ITO, V. Huwai Technology India Pvt. Ltd.,

ITA 459/BANG/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5295 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 1 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 02-05-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 03-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P K PRASAD
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI A.K. GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER IT(TP)A NO. 395/BANG/2013 ASSESSMENT YEAR: 2008-09 M/S. HUAWEI TECHNOLOGIES INDIA PVT. LTD., REGD. OFFICE: SYNO 37,46,45/3,45/4 ETC., KNO 1540, KUNDALAHALLI VILLAGE, BANGALORE 560 037. PAN: AAACH 8599L VS. THE INCOME TAX OFFICER, WARD 11(2), BANGALORE. APPELLANT RESPONDENT IT(TP)A NO. 459/BANG/2013 ASSESSMENT YEAR: 2008-09 THE INCOME TAX OFFICER, WARD 11(2), BANGALORE. VS. M/S. HUAWEI TECHNOLOGIES INDIA PVT. LTD., REGD. OFFICE: SYNO 37,46,45/3,45/4 ETC., KNO 1540, KUNDALAHALLI VILLAGE, BANGALORE 560 037. PAN: AAACH 8599L APPELLANT RESPONDENT IT(TP)A NOS. 395 & 459/BANG/2013 PAGE 2 OF 8 ASSESSEE BY : SHRI P.K. PRASAD, ADVOCATE REVENUE BY : MS. NEERA MALHOTRA, CIT(DR) DATE OF HEARING : 02.05.2017 DATE OF PRONOUNCEMENT : 31.05.2017 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 24.01.2013 OF CIT(A) FOR THE ASSESSMENT YEAR 2008-09. 2. THE ASSESSEE IS WHOLLY OWNED SUBSIDIARY OF HUAWEI T ECH. INVESTMENT COMPANY LIMITED (HUAWEI HONG KONG) WHICH IS IN TURN A SUBSIDIARY OF HUAWEI TECHNOLOGIES COMPANY LIMITED (HUAWEI CHINA ). THE ASSESSEE PROVIDED SOFTWARE DEVELOPMENT SERVICES TO ITS AE AT HONG KONG AS WELL AS CHINA UNDER THE MASTER SERVICES AGREEMENT ENTERE D INTO WITH THESE TWO COMPANIES. THE FINANCIAL RESULTS AND INTERNATI ONAL TRANSACTIONS REPORTED BY THE ASSESSEE ARE AS UNDER: FINANCIAL RESULTS DESCRIPTION SOFTWARE DEVELOPMENT SERVICES OPERATING REVENUE RS. 1,784,290,768/- OPERATING COST RS. 1,621,513,567/- OPERATING PROFIT (PBIT) RS.162,777,201/- OPERATING PROFIT TO COST RATIO 10.04% IT(TP)A NOS. 395 & 459/BANG/2013 PAGE 3 OF 8 INTERNATIONAL TRANSACTIONS 1. RECEIPTS FOR SOFTWARE DEVELOPMENT SERVICES RS. 1,784,290,768/- 2. PURCHASE OF FIXED ASSETS RS. 385,38,532 3. TO BENCH MARK ITS INTERNATIONAL TRANSACTION THE ASS ESSEE SELECTED 16 COMPANIES IN ITS TP STUDY ANALYSIS HAVING MEAN MARG IN AT 12%. THEREFORE, THE ASSESSEE CLAIMED ITS INTERNATIONAL T RANSACTIONS AT ARMS LENGTH BEING WITHIN THE TOLERANCE RANGE OF + 5% OF THE COMPARABLE PRICE. THE TPO REJECTED THE TP STUDY ANALYSIS AND CARRIED OUT A FRESH SEARCH. THE TPO SELECTED 20 COMPANIES IN THE FINAL SET OF C OMPARABLES HAVING MEAN MARGIN OF 23.65% AND AFTER ALLOWING WORKING CA PITAL ADJUSTMENT OF 1.87% THE ADJUSTED MEAN MARGIN WAS ARRIVED AT 21.78 %. ACCORDINGLY, THE TPO PROPOSED AN ADJUSTMENT U/S. 92CA OF RS. 19, 03,88,454/-. THE ASSESSEE CHALLENGED THE ACTION OF THE TPO BEFORE TH E CIT(A) AND DISPUTED THE FUNCTIONAL COMPARABILITY OF THE COMPANIES SELEC TED BY THE TPO. THE CIT(A) APPLIED TURNOVER FILTER OF RS. 1 CRORE TO 20 0 CRORES AND THEREBY EXCLUDED 7 COMPANIES FROM THE SET OF COMPARABLES SE LECTED BY THE TPO. THE CIT(A) HAS ALSO EXCLUDED ONE COMPANY ON THE GRO UND OF HIGH PROFIT MARGIN APART FROM 2 COMPANIES WERE FOUND AS FUNCTIO NALLY NOT COMPARABLE AND DIRECTED TO BE EXCLUDED. THUS THE C IT(A) REJECTED THE 10 