Heartland Delhi Transcription and Services Private Ltd. (HDTS), New Delhi V. ITO, New Delhi

ITA 5175/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3655 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 11-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 22-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MONA MOHANTY
• Assessee Lawyers: GAURAV JAIN AMIT ARORA; SANCHIT GAR G C AS
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 92C; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH C DELHI ] BEFORE SHRI I. P. BANSAL, JM AND SHRI K. D. RA NJAN, AM I. T. APPEAL NO. 5175 (DEL) OF 2010 ASSESSMENT YEAR : 2006-07. HEARTLAND INFORMATION & CONSULTANCY SERVICES P . LTD., THE INCOME-TAX OFFICE R, [IN RELATION TO HEARTLAND DELHI TRANS. & SER. P. LT D. [HDTS] VS. W A R D : 12 (3), C/O. WALKER CHANDIOK & CO.; N E W D E L H I. L41, CON. CIRCUS, N E W D E L H I110 001. P A N / G I R NO. AAA CH 8644 L. A N D I. T. APPEAL NO. 5176 (DEL) OF 2010 ASSESSMENT YEAR : 2006-07. HEARTLAND INFORMATION & CONSULTANCY SERVICES P . LTD., THE INCOME-TAX OFFICER, [IN RELATION TO HEARTLAND BANGALORE TRANS. & SER. P . LTD. [HBTS] VS. W A R D : 12 (3), C/O. WALKER CHANDIOK & CO.; N E W D E L H I. L41, CON. CIRCUS, N E W D E L H I110 001. P A N / G I R NO. AAA CH 9232 J. ( APPELLANTS ) ( RESPONDENT ) ASSESSEES BY : SHRI ARUN CHHABRA; SHRI ANKIT GO EL, C.AS.; & S/SHRI GAURAV JAIN, AMIT ARORA & SANCHIT GAR G, C.AS.; DEPARTMENT BY : MS. MONA MOHANTY, SR. D. R. O R D E R. PER K. D. RANJAN, AM : 2 I. T. APPEAL NO. 5175 (DEL) OF 2010 A N D I. T. APPEAL NO. 5176 (DEL) OF 2010. THESE TWO APPEALS BY TWO DIFFERENT ASSESSEES ARISE OUT OF TWO SEPARATE ORDERS OF THE LD. DISPUTE RESOLUTION PANELII, DELHI AND PERTAIN TO A SSESSMENT YEAR 2006-07. THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF, FOR THE SAKE OF CONVENIENCE, BY THIS CONSOLIDATED ORDER. 2. THE FIRST ISSUE FOR OUR CONSIDERATION WHICH IS C OMMON IN BOTH THE APPEALS RELATES TO TRANSFER PRICING ADJUSTMENT. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT BOTH THE ASSESSEES ARE SUBSIDIARIES OF HEARTLAND ASIA (MAURITIUS) LTD. WIT H 99.99 PER CENT OF SHARE HOLDING HELD BY HEARTLAND ASIA (MAURITIUS) LTD. AND 0.01 PER CENT H ELD BY HCR INFORMATION CORPORATION, USA. THESE ASSESSEES ARE PRIMARILY ENGAGED IN PROVIDING I.T. ENABLED SERVICES IN THE AREA OF MEDICAL TRANSCRIPTION TO ITS PARENT COMPANY HCR INFORMATION CORPORATION, USA. BOTH THE COMPANIES ARE HUNDRED PER CENT EXPORT ORIENTED UNDER THE SOFT WARE TECHNOLOGY