALLOWING 5% FRO M THE ARITHMETICAL MEAN PRICE BASED ON THE DECISION O F THE HONBLE ITAT IN SAP LABS INDIA PVT. LTD. IN ITA NO.398/418/BANG/2008, EVEN WHEN THE PRICE CHARGED B Y ITA NO. 454/B/11 4 THE ASSESSEE FALLS BEYOND + 5% FROM THE ARITHMETICAL MEAN PRICE. VII. WITHOUT PREJUDICE TO THE GROUNDS MENTIONED IN 3 & 4 ABOVE, THE LD. CIT(A) IS NOT JUSTIFIED IN TAKING 0.19% TOWARDS WORKING CAPITAL ADJUSTMENT AS ADOPTED BY THE TPO FOR NINE COMPARABLES WITHOUT REVISING TH E WORKING CAPITAL ADJUSTMENT DOWNWARD AFTER EXCLUSION OF 3 COMPARABLES FOR WORKING OUT REVISED PLI. 3. AS REGARDS GROUND NO.1, WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF TATA ELXSI AND THE CIT(A) HAS FOLLOWED THE SAME IN GRA NTING RELIEF TO THE ASSESSEE. IN VIEW OF THE SAME, WE DO NOT SEE ANY R EASON TO INTERFERE WITH THE ORDER OF THE CIT(A) ON THIS ISSUE. THIS GR OUND OF APPEAL IS ACCORDINGLY REJECTED. 4. COMING TO THE GROUNDS NO.2 AND 3, THE BRIEF FACT S OF THE CASE ARE THAT THE ASSESSEE COMPANY, WHICH IS A 100% EXPO RT ORIENTED UNIT, IS ENGAGED IN SOFTWARE DEVELOPMENT, RENDERING SERVI CES EXCLUSIVELY TO ITS HOLDING COMPANY, M/S NEXTLINX CORPORATION, USA. IT FILED ITS RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR. AS THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS WITH IT S HOLDING COMPANY, ITA NO. 454/B/11 5 ITS ASSOCIATED ENTERPRISE, A REFERENCE U/S 92CA OF THE INCOME-TAX ACT WAS MADE TO THE TPO TO DETERMINE THE ARMS LENGTH PR ICE FOR THE INTERNATIONAL TRANSACTIONS. THE TPO HAS REJECTED S OME OF THE COMPARABLES ADOPTED BY THE ASSESSEE AND AFTER MAKIN G A SEARCH ON THE CAPITA-LINE AND PROWESS DATA-BASE HAS ADOPTED CERTAIN OTHER COMPANIES AS COMPARABLES AND HAS DETERMINED THE ALP . THE AO MADE THE ADJUSTMENT ACCORDINGLY. 5. AGGRIEVED BY THE SAID ADJUSTMENT, THE ASSESSEE P REFERRED AN APPEAL BEFORE THE CIT(A). THE CIT(A) EXCLUDED THRE E COMPANIES I.E 1) VISHAL INFORMATION TECHNOLOGY LTD. 2) NUCLEAR NE TSOFT & GIS (INDIA) LTD. 3) TRANSWORKS INFORMATION SERVICES LTD ., FROM THE LIST OF COMPARABLES HOLDING THAT VISHAL INFORMATION TECHNOL OGY LTD. AND NUCLEAR NETSOFT & GIS (I) LTD., ARE SUPER PROFIT M AKING COMPANIES, WHILE TRANSWORKS INFORMATION SERVICES LTD. IS HAVIN G VERY LOW MARGIN. 6. AGGRIEVED BY THE EXCLUSION OF THESE COMPANIES FR OM THE LIST OF COMPARABLES, THE REVENUE IS IN APPEAL BEFORE US. ITA NO. 454/B/11 6 7. THE LEARNED DR, FARHAT HUSSAIN QURESHI, SUBMITT ED THAT THE EXCLUSION OF THE FIRST TWO OF THE ABOVE COMPANIES F ROM THE LIST OF COMPARABLES HOLDING THAT THEY ARE SUPER PROFIT COMP ANIES IS ERRONEOUS AS NO PECULIAR ECONOMIC CONDITIONS THAT HAVE RESULT ED IN SO CALLED SUPER PROFITS AS MENTIONED BY THE CIT(A) ARE MENTIO NED BEFORE THEIR EXCLUSION. HE SUBMITTED THAT NO BENCH MARKING FOR SUPER PROFIT MAKING COMPANIES IS PRESCRIBED BY THE LAW. ACCORDI NG TO HIM, AS LONG AS TWO COMPANIES ARE FUNCTIONALLY SIMILAR, THE Y ARE TO BE CONSIDERED AS COMPARABLES UNLESS IT IS PROVED THAT CERTAIN CIRCUMSTANCES INFLUENCING THE PROFIT MAKING CAPACIT Y OF THE SAID COMPANY EXIST AND ARE DISTINGUISHABLE FACTORS DEMAN DING SUCH EXCLUSION. HE SUBMITTED THAT THE ASSESSEE HAS A NE T MARGIN OF 13%, WHILE THE TPO HAS ARRIVED AT NET MARGIN OF 24% AND THE NET PROFIT MARGIN OF VISHAL INFORMATIONAL TECHNOLOGY AND N UCLEAR NETSOFT& GIS (I) LTD., IS AROUND 40% WHICH CANNOT BE SAID TO BE EXTRAORDINARILY HIGH. SIMILARLY, HE SUBMITTED THAT THE LOWER PROFI T MARGIN OF 2.16% OF TRANSWORKS INFORMATION SERVICES ALSO CANNOT BE EXCL UDED FOR THE ABOVE REASONS. 8. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, SUBMITTED THAT VISHAL INFORMATION TECH. THOUGH IS E NGAGED IN THE ITA NO. 454/B/11 7 INFORMATION TECHNOLOGY ENABLED SERVICES, IS OUT SOU RCING ITS WORK AND HAS AROUND 700 VENDORS, WHICH CLEARLY SHOWS THA T THOUGH THE SERVICES RENDERED BY TWO COMPANIES ARE THE SAME, TH E METHOD OF RENDERING SUCH SERVICES IS TOTALLY DIFFERENT AND CA NNOT BE SAID TO BE COMPARABLE. AS REGARDS NUCLEAR NETSOFT, HE SUBMITT ED THAT THE DATA AVAILABLE FOR THIS COMPANY IS OF SUBSEQUENT YEARS O NLY WHILE ONLY CONTEMPORARY DATA IS TO BE CONSIDERED FOR THE PURP OSES OF MAKING THE TRANSFER PRICING STUDY. HE SUBMITTED THAT THE TPO HAS CONSIDERED THE SUBSEQUENT YEAR DATA OF THIS COMPARABLE WHICH, ACC ORDING TO HIM, IS NOT TENABLE AND HENCE CIT(A) HAS RIGHTLY EXCLUDED T HE SAME. THUS ACCORDING TO HIM, THESE TWO COMPANIES HAVING SUPER PROFITS AND ALSO IRRELEVANT DATA HAVE TO BE EXCLUDED FROM THE LIST O F COMPARABLES. FOR SIMILAR REASONS HE SUPPORTED THE ORDER OF THE CIT(A ) EXCLUDING THE TRANSWORKS INFORMATION SERVICES LTD., ALSO FROM THE LIST OF COMPARABLES. 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDE RED THEIR RIVAL CONTENTIONS, WE FIND THAT THE MUMBAI TRIBUNAL IN TH E CASE OF M/S MEARSK GLOBAL SERVICES (I) PVT. LTD., IN ITA NO.377 4/MUM/2011, ORDERS DATED 9.11.2011 HAS HELD THAT VISHAL INFORM ATION TECHNOLOGY ITA NO. 454/B/11 8 BY OUTSOURCING MOST OF ITS WORK HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES WHERE THE ASSESSEE WAS CARRYING OUT THE WORK BY ITSELF. IN THE CASE BEFORE US ALSO THE ASSESSEE WAS ALSO CA RRYING OUT ITS WORK BY ITSELF. SO RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE FINDING OF THE CIT(A) THAT VISHAL INFORMATION TECHNOLOGY CA NNOT BE CONSIDERED AS A COMPARABLE. HOWEVER, AS REGARDS NU CLEAR NETSOFT BEING EXCLUDED FROM THE LIST OF COMPARABLES IS CONC ERNED, WE FIND THAT CIT(A) HAS RELIED UPON THE ORDERS OF THE TRIBUNAL, WHEREIN A CATENA OF DECISIONS, IT WAS HELD THAT SUPER PROFIT MAKING COM PANIES ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THE WORD SUPER IS A SUPERLATIVE WORD WHICH DENOTES THAT IT IS SOMETHING EXTRA ORDINARY I.E THE PROFIT WHICH IS FAR ABOVE WHAT THE INDUSTRY IN GENERAL IS MAKING. IN ALL THE CASES WHERE THESE SUPER PROFIT MAKING CO MPANIES WERE DIRECTED TO BE EXCLUDED, THE TPO WAS COMPARING THE CASES LIKE INFOSYS, WIPRO ETC., WHERE THE TURNOVER WAS MORE TH AN 10 TIMES OF THE ASSESSEE AND THE PROFIT MARGIN WAS ABNORMALLY HIGH. THE NET PROFIT OF NUCLEAR NETSOFT WAS 40% WHICH CANNOT BE SAID TO BE SUPER PROFIT MAKING COMPANY. THE ASSESSEES CONTENTION IS THAT ANY MARGIN ABOVE THE ASSESSEES MARGIN HAS TO BE IGNORED CANNOT BE A CCEPTED. THE NET MARGIN OF 24% WAS ARRIVED AT AFTER TAKING INTO ACCO UNT BOTH 40% AND ALSO 2% WHICH IS LOWEST IN THE RELEVANT INDUSTRY. 