M/s Metric Stream Infotech (India) Pvt. Ltd., Bangalore V. Asst.C.I.T., Bangalore

ITA 493/BANG/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 7598 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 18-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO I
• Assessee Lawyers: NARENDRA KUMAR J JAIN
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER I T (TP) A NO. 493/BANG/2016 ASSESSMENT YEAR : 2011 - 12 M/S. METRICSTREAM INFOTECH (INDIA) PVT. LTD., AMR TECH PARK 4B, NO.23 & 24, HONGASANDRA VILLAGE, BEGUR HOBLI, BENGALURU SOUTH TALUK, BENGALURU 560 068. PAN: AACCM 4991K VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(2), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI NARENDRA KUMAR J JAIN, ADVOCATE RE SPONDENT BY : SHRI C.H. SUNDAR RAO , CIT(DR - I )(ITAT), BENGALURU. DATE OF HEARING : 11 .06 .201 8 DATE OF PRONOUNCEMENT : 20 . 07 .2018 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE F INAL ORDER OF ASSESSMENT DATED 19.01.2016 OF THE ACIT, CIRCLE 4(1 )(2), BANGALORE PASSED U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX AC T, 1961 [THE ACT] RELATING TO ASSESSMENT YEAR 2011-12. 2. THE ONLY GROUND OF CHALLENGE IN THIS APPEAL IS W ITH REGARD TO DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPEC T OF AN INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS A SSOCIATED ENTERPRISE (AE). THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF METRICSTREAM INC., IT(TP)A NO. 493/BANG/2016. PAGE 2 OF 7 CALIFORNIA, USA. THE ASSESSEE IS ENGAGED IN THE BU SINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS PARENT COMPANY . IT IS NOT IN DISPUTE THAT THE TRANSACTION OF PROVIDING SOFTWARE DEVELOPM ENT SERVICES TO ITS HOLDING COMPANY, THERE WAS INTERNATIONAL TRANSACTIO NS AND THE INCOME FROM SUCH TRANSACTIONS HAD TO BE DETERMINED HAVING REGAR D TO THE ARMS LENGTH PRICE (ALP) AS LAID DOWN IN SECTION 92 OF THE INCOM E-TAX ACT, 1961 [THE ACT]. 3. IT IS NOT IN DISPUTE BETWEEN THE ASSESSEE AND T HE REVENUE THAT TRANSACTIONAL NET MARGIN METHOD (TNMM) WAS THE MOST APPROPRIATE METHOD AND THE PROFIT LEVEL INDICATOR (PLI) FOR THE PURPOSE OF COMPARISON OF THE PROFIT MARGIN WITH THE PROFIT MARGIN OF THE COMPARABLE COMPANIES WAS OPERATING PROFIT TO OPERATING COST (OP/OC). THE TR ANSFER PRICING OFFICER (TPO) TO WHOM THE DETERMINATION OF ALP WAS REFERRED TO BY THE AO U/S.92CA OF THE ACT, SELECTED A LIST OF 13 COMPARAB LE COMPANIES AND ARRIVED AT THE ARITHMETIC MEAN OF THE PROFIT MARGIN OF THOSE COMPANIES BEFORE AND AFTER WORKING CAPITAL ADJUSTMENT AND DET ERMINED THE ALP AND CONSEQUENT ADDITION TO THE MADE TO THE TOTAL INCOME CONSEQUENTLY AS FOLLOWS:- MARGINS AS COMPUTED BY THE TPO SI.NO. NAME OF THE COMPANY OPERATING MARGIN ON COST ADJUSTED MARGIN ON COST 1 ACROPETAL TECHNOLOGIES LTD (SEG) 31.98% 26.90% 2 E-ZEST SOLUTIONS LTD 21.03% 17.31% 3 E-INFOCHIPS LTD 56.44% 53.93% 4 EVOKE TECHNOLOGIES PVT LTD 8.11% 6.48% 5 I C R A TECHNO ANALYTICS LTD. 24.83% 21.10% 6 INFOSYS TECHNOLOGIES LTD. 43.39% 41.45% 7 LARSEN ET TOUBRO INFOTECH LTD. 19.83% 18.16% 8 MINDTREE LTD.(SEG) 10.66% 7.72% 9 PERSISTENT SYSTEMS & SOLUTIONS LTD. 22.12% 19.48% IT(TP)A NO. 493/BANG/2016. PAGE 3 OF 7 10 PERSISTENT SYSTEMS LTD. 22.84% 19.92% 11 R S SOFTWARE (INDIA) LTD. 16.37% 14.59% 12 SASKEN COMMUNICATION TECHNOLOGIES 24.13% 22.75% 13 TATA ELXSI (SEG) 20.91% 17.27% ARITHMETIC. MEAN 24.82% 21.68% COMPUTATION OF ARM'S LENGTH PRICE BY THE AO/TPO AND THE ADJUSTMENT MADE: ARM'S LENGTH MEAN MARGIN 24.82% LESS: WORKING CAPITAL ADJUSTMENT 1.63% ADJUSTED MEAN MARGIN AFTER WORKING CAPITAL ADJUSTME NT 23.19% OPERATING COST (A)* 24,05,28,396 ARM'S LENGTH PRICE - 123.19% OF OPERATING COST (B) 29,63,06,931 TOTAL OPERATING REVENUE (C) 27,63,36,605 SHORT FALL BEING ADJUSTMENT U/S 92CA (B - C) 1,99,70,326 4. AGGRIEVED BY THE DIRECTIONS OF THE TPO DIRECTING THE SHORTFALL IN THE PRICE CHARGED BY THE ASSESSEE TO ITS AE AT A SUM OF RS.1,99,70,326/- AND SUGGESTING AN ADDITION TO THE TOTAL INCOME OF THE A SSESSEE, THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANE L (DRP). THE DRP GAVE DIRECTIONS TO EXCLUDE THE COMPARABLES SELECTED BY T HE TPO HAVING TURNOVER OF MORE THAN RS.200 CRORES. ACCORDINGLY, INFOSYS TECHNOLOGIES LTD, LARSEN & TOUBRO INFOTECH LTD, MINDTREE LTD, PERSISTENT SYS TEMS & SOLUTIONS LTD, PERSISTENT SYSTEMS LTD, SASKEN COMMUNICATION TECHNO LOGIES AND TATA ELXSI WERE EXCLUDED FROM THE LIST OF COMPARABLE COM PANIES CHOSEN BY THE TPO. FURTHER, THE DRP HAS ALSO REJECTED E-ZEST SOLU TIONS LTD ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT AND THE DE PARTMENT HAS NOT FILED AN APPEAL AGAINST THIS DIRECTIONS OF THE DRP. 5. IN PURSUANCE TO DRP DIRECTION, THE AO PASSED FI NAL ORDER OF ASSESSMENT GIVING EFFECT TO THE DIRECTIONS OF THE D RP, WHEREIN THE TP IT(TP)A NO. 493/BANG/2016. PAGE 4 OF 7 ADDITION WAS ENHANCED TO RS.2,17,02,130/- FROM RS.1 ,99,70,326/- IN THE SOFTWARE SEGMENT. 6. AGGRIEVED BY THE DIRECTIONS OF THE DRP WHICH W AS INCORPORATED IN THE FINAL ORDER OF ASSESSMENT BY THE AO, THE ASSESS EE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. CO UNSEL FOR THE ASSESSEE SUBMITTED BEFORE THAT 4 OUT OF 6 COMPARABL ES THAT REMAINED AFTER THE ORDER OF DRP HAVE TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THE 4 COMPANIES WHICH THE ASSESSEE SEEK S EXCLUSION ARE; (I) ACROPETAL TECHNOLOGIES LTD., (II) E-INFOCHIPS L TD., (III) ICRA TECHNO ANALYTICS LTD. & (IV) PERSISTENT SYSTEMS & SOLUTION S LTD. 8. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DECISION OF ITAT BANGALORE PERTAININ G TO AY 2011-12 RENDERED IN THE CASE OF SOFTWARE DEVELOPMENT SERVIC E PROVIDER SUCH AS THE ASSESSEE VIZ., M/S. ELECTRONIC IMAGING INDIA PVT. LTD. V. DCIT, IT(TP)A NO.1506/BANG/2015, ORDER DATED 14.05.2017. IN THE AFORESAID ORDER, THE AFORESAID 4 COMPANIES WERE EXCLUDED FROM THE LIST O F COMPARABLE COMPANIES. IT IS NOT IN DISPUTE THAT THE FUNCTIONA L PROFILE OF ASSESSEE IN THE DECISION CITED BY THE LD. COUNSEL FOR THE ASSESSEE AND IN THE PRESENT CASE ARE IDENTICAL. IT WAS ALSO BROUGHT TO OUR NOTICE T HAT THE COMPARABLES CHOSEN BY THE TPO IN THE PRESENT CASE AND IN THE CA SE OF M/S. ELECTRONIC IMAGING INDIA PVT. LTD. (SUPRA) ARE IDENTICAL. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE DECISION RENDERED BY THE TRIBU NAL IN THE AFORESAID CASE WOULD BE EQUALLY APPLICABLE IN THE PRESENT CASE ALS O. THE TRIBUNAL IN THE AFORESAID DECISION HELD THAT ACROPETAL TECHNOLOGIES LTD. CANNOT BE FUNCTIONALLY COMPARED WITH A SOFTWARE DEVELOPMENT S ERVICE PROVIDER AND THAT IT WAS A SOFTWARE PRODUCT COMPANY. IN THE CAS E OF MICROSOFT RESEARCH IT(TP)A NO. 493/BANG/2016. PAGE 5 OF 7 LAB INDIA PVT. LTD. V. ACIT IN IT(TP)A NO.115/BANG/ 2015 FOR AY 2011-12, ORDER DATED 16.08.2017, VIDE PARA 7.1 & 7.3, THE TR IBUNAL HAS HELD THAT THE INCOME FROM SOFTWARE DEVELOPMENT SERVICE OF THIS CO MPANY WAS LESS THAN 75% OF THE TOTAL REVENUE AND THEREFORE THIS COMPANY CANNOT BE REGARDED AS A COMPANY COMPARABLE WITH A SOFTWARE SERVICE PRO VIDER SUCH AS THE ASSESSEE. 9. AS FAR AS E-INFOCHIPS LTD. IS CONCERNED, THIS TR IBUNAL IN THE CASE OF M/S. ELECTRONIC IMAGING INDIA PVT. LTD. (SUPRA) VIDE PARA 9 OF ITS ORDER HAD HELD THAT THIS COMPANY WAS A SOFTWARE DEVELOPMENT A ND ITES PROVIDING COMPANY AND SOFTWARE DEVELOPMENT PRODUCT COMPANY. THE TRIBUNAL HELD THAT NO SEGMENTAL DATA OF THIS COMPANY WAS AVAILABL E AND THEREFORE IT IS DIFFICULT TO COMPUTE THE OPERATING MARGIN FROM SOFT WARE DEVELOPMENT SERVICES AND THEREFORE THIS COMPANY SHOULD BE EXCLU DED FROM THE LIST OF COMPARABLE COMPANIES. 10. AS FAR AS ICRA TECHNO ANALYTICS LTD. IS CONCERN ED, THE TRIBUNAL IN THE CASE OF M/S. ELECTRONIC IMAGING INDIA PVT. LTD. (SUPRA) VIDE PARA 10 OF ITS ORDER HELD THAT THIS COMPANY IS NOT FUNCTIONALL Y COMPARABLE WITH A COMPANY PROVIDING SOFTWARE DEVELOPMENT SERVICE. 11. AS FAR AS PERSISTENT SYSTEMS & SOLUTIONS LTD. I S CONCERNED, THIS TRIBUNAL IN THE CASE OF M/S. ELECTRONIC IMAGING INDIA PVT. LTD. (SUPRA) HELD THAT THIS COMPANY WAS NOT FUNCTIONALLY COMPARABLE A ND IS ALSO ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS VIDE PARA 8 OF ITS ORDER. 12. IN VIEW OF THE AFORESAID DECISIONS ON THE COMPA RABILITY OF THE AFORESAID 4 COMPANIES, WE HOLD AND DIRECT EXCLUSION OF THE AFORESAID 4 COMPANIES FROM THE LIST OF COMPARABLE COMPANIES. TH E TPO IS DIRECTED TO COMPUTE THE ARITHMETIC MEAN OF COMPARABLE COMPANIES AFTER EXCLUDING THE 4 COMPANIES. IT(TP)A NO. 493/BANG/2016. PAGE 6 OF 7 13. THE OTHER ISSUE WHICH WAS ARGUED BEFORE US BY T HE LD. COUNSEL FOR THE ASSESSEE IS THE ISSUE WITH REGARD TO COMPUTATIO N OF WORKING CAPITAL ADJUSTMENT. IN THIS REGARD, IT IS SEEN THAT THE TP O IN HIS ORDER AT PAGE 16 IN PARA 10 COMPUTED THE ADJUSTMENT ON ACCOUNT OF WORKI NG CAPITAL AT 2.54%. HE, HOWEVER, RESTRICTED WORKING CAPITAL ADJUSTMENT ONLY TO A SUM OF 1.63%. 14. THE SUBMISSION OF THE ASSESSEE BEFORE THE DRP W AS THAT WORKING CAPITAL ADJUSTMENT OUGHT TO HAVE BEEN ALLOWED AT TH E ACTUAL FIGURES WORKED OUT BY THE TPO AND THE SAME SHOULD NOT HAVE BEEN RE STRICTED TO 1.63% FROM 2.54%. THIS SUBMISSION DID NOT FIND FAVOUR WI TH THE DRP. 15. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE PL ACED RELIANCE ON THE DECISION OF ITAT BANGALORE IN THE CASE OF M/S. ZYME SOLUTIONS P. LTD. V. ITO IN MP NO.36/BANG/2016 IN IT(TP)A NO.465/BANG/20 15 FOR AY 2010-11, ORDER DATED 03.06.2016. THE FOLLOWING WERE THE REL EVANT OBSERVATIONS OF THE TRIBUNAL:- IT IS CLEAR FROM THE ABOVE THAT TRIBUNAL HAD ALLO WED THE GROUND OF THE ASSESSEE, THOUGH SECOND PART OF THE GROUND W AS NOT SPECIFICALLY DEALT WITH. NOT DEALING WITH SECOND PA RT OF THE GROUND REGARDING INCORRECT COMPUTATION OF WORKING C APITAL IS A MISTAKE APPARENT ON RECORD. THERE CAN BE NO DISPUTE THAT WORKING CAPITAL ADJUSTMENT HAS TO BE CALCULATED FRO M THE FINAL LIST OF COMPARABLES AND CANNOT BE RESTRICTED. WE THEREFORE MODIFY PARA 43 OF THE ORDER AND DIRECT TH E AO/TPO TO GIVE WORKING CAPITAL ADJUSTMENT BASED ON ACTUAL FIGURES COMPUTED FROM THE FINAL LIST OF COMPARABLES . 16. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE HOLD THAT WORKING CAPITAL ADJUSTMENT HAS TO BE ALLOWED AT 2.54% AS CO MPUTED BY THE TPO AND CANNOT BE RESTRICTED TO 1.63% AS DONE BY THE TP O. 17. THE OTHER GROUNDS OF APPEAL WERE NOT PRESSED FO R ADJUDICATION. IT(TP)A NO. 493/BANG/2016. PAGE 7 OF 7 18. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ORIGINALLY IN FORM 36B (FORM IN WHICH THE APPEAL WAS TO BE FILED) WHIC H WAS FILED IN TIME WAS SIGNED BY AUTHORIZED SIGNATORY. LATER ON IT WAS NO TICED THAT FORM 36B WAS TO BE SIGNED BY DIRECTOR OF THE COMPANY AND THEREFO RE A REVISED FORM 36B WAS FILED. THE REVISED FORM 36B WAS FILED AT A MUC H LATER DATE TO AVOID ANY TECHNICAL OBJECTION. THE LD. COUNSEL FOR THE A SSESSEE PRAYED THAT IT MIGHT BE RECORDED THAT THERE IS NO DELAY IN FILING THE APPEAL AND THAT IT WAS ONLY A TECHNICAL MISTAKE ON THE PART OF THE ASSESSE E. IN OUR VIEW, THIS IS PURELY A TECHNICAL DEFECT AND THERE CANNOT BE ANY A DVERSE INFERENCE DRAWN AGAINST THE ASSESSEE. 19. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF JULY, 2018. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE, DATED, THE 20 TH JULY, 2018. / D ESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.