DCIT, Bangalore V. M/s C - Cube Solutiions Pvt. Ltd., Bangalore

ITA 475/BANG/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5035 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 10 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 17-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER IT(TP)A NO.475/BANG/2016 ASSESSMENT YEAR : 2011-12 DY. COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), 2 ND FLOOR, BMTC BUILDING, KORAMANGALA, BANGALORE. VS. M/S. C-CUBE SOLUTIONS PVT. LTD., NO.3 & 4, VENKATAREDDY LAYOUT, OFF 80 FEET ROAD, KORAMANGALA, BANGALORE 560 095. PAN : AABCC 4198 F REVENUE BY : SHRI. C. H. SUNDAR RAO, CIT-DR-I ASSESSEE BY : NONE DATE OF HEARING : 18.12.2018 DATE OF PRONOUNCEMENT : 06.02.2019 O R D E R PER JASON P. BOAZ, ACCOUNTANT MEMBER THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE FINAL ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2011-12, PASSED U/S 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) VIDE ORDER DATED 18.01.2016, PURSUANT TO THE DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL, BANGALORE (DRP), U/S 144C(5) OF THE ACT ON 29.12.2015. IT(TP)A NO. 475/BANG/2016 PAGE 2 OF 9 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE AS UNDER: 2.1 THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF CUSTOMER FOCUS SERVICES LLC USA AND PROVIDES BACK OFFICE OPERATIONS FOR ITS ASSOCIATED ENTERPRISES (AE) I.E., IN THE NATURE OF IT ENABLED SERVICES (ITES). FOR ASSESSMENT YEAR 2011-12, THE ASSESSEE FILED ITS RETURN ON 31.03.2012 DECLARING INCOME OF RS.1,79,52,549/-. THE CASE WAS TAKEN UP FOR SCRUTINY FOR THIS ASSESSMENT YEAR AND THE ASSESSING OFFICER (AO) MADE A REFERENCE U/S 92CA OF THE ACT TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE, AS MENTIONED IN THE 92CE REPORT. AFTER EXAMINING THE ASSESSEES TP DOCUMENTATION, THE TPO, IN HIS ORDER UNDER SECTION 92CA OF THE ACT DATED 12.01.2015, PROPOSED A TP ADJUSTMENT OF RS.3,29,97,629/- IN RESPECT OF THE ITES SEGMENT OF THE TAX PAYERS INTERNATIONAL TRANSACTIONS. THE AO ACCORDINGLY COMPLETED THE DRAFT ORDER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 144C OF THE ACT VIDE ORDER DATED 17.03.2015 WHEREIN THE ASSESSEES INCOME WAS DETERMINED AT RS.5,19,03,293/-; WHICH, INTER ALIA, INCLUDED THE TP ADJUSTMENT OF RS.3,29,97,629/-. 2.2 AGGRIEVED BY THE DRAFT ORDER OF ASSESSMENT DATED 17.03.2015 FOR ASSESSMENT YEAR 2011-12, THE ASSESSEE FILED ITS OBJECTIONS THERETO BEFORE THE DRP. THE DRP ISSUED ITS DIRECTIONS THEREON UNDER SECTION 144C(5) OF THE ACT ON 29.12.2015 ALLOWING THE ASSESSEE PARTIAL RELIEF, WHEREBY, CONSEQUENTLY, THE TP ADJUSTMENT WAS REDUCED FROM RS.3,29,97,629/- TO RS.2,47,93,726/-. THE FINAL ORDER OF ASSESSMENT WAS IT(TP)A NO. 475/BANG/2016 PAGE 3 OF 9 CONCLUDED UNDER SECTION 143(3) R.W.S. 144C OF THE ACT VIDE ORDER DATED 18.01.2016. 