40% PROFIT IN THE ITA NO. 454/B/11 9 ITES INDUSTRY CANNOT BE HELD TO BE EXTRA ORDINARY O R SUPER PROFIT. IN VIEW OF THE SAME, WE HOLD THAT THE NET MARGIN OF NU CLEAR NETSOFT HAS TO BE CONSIDERED. SIMILARLY, THE NET MARGIN OF TRA NSWORK INFORMATION SERVICES LTD., ALSO HAVE TO BE CONSIDERED FOR THE P URPOSE OF COMPUTING THE ALP OF THE INTERNATIONAL TRANSACTION. THIS GRO UND IS ACCORDINGLY PARTLY ALLOWED. 10. AS REGARDS GROUND NO.4, THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESEE HAD SUBMITTED BEFORE THE CIT(A) THAT THE HO LDING COMPANY OF THE ASSESSEE IN USA WAS INCURRING LOSSES FOR THE PA ST THREE YEARS AND AFTER CONSIDERING THE SAME, THE CIT(A) HAS ALLOWED 2% DEDUCTION FROM THE ALP AFTER EXCLUDING THE 3 COMPARABLE CASES . THE GRIEVANCE OF THE REVENUE IS THAT SUCH DEDUCTION IS NOT GUIDED BY COMMERCIAL CONSIDERATIONS OR GUIDELINES ISSUED BY THE DEPARTME NT, THEREFORE, SUCH DEDUCTION IS NOT CALLED FOR. 11. THE LEARNED AR SUPPORTED THE ORDER OF THE CIT(A ). 12. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS, WE FIND THAT THE ADJUSTMENTS ARE TO BE MADE TO THE ALP HAVING REGARD TO ITS PROFIT MAKING CAPACITY IN INDI A COMPARED TO THE ITA NO. 454/B/11 10 COMPARABLE COMPANIES. THE FACTOR OF LOSS IN THE P ARENT COMPANY WOULD NOT BE A GUIDING FACTOR FOR MAKING ANY ADJUST MENT TO THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. IF THE PARENT COMPANY IS MAKING ANY LOSSES, IT IS FOR THE SAID COMPANY TO CL AIM THE LOSSES IN ACCORDANCE WITH THE LAWS OF THE COUNTRY IN WHICH IT IS TAXABLE. THE ASSESSEE CANNOT BE GIVEN ANY DEDUCTION FOR SUCH AN EVENT AND THE CIT(A) HAS ERRED IN GIVING SUCH A DEDUCTION. 13. IN THE RESULT, THIS GROUND OF APPEAL IS ALLOWED . 14. AS REGARDS GROUNDS NO. 5 AND 6 RELATING TO ALL OWING OF STANDARD DEDUCTION OF 5% FROM ALP, BY FOLLOWING THE DECISION OF ITAT IN THE CASE OF M/S SAP LAB INDIA PVT. LTD., RE PORTED IN ITA 398 OF 2008, BANGALORE, WE FIND THAT THIS ISSUE IS NOW SETTLED BY THE RETROSPECTIVE AMENDMENT OF THE PROVISION BY THE FIN ANCE ACT OF 2012. IN VIEW OF THE SAME, THESE TWO GROUNDS OF APPEAL AR E ALLOWED AND THE AO IS DIRECTED TO MAKE THE ADJUSTMENT IN ACCORDANCE WITH LAW. 15. GROUND NO.7 IS RELATING TO THE WORKING CAPITAL ADJUSTMENT MADE BY THE TPO FOR 9 COMPARABLES. IT IS SUBMITTED BY T HE LEARNED DR THAT THE CIT(A) EVEN AFTER EXCLUDING THE 3 COMPARABLE CO MPANIES FROM THE ITA NO. 454/B/11 11 LIST OF COMPARABLES HAS ADOPTED THE WORKING CAPITAL ADJUSTMENT OF THE 9 COMPANIES, WHICH IS ERRONEOUS. AS THIS GROUND OF APPEAL IS DEPENDENT UPON THE RELIEF GIVEN BY US IN GROUNDS NO .2 AND 3, WE DIRECT THE AO TO MAKE THE WORKING CAPITAL ADJUSTMEN T AFTER TAKING INTO CONSIDERATION THE 8 COMPARABLES AND EXCLUDING THE V ISHAL INFORMATION TECHNOLOGY FROM THE LIST OF COMPARABLES. THIS GROU ND OF APPEAL IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 16. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH OCT, 2012. SD/- SD/- (JASON P BOAZ) (MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER VMS. BANGALORE, DATED : /10/2012 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER SR. PRIVATE SECRETA RY, ITAT, BANGALORE.