PARK SCHEME OF THE DEPARTMENT OF ELECTRONICS, GOVT. OF INDIA. BOTH TH E ASSESSEES IN THE RETURN OF INCOME CLAIMED EXEMPTION UNDER SECTION 10-A OF THE ACT. BOTH THE ASSESSEES HAVE ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES. IN THE C ASE OF HEARTLAND DELHI TRANSCRIPTION & SERVICES PVT. LTD., THE INTERNATIONAL TRANSACTION A S PER ASSESSEE IS OF RS.14,94,04,081/- AND IN THE CASE OF HEARTLAND BANGALORE TRANSCRIPTION SERVICES PVT. LTD., THE AMOUNT IS OF RS.16,26,34,428/-. THE ASSESSING OFFICER REFERRED THE MATTER TO TRANSF ER PRICING OFFICER UNDER SECTION 92-CA OF THE ACT. THE TPO IN THE CASE OF HEARTLAND DELHI TRANSC RIPTION & SERVICES PVT. LTD. DETERMINED ARMS LENGTH PRICE OF TRANSACTIONS WITH ASSOCIATED E NTERPRISES AT RS.16,61,10,174/- AS AGAINST BOOK VALUE OF MEDICAL TRANSCRIPTION SERVICES LTD. S HOWN BY THE ASSESSEE AT RS.14,94,04,081/-. IN THE CASE OF HEARTLAND BANGALORE TRANSCRIPTION & SER VICES PVT. LTD., THE LD. TPO DETERMINED ARMS LENGTH VALUE OF TRANSACTIONS AT RS.18,07,17,535/-. SINCE THERE WAS DIFFERENCE IN ARMS LENGTH PRICE DETERMINED BY THE TPO VIS--VIS BOOK VALUE OF TRANS ACTIONS, THE AO CONFRONTED THE ASSESSEE. THE AO WHILE PASSING DRAFT ORDER REJECTED THE EXPLA NATION OFFERED BY THE ASSESSEE ON THE GROUND THAT SUBMISSIONS MADE BY THE ASSESSEE HAD ALREADY B EEN CONSIDERED BY THE TPO WHILE PASSING ORDERS UNDER SECTION 92-CA OF THE ACT. THE TPO HAD PASSED ORDER UNDER SECTION 92-CA(3) READ WITH SECTION 154 OF THE ACT IN BOTH THE CASES DETER MINING THE ARMS LENGTH PRICE IN CASE OF HEARTLAND DELHI TRANSCRIPTION & SERVICES PVT. LTD. AT RS.1,51,51,186/- AND IN THE CASE OF HEARTLAND BANGALORE TRANSCRIPTION & SERVICES PVT. L TD. AT RS.1,78,02,353/-. THE ASSESSING 3 I. T. APPEAL NO. 5175 (DEL) OF 2010 A N D I. T. APPEAL NO. 5176 (DEL) OF 2010. OFFICER ADOPTED THE ARMS LENGTH PRICE AS DETERMINED BY THE TPO UNDER SECTION 92-CA(3) / 154 OF THE ACT IN BOTH THE CASES. THE AO WHILE COMPUTING TOTAL INCOME DISALLOWED THE CLAIM OF EXEMPTION UNDER SECTION 10-A IN THE CASE OF HEART LAND DELHI TRANSCRIPTION & SERVICES PVT. LTD. ON THE GROUND THAT STPI AUTHORITIES HAVE GIVEN NO O BJECTION TO THE SUCCESSION OF BUSINESS OF MEDICAL TRANSCRIPTION SERVICES PROVIDED BY THE UNDE RTAKING WHICH DO NOT HAVE ANY RELEVANCE WITH ALLOWABILITY OF DEDUCTION UNDER SECTION 10-A OF THE ACT. THE ASSESSING OFFICER, HOWEVER ALLOWED EXEMPTION U/S 10A IN THE CASE OF HEARTLAND BANGLORE TRANSCRIPTION & SERVICES PVT. LTD. 3. THE ASSESSING OFFICER MADE DRAFT ASSESSMENT ORDE RS IN BOTH THE