Syniverse Technologies Services (India) Pvt. Ltd., Gurgaon V. ACIT, Circle- 4(1), Gurgaon

ITA 500/DEL/2018

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2953 (ITAT-DELHI)
• Duration Of Justice: 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-03-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Assessment Year: 2013-2014
• Appeal Filed On: 19-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Application of stay
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO.500/DEL/2018 ASSESSMENT YEAR : 2013-14 STAY APPLICATION NO.151/DEL/2018 (ITA NO.500/DEL/2018) ASSESSMENT YEAR : 2013-14 SYNIVERSE TECHNOLOGIES SERVICES (INDIA) PVT. LTD., DLF BUILDING NO.5, TOWER-A, 15 TH FLOOR, DLF PHASE-III, GURGAON. PAN: AANCS1158H VS. ACIT, CIRCLE-4(1), GURGAON. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ROHIT TIWARI, ADVOCATE DEPARTMENT BY : SHRI SANJAY I. BARA, CIT, DR & SHRI KUMAR PRANAV, SR. DR DATE OF HEARING : 13.03.2018 DATE OF PRONOUNCEMENT : 13.03.2018 ITA NO.500/DEL/2018 SA NO.151/DEL/2018 2 ORDER PER R.S. SYAL, VP: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE FINAL ASSESSMENT ORDER DATED 21.11.2017 PASSED BY THE ASS ESSING OFFICER (A.O.) U/S 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMEN T YEAR 2013-14. 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.16,2 6,63,782/-. 3. SUCCINCTLY, THE FACTS OF THE CASE ARE THAT THE A SSESSEE REPORTED CERTAIN INTERNATIONAL TRANSACTIONS INCLUDING PROVISION OF SOFTWARE DEVELOPMENT SERVICES WITH A TRANSACTED VALUE OF RS.64,82,23,98 2/-. THE ASSESSING OFFICER (A.O.) MADE REFERENCE TO THE TRANSFER PRICI NG OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INT ERNATIONAL TRANSACTIONS. THE TPO OBSERVED THAT THE ASSESSEE EMPLOYED THE TRA NSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT S ERVICES. THE TPO NOTICED THAT THE ASSESSEE FURNISHED SEGMENTAL ACCOU NTS WHICH WERE NOT AUDITED. HE, THEREFORE, REJECTED THE ASSESSEES SE PARATE OPERATING PROFIT ITA NO.500/DEL/2018 SA NO.151/DEL/2018 3 MARGIN FROM THE INTERNATIONAL TRANSACTIONS DECLARED AT 17.00% AS AGAINST LOSS FROM THE NON-INTERNATIONAL TRANSACTIONS AT 43. 26%. HE PROCEEDED TO CALCULATE PROFIT OF THE ASSESSEE ON OVERALL BASIS. THEREAFTER, HE COMPUTED OP/TC OF COMPARABLES AT AVERAGE OF 18.67%. ON THIS BASIS, HE DETERMINED THE AMOUNT OF TRANSFER PRICING ADJUSTMENT AT RS.21, 25,54,922/- AS UNDER :- TOTAL OPERATING COST 875,283,158 ARMS LENGTH PRICE AT A MARGIN OF 18.67% 163,415,36 6 OPERATING MARGIN OF THE ASSESSEE -49,139,556 SHORTFALL OF TRANSFER PRICE FROM ALP 212,554,922 4. THE ASSESSEE ASSAILED THE DRAFT ORDER, INCORPORA TING THE ABOVE TRANSFER PRICING ADJUSTMENT, BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE DRP GAVE CERTAIN DIRECTIONS IN THIS REGARD. THE TPO, A FTER GIVING EFFECT TO THE DIRECTIONS OF THE DRP, PASSED A FRESH ORDER ON 12. 10.2017 DETERMINING THE AMOUNT OF TRANSFER PRICING ADJUSTMENT AT RS.16,26,6 3,782/- AS UNDER:- TOTAL OPERATING COST 87,52,83,158 ARMS LENGTH PRICE AT A MARGIN OF 12.97% 11,35,24,2 26 OPERATING MARGIN OF THE ASSESSEE -4,91,39,556 SHORTFALL OF TRANSFER PRICE FROM ALP 16,26,63,782 ITA NO.500/DEL/2018 SA NO.151/DEL/2018 4 5. THE ASSESSEE IS AGGRIEVED AGAINST THE FINAL ASSE SSMENT ORDER MAKING ADDITION OF RS.16.26 CRORE AND ODD ON ACCOUNT OF TR ANSFER PRICING ADJUSTMENT IN THE INTERNATIONAL TRANSACTION OF PRO VISION OF SOFTWARE DEVELOPMENT SERVICES. 6. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE REL EVANT MATERIAL ON RECORD. SHORN OF UNNECESSARY DETAILS, IT IS SEEN TH AT THE FIRST AND THE FOREMOST ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION OF RS.16,26,63,782/- MADE BY THE AUTHORITIES ON ACCOUN T OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF TRANSACTIONS WITH THE ASSO CIATED ENTERPRISES (AES) AND NON-AES. COMPUTATION OF THE ARMS LENGTH PRICE (ALP) BY THE TPO IN HIS ORDER PASSED BEFORE AND AFTER THE DRP DI RECTIONS, WHOSE RELEVANT PARTS HAVE BEEN REPRODUCED ABOVE, DIVULGES THAT HE TOOK TOTAL OPERATING COSTS AT RS.87,52,83,158/- . BY APPLYING ARITHMETIC MEAN OF THE COMPARABLES AT 12.97%, HE FINALLY PROPOSED A TRANSF ER PRICING ADJUSTMENT OF RS.16,26,63,782/-. IT IS, THUS, SEEN THAT THE T PO CONSIDERED TOTAL OPERATING COSTS AT RS.87.52 CRORE. WHEN WE ADVERT TO THE FINAL ACCOUNTS OF THE ASSESSEE, WHOSE COPY IS AVAILABLE AT PAGE 11 5 OF THE STAY FILE, IT EMERGES THAT THE ASSESSEE EARNED REVENUE OF RS.64,8 2,23,982/- FROM ITS ITA NO.500/DEL/2018 SA NO.151/DEL/2018 5 AES AT BANGALORE OFFICE AND RS.17,79,19,620/- FROM NON-AES AT ITS GURGAON OFFICE, THEREBY MAKING TOTAL REVENUE OF R S.82,61,43,602/-. TOTAL OPERATING COSTS IN RESPECT OF AE AND NON-AE T RANSACTIONS HAVE BEEN REPORTED IN SUCH ANNUAL ACCOUNTS AT RS.86,76,03,015 /-, WHICH ARE EXCLUSIVE OF AMORTIZATION OF GOODWILL AMOUNTING TO RS.76,80,144/-. THE A.O. ADDED UP TOTAL OPERATING COSTS AT ENTITY LEVEL AMOUNTING TO RS.86.76 CRORE WITH AMORTIZATION OF GOODWILL AT RS.0.76 CROR E TO COMPUTE TOTAL OPERATING COSTS AT RS.87,52,83,158/-, WHICH IS THE STARTING POINT OF THE CALCULATION OF THE TRANSFER PRICING ADJUSTMENT. IT IS ON THIS TOTAL OPERATING COSTS OF THE ENTITY, THAT THE TPO APPLIED ARMS LEN GTH MARGIN OF 12.97% FOR COMPUTING THE FINAL AMOUNT OF TRANSFER PRICING ADJU STMENT AT RS.16.26 CRORE. 7. THE LD. AR CONTENDED THAT THE AO/TPO ERRED IN MA KING/PROPOSING TRANSFER PRICING ADJUSTMENT EVEN IN RESPECT OF TRA NSACTIONS WITH NON-AES, WHICH IS IMPERMISSIBLE UNDER LAW. 8. IT IS UNCONTROVERTED, AS IS ALSO APPARENT FR OM THE TPOS ORDER, THAT THE TRANSFER PRICING ADJUSTMENT HAS BEEN MADE BY CONSID ERING TOTAL COSTS ITA NO.500/DEL/2018 SA NO.151/DEL/2018 6 INCURRED BY THE ASSESSEE IN RESPECT OF TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES (AE) AND NON-AES. UNDER THE TNMM, THE PROCESS IS SIMPLE IN INITIALLY FINDING OUT THE OPERATING PROFIT MARGIN O F THE ASSESSEE AND THEN THE AVERAGE ADJUSTED