3. REVENUE, BEING AGGRIEVED BY THE FINAL ORDER OF ASSESSMENT DATED 18.01.2016 FOR ASSESSMENT YEAR 2011-12, HAS PREFERRED THIS APPEAL WHEREIN IT HAS RAISED THE FOLLOWING GROUNDS: 1. APPLICATION OF ONSITE REVENUE FILTER: I) IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP ERRED IN HOLDING THAT THE, M/S ACROPETAL TECHNOLOGIES LTD. CANNOT BE TAKEN AS COMPARABLE, WHEN IT SATISFIES ALL THE QUALITATIVE AND QUANTITATIVE FILTERS ADOPTED BY THE TPO. II) THE HON'BLE DRP ERRED IN APPLYING 'ONSITE REVENUE FILTER' WITHOUT APPRECIATING THE FACT THAT THE FUNCTION CARRIED OUT IS 'SOFTWARE DEVELOPMENT' IRRESPECTIVE OF WHETHER ONSITE OR OFFSHORE. III) THE HON'BLE DRP ERRED IN EXCLUDING M/S ACROPETAL TECHNOLOGIES ON THE GROUND THAT THEY HAVE SIGNIFICANT ONSITE REVENUE WITHOUT APPRECIATING THE FACT THAT ONSITE DEVELOPMENT OF SOFTWARE ENTAILS MORE COST AND THEREBY RESULTS IN LOWER PROFIT MARGINS. IV) THE HON'BLE DRP ERRED IN SEEKING EXACT COMPARABILITY WHILE SEARCHING FOR COMPARABLE COMPANIES OF THE ASSESSEE UNDER TNMM METHOD WHEREAS REQUIREMENT OF LAW AND INTERNATIONAL JURISPRUDENCE REQUIRE SEEKING SIMILAR COMPARABLE COMPANIES. 2. M/S. JEEVAN SCIENTIFIC TECHNOLOGY LIMITED. A) THE HON'BLE DRP ERRED IN FACTS AND LAW IN EXCLUDING THE COMPANY AS A COMPARABLE, ON THE GROUND OF FAILING THE SERVICE INCOME FILTER, WHEN ONLY THE SEGMENTAL RESULTS HAVE BEEN CONSIDERED FOR COMPARABILITY B) THE HON'BLE DRP ERRED IN APPRECIATING THE FACT THAT WHEN SEGMENTAL RESULTS ARE AVAILABLE AND CONSIDERED FOR COMPARABILITY, THE APPLICATION OF SERVICE INCOME TO TOTAL INCOME FILTER DOES NOT ARISE C) THE HON'BLE DRP ERRED IN SEEKING EXACT COMPARABILITY WHILE SEARCHING FOR COMPARABLE COMPANIES OF THE ASSESSEE UNDER TNMM METHOD WHEREAS REQUIREMENT OF LAW AND INTERNATIONAL JURISPRUDENCE REQUIRE SEEKING SIMILAR COMPARABLE COMPANIES. IT(TP)A NO. 475/BANG/2016 PAGE 4 OF 9 4. GROUND NO. 1 (I TO IV) APPLICATION OF ONSITE REVENUE FILTER M/S. ACROPETAL TECHNOLOGIES LTD., 4.1 IN THESE GROUNDS (SUPRA), REVENUE CONTENDS THAT THE DRP ERRED IN EXCLUDING ACROPETAL TECHNOLOGIES LTD., (IN SHORT ACROPETAL) FROM THE LIST OF COMPARABLES WHEN IT SATISFIES ALL THE QUALITATIVE AND QUANTITATIVE FILTERS ADOPTED BY THE TPO. ACCORDING TO THE LEARNED DR, THE DRP ERRED BY APPLYING THE ON-SITE FILTER TO EXCLUDE ACROPETAL, ON THE GROUND THAT IT HAS SIGNIFICANT ON-SITE REVENUES. IT IS ALSO ALLEGED THAT THE DRP ERRED IN ATTEMPTING TO CHOOSE EXACT COMPARABLES UNDER TNMM, WHERE SIMILAR COMPARABLES ARE SUFFICIENT. 4.2 PER CONTRA, THE LEARNED AR FOR THE ASSESSEE SUPPORTED THE ORDERS OF THE DRP IN EXCLUDING ACROPETAL FROM THE LIST OF COMPARABLES. THE LEARNED AR DREW THE ATTENTION OF THE BENCH TO THE DRPS ORDER WHERE ACROPETALS COMPARABILITY WAS CONSIDERED TO DRIVE HOME ITS POINT THAT REVENUES GROUNDS/AVERMENTS WERE MISPLACED; AS THE DRP HAD EXCLUDED ACROPETAL ON GROUNDS ON FUNCTIONAL COMPARABILITY; FOR THE REASON THAT ACROPETAL PERFORMS ENGINEERING DESIGN SERVICES, AND THEREFORE IT IS NOT COMPARABLE WITH THE ASSESSEE IN THE CASE ON HAND WHO PERFORMS ONLY ITES/BPO FUNCTIONS. IT WAS PRAYED THAT IN THE LIGHT OF THE ABOVE, REVENUES GROUND NO.1 (I TO IV) BE DISMISSED. 4.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD REGARDING THE COMPARABILITY OF ACROPETAL TO THE ASSESSEE IN THE CASE ON HAND. THE DRP IN ITS ORDER, IT(TP)A NO. 475/BANG/2016 PAGE 5 OF 9 WHILE DECIDING THE COMPARABILITY OF ACROPETAL TO THE ASSESSEE IN THE CASE ON HAND, AT PAGES 5 AND 6 THEREOF, HAS HELD AS UNDER: ACROPETAL TECHNOLOGIES LTD HAVING CONSIDERED THE SUBMISSIONS, ON PERUSAL OF THE ANNUAL REPORT, IT IS NOTICED BY US THAT THE ASSESSING OFFICER HAS CONSIDERED THE REVENUE FROM THE ENGINEERING DESIGN SEGMENT. HON'BLE ITAT, BANGALORE IN IT(TP)/A/1678/BANG/2012 IN THE CASE OF GLOBAL E BUSINESS OPERATIONS, DIRECTED TO EXCLUDE THE ABOVE COMPANY BY OBSERVING THAT 'WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNED COUNSEL FOR ASSESSEE, ON PERUSAL OF NOTE NO.15 OF NOTES TO ACCOUNTS, WHICH GIVES SEGMENTAL REVENUE OF THIS COMPANY , IT IS CLEAR THAT THE MAJOR SOURCE OF THE INCOME FOR THIS COMPANY IS FROM PROVIDING ENGINEERING DESIGN SERVICES AND INFORMATION TECHNOLOGY SERVICES. THE FUNCTION PERFORMED BY THE ENGINEERING DESIGN SERVICES OF THE COMPANY CANNOT BE CONSIDERED AS COMPARABLE TO THE ITES/BPO FUNCTION PERFORMED BY THE ASSESSEE. THE PERFORMANCE OF THE ENGINEERING DESIGN SERVICES IS REGARDED AS PROVIDING HIGH END SERVICES AMONGST THE BPO WHICH REQUIRE HIGH SKILL WHEREAS THE SERVICES PERFORMED BY THE ASSESSEE ARE ROUTING LOW END ITES FUNCTION. WE THEREFORE HOLD THAT THIS COMPANY COULD NOT HAVE BEEN SELECTED AS COMPARABLE, ESPECIALLY WHEN IT PERFORMS ENGINEERING DESIGN SERVICES WHICH ONLY A KNOWLEDGE PROCESSING OUTSOURCING (KPO) WOULD DO AND NOT A BUSINESS PROCESSING OUTSOURCING (BPO).' SIMILAR VIEW WAS TAKEN BY HON'BLE BANGALORE ITAT IN THE CASE OF - SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD. VS. ITO (IT (TP) A NO. 1316/BANG/2012) , HELD THAT ACROPETAL CANNOT BE CONSIDERED AS COMPARABLE AS IT PERFORMS ENGINEERING DESIGN SERVICES ACCORDINGLY WE DIRECT THE ASSESSING OFFICER TO EXCLUDE THE COMPANY FROM THE COMPARABLES. IT(TP)A NO. 475/BANG/2016 PAGE 6 OF 9 4.3.2 ON A CAREFUL APPRAISAL OF MATERIAL ON RECORD AND THE DRPS ORDER (SUPRA), WE FIND THAT THE DRP HAS EXCLUDED ACROPETAL FROM THE LIST OF COMPARABLES ON THE GROUNDS OF IT BEING FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND AND NOT ON THE GROUND OF APPLICATION OF ON-SITE FILTER AS ALLEGED BY REVENUE IN THE GROUNDS RAISED (SUPRA). WE ALSO FIND THAT REVENUE IN THIS APPEAL HAS NEITHER CHALLENGED DRPS ACTION IN EXCLUDING