CASES MAKING ADJUSTMENTS ON ACCOUNT OF ARMS LENGTH PRICES PROPOSED BY THE TP O. THE DRAFT ASSESSMENT ORDER UNDER SECTION 144-C OF THE ACT WAS SENT TO DISPUTES RESOLUTION PE NAL -II, DELHI. THE FIRST OBJECTION RELATED TO DISALLOWANCE OF DEDUCTION UNDER SECTION 10-A OF THE ACT IN THE CASE OF HEARTLAND DELHI TRANSCRIPTION & SERVICES PVT. LTD. THE DRP NOTED T HAT THE ASSESSEE HAD BEEN CLAIMING DEDUCTION UNDER SECTION 10-B FROM ASSESSMENT YEARS 2002-03 TO ASSESSMENT YEAR 2005-06. FROM AY 2006-07 THE ASSESSEE HAS CHANGED THE SECTION UND ER WHICH DEDUCTION WAS CLAIMED. THE ASSESSEE HAD NOT FURNISHED ANY REASONS AS TO WHY IT HAD STARTED CLAIMING DEDUCTION UNDER SECTION 10-A FROM AY 2006-07. DEDUCTION UNDER SECTION 10-B OF THE ACT IS AVAILABLE TO HUNDRED PER CENT EXPORT ORIENTED UNDERTAKINGS. AS PER CLAUSE ( IV) OF EXPLANATION 2 OF SECTION 10-B, HUNDRED PER CENT EXPORT ORIENTED UNDERTAKING MEANS AN UNDER TAKING WHICH HAS BEEN APPROVED BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOV T. IN EXERCISE OF POWERS CONFERRED BY SECTION 14 OF THE INDUSTRIAL (DEVELOPMENT & REGULATION) ACT , 1951 AND THE RULES MADE UNDER THAT ACT. THE DRP FURTHER NOTED THAT THE UNDERTAKING OF THE A SSESSEES HAD NOT BEEN APPROVED BY THE SAID BOARD AS REQUIRED BY SUB CLAUSE (IV) OF THE EXPLA NATION OF SECTION 10-B. IN THE ABSENCE OF THE SAID APPROVAL BY THE SAID BOARD, THE ASSESSEES WA S DISQUALIFIED FROM CLAIMING DEDUCTION UNDER SECTION 10-B OF THE ACT. THE APPROVAL GRANTED TO T HE ASSESSEES BY THE STPI AUTHORITIES COULD NOT BE REGARDED AS APPROVAL GRANTED BY THE SAID BOARD . THE LD. DRP FURTHER NOTED THAT FROM AY 2002-03 THE ASSESSEE HAD BEEN CLAIMING DEDUCTIONS UNDER SECTION 10-B OF THE ACT, IT COULD NOT BE PERMITTED TO START CLAIMING DEDUCTION UNDER SECT ION 10-A OF THE ACT IN RESPECT OF THE SAME UNDERTAKING. THE LD. DRT, THEREFORE, DISALLOWED TH E CLAIM OF THE ASSESSEE. 4 I. T. APPEAL NO. 5175 (DEL) OF 2010 A N D I. T. APPEAL NO. 5176 (DEL) OF 2010. 4. THE NEXT CONTENTION RAISED BEFORE THE LD. DRP RE LATED TO ADJUSTMENT OF RS.1,64,48,031/- TO ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTI ONS IN THE CASE OF HEARTLAND DELHI TRANSCRIPTION & SERVICES PVT. LTD. AND RS.1,78,02,353/- IN THE CA SE OF HEARTLAND BANGALORE TRANSCRIPTION & SERVICES PVT. LTD. BEFORE THE LD. DRP IT WAS CONTE NDED BY THE ASSESSEE THAT TPO HAS WRONGLY REJECTED THE LOSS MAKING COMPARABLES SELECTED BY TH E ASSESSEE, USE OF ONLY CURRENT YEARS DATA AND NOT GRANTING 5 PER CENT STANDARD DEDUCTION FOR SAFE MARGIN BY