OPERATING PROFIT MARGIN OF COM PARABLES. SUCH ADJUSTED PROFIT MARGIN OF THE COMPARABLES CONSTITUT ES THE BENCHMARK MARGIN, WHICH IS THEN COMPARED WITH THE OPERATING P ROFIT MARGIN FROM THE ASSESSEES INTERNATIONAL TRANSACTIONS, WHICH ONLY C OMPRISE OF TRANSACTIONS WITH AES. IT IS NOT PERMISSIBLE TO MAKE TRANSFER P RICING ADJUSTMENT, BY APPLYING THE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLES, ON THE ASSESSEES UNIVERSAL TRANSACTIONS ENTERED INTO WITH BOTH THE AES AND NON- AES. AS THE ENTIRE EXERCISE UNDER CHAPTER-X OF THE ACT IS CONFINED TO COMPUTING TOTAL INCOME OF THE ASSESSEE FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO THE ARMS LENGTH PRICE, THERE IS N O SCOPE FOR COMPUTING INCOME FROM NON-INTERNATIONAL TRANSACTIONS ALSO HAV ING REGARD TO THE ALP. SINCE THE TPO HAS COMPUTED THE TRANSFER PRICING ADJ USTMENT QUA ALL THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH REFER ENCE TO THE BASE OF TOTAL COSTS, ALSO INCLUSIVE OF COSTS RELEVANT FOR TRANS ACTIONS WITH NON-AES, WE CANNOT COUNTENANCE SUCH A POINT OF VIEW. ITA NO.500/DEL/2018 SA NO.151/DEL/2018 7 9. OUR VIEW IN HOLDING THAT NO TRANSFER PRICIN G ADJUSTMENT CAN BE MADE ON TRANSACTIONS WITH THE NON-AES IS SUPPORTED BY TH E JUDGMENT OF THE HONBLE DELHI HIGH COURT IN CIT VS. KEIHIN PANALFA LTD. (2016) 381 ITR 407 (DEL), IN WHICH IT HAS BEEN HELD THAT THE TRANSFER PRIC ING ADJUSTMENT CAN BE MADE ONLY WITH REFERENCE TO THE INTERNATIONA L TRANSACTIONS AND NOT THE TRANSACTIONS WITH THE NON-ASSOCIATED ENTERPRISE S. SIMILAR VIEW HAS BEEN ESPOUSED BY THE HON'BLE BOMBAY HIGH COURT IN CIT VS. THYSSEN KRUPP INDUSTRIES INDIA PRIVATE LTD. (2016) 381 ITR 413 (BOM) . IN VIEW OF THE ABOVE DISCUSSION, IT IS CLEAR THAT THE TRANSFER PRICING ADJUSTMENT CANNOT BE MADE WITH REFERENCE TO THE NON-AE TRANSACTIONS, BUT, THE SAME HAS TO BE CONFINED ONLY TO THE INTERNATIONAL TRANSACTIONS. S INCE THE TPO/AO HAS PROPOSED/MADE THE ADDITION ON THE BASIS OF TRANSACT IONS EVEN WITH NON- AES, WE SET ASIDE THE IMPUGNED ORDER AND SEND THE M ATTER BACK TO THE FILE OF THE AO/TPO FOR DECIDING THE ISSUE AFRESH AS PER LAW AFTER ALLOWING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. IN DECIDING THE ISSUE AFRESH, IT WILL BE OPEN TO THE TPO/ASSESSEE TO DEPA RT FROM THE EARLIER STAND AND TAKE INTO CONSIDERATION LATER DEVELOPMENTS IN L AW HAVING BEARING ON ITA NO.500/DEL/2018 SA NO.151/DEL/2018 8 THE ISSUE, WHEREVER APPLICABLE. NEEDLESS TO SAY, T HE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. 10. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. 11. IN VIEW OF OUR DECISION IN THE APPEAL, THE STAY APPLICATION HAS BECOME INFRUCTUOUS AND THE SAME IS, THEREFORE, DISM ISSED. 12. IN THE RESULT, THE STAY APPLICATION IS DISMISSE D. THE ORDER PRONOUNCED IN THE OPEN COURT ON 13.03.201 8. SD/- SD/- [SUCHITRA KAMBLE] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 13 TH MARCH, 2018. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.