ACROPETAL FROM THE LIST OF COMPARABLES ON GROUNDS OF NOT BEING FUNCTIONALLY COMPARABLE TO THE ASSESSEE NOR HAS REVENUE BEEN ABLE PLACE ON RECORD ANY FACTUAL EVIDENCE TO CONTROVERT DRPS FINDING THAT ACROPETAL IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE WHO IS ENGAGED IN PROVISION OF ITES/BPO SERVICES. IN THIS FACTUAL MATRIX OF THE CASE, AS DISCUSSED ABOVE, WE FIND NO MERIT IN THE GROUNDS RAISED BY REVENUE AND CONSEQUENTLY UPHOLD THE DRPS ORDER EXCLUDING ACROPETAL TECHNOLOGIES LTD., FROM THE LIST OF COMPARABLES AS IT IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. THEREFORE, GROUND NOS. 1 (I TO IV) IN REVENUES APPEAL ARE DISMISSED AS THEY ARE DEVOID OF ANY MERIT. 5. GROUND NO. 2 (A TO C) M/S. JEEVAN SCIENTIFIC TECHNOLOGY LTD., (JEEVAN) 5.1 IN THESE GROUNDS (SUPRA), REVENUE CONTENDS THAT THE DRP ERRED IN EXCLUDING JEEVAN FROM THE LIST OF COMPARABLES BY APPLYING THE SERVICE INCOME FILTER TO TOTAL INCOME, WHEN ONLY THE SEGMENTAL RESULTS HAVE BEEN CONSIDERED FOR COMPARABILITY. IT IS ALSO ALLEGED THAT THE DRP ERRED IN SEEKING EXACT COMPARABILITY FOR COMPARABLE COMPANIES TO THE ASSESSEE UNDER TNMM, WHEN ONLY SIMILAR COMPANIES ARE SUFFICIENT. THE LEARNED DR SUPPORTED THE GROUNDS RAISED AND PRAYED FOR INCLUSION OF THIS COMPANY, JEEVAN SCIENTIFIC TECHNOLOGY LTD., IN THE LIST OF COMPARABLES. IT(TP)A NO. 475/BANG/2016 PAGE 7 OF 9 5.2 PER CONTRA, THE LEARNED AR FOR THE ASSESSEE SUPPORTED THE ORDER OF DRP IN EXCLUDING THIS COMPANY FROM THE LIST OF COMPARABLES TO THE ASSESSEE IN THE CASE ON HAND. ACCORDING TO THE LEARNED AR, THE DRP HAS EXCLUDED THIS COMPANY (I) NOT ONLY BECAUSE OF THE ASSESSEES FAILING THE REVENUE EARNING FILTER OF 75% APPLIED BY THE TPO, BUT ALSO (II) BECAUSE OF HUGE FLUCTUATIONS IN THE MARGINS OF THE COMPANY OVER MANY YEARS AND (III) ALSO BECAUSE THERE IS NO FOREIGN EARNING IN RESPECT OF THE ERP SEGMENT, AND THERE WOULD BE LESS THAN 32.28% REVENUE RATIO EVEN IF THE BPO SEGMENT IS CONSIDERED. IT IS SUBMITTED THAT THIS COMPANY JEEVAN HAS ALSO BEEN EXCLUDED BY DRP ON ACCOUNT OF (I) HUGE FLUCTUATION IN THE PROFIT MARGINS OF THE COMPANY IN THE LAST FEW YEARS AND (II) FOR FAILURE ON THE 75% REVENUE EARNING FILTER APPLIED BY THE TPO WHICH HAVE NOT BEEN CHALLENGED BY REVENUE AND THEREFORE THIS COMPANY, JEEVAN HAS TO REMAIN EXCLUDED FROM THE LIST OF COMPARABLES TO THE ASSESSEE. 5.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND THAT THE DRP HAS DEALT WITH THE COMPARABILITY OF THE COMPANY JEEVAN AT PAGES 7 AND 8 OF ITS ORDER AND EXCLUDED IT FROM THE LIST OF COMPARABLES TO THE ASSESSEE, BY HOLDING AS UNDER: JEEVAN SCIENTIFIC TECHNOLOGY LTD: THE OBJECTION AGAINST THE WRONG PLI BECOMES ACADEMIC IN NATURE IN VIEW OF OUR FINDINGS IN THE SUBSEQUENT PARA WHEREIN THIS COMPANY HAS BEEN REJECTED ON FUNCTIONAL ANALYSIS. 2.6 GROUND OF OBJECTION 7: THE LEARNED TRANSFER PRICING OFFICER AND IN TURN THE ASSESSING OFFICER ERRED IN ITS FUNCTIONAL ANALYSIS OF JEEVAN SCIENTIFIC TECHNOLOGIES LTD, AND WENT ON TO WRONGLY CONSIDER THE SAME AS A COMPARABLE COMPANY. HAVING CONSIDERED THE SUBMISSIONS, IT IS NOTICED BY US FROM THE PERUSAL OF ANNUAL REPORT THAT THE FOREIGN EXCHANGE EARNINGS OF 79.21 LAKHS IS ONLY FROM BPO OPERATE AND THERE IS NO FOREIGN EXCHANGE EARNING IN IT(TP)A NO. 475/BANG/2016 PAGE 8 OF 9 RESPECT OF ERP SEGMENT. THEREFORE, THE ERP SEGMENTS CANNOT BE CONSIDERED AS IT DOES NOT HAVE ANY REVENUE FROM THE EXPORT. IT IS ALSO NOTICED BY US THAT THE ERP SEGMENT IS NOT OTHERWISE COMPARABLE TO THE FUNCTIONS OF THE ASSESSEE COMPANY. THE BPO SEGMENT ALONE CANNOT BE CONSIDERED AS COMPARABLE AS THE REVENUE TO THE TOTAL REVENUE RATIO IS ONLY 32.28%. IT IS ALSO NOTICED BY US THAT THERE IS A HUGE FLUCTUATION IN THE MARGIN OF THE COMPANY FROM F.Y. 2008-09 TO 2012-13 VIZ., IN BPO SEGMENT 15.66%, 18.22%, 6.24%, 14.42% AND (-)56,89%, WHICH INDICATE THAT CERTAIN PECULIAR CIRCUMSTANCES INFLUENCING THE PROFIT MARGIN OF THE COMPANY AND THE COMPANY FAILS THE REVENUE EARNING FILTER OF 75% APPLIED BY THE TPO, IN VIEW OF THE ABOVE DIFFERENCES, WE DIRECT THE A.O. TO EXCLUDE THE ABOVE COMPANY FROM THE COMPARABLES. 5.3.2 ON A CAREFUL CONSIDERATION OF THE DRPS ORDER AND THE FACTS ON RECORD, WE FIND THAT REVENUE HAS CHALLENGED THE EXCLUSION OF JEEVAN FROM THE LIST OF COMPARABLES TO THE ASSESSEE BY THE DRP ON GROUNDS OF APPLICATION OF SERVICE INCOME FILTER OF 75%; WHICH WAS INFACT A FILTER APPLIED BY THE TPO. APART FROM RAISING THIS GROUND (SUPRA), REVENUE HAS NOT PLACED ON RECORD ANY FACTUAL MATERIAL EVIDENCE TO CONTROVERT THE DRPS FINDING THAT THIS COMPANY JEEVAN HAD PASSED THE 75% REVENUE FILTER APPLIED BY THE TPO. EVEN OTHERWISE, THE DRP HAS, INTER ALIA, EXCLUDED JEEVAN ON GROUNDS OF ITS HUGE FLUCTUATING MARGINS OVER THE LAST FEW YEARS WHICH HAS NOT BEEN CHALLENGED BY REVENUE. IN THIS FACTUAL MATRIX OF THE CASE, AS DISCUSSED ABOVE, WE UPHOLD THE ACTION OF THE DRP OF EXCLUDING THIS COMPANY JEEVAN SCIENTIFIC TECHNOLOGY LTD., FROM THE LIST OF COMPARABLES FOR FAILING THE 75% REVENUE FILTER APPLIED BY THE TPO AND ON ACCOUNT OF ITS HUGELY FLUCTUATING MARGINS OVER THE LAST FEW YEARS WHICH INDICATE THAT THERE WERE CERTAIN PECULIAR CIRCUMSTANCES INFLUENCING THE PROFIT MARGINS OF THE COMPANY. CONSEQUENTLY, GROUNDS 2(A TO C) RAISED BY REVENUE (SUPRA) ARE DISMISSED. IT(TP)A NO. 475/BANG/2016 PAGE 9 OF 9 6. IN THE RESULT, THE ASSESSEES APPEAL FOR ASSESSMENT YEAR 2011-12 IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 06.02.2019 . SD/- SD/- ( N. V. VASUDEVAN ) (JASON P. BOAZ) VICE PRESIDENT ACCOUNTANT MEMBER BANGALORE. DATED: 06.02.2019. /NS/* COPY TO: 1. APPELLANTS 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.