THE TPO. THE LD. DRP RELYING ON SPECIAL BENCH DECISION OF THE ITAT IN THE CASE OF E ZTEC & TECHNOLOGIES SERVICES LTD. 294 ITR (AT) 32 (SPECIAL BENCH), BANGALORE AND DELHI BENCH DECISION IN THE CASE OF MENTOR GRAPHICS PVT. LTD. 109 I.T.D. 101 HELD THAT THE COMPARABILIT Y ANALYSES IS TO BE CONDUCTED ON THE BASIS OF CURRENT YEARS DATA. AS REGARDS GRANTING 5 PER CENT STANDARD DEDUCTION SAFE MARGIN UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT THE OBJECTION OF THE ASSESSEE WAS REJECTED IN VIEW OF AMENDMENT TO PROVISO TO SECTION 92C(2) ACCORDING TO WHICH IF THE DIFFERENCE IN ARMS LENGTH PRICE ARRIVED AT BY THE TPO / AO AND THE TRANSFER PRICING SHOWN BY THE ASSESSEE IS LESS THAN 5 PER CENT OF THE ARMS LENGTH PRICE SHOWN BY THE ASSESSEE THEN FOR THE PURPOSES OF MAKING ASSESSMENT, VARIATION IN THE INCOME WILL NOT BE MADE ON THIS AC COUNT SINCE THE DIFFERENCE BETWEEN THE ARMS LENGTH PRICE DETERMINED BY THE TPO AND ARMS LENGTH PRICE SHOWN BY THE ASSESSEE EXCEEDED 5 PER CENT, NO BENEFIT WAS ALLOWABLE TO THE ASSESSEE. AS REGARDS REJECTION OF COMPARABLES ON THE GROUND OF INCURRING LOSSES YEAR AFTER YEAR THE DRP AGREED WITH THE TPO THAT COMPARABLES SHOWING LOSSES FROM YEAR TO YEAR OR SHOWING HIGHLY UNPREDICTABLE PROFITABILITY OR SHOWING AS DOWN-WARD TREND FOR THE FOUR YEARS COULD NOT BE SEL ECTED IN TRANSFER PRICING STUDY AS COMPARABLES. THE ASSESSEE ALSO OBJECTED THAT THE A O HAD NOT ALLOWED COMPARABILITY ADJUSTMENTS FOR WORKING CAPITAL AND FOR RISK ADJUSTMENT. THE L D. DRP NOTED THAT ITAT IN THE CASE OF PHILLIPS SOFTWARE P. LTD. HAD ALLOWED RISK ADJUSTMENTS, BUT THE OPERATION OF JUDGEMENT OF THE ITAT HAD BEEN STAYED BY HONBLE KARNATAKA HIGH COURT. THE L D. DRP ACCORDINGLY REJECTED THE OBJECTION OF THE ASSESSEE REGARDING NOT ALLOWING ANY COMPARAB ILITY ADJUSTMENT FOR RISKS ASSUMED AND THE WORKING CAPITAL EMPLOYED. 5 I. T. APPEAL NO. 5175 (DEL) OF 2010 A N D I. T. APPEAL NO. 5176 (DEL) OF 2010. 5. BEFORE US THE LD. AR OF THE ASSESSEE SUBMITTED T HAT THE LD. DRP HAS NOT PASSED SPEAKING ORDER REGARDING OBJECTIONS RAISED BY THE ASSESSEE B EFORE IT. IT HAS BEEN SUBMITTED THAT 5 PER CENT ADJUSTMENTS HAS NOT BEEN ALLOWED BY THE LD. DRP THO UGH THE AMENDMENT TO PROVISO TO SECTION 92C (2) HAS BEEN MADE WITH EFFECT FROM 1/10/2009 BY THE FINANCE (NO.2) ACT, 2009. SINCE THE ASSESSMENT YEAR INVOLVED IN BOTH THE CASES IS 2006- 07 THE ASSESSEE IS ELIGIBLE FOR ADJUSTMENT OF 5 PER CENT OF ARITHMETICAL MEAN WHILE COMPUTING ARMS LENGTH PRICE. IT HAS ALSO BEEN SUBMITTED THAT ITAT, DELHI BENCH IN ASSESSEES OWN CASE HAD A LLOWED CLAIM FOR DEDUCTION UNDER SECTION 10-B OF THE ACT VIDE ORDER DATED 25 TH JUNE, 2010 IN ITA. NOS. 1552 TO 1553 (DEL) OF 2003 . THEREFORE, HEARTLAND DELHI TRANSCRIPTION & SERVICES PVT. LTD. IS ENTITLED FOR DEDUCTION UNDER SECTION 10-B OF THE ACT. THE LD. AR OF THE ASSESSE E FURTHER SUBMITTED THAT THE LD. DRP HAS REJECTED COMPARABLES SELECTED BY THE ASSESSEE ON TH E GROUND THAT COMPARABLE COMPANIES WERE PERSISTENT LOSS MAKING COMPANIES. IT HAS BEEN, THER EFORE, SUBMITTED THAT MATTER MAY BE SET ASIDE DRP FOR DECIDING THE OBJECTIONS RAISED BY ASSESSEE BY AN SPEAKING ORDER. ON THE OTHER HAND, THE LD. SR. DR SUPPORTED THE ORDER OF THE LD. DRP. 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. FROM THE ORDER OF THE LD. DRP WE FIND THAT THE ASSESSEE HAS RAISED OBJECTIONS ON VARIOUS POINTS ON WHICH THE LD. DRP HAS NOT PASSED SPEAKING ORDER. TH E OBJECTIONS RAISED BY THE ASSESSEE HAVE BEEN SUMMARILY REJECTED. 5 PER CENT STANDARD DEDUCT ION HAS BEEN DENIED ON THE GROUND THAT PROVISO TO SECTION 92C(2) OF THE ACT HAS BEEN AMEND ED THOUGH THE SAID AMENDMENT HAS BEEN MADE BY FINANCE (NO.2) ACT, 2009 WITH EFFECT FROM 1 /10/2009. PRIOR TO THIS AMENDMENT AS PER PROVISO TO SECTION 92C(2) THE ASSESSEE WAS ELIGIBLE FOR 5 PER CENT OF ADJUSTMENTS. SINCE THE AMENDMENT HAS BEEN MADE EFFECTIVE FROM 1/10/2009 IT IS HELD THAT THE ASSESSEE WILL BE ELIGIBLE FOR 5 PER CENT OF ADJUSTMENT WHILE COMPUTING ARMS L ENGTH PRICE. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. THE DRP IN THE CASE OF HEARTLAND DELHI TRANSCRIPTION & SERVICES PVT. LTD. HAD ALSO CONFIRMED THE DISALLOWANCE IN RESPECT OF THE CLAIM OF THE ASSESSEE FOR DEDUCTION UNDER SECTION 10-A. SINCE THE LD. DRP HAD NOT PASSED SPEAKING O RDER IN RESPECT OF OTHER OBJECTIONS RAISED BY THE ASSESSEE, WE FEEL IT PROPER TO SET ASIDE THE MA TTER TO THE FILE OF LD. DRP WITH THE DIRECTIONS TO 6 I. T. APPEAL NO. 5175 (DEL) OF 2010 A N D I. T. APPEAL NO. 5176 (DEL) OF 2010. EXAMINE THE OBJECTIONS RAISED BY THE ASSESSEE AND P ASS A SPEAKING ORDER AFTER GIVING PROPER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE D ECIDING THE OBJECTIONS RAISED BY IT. 7. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASS ESSEES ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 30 TH JUNE, 2011. SD/- SD/- [ I. P. BANSAL ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30 TH JUNE, 2011. * MEHTA * COPY OF THE ORDER FORWARDED TO : - 1. APPELLANTS. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT.