Digital Group Infotech Pvt.Ltd, Pune V. Deputy Commissioner of Income tax, Pune

ITA 475/PUN/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 9243 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 24-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.475/PUN/2017 / ASSESSMENT YEAR : 2012-13 DIGITAL GROUP INFOTECH PVT. LTD., PYRAMID SHAPE BUILDING, PLOT NO.5, RAJIV GANDHI INFOTECH PARK, MIDC, PHASE I, HINJEWADI, PUNE 411 057. PAN : AABCD8744J. . / APPELLANT V/S DY.COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE. . / RESPONDENT ASSESSEE BY : SHRI KISHOR PHADKE. REVENUE BY : SHRI RAJEEV KUMAR, CIT. / ORDER PER ANIL CHATURVEDI, AM : 1. THIS APPEAL FILED BY THE ASSESSEE FOR A.Y. 2012-13 IS EMANATING OUT OF THE ORDER DT.25.01.2017 PASSED U/S 143(3 ) R.W.S. 144C(13) OF THE ACT. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON R ECORD ARE AS UNDER :- 2.1 ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BUSINESS OF OFFSHORE DEVELOPMENT OF SOFTWARE. ASSESSEE FILED ITS RETUR N OF / DATE OF HEARING : 19.02.2018 / DATE OF PRONOUNCEMENT: 28.02.2018 2 INCOME FOR A.Y. 2012-13 ON 29.11.2012 DECLARING TOTAL INCOME OF RS.3,14,57,063/-. IT WAS NOTICED THAT ASSESSEE HAD ENTER ED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE S (A.ES) AMOUNTING TO RS.46,90,15,187/-. ACCORDINGLY, REFERENCE U/S 92CA(1) OF THE ACT WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) FOR COMPUTATION OF ARMS LENGTH PRICE (ALP) IN RELATION TO TH E INTERNATIONAL TRANSACTIONS. THEREAFTER, THE TPO VIDE ORDE R DT.29.01.2016 PASSED U/S 92CA(3) OF THE ACT DID NOT ACCEPT THE BENCH MARKING OF THE INTERNATIONAL TRANSACTIONS DONE BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES AND MADE AN UP WARD ADJUSTMENT OF RS.5,47,53,550/-. THE ASSESSEE WAS THEREFO RE VIDE SHOW CAUSE NOTICE DT.08.06.2013 ASKED TO SHOW CAUSE AS TO WHY THE INCOME NOT BE ENHANCED BY THE ADJUSTMENT AS SUGG ESTED BY TPO. ASSESSEE INTER-ALIA SUBMITTED THAT ASSESSEE DID NOT AGREE WITH THE PROPOSED ADDITION FOR THE REASONS SUBMITTED BY IT BEFORE TPO. AO THEREAFTER PASSED DRAFT ASSESSMENT ORDER U/S 143 R.W.S 144C(1) OF THE ACT VIDE ORDER DT.18.03.2016 AND DETERMINED THE TOTAL INCOME AT RS.8,69,19,540/-. AGGRIEVED WITH THE DRAFT ASSESSMENT ORDER PASSED BY AO, ASSESSEE CARRIED THE MATTER BEFORE THE DISPUTE RESOLUTION PANEL (DRP), WHO VIDE ORDER DT.17.11.2016 GAVE CERTAIN DIRECTIONS. PURSUANT TO THE DIR ECTIONS OF THE DRP, AO PASSED ORDER U/S 143(3) R.W.S. 144C(13) OF T HE ACT VIDE ORDER DT.25.01.2017 AND DETERMINED THE TOTAL INCOME AT RS.6,40,56,250/-. AGGRIEVED BY THE ORDER OF TPO, ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS : 3 1. GENERAL GROUNDS THE LEARNED DRP-3 MUMBAI (HEREINAFTER DRP) ERRED IN LAW AND FACTS IN DIRECTING AND THE LEARNED DCIT CIRCLE 1 (2) PUNE (HEREINAFTER' AO') ERRED IN LAW AND ON FACTS IN MAK ING THE ADDITIONS OF RS.3,22,90,259/- TO THE TAXABLE INCOME OF THE APPELLANT COMPANY. 2. TRANSFER PRICING RELATED GROUNDS (TOTAL ADDITION RS. 3,18,90,259) 2.1 THE LEARNED DRP HAS ERRED IN LAW AND ON FACTS IN CONFIRMING AND THE LEARNED AO/TPO ERRED IN MAKING A REFERENCE U/S.92CA(1) TO THE TPO FOR DECIDING ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE APPE LLANT, WITHOUT REACHING ANY OPINION ABOUT SITUATIONS SPECI FIED IN SECTION 92C(3) OF THE ITA, 1961. THE LEARNED AO OUG HT TO HAVE GRANTED A SPECIFIC HEARING TO THE APPELLANT BE FORE MAKING A REFERENCE TO THE LEARNED TPO IN THIS REGAR D. 2.2 THE LEARNED DRP HAS ERRED IN LAW AND ON FACTS IN CONFIRMING AND THE LEARNED AO/TPO ERRED IN HOLDING THAT ARM'S LENGTH PRICE ('ALP') OF THE SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE APPELLANT TO ITS AE PARTY SHOULD BE WORKED OUT BY CONSIDERING OP/TC MARGIN OF 18.54%, LEADING TO AN ADDITION OF RS.3,18,90,259/-. 2.3 THE LEARNED DRP AND LEARNED AO/TPO ERRED IN TREATING FOREIGN EXCHANGE GAIN OF RS 1,89,07,522 AS NON- OPERATIVE INCOME, NOT ELIGIBLE FOR COMPUTATION OF P ROFIT LEVEL INDICATOR (PLI) OF OP/TC OF THE APPELLANT COMPANY AND THUS REDUCING THE APPELLANT'S MARGIN TO 10.20% INSTEAD O F 15.93% . 2.4 THE LEARNED DRP AND LEARNED AO/TPO ERRED IN CONSIDERING ONLY SINGLE YEAR DATA OF THE EXTERNAL COMPARABLES INSTEAD OF MULTIPLE YEAR DATA USED BY T HE APPELLANT. 2.5 THE LEARNED DRP AND LEARNED AO/TPO ERRED IN LAW AN D ON FACTS IN KEEPING / SELECTING FOLLOWING COMPARABL E IN THE FINAL ARRAY OF COMPARABLES, FOR ONE OR THE OTHER RE ASONS - CYBERMATE INFOTEK LTD - INFOBEANS SYSTEMS PVT. LTD. - EZEST SOLUTIONS LIMITED - CYBERCOM DATAMATICS INFORMATION SOLUTIONS LTD. - THIRDWARE SOLUTIONS LTD. 2.6 THE LEARNED DRP AND LEARNED AO/TPO ERRED IN LAW AN D ON FACTS IN REJECTING FOLLOWING COMPARABLE, FOR FUN CTIONAL DIFFERENCES AND FOR OTHER REASONS- - DATAMATICS GLOBAL SERVICES LTD. - FIRSTOBJECT TECHNOLOGIES LTD. - OBJECTONE INFORMATION SYSTEMS LTD. 4 - R SYSTEMS INTERNATIONAL LTD. - TECHNOSOFT ENGINEERING PROJECTS LTD. 2.7 THE LEARNED DRP AND LEARNED AO/TPO ERRED IN LAW AN D ON FACTS IN NOT GRANTING ADJUSTMENT OF AROUND RS 3.50 CRORES IN RESPECT OF EXCESSIVE BENCHING COST INCURRED BY THE APPELLANT. 2.8 THE LEARNED DRP AND LEARNED AO/TPO ERRED IN LAW AN D ON FACTS IN NOT ACCEPTING ALTERNATIVE BENCHMARKING DONE BY CHANGING THE TESTED PARTY . 2.9 THE LEARNED DRP ERRED IN LAW AND ON FACTS IN SUSTA INING AND THE LEARNED AO/TPO ERRED IN PROPOSING ENHANCEME NT OF ALP OF INTERNATIONAL TRANSACTIONS OF THE APPELLANT WITHOUT APPRECIATING THAT THE OVERALL ADDITION OF RS. 3,18,90,259 WAS MORE THAN THE OFF-SHORE SEGMENTAL PROFITS OF TH E AE PARTY. 3. THE LEARNED DRP AND LEARNED AO/TPO ERRED IN LAW AND ON FACTS IN MAKING/SUSTAINING AD-HOC DISALLOWANCE O F RS.4,00,000 BEING 20% OF TRAVELLING & HOTEL EXPENSES OF DIRECTORS DEBITED TO P & L ACCOUNT AMOUNTING TO RS.19,98,034. 3. BEFORE US, AT THE OUTSET, LD.A.R. SUBMITTED THAT THOUGH THE ASSESSEE HAS RAISED VARIOUS GROUNDS BUT IF GROUND NO.2.3 RAISED BY THE ASSESSEE IS DECIDED IN FAVOUR OF THE ASSESSEE THE N THE TRANSACTION OF THE ASSESSEE WOULD BE AT ALP AND NO ADJ USTMENT WOULD BE REQUIRED AND THEREFORE THE OTHER GROUNDS RAISE D BY THE ASSESSEE WOULD BE RENDERED ACADEMIC. LD.D.R. DID NOT OBJE CT TO THE AFORESAID SUBMISSIONS OF LD.A.R. IN VIEW OF THE AFORESAID SUBMISSION OF LD.A.R., WE PROCEED TO FIRST DISPOSE OF GROUND NO.2.3. 4. DURING THE COURSE OF PROCEEDINGS BEFORE HIM, TPO NOT ICED THAT ASSESSEE HAD EARNED FOREIGN EXCHANGE GAINS OF RS.1,89,07,522/-. HE NOTICED THAT ASSESSEE HAD CONSIDERED THE AFORESAID GAINS AS OPERATIONAL INCOME AND WORKED OUT THE PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO OPERATING COST (OP/OC) 5 AT 15.93%. TPO WAS OF THE VIEW THAT THE FOREIGN EXCHANGE INCOME CANNOT BE CONSIDERED AS OPERATIONAL INCOME BUT HAS TO B E CONSIDERED AS NON-OPERATIONAL INCOME. BEFORE TPO IT WAS SUBMITTED THAT THE FOREIGN EXCHANGE GAINS DERIVED BY T HE ASSESSEE WAS ON ACCOUNT OF TRADE SALES MADE DURING THE YEAR A ND IT WAS DIRECTLY RELATED TO THE MAIN BUSINESS OPERATION OF THE AS SESSEE AND THE SAME SHOULD THEREFORE BE INCLUDED WHILE COMPUTING TH E OPERATING MARGIN OF THE ASSESSEE. THE SUBMISSION OF THE A SSESSEE WAS NOT FOUND ACCEPTABLE TO THE TPO. TPO WAS OF THE VIE W THAT CONSIDERING THE DEFINITION GIVEN IN RULE 10TA OF THE INCOME T AX RULES, THE FOREIGN EXCHANGE GAINS CANNOT BE CONSIDERED T O BE OPERATIONAL INCOME. HE ACCORDINGLY CONSIDERED THE FOREIGN EXCHANGE GAINS AS NON-OPERATIONAL INCOME AND WORKED OUT THE PLI OF OPERATING PROFIT TO OPERATING COST (OP/OC) AT 10.20% AN D ENHANCED THE INCOME. AGGRIEVED BY THE ORDER OF TPO, AS SESSEE CARRIED THE MATTER BEFORE DRP, WHO UPHELD THE ORDER OF AO BY HOLDING AS UNDER : 6.2 IN THIS REGARD, WE ARE OF THE VIEW THAT FOREIG N EXCHANGE GAIN/LOSS ARISES ON ACCOUNT OF FLUCTUATION IN THE E XCHANGE RATE OF THE FOREIGN CURRENCY AND THEREFORE IT HAS NO RELATI ON TO BUSINESS OPERATIONS OF THE ASSESSEE. SUCH INCOME OR EXPENDIT URE WHICH HAS NO CONNECTION WITH THE NORMAL BUSINESS OPERATIONS O F THE COMPANY IS REQUIRED TO BE TREATED AS NON-OPERATING INCOME/E XPENDITURE AND SHOULD BE EXCLUDED FROM THE COMPUTATION OF OPERATIN G PROFIT WHILE DETERMINING THE OPERATING MARGINS. THE SUPPORT FOR THIS VIEW IS TAKEN FROM THE DEFINITION OF THE EXPRESSION OPERAT ING REVENUE AND OPERATING EXPENSE FURNISHED IN RULE 10TA OF T HE I.T. RULES FORMING PART OF THE SAFE HARBOUR RULES. AGGRIEVED BY THE ORDER OF DRP, ASSESSEE IS NOW IN APPEAL BEFORE US. 5. BEFORE US, LD.A.R. REITERATED THE SUBMISSIONS MADE BEFOR E TPO AND DRP AND FURTHER SUBMITTED THAT THE FOREIGN EXCH ANGE 6 GAINS DERIVED BY THE ASSESSEE ON TRADE SALES MADE DURIN G THE YEAR DIRECTLY RELATES TO THE MAIN BUSINESS OPERATIONS OF THE A SSESSEE AND THE SAME SHOULD BE INCLUDED WHILE COMPUTING THE OPER ATING MARGIN OF THE ASSESSEE. HE FURTHER SUBMITTED THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF PR.CIT VS. BC MANAGEME NT SERVICES PVT. LTD., IN ITA NO.1064 OF 2017 VIDE ORDER DT.28.11.2017 HAS HELD THAT FOREIGN EXCHANGE GAINS EARNED BY THE ASSESSEE EMANATE OUT OF INTERNATIONAL TRANSACTIONS. HE FU RTHER SUBMITTED THAT THE TPO AS WELL AS DRP HAD RELIED ON RULE 10TA OF THE INCOME TAX RULES FORMING PART OF SAFE HARBOUR RULE S TO CONCLUDE THAT THE FOREIGN EXCHANGE GAINS ARE NOT OPERAT ING PROFITS. HE SUBMITTED THAT RULE 10TA TO 10TG WHICH PERTAINS TO S AFE HARBOUR RULES FOR INTERNATIONAL TRANSACTIONS WERE INSERTE D BY IT (SIXTEENTH AMENDMENT) RULES 2013 W.E.F. 18.09.2013 AND THUS THE SAFE HARBOUR RULES CAME INTO FORCE IN 2013 AND THE REFORE NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION BEING A.Y. 2 012-13. IN SUPPORT OF HIS CONTENTION THAT RULE 10TA ARE NOT AP PLICABLE TO A.Y. 2012-13, HE RELIED ON THE AFORESAID DECISION RENDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF BC MANAGEMENT SE RVICES PVT. LTD., (SUPRA). HE THEREFORE SUBMITTED THAT THE TPO AN D DRP ERRED IN NOT CONSIDERING THE FOREIGN EXCHANGE GAIN AS OPE RATIONAL INCOME. LD.D.R. ON THE OTHER HAND, SUPPORTED THE ORDER O F TPO AND DRP. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND IS NON- CONSIDERATION OF THE FOREIGN EXCHANGE GAINS AS OPERATIONAL INCOME FOR THE PURPOSE OF COMPUTING THE PLI. BEFORE US, IT IS ASS ESSEES 7 CONTENTION THAT THE FOREIGN EXCHANGE GAINS HAVE BEEN EA RNED IN THE NORMAL COURSE OF BUSINESS AND HAVE BEEN DERIVED ON ACCOUNT OF TRADE SALES MADE DURING THE YEAR AND DIRECTLY RELATES TO THE MAIN BUSINESS OPERATION OF THE ASSESSEE. THE AFORESAID SUBMISSION OF THE ASSESSEE HAS NOT BEEN CONTROVERTED B Y THE REVENUE. FURTHER, THE REVENUE HAS RELIED UPON RULE 10TA OF THE I.T. RULES, 1962 FOR COMING TO THE CONCLUSION THAT THE FOR EIGN EXCHANGE GAINS CANNOT BE CONSIDERED AS NON-OPERATIONAL INCOME. WE FIND THAT HONBLE DELHI HIGH COURT IN THE CASE OF BC MANAGEMENT SERVICES (P) LTD., (SUPRA), HAS HELD THAT THE S AFE HARBOUR RULES WHICH WERE NOTIFIED BY THE REVENUE AUTHO RITIES CAME INTO FORCE IN 2013 AND THEREFORE NOT APPLICABLE TO A.Y . 2011- 12. BEFORE US, REVENUE HAS NOT PLACED ANY CONTRARY BIN DING DECISION IN ITS SUPPORT. WE THEREFORE RESPECTFULLY FOLLOWING T HE AFORESAID DECISION OF HONBLE DELHI HIGH COURT IN THE CASE O F BC MANAGEMENT SERVICES (P) LTD., (SUPRA), ARE OF THE VIEW THAT THE TPO AND DRP HAS ERRED IN CONSIDERING THE FOREIGN EXCHANG E GAIN TO BE AS NON-OPERATIONAL INCOME BY RELYING SOLELY ON RULE 10TA. WE THEREFORE SET ASIDE THE ORDER OF TPO AND DIRECT THAT THE FOREIGN EXCHANGE GAINS TO BE CONSIDERED AS OPERATIONAL INCOME FOR THE PURPOSE OF COMPUTATION OF PLI. THUS, THE GROUND NO.2.3 OF THE ASSESSEE IS ALLOWED. 7. BEFORE US, LD.A.R. SUBMITTED THAT IN CASE THE GROUND NO.2.3 IS DECIDED IN ASSESSEES FAVOUR, THE OTHER GROUNDS WOULD BE RENDERED ACADEMIC. IN VIEW OF THE AFORESAID SUBMISSION AND IN VIEW OF OUR DECISION ON GROUND NO.2.3 WHEREIN WE HAVE DECID ED 8 THE ISSUE IN FAOVUR OF ASSESSEE, THE OTHER GROUNDS RAISE D BY THE ASSESSEE ARE HELD TO BE OF ACADEMIC AND THEREFORE NOT ADJUDICATE D. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED ON 28 TH DAY OF FEBRUARY, 2018. SD/- SD/- ( VIKAS AWASTHY ) ( ANIL CHATURVEDI ) ' / JUDICIAL MEMBER #' / ACCOUNTANT MEMBER PUNE; DATED : 28 TH FEBRUARY, 2018. YAMINI $%&'()(& / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. 4. 5 6. CIT(A) 13, PUNE. CIT(IT/TP), PUNE. '#$ %%&',) &', / DR, ITAT, A PUNE; $-.// GUARD FILE. / BY ORDER // TRUE COPY // // TRUE COPY // 012%3&4 / SR. PRIVATE SECRETARY ) &', / ITAT, PUNE.