ITO, Bangalore V. M/s i Pass India Pvt. Ltd., Bangalore

ITA 526/BANG/2012

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7640 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 29-08-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 16-04-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI A RUN KUMAR GARODIA , ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO , JUDICIAL MEMBER I.T. (T.P) A. NO. 526 /BANG/201 2 (ASSESSMENT YEAR : 20 07 - 08 ) INCOME TAX OFFICER, WARD 11(2), BANGALORE. VS. M/S. IPASS INDIA PVT. LTD., LEVEL - 5, PRESTIGE SOLITAIRE, NO.6, BRUNTON ROAD, BANGALORE - 560 001 PAN AABCG 3659H APPELLANT RESPONDENT. I.T. (T.P) A. NO. 508 /BANG/201 2 (ASSESSMENT YEAR : 20 07 - 08 ) (BY ASSESSEE) ASSESSEE BY : SHRI CHAVALI NARAYAN, C .A. REVENUE BY : SHRI KARUPPUSAMY, ADDL. CIT (D.R) DATE OF H EARING : 29.08.2017. DATE OF P RONOUNCEMENT : 31 .08. 201 7 . O R D E R PER SHRI VIJAY P AL RAO, J. M. : TH ESE CROSS APPEAL S ARE DIRECTED AGAINST THE ORDER DT. 13.02.2012 OF COMMISSIONER OF INCOME TAX (APPEALS) - IV , BANGALORE FOR THE ASSESSMENT YEAR 20 07 - 08. 2 IT (TP) A NO S . 526 & 508 /BANG/ 2012 2. THE ASSESSEE IS WHOLLY OWNED SUBSIDIARY O F IPASS INC. USA. THE ASSESSEE IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) ON COST PLUS 10% MARK UP BASIS. THE ASSESSEE HAS REPORTED THE INTERNATIONAL TRANSACTIONS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES T O AE OF RS.18,90,71,000. TO BENCH MARK ITS INTERNATIONAL TRANSACTIONS, THE ASSESSEE SELECTED 28 COMPANIES AS COMPARABLE HAVING ARITHMETIC MEAN OF 14.53% AND CLAIMED ITS INTERNATIONAL TRANSACTIONS AT ARM S LENGTH. THE TPO REJECTED 20 COMPANIES FROM THE SE T OF COMPARABLES SELECTED BY THE ASSESSEE AND CARRIED OUT A FRESH SEARCH. THE TPO FINALLY SELECTED A SET OF 26 COMPANIES AS UNDER : 3 IT (TP) A NO S . 526 & 508 /BANG/ 2012 AFTER ALLOWING WORKING CAPITAL ADJUSTMENT OF 2.03%, THE TPO HAS COMPUTED ADJUSTED ARITHMETIC MEAN AT 23.11% AND ACCOR DINGLY PROPOSED AN ADJUSTMENT UNDER SECTION 92CA OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') OF RS.21,15,81,053. WHILE COMPUTING THE MARGINS OF THE ASSESSEE AND COMPARABLE COMPANIES, THE TPO HAS EXCLUDED THE FOREIGN EXCHANGE GAIN/LOSS AS NON - OPERATIN G IN NATURE. AGGRIEVED BY THE ORDER OF THE TPO / A.O THE ASSESSEE FILED 4 IT (TP) A NO S . 526 & 508 /BANG/ 2012 THE APPEAL BEFORE THE CIT (APPEALS). THE CIT (APPEALS) APPLIED A FILTER OF 0% RELATED PARTY TRANSACTION (RPT) AND REJECTED THE MAJORITY OF THE COMPANIES SELECTED BY THE TPO. THE CIT (APPEALS) HAS ALSO APPLIED SOME OTHER FILTER AND THEREFORE 23 COMPANIES OUT OF THE SET OF 26 WERE REJECTED BY THE CIT (APPEALS). FURTHER THE CIT (APPEALS) ALSO GRANTED RELIEF TO ASSESSEE REGARDING THE ISSUE OF REDUCTION OF DEDUCTION UNDER SECTION 10A OF THE ACT IN RESPECT OF EXPENDITURE INCURRED ON ACCOUNT OF COMMUNICATION EXPENSES AS WELL AS FOREIGN CURRENCY TRAVEL EXPENSES BOTH FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. THUS BOTH THE ASSESSEE AND REVENUE ARE AGGRIEVED BY THE IMPUGNED ORDER OF THE CIT (APPEALS) AND FILED CROSS APPEALS WHEREIN THE FOLLOWING GROUNDS HAVE BEEN RAISED : ASSESSEE'S GROUNDS 5 IT (TP) A NO S . 526 & 508 /BANG/ 2012 6 IT (TP) A NO S . 526 & 508 /BANG/ 2012 REVENUE S GROUNDS 7 IT (TP) A NO S . 526 & 508 /BANG/ 2012 3. WE HAVE HEARD THE LEARNED A.R. AS WELL AS LEARNED D.R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE REVENUE HAS RAISED AN ISSUE OF 0% RPT FILTER APPLIED BY THE CIT (APPEALS) AND SUBMITTED THAT THE TPO HAS APPLIED A FILTER OF 25% WHICH HAS NOT BEEN DISPUTED BY THE ASSESSEE AND THEREFORE THE CIT 8 IT (TP) A NO S . 526 & 508 /BANG/ 2012 (APPEALS) IS NOT JUSTIFIED IN APPLYING THE FILTER OF RPT AT 0%. THE LEARNED AUTHORISED REPRESENTATIVE HAS NOT DISPUTED THIS FACT THAT THE ASSESSEE DID NOT RAISE A GROUND AGAINST THE FILTER OF RPT AT 25% APPLIED BY THE TPO. 4. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD, WE NOTE THAT THIS FILTER OF 0% RPT WAS APPLIED BY THE CIT (APPEALS) SUO MOTO WITHOUT ANY GROUND RAISED BY THE ASSESSEE. WHEN THE ASSESSEE IS NOT AGGRIEVED BY THE RPT FILTER APPLIED AT 25% AND FURTHER IT IS ALMOST IMPOSSIBLE TO FIND A COMPARABLE COMPANY HAVI NG NO RPT THEREFORE A REASONABLE TOLERANCE RANGE OF RELATED PARTY HAS BEEN ACCEPTED BY THIS TRIBUNAL FROM 5% TO 25% DEPENDING UPON THE FACTS AND CIRCUMSTANCES OF THE EACH CASE AS WELL AS AVAILABILITY OF COMPARABLE COMPANIES. HENCE WE FIND THAT THE CIT (AP PEALS) IS NOT JUSTIFIED IN APPLYING SUO MOTO RPT FILTER AT 0%. 5. FURTHER THE ASSESSEE IS SEEKING EXCLUSION OF VARIOUS COMPANIES SELECTED BY THE TPO ON FUNCTIONAL DISSIMILARITY. THE ASSESSEE IS SEEKING THE EXCLUSION OF 9 COMPANIES FROM THE SET OF COMP ARABLES AND THE CORRECT MARGIN IN RESPECT OF MEGA SOFT SOLUTION LIMITED . IN VIEW OF THE FACT THAT THE CIT (APPEALS) HAS NOT EXAMINED AND DECIDED THE ISSUE OF FUNCTIONAL DISSIMILARITY IN RESPECT OF THE 9 COMPANIES AGAINST WHICH THE ASSESSEE HAS RAISED THE OBJECTION OF FUNCTIONAL 9 IT (TP) A NO S . 526 & 508 /BANG/ 2012 DISSIMILARITY, WE ARE OF THE CONSIDERED OPINION THAT THE ENTIRE TP MATTER IS REQUIRED TO BE RELOOKED BY CIT (APPEALS). ACCORDINGLY WE REMIT THE SAME TO THE RECORD OF THE CIT (APPEALS) FOR DECIDING THE FUNCTIONAL COMPARABILITY OR DISSIMILARITY OF THE COMPANIES SELECTED BY THE TPO AND OBJECTED BY THE ASSESSEE. NEEDLESS TO SAY AN APPROPRIATE OPPORTUNITY OF HEARING BE AFFORDED TO THE ASSESSEE. FURTHER THE ASSESSEE IS ALSO AT LIBERTY TO RAISE THE ISSUE OF FOREIGN EXCHANGE GAIN/LOSS A S OPERATING IN NATURE AS RAISED IN THIS APPEAL. THUS THE GROUNDS OF THE REVENUE REGARDING TP ISSUE FROM GROUND NOS.5 TO 8 AND THE APPEAL OF THE ASSESSEE RAISING ONLY TP ISSUE IS SET ASIDE TO THE RECORD OF THE CIT (APPEALS) IN THE ABOVE TERMS. 6. THE REVENUE HAS ALSO RAISED AN ISSUE IN GROUND NOS.2 & 3 REGARDING THE EXCLUSION OF COMMUNICATION CHARGES AND TRAVELLING EXPENSES FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT. 7. WE HAVE HEARD T HE LEARNED D.R. AS WELL AS LEARNED A.R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE ISSUE OF EXPENDITURE INCURRED TOWARDS COMMUNICATION CHARGES & TRAVELLING CHARGES ARE REDUCED FROM EXPORT TURNOVER AN EQUAL AMOUNT SHOULD ALSO BE REDU CED FROM TOTAL TURNOVER WHILE 10 IT (TP) A NO S . 526 & 508 /BANG/ 2012 COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT, IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. 349 ITR 98 (KAR) . THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT HAS BEEN FOLLOWED IN A NUMBER OF CASES IN CO - ORDINATE BENCHES OF ITAT. HENCE, THIS ISSUE IS DECIDED AGAINST THE REVENUE AND IN FAVOUR OF ASSESSEE. 8. GROUND NO.1 OF THE REVENUE S APPEAL IS GENERAL IN NATURE AND DOES NOT REQU IRE ANY SPECIFIC ADJUDICATION. 9. IN THE RESULT, THE CROSS APPEALS ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST AUG., 201 7 . SD/ - (A RUN KUMAR GARODIA ) ACCOUNTANT MEMBE R SD/ - (VIJAY PAL RAO) JUDICIAL MEMBER BANGALORE, DT. 31 .08. 2017. *REDDY GP COPY TO : 1 APPELLANT 4 CIT(A) 2 RESPONDENT 5 DR. ITAT, BANGALORE 3 CIT 6 GUARD FILE SENIOR PRIVATE S ECRETARY INCOME TAX APPELLATE TRIBUNAL BANGALORE.