Broadcom Communications Technologies Private Limited, Bangalore V. Asst.C.I.T., Bangalore

ITA 501/BANG/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7227 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-11-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 17-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 26-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BISWARANJAN SASMAL
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction
• Section: 143(3); 27

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBERAN D SHRI LALIET KUMAR, JUDICIAL MEMBER IT (TP)A NO. 347/BANG/2015 ASSESSMENT YEAR : 20 10 - 11 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), BANGALORE. VS. M/S. BROADCOM COMMUNICATION TECHNOLOGIES PVT. LTD., 4 TH FLOOR, CAMPUS 1A, RMZ ECOSPACE, BELLANDUR VILLAGE, VARTHURHOBLI, BANGALORE 560 103. PAN: AACCB 8136B APPELLANT RESPONDENT IT (TP)A NO. 501/BANG/2015 ASSESSMENT YEAR : 20 10 - 11 M/S. BROADCOM COMMUNICATION TECHNOLOGIES PVT. LTD., 4 TH FLOOR, CAMPUS 1A, RMZ ECOSPACE, BELLANDUR VILLAGE, VARTHURHOBLI, BANGALORE 560 103. PAN: AACCB 8136B VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), BANGALORE. APPELLANT RESPONDENT ASSESSEE BY : SHRI SHARATH RAO, CA REVENUE BY : SHRI BISWARANJANSASMAL, CIT (DR) DATE OF HEARING : 1 5 . 1 1 .201 7 DATE OF PRONOUNCEMENT : 17 .1 1 .2017 O R D E R PER SHRI A.K. GARODIA, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS FILED BY THE REVENUE AND AS SESSEE WHICH ARE DIRECTED AGAINST THE ASSESSMENT ORDER PASSED BY THE AO ON 27 .01.2015 U/S. 143(3) R.W.S. 144C OF THE I.T. ACT, 1961 AS PER THE DIRECT IONS OF DRP. IT(TP)A NOS. 347 & 501/BANG/2015 PAGE 2 OF 7 2. THE GROUNDS RAISED BY THE ASSESSEE AS PER REVISE D GROUNDS OF APPEAL ARE AS UNDER. GENERAL 1. THE ASSESSMENT ORDER DATED JANUARY 27, 2015 PASS ED BY THE LEARNED ASSESSING OFFICER ('AO') PURSUANT TO THE DI RECTIONS PASSED BY THE HONORABLE DISPUTE RESOLUTION PANEL ('DRP') IS N OT IN ACCORDANCE WITH THE LAW AND IS CONTRARY TO THE FACT S AND CIRCUMSTANCES OF THE PRESENT CASE AND IN ANY CASE I N VIOLATION OF THE PRINCIPLE OF EQUITY AND NATURAL JUSTICE. TRANSFER PRICING 1. THE HONOURABLE DRP AND THE LEARNED AO ERRED IN F ACT AND IN LAW IN MAKING AN ADJUSTMENT TO THE ARM'S LENGTH PRICE ( 'ALP') OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT IN THE SOFTWARE DEVELOPMENT SEGMENT; 2. THE HONORABLE DRP AND THE LEARNED AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TRANSFERPRICING OFFICER ('TPO') I N REJECTING THE TRANSFER PRICING ('TP) DOCUMENTATION MAINTAINED AN D THE DETAILED BENCHMARKING ANALYSIS CONDUCTED BY THE APPELLANT; 3. THE HONOURABLE DRP HAS ERRED IN LAW IN UPHOLDING THE ACTION OF THE TPO IN MODIFYING THE FILTERS ADOPTED BY THE APP ELLANT AND ADOPTING ADDITIONAL FILTERS FOR UNDERTAKING A NEW S EARCH AND ARRIVING AT A FRESH SET OF COMPARABLES; 4. THE HONORABLE DRP AND THE LEARNED AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN DISREGARDING THE MULTIPLE / PRIOR YEAR DATA CONSIDERED BY THE APPELLANT IN DETERMINING THE ALP AND ADOPTING THE FINANCIAL DATA FOR A SINGLE YEAR [I.E. THE FINANCIA L YEAR ('FY') 2009- 10] OF THE COMPARABLES; 5. THE HONORABLE DRP HAS ERRED IN UPHOLDING THE ACT ION OF THE TPO IN FINALIZING THE TP ORDER WITH THE FOLLOWING COMPA NIES AS COMPARABLE TO THE APPELLANT WITHOUT UNDERTAKING A PROPER FUNCT IONS, ASSET AND RISK ('FAR') ANALYSIS, DESPITE SUCH COMPANIES BEING FUNCTIONALLY DIFFERENT TO THE APPELLANT AND FAIL TO MEET THE LEG ALLY ACCEPTABLE CRITERIA FOR COMPARABILITY: - LARSEN AND TOUBRO INFOTECH LIMITED - TATA ELXSI LIMITED 6. THE HONOURABLE DRP HAS ERRED IN SUO-MOTO REJECTI NG THE FOLLOWING COMPANIES AS COMPARABLE TO THE APPELLANT, DESPITE T HE SAME BEING CONSIDERED AS COMPARABLE BY THE TPO AND NOT OBJECTE D TO BY THE APPELLANT: - R S SOFTWARE (INDIA) LIMITED - PERSISTENT SYSTEMS AND SOLUTIONS LIMITED 7. THE HONOURABLE DRP HAS ERRED IN UPHOLDING THE AC TION OF THE TPO IN REJECTING THE FOLLOWINGCOMPANIES SELECTED BY THE APPELLANT DESPITE IT(TP)A NOS. 347 & 501/BANG/2015 PAGE 3 OF 7 THE SAME BEING FUNCTIONALLY COMPARABLE TO THE APPEL LANT AND QUALIFY THE LEGALLY ACCEPTABLE CRITERIA FOR COMPARABILITY: - AKSHAY SOFTWARE TECHNOLOGIES LIMITED - LGS GLOBAL LIMITED - QUINTEGRA SOLUTIONS LIMITED - HELIOS AND MATHESON INFORMATION TECHNOLOGY LIMITED - SILVERLINE TECHNOLOGIES LIMITED - SAGARSOFT INDIA PRIVATE LIMITED - R SYSTEMS INTERNATIONAL LIMITED 8. THE HONORABLE DRP HAS ERRED IN UPHOLDING THE LEA RNED TPO/AOS ACTION OF WRONGLY COMPUTING THE OPERATING MARGIN OF THE APPELLANT AND COMPARABLE COMPANIES; 9. THE HONORABLE DRP AND THE LEARNED AO / TPO HAVE ERRED IN NOT GRANTING THE RISK ADJUSTMENT, AS CLAIMED BY THE APP ELLANT; OTHERS 10. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE ABOVE GROUNDS, AT ANY TIME BEFORE OR AT T HE TIME OF HEARING OF THE APPEAL. EACH OF THE ABOVE OBJECTIONS IS INDEPENDENT AND WITHOUT PREJUDICE TO THE OTHER GROUNDS PREFERRE D BY THE APPELLANT. 3. SIMILARLY THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER. 1. THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL A RE OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE DISPUTE RESOLUTION PANEL ERRED IN LAW IN DIRECTING THE AO T O EXCLUDE THE EXPENDITURE INCURRED IN FOREIGN CURRENCY BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER FOR THE PUR POSE OF COMPUTATION OF DEDUCTION U/S 10A, WITHOUT APPRECIATING THE FACT THAT THE STATUTE ALLOWS EXCLUSION OF SUCH EXPENDITURE ONLY FROM EXPO RT TURNOVER BY WAY OF SPECIFIC DEFINITION OF EXPORT TURNOVER AS EN VISAGED BY SUB- CLAUSE (4) OF EXPLANATION 2 BELOW SUB-SECTION (8) O F SECTION 10A AND THE TOTAL TURNOVER HAS NOT BEEN DEFINED IN THIS SEC TION. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTING THE AO TO COMPU TE DEDUCTION U/S 10A IN THE ABOVE MANNER BY PLACING RELIANCE ON THE DECISION OF HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF M/S TATA ELXSI LTD., WHICH HAS NOT BECOME FINAL SINCE THE SAME HAS NOT B EEN ACCEPTED BY THE DEPARTMENT AND SLPS ARE PENDING BEFORE THE HON' BLE SUPREME COURT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL CAN MAKE ADJUSTMEN T ON THE BASIS OF ADVANCE RECEIVED FROM AES IN ABSENCE OF DEBTORS AND INVENTORY IN IT(TP)A NOS. 347 & 501/BANG/2015 PAGE 4 OF 7 THE CASE OF ASSESSEE FOR CALCULATING THE COST OF WO RKING CAPITAL BUILT IN THE PROFIT MARGIN. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL WERE JUSTIFIED IN DIRECTING THE TPO TO ADJUST THE PROFIT MARGIN OF THE ASSESSEE FOR THE ENTIRE AMOUNT OF ADVANCES RECEIVED FROM AE ON THE GROUND THAT THERE IS TIME VALUE OF MONEY. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE HON'BLE DISPUTE RESOLUTION PANEL ERRED BY NOT UPHOLDING THE APPROACH OF THE TPO IN ITS ORDER. 7. THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN EXCLUDING M/ S ICRA TECHNO ALALYTICS LTD M/S PERSISTENT SYSTEMS & SOLUTIONS LT D, M/S SASKEN COMMUNICATIONS TECHNOLOGIES LTD AND M/S PERSISTENT SYSTEMS LTD WHILE THE COMPARABLES ARE QUALIFYING ALL THE QUALIT ATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN EXCL UDING INFOSY LTD AND KALS INFORMATION SYSTEMS LTD. ON THE BASIS OF D ECISION IN A DIFFERENT CASE FOR A DIFFERENT FY WHILE THE COMPARA BLE IS QUALIFYING ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, WHETHER THE APPLICATION OF A NEW FILTER (ONSITE FILTER) IS WITH IN THE PURVIEW OF HONBLE DISPUTE RESOLUTION PANEL. 10. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN APPL YING THE ONSITE FILTER IN SOFTWARE DEVELOPMENT SEGMENT IN THE CASE OF M/S RS SOFTWARE INDIA LTD. 11. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, WHETHER THE HON'BLE DISPUTE RESOLUTION PANEL IS CORRECT IN GIVI NG A DIRECTION WHICH AMOUNTS TO SET ASIDE AN ISSUE. 12. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED A T THE TIME OF HEARING, IT IS PRAYED THAT THE DIRECTIONS OF THE DI SPUTE RESOLUTION PANEL IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED. 13. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 4. AT THE VERY OUTSET, IT WAS POINTED OUT BY THE BE NCH THAT AS PER GROUND NO. 10 OF THE APPEAL OF THE REVENUE, IT IS THE GRIEVANCE OF T HE REVENUE THAT THE DRP WAS NOT CORRECT IN APPLYING ONSITE FILTER IN SOFTWARE D EVELOPMENT SEGMENT IN THE CASE IT(TP)A NOS. 347 & 501/BANG/2015 PAGE 5 OF 7 OF M/S. RS SOFTWARE INDIA LTD. AS PER GROUND NO. 9 , THIS IS THE GRIEVANCE OF THE REVENUE AS TO WHETHER THE APPLICATION OF NEW FILTER (ONSITE FILTER) IS WITHIN THE PURVIEW OF THE DRP. THE BENCH OBSERVED THAT THIS T RIBUNAL IS TAKING A CONSISTENT VIEW THAT IF A NEW FILTER IS APPLIED, IT SHOULD BE APPLIED TO ALL COMPARABLES AND NOT TO PARTICULAR COMPARABLES ON PI CK AND CHOOSE BASIS AND THEREFORE, IN THAT SITUATION WHERE NEW FILTER IS AP PLIED, THE MATTER HAS TO GO BACK TO EXAMINE ALL COMPARABLES IN THE LIGHT OF THE NEW FILTER. IN REPLY, IT WAS SUBMITTED BY LD. AR OF ASSESSEE THAT REGARDING ONLY ONE COMPARABLE I.E. M/S. RS SOFTWARE INDIA LTD., THE DRP HAS APPLIED THIS NE W FILTER AND EXCLUDED THIS COMPARABLE AND THE ASSESSEE AS WELL AS REVENUE BOTH ARE IN APPEAL AGAINST THE EXCLUSION OF THIS COMPARABLE AND THEREFORE, THI S SHOULD BE HELD THAT THIS FILTER IS NOT APPLICABLE IN THE PRESENT CASE. THE LD. DR OF REVENUE SUPPORTED THE ORDER OF TPO AND DRAFT ASSESSMENT ORDER. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FI ND THAT AS PER PARA NO. 3.5 OF ITS ORDER, IT IS NOTED BY DRP THAT CONSIDERING THE FACT THAT THE OBJECTIONS ARE RAISED BY THE ASSESSEE IN RESPECT OF HIGHER MARGIN COMPARABLES, IT WAS FOUND APPROPRIATE BY THEM TO EXAMINE OTHER COMPANIES SELE CTED BY TPO AS COMPARABLE IN REGARD TO THEIR COMPARABILITY. THERE AFTER, IT WAS NOTED THAT FROM THE PERUSAL OF THE ANNUAL REPORTS, IT IS NOTICED TH AT AS PER PAGE NO. 45 OF ANNUAL REPORTS IN CASE OF M/S. RS SOFTWARE INDIA LTD., THE EXPENSES ON FOREIGN BRANCHES ARE INCURRED TO THE EXTENT OF RS. 12.42 CR ORES (82%) OF TOTAL EXPENSES OF RS. 15 CRORES DEBITED IN P & L ACCOUNT, WHICH MA KES IT CLEAR THAT IT IS PREDOMINANTLY ONSITE SOFTWARE DEVELOPMENT COMPANY A ND THEREFORE, IT CANNOT BE RETAINED AS COMPARABLE. THE DRP DIRECTED THE AO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. BEFORE US, AS PER TH E REVISED GROUNDS OF APPEAL FILED BY THE ASSESSEE AS REPRODUCED ABOVE, ASSESSEE IS OBJECTING TO THE EXCLUSION OF THIS COMPARABLE I.E. M/S. RS SOFTWARE INDIA LTD. BUT THERE IS NO OBJECTION ON THIS ASPECT IN THE GROUNDS RAISED BEFO RE US THAT ONSITE FILTER SHOULD NOT BE APPLIED. ONSITE FILTER IS VERY RELEVANT AND IMPORTANT FILTER IN TP STUDY AND THEREFORE, IT CANNOT BE SAID THAT ONSITE FILTER CAN NOT BE APPLIED. HENCE, WE HOLD THAT IN THE FACTS OF THE PRESENT CASE, ONSITE FILTE R HAS TO BE APPLIED BUT SINCE IT WAS APPLIED BY THE DRP TO ONLY ONE COMPARABLE, ALL THE COMPARABLES SHOULD BE EXAMINED IN THE LIGHT OF THIS FILTER AND THEREAFTER , THE LIST OF COMPARABLES SHOULD IT(TP)A NOS. 347 & 501/BANG/2015 PAGE 6 OF 7 BE FINALIZED. WE WANT TO MENTION THAT IN RESPECT O F THOSE COMPARABLES WHICH ARE PASSING THROUGH THIS FILTER I.E. ONSITE FILTER, THE DRP SHOULD EXAMINE THE APPLICABILITY OF ALL OTHER RELEVANT FILTERS ALSO AN D ALL OTHER OBJECTIONS SUCH AS FUNCTIONAL SIMILARITY / DISSIMILARITY ETC. ALSO TO DECIDE ABOUT INCLUSION OR EXCLUSION OF SUCH COMPARABLES AFTER PROVIDING ADEQU ATE OPPORTUNITY OF BEING HEARD TO BOTH SIDES. HENCE THE ENTIRE TP MATTER IS RESTORED BACK TO THE FILE OF DRP FOR FRESH DECISION. 6. IN ADDITION TO TP ISSUE, ONE CORPORATE TAX ISSUE IS ALSO RAISED BY THE REVENUE AS PER GROUND NOS. 2 AND 3 AND THIS ISSUE IS REGARDING REDUCING THE EXPENDITURE INCURRED IN FOREIGN CURRENCY BOTH FROM EXPORT TURNO VER AS WELL AS TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING OF DEDUCTION U/S. 10A OF THE I.T. ACT. THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE J UDGMENT OF HON'BLE KARNATAKA HIGH COURT RENDERED IN THE CASE OF CIT VS . TATA ELXSI LTD. AS REPORTED IN 349 ITR 98. IT WAS HELD BY HON'BLE KAR NATAKA HIGH COURT IN THIS CASE THAT TOTAL TURNOVER IS SUM TOTAL OF EXPORT TUR NOVER AND DOMESTIC TURNOVER AND THEREFORE, IF AN AMOUNT IS REDUCED FROM EXPORT TURNOVER THEN TOTAL TURNOVER ALSO GOES DOWN BY THE SAME AMOUNT. RESPECTFULLY FO LLOWING THIS JUDGMENT OF HON'BLE KARNATAKA HIGH COURT, WE DECLINE TO INTERFE RE IN THE ORDER OF DRP ON THIS ISSUE. HENCE GROUND NOS. 2 AND 3 OF REVENUES APPEAL ARE REJECTED. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES WHEREAS THE APPEAL FILED BY THE REVENUE IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. SD/- SD/- (LALIET KUMAR) (ARUN KUMAR GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 17 TH NOVEMBER, 2017. /MS/ IT(TP)A NOS. 347 & 501/BANG/2015 PAGE 7 OF 7 COPY TO: 1. APP ELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.