COMPANIES FROM THE SET OF 20 SELECTED BY THE TPO. THEREFORE BOTH IT(TP)A NOS. 395 & 459/BANG/2013 PAGE 4 OF 8 ASSESSEE AS WELL AS REVENUE ARE AGGRIEVED BY THE OR DER OF CIT(A) ON THE ISSUE OF TRANSFER PRICING AND RAISED THE FOLLOWING GROUNDS. GROUNDS RAISED BY THE ASSESSEE:- IT(TP)A NOS. 395 & 459/BANG/2013 PAGE 5 OF 8 GROUNDS RAISED BY THE REVENUE:- IT(TP)A NOS. 395 & 459/BANG/2013 PAGE 6 OF 8 4. AS REGARDS THE TURNOVER FILTER OF RS. 1 CRORE TO 20 0 CRORES APPLIED BY THE CIT(A) WE FIND THAT THE TRIBUNAL HAS TAKEN A CONSIS TENT VIEW THAT APPLYING A TURNOVER FILTER OF A SLAB RS. 1 TO 200 C RORES IS NOT PROPER AS IT GIVES UNACCEPTABLE RESULTS. THEREFORE THE TRIBUNAL HAS CONSIDERED A TOLERANCE RANGE OF TURNOVER AS TEN TIMES OF TURNOVE R OF THE TESTED PARTY ON BOTH SIDES HIGHER AS WELL AS LOW. 5. AS REGARDS THE HIGH PROFIT MARGIN AS A GROUND FOR E XCLUSION OF A COMPARABLE COMPANY IT IS WELL SETTLED PROPOSITION T HAT HIGH PROFIT MARGIN OR LOSS CANNOT BE A GROUND OR CRITERIA FOR EXCLUSIO N OR INCLUSION OF A COMPANY IN THE SET OF COMPARABLE THOUGH AN ABNORMAL OR AN EXTRAORDINARY EVENT RESULTING IN ABNORMAL HIGH PROF IT CAN BE A CRITERIA FOR EXCLUSION OF A PARTICULAR COMPANY FROM THE SET OF C OMPARABLES. THEREFORE ABNORMAL CIRCUMSTANCES OR EXTRAORDINARY E VENT CAN BE A REASON FOR EXCLUSION AND NOT THE HIGH PROFIT MARGIN ALONE. 6. THE ASSESSEE IS SEEKING EXCLUSION OF 12 COMPANIES F ROM THE SET OF COMPARABLES SELECTED BY THE TPO WHEREAS THE REVENUE IS SEEKING RESTORATION OF THE COMPANIES WHICH WERE REJECTED BY THE CIT(A) AND PARTICULARLY BY APPLYING THE TURNOVER FILTER AND HI GH PROFIT MARGIN. THEREFORE EXCEPT TWO COMPANIES THE CIT(A) DID NOT E XAMINE THE FUNCTIONAL COMPARABILITY OF 8 COMPANIES REJECTED BY IT. HENCE IN THE FACTS IT(TP)A NOS. 395 & 459/BANG/2013 PAGE 7 OF 8 AND CIRCUMSTANCES OF THE CASE WE SET ASIDE THE ENTI RE ISSUE OF DETERMINATION OF ARMS LENGTH PRICE AND CONSEQUENTIA L TRANSFER PRICING ADJUSTMENT TO THE RECORD OF THE CIT(A) FOR DECIDING THE FUNCTIONAL COMPARABILITY OF ALL THE COMPANIES OBJECTED BY THE ASSESSEE. NEEDLESS TO SAY THE ASSESSEE BE GIVEN AN APPROPRIATE OPPORTUNIT Y OF HEARING BEFORE PASSING THE FRESH ORDER ON THIS ISSUE. 7. THE DEPARTMENT HAS ALSO RAISED THE ISSUE UNDER GROU ND NO. 7 REGARDING EXCLUSION OF THE EXPENDITURE INCURRED IN FOREIGN CU RRENCY FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION U/S. 10A OF THE ACT. WE HAVE HEARD THE LD. DR AS WELL AS LD . AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT THIS ISSUE IS COVERED BY THE DECISION OF HONBLE JURISDICTIONAL H IGH COURT IN CASE OF CIT VS TATA ELXSI LTD. (349 ITR 98). WE NOTE THAT THE CIT(A) HAS DECIDED THIS ISSUE BY FOLLOWING THE DECISION OF HON BLE JURISDICTIONAL HIGH COURT IN CASE OF CIT VS TATA ELXSI LTD. (SUPRA ). ACCORDINGLY WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED OR DER OF THE CIT(A) QUA THIS ISSUE THE SAME IS REJECTED. IT(TP)A NOS. 395 & 459/BANG/2013 PAGE 8 OF 8 8. IN THE RESULT THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES AND THE REVENUES APPEAL IS PARTLY ALLOWED FOR STATISTI CAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF MAY, 2017. SD/- SD/- (A.K. GARODIA) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 31 ST MAY, 2017. / MS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.