Pitney Bowes Software India Pvt. Ltd., New Delhi V. ADDL. CIT, SPECIAL RANGE- 7, New Delhi

ITA 5052/DEL/2018

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9345 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Assessment Year: 2014-2015
• Appeal Filed On: 20-07-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NAMITA
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I - 2 BENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO. 5052 /DEL/201 8 M/S PITNEY BOWES SOFTWARE INDIA PVT. LTD. VS. ADDL. C.I.T 709 - 710, ANSAL CHAMBERS SPECIAL RANGE - 7 BHIKAJI CAMA PALACE NEW DELHI NEW DELHI PAN : AAECM 9134 E DATE OF HEARING : 10 .12.2018 DATE OF PRONOUNCEMENT : 17 .12.2018 ASSESSEE BY : SH RI NEERAJ JAIN , ADV SH RI RAMIT KATYAL , CA REVENUE BY : SMT. NAMITA PANDEY , SR. DR ORDER PER N.K. BILLAIYA, AM: - THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST THE ORDER DATED 2 9 .0 6 .2018 FRAMED U/S 143(3) R.W.S 144C OF THE INCOME - TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT'] PERTAINING TO ASSESSMENT YEAR 20 14 - 15. 2 2. GROUND NO. 1 IS GENERAL IN NATURE AND NEEDS NO SEPARATE ADJUDICATION. 3. GROUND NO. 2, WITH ITS SUB GROUNDS , RELATES TO THE ADDITION OF RS. 6.87 CRORES TO THE INCOME OF ASSESSEE , ALLEGEDLY ON ACCOUNT OF DIFFERENCE IN THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFT WARE DEVELOPMENT SERVICES. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE APPELLANT COMPANY IS A SUBSIDIARY OF PITNEY BOWES SOFTWARE INC., USA AND IS ENGAGED I N THE BUSINESS OF PROVIDING END - TO - END BUSINESS SOLUTIONS IN LOCATION INTELLIGENCE , WHICH COMBINES TECHNOLOGY, DATA AND SERVICES WITH DOMAIN EXPERTISE TO ENABLE AN ORGANIZATION TO MEASURE, COMPARE, VISUALIZE ITS BUSINESS DATA. 5. THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE COMPANY WITH ITS AES , AS REPORTED ARE AS UNDER: 3 NATURE OF INTERNATIONAL TRANSACTIONS METHOD AMOUNT [RS.] PROVISION OF SOFTWARE DEVELOPMENT SERVICES TNMM 1396735089 ROYALTY FEE TNMM 8324 RECOVERY OF EXPENSES CUP 44655111 REIMBURSEMENT OF EXPENSES [PAID] CUP 35292817 RECEIVABLES OTHER METHOD 114386193 6. UNDER THE SEGMENT SOFTWARE DEVELOPMENT SERVICES, THE ASSESSEE HAS USED TNMM AS THE MOST APPROPRIATE METHOD AND OP/OC AS THE PLI. THE ASSESSEE SELECTED A SET OF 7 COMPARABLES WITH AN AVERAGE MARGIN OF 8.36%. THE 7 COMPARABLES ARE AS UNDER: SR. NO. COMPANY NAME OP/OC (%) (AS PER TP STUDY) UPDATED MARGINS SUBMITTED VIDE REPLY DATED 17.03.2017 (%) 1 . ACE SOFTWARE EXPORTS LTD - 2.70 - 2.48 2. CG - VAK SOFTWARE & EXPORTS LTD. 10.32 12.39 3. FCS SOFTWARE SOLUTIONS LTD - 6.00 - 1.60 4. GOLDSTONE TECHNOLOGIES LTD 5.11 3.52 5. NUCLEPSLSOFTWARE EXPORTS LTD 19.39 19.39 6 . POLARIS ENTERPRISE SOLUTIONS LTD PJ>TARIS ENTERPRISE SOLUTIONS LTD 15.83 - 7. TATA ELXSI LTD 16.55 16.55 I Y ARITHMETIC MEAN 8.36% 7.96% 4 7 . SINCE THE ASSESSEES OPERATING PROFIT MARGIN IS SHOWN AT 14.09% AND WHEN COMPARED TO OP/OC OF 7 COMPARABLES , WHICH IS 8.36%, THE ASSESSEE RETURNED THE INTERNATIONAL TRANSACTION AT ARMS LENGTH. 8. WHILE ANALYZING THE TP STUDY REPORT VIS A VIS THE COMPARABLES, THE T PO REJECTED FOUR COMPARABLE COMPANIES , NAMELY: (I) FCS SOFTWARE SOLUTIONS LTD, (II) GOLDSTONE TECHNOLOGIES LTD (III) NUCLEUS SOFTWARE EXPORTS LTD & (IV) POLARIS ENTERPRISE SOLUTIONS LTD . 9. AFTER REJECTING THE AFOREMENTIONED COMPARABLES, THE TPO INCLUDED OTHER COMPARABLES. THE COMPARABLES FINALLY USED BY THE TPO ARE AS UNDER: S.NO . NAME OF THE COMPANY OP/OC (%) 1 ACE SOFTWARE EXPORTS LTD - 0.58% 2. ACROPETAL TECHNOLOGIES LTD 1.83% 3. AKSHAY SOFTWARE TECHNOLOGIES LTD 0.44% 4 . ALCATEL - LUCENT INDIA LTD 10.71% 5. BIRLASOFT (INDIA) LTD 32.83% 6 CG - VAK SOFTWARE & EXPORTS LTD 10.16% 7. LARSEN & TOUBRO INFOTECH LTD 26.76% 8. MINDTREE LTD 19.42% 9. PERSISTENT SYSTEMS LTD 34.48% 5 10 , SASKEN TECHNOLOGIES LTD 6.46% 11 . TATA ELXSI LTD 15.78% 12. TATA TECHNOLOGIES LTD 34.38% 13. TECHNOSOFT ENGINEERING PROJECTS LTD 27.34% 14 . THIRDWARE SOLUTION LTD 49.19% 15. WIPRO LTD 26.24% AVERAGE 19.70% 10. ACCORDINGLY, THE TPO COMPUTED THE ADJUSTMENT AS UNDER: OPERATING COST 1,23,17,72,445 ARMS LENGTH MARGIN (%) OP/OC 19.70% ARMS LENGTH MARGIN 24,26,59,172 ANNS LENGTH REVENUE 1,47,44,31,617 OPERATING REVENUE 1,40,52,72,880 SHORTFALL BEING ADJUSTMENT 6,91,58,737 INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES 1,39,67,35,089 % OF INTERNATIONAL TRANSACTION 99.39% SHORTFALL BEING ADJUSTMENT 6,87,36,868 11. THE ASSESSEE RAISED OBJECTIONS BEFORE THE DRP BUT WITHOUT ANY SUCCESS. 6 1 2 . BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES AND SUBMITTED THAT IF FROM THE FINAL SET OF COMPARABLES USED BY THE TPO, FOUR COMPARABLES ARE ELIMINATED THEN MEAN AVERAGE OF THE REMAINING COMPARABLES WILL CONCLUSIVELY DECIDE THAT THE ASSESSEE S TRANSACTION WITH THE AE IS AT ARMS LENGTH. 13. THE FOUR COMPARABLES ARE AS UNDER: I) BIRLA SOFT INDIA LTD II) WIPRO LTD III) LARSEN & TOUBRO INFOTECH LTD IV) TATA TECHNOLOGIES LTD 14. WE WILL NOW CONSIDER THESE COMPARABLES ONE BY ONE. BIRLA S OFT INDIA LTD 15. THE TPO, AT PAGE 5 OF HIS ORDER HAS USED CERTAIN FILTERS KEEPING IN MIND THE PROFILE OF THE ASSESSEE AND ONE OF THE FILTERS IS TO REJECT THE COMPANIES WHOSE TRANSACTION WITH RELATED PARTY IS MORE THAN 25% OF ITS TURNOVER. IN THE CASE OF BI RLA SOFT INDIA LTD, TOTAL SALES IS AT RS. 467 CRORES AND THE TOTAL RELATED PARTY TRANSACTIONS AMOUNTS TO RS. 377 7 CRORES WHICH IS ABOUT 80% OF THE TOTAL SALES. THESE FACTS ARE CLEARLY IN CONTRADICTION TO THE FILTER APPLIED BY THE TPO AND, THEREFORE, THIS C OMPANY DESERVES TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. WIPRO LTD. 16. THE FINANCES OF THIS COMPANY SHOWS THAT IT IS ENGA G ED IN THE PROVISION OF IT SERVICES, INCLUDING BUSINESS PROCESS OUTSOURCING [BPO] AND I.T. PRODUCTS. MOREOVER, THE ANNUAL REPORT OF THIS COMPANY STATES THAT SEGMENTAL ACCOUNT HAVE BEEN PREPARED AT CONSOLIDATED LEVEL. MOREOVER, EVEN WITHIN THE I.T. SERVICE S SEGMENT [CONSOLIDATED] THIS COMPANY HAS INCLUDED REVENUE FROM BPO SERVICES. THE BALANCE SHEET OF THIS COMPANY SHOWS THAT IT OWNS SIGNIFICANT INTANGIBLES IN THE FORM OF BRAND, TRADEMARKS, PATENTS AND TECHNICAL KNOW - HOW ETC. 17. THE HON'BLE JURISDICTIO NAL HIGH COURT OF DELHI IN THE CASE OF PR. CIT VS. ORACLE [OFSS] BPO SERVICES PVT. LTD ITA NO. 124/2018 HAS EXCLUDED WIPRO LTD ON THE BASIS THAT THE COMPANY HAS A SIGNIFICANT BRAND PRESENCE AND BRAND V A LUE OF AN ENTITY HAS A SIGNIFICANT ROLE IN THE ABILITY TO GARNER PROFITS AND NEGOTIATE CONTRACTS. THIS DECISION OF THE HON'BLE HIGH COURT HAS BEEN UPHELD BY THE HON'BLE SUPREME COURT IN SLP ( CC ) NO. 32469/2018 . 8 18. AS MENTIONED ELSEWHERE, THIS COMPANY OWNS SIGNIFICANT INTANGIBLES AND ITS ANNUAL REPORT STATES THAT DURING THE YEAR, IT HA S A P PLIED FOR 118 NEW PATENTS AND WAS GRANTED 18 NEW PATENTS AGAINST ITS EXISTING PATENT APPLICATIONS. THE COMPANY HAS SEPARATELY CAPITALIZED PATENTS, TRADE - MARKS AND TECHNICAL KNOW - HOW IN ITS BALANCE SHEET. 19. CONSIDERING TH ESE FACTS IN TOTALITY, WE DO NOT FIND WIPRO TO BE A FIT COMPARABLE AND ACCORDINGLY DIRECT FOR ITS EXCLUSION. LARSEN & TOUBRO INFOTECH LTD 20. A PERUSAL OF THE ANNUAL ACCOUNT OF THIS COMPANY SHOWS THAT UNDER THE HEAD SEGMENTAL REPORTING, THIS COMPANY HA S SHOWN REVENUE FROM THREE SEGMENTS, NAMELY, SERVICE CLUSTER S , INDUSTRIAL CLUSTER S AND TELECOM CLUSTERS [PES]. FROM THE TOTAL SEGMENTAL OPERATING PROFIT, THIS COMPANY HAS DEDUCTED UNALLOCABLE EXPENSES , WHICH MEANS THAT THE OPERATING MARGIN OF INDUSTRIAL C LUSTER SEGMENT SELECTED BY THE TPO IS DEVOID OF UNALLOCABLE EXPENSES AS THE SAME HAS BEEN DEDUCTED FROM THE TOTAL SEGMENTAL PROFIT. 9 21. IN OUR CONSIDERED OPINION, SUCH SEGMENTAL ACCOUNTS CANNOT BE ACCEPTED AS THE COMPANY IS HAVING UNALLOCATED EXPENSES. FO R SIMILAR REASONS, IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2013 - 14, THE TRIBUNAL HAS EXCLUDED THIS COMPANY AT THE THRESHOLD IN ITA NO. 7034/DEL/2017. CONSIDERING THE PECULIARITY OF THE FACTS OF THIS COMPANY IN THE LIGHT OF THE FINDINGS OF THE CO - ORDINAT E BENCH, WE DIRECT FOR EXCLUSION OF THIS COMPANY. TATA TECHNOLOGIES LIMITED 22. AS MENTIONED ELSEWHERE, THE TPO HAS ADOPTED FILTER OF RELATED PARTY TRANSACTION WHICH IS MORE THAN 25%. THE ACCOUNTS OF THIS COMPANY SHOWS TOTAL SALES OF 886 CRORES AND THE REVENUE FROM RELATED PARTY TRANSACTION IS RS. 777 CRORES WHICH COMES TO ABOUT 87% AND IS, THEREFORE, HIT BY THE FILTER ADOPTED BY THE TPO HIMSELF. THIS COMPANY DESERVES TO BE EXCLUDED AND WE DIRECT ACCORDINGLY 23. THE SECOND ADJUSTMENT DISPUTE D BY THE ASSESSEE RELATES TO THE AD DI TION OF RS. 81,649/ - ON ACCOUNT OF NOTIONAL INTER E ST IMPUTED ON RECEIVABLES OUTSTANDING FROM THE AE. 10 24. WE HAVE DIRECTED FOR EXCLUSION OF FOUR COMPARABLES TAK EN BY THE TPO, NAMELY , I) BIRLA SOFT INDIA LTD II) WIPRO LTD III) LARSEN & TOUBRO INFOTECH LTD IV) TATA TECHNOLOGIES LTD 25. AFTER THE EXCLUSION OF THESE FOUR COMPARABLES, THE MARGIN OF THE ASSESSEE COMES WITHIN THE RANGE OF +/ - 5%. SINCE THE OPERATING PROFIT MARGIN OF THE ASSESSEE IS WITHIN THE PLUS MINUS 5% OF THE OPERATING PROFIT MARGIN OF THE COMPARABLES, W E DO NOT FIND ANY REASON WHY RECEIVABLES SHOULD BE CONSIDERED SEPARATELY FOR DETERMINING ALP. INTEREST HAS ALREADY BEEN CONSIDERED. AC CORDINGLY WE HOLD THAT NO INTEREST CAN BE IMPUTED SEPARATELY AND ADDITIONALLY. WE DIRECT THE ASSESSING OFFICER/TPO TO DELETE THE ADDITION OF RS. 81,649/ - . GROUND NO. 3 WITH ITS SUB - GROUNDS IS ALLOWED. 11 26 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 5052/DEL/2018 IS ALLOWED. THE ORDER IS PRONOU NCED IN THE OPEN COURT ON 17 .12.2018. SD/ - SD/ - [KULDIP SINGH] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 17 TH DECEMBER, 2018 VL/ COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI 12 DATE OF DICTATION .12.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER