Appeal details
Counselvise Citation
[2013] 120 COUNSELVISE.COM (IT) 2654 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 7 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
05-07-2013
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I
Assessment Year
2007-2008
Appeal Filed On
05-12-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI SHAMIM YAHYA ITA NO. 5420/DEL/2011 & 6057/DEL/2012 A.YRS. 2007-08 & 2008-09 HUGHES SYSTIQUE INDIA PVT. LTD. VS. ACIT, CIRCLE 12(1), 1, SHIVAJI MARG, WESTEND GREEN, NEW DELHI. NH-8, NEW DELHI-110038. PAN: AACB 6600 N ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI AJAY VOHRA ADV. SHRI ABHISHEK AGARWAL CA SHRI RAMIT KATYAL CA RESPONDENT BY : SHRI PEEYUSH JAIN CIT(DR) TP O R D E R PER R.P. TOLANI, J.M: : THESE ARE ASSESSEES APPEALS AGAINST ASSESSMENT ORD ERS DATED 31.10.2011 FOR A.Y. 2007-08 AND DATED 19.10.2012 FO R A.Y. 2008- 09.PASSED BY THE ASSESSING OFFICER U/S 143(3) AFTER SEEKING DIRECTIONS FROM DRP U/S 144C(13) OF THE INCOME-TAX ACT, 1961 ( THE ACT). BOTH THE APPEALS ARE HEARD TOGETHER AND DISPOSED OF BY T HIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE PRINCIPAL GROUNDS OF APPEAL, COMMON IN BOTH THE YEARS UNDER CONSIDERATION, RAISED BY THE APPELLANT ARE AS UNDE R; OTHERS BEING SUPPLEMENTARY AND ARGUMENTATIVE GROUNDS ARE NOT PRE SSED HENCE DISMISSED. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS. 129,356,670/- (A.Y. 2007- 08) & RS. 17,28,83,745/- (A.Y. 2008-09) ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARMS LENGTH PRICE OF THE INTERN ATIONAL ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 2 TRANSACTION OF (I) PROVISION OF SOFTWARE SERVICES, AND (II) MARKETING SUPPORT SERVICES, ON THE BASIS OF THE ORD ER PASSED UNDER SECTION 92CA(3) READ WITH SECTION 144C(5) OF THE ACT BY THE TRANSFER PRICING OFFICER (THE TPO). 2.1. THAT THE ASSESSING OFFICER / DRP ERRED ON FACT S AND IN LAW IN DISREGARDING THE INTERNAL BENCHMARKING UNDER TAKEN BY THE ASSESSEE FOR DETERMINING THE ARMS LENGTH PR ICE OF THE INTERNATIONAL TRANSACTIONS APPLYING TNMM ON THE GRO UND THAT (I) THE TRANSACTIONS UNDERTAKEN WITH UNRELATED PARTY AT 20.60% OF THE TOTAL REVENUE, IS LOWER THAN THE QUAN TUM OF TRANSACTION UNDERTAKEN WITH ASSOCIATED ENTERPRISES, HENCE, IT DOES NOT PROVIDE A ROBUST MEASURE OF COMPARABILITY, AND (II) INTERNAL BENCHMARKING WAS ADOPTED TO GLOSS OVER THE ENTITY LEVEL LOSS. 2.2. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN EVALUATING THE INTERNATIONAL TRANSACTIONS AP PLYING TNMM AT ENTITY LEVEL BY COMPARING THE NET OPERATING PROFIT MARGIN OF THE ASSESSEE WITH UNCONTROLLED NET OPERAT ING PROFIT MARGIN OF COMPARABLE UNCONTROLLED ENTERPRISE S. 3. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AN D IN LAW IN HOLDING THE ARMS LENGTH PRICE OF THE INTERNA TIONAL TRANSACTIONS OF PAYMENT OF MARKET SUPPORT SERVICES FEES (MSF) OF RS. 9,12,80,860/- (A.Y. 2007-08) AND RS. 7,70,11,732/- (A.Y. 2008-09) AT NIL ALLEGEDLY CONCL UDING THAT NO SUCH SERVICE HAS BEEN RECEIVED BY THE AND THEREF ORE THERE IS NO RATIONALE FOR PAYING THIS MARKETING SUPPORT S ERVICES FEES TO THE AE. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW RESTRICTING DEPRECIATION ON COMPUTER PERIPHERALS @ 15% AS AGAINST 60% CLAIMED BY THE ASSESSEE, WITHOUT APPREC IATING THAT UPS COULD NOT WORK WITHOUT COMPUTERS AND SUCH MACHINES ARE A PART OF COMPUTER SYSTEM AND NOT PLAN T AND MACHINERY. ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 3 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 234 C OF THE ACT. 3. BRIEF FACTS ABOUT GROUNDS OF APPEALS ARE : THE APPELLANT HAS CHALLENGED BEFORE US TRANSFER PRICING ADJUSTMENT MA DE BY THE TPO AND SUSTAINED BY THE DISPUTE RESOLUTION PANEL (DRP) O N ACCOUNT OF (I) INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES; AND (II) INTERNATIONAL TRANSACTION OF PAYMENT OF FE E FOR MARKETING SUPPORT SERVICES TO THE ASSOCIATED ENTERPRISE. (I) TRANSFER PRICING ADJUSTMENT IN RESPECT OF THE INTER NATIONAL TRANSACTIONS OF SOFTWARE DEVELOPMENT SERVICES : 3.1. THE APPELLANT, HUGHES SYSTIQUE INDIA PVT. LTD. , IS AS SUBSIDIARY COMPANY OF HUGHES SYSTIQUE MAURITIUS PRIVATE LIMITE D AND IS ENGAGED IN THE BUSINESS OF PROVIDING SOFTWARE ENGINEERING S ERVICES IN THE TELECOM DOMAIN WITH AREAS OF FOCUS BEING BROADBAND, SATELLI TE COMMUNICATIONS, WIRELESS, MULTIMEDIA APPLICATIONS, ETC. DURING THE PREVIOUS YEAR, RELEVANT TO ASSESSMENT YEARS 2007-08 AND 2008-09 THE APPELLA NT, IN THE COURSE OF ITS BUSINESS, ENTERED INTO INTERNATIONAL TRANSACTIO N OF RENDERING OF SOFTWARE DEVELOPMENT SERVICES WITH ITS ASSOCIATED E NTERPRISE, VIZ., HUGHES NETWORK SYSTEMS, USA. 3.2. THIS INTERNATIONAL TRANSACTION OF RENDERING OF SOFTWARE DEVELOPMENT SERVICES TO THE ASSOCIATED ENTERPRISE W AS REPORTED TO BE AT ARMS LENGTH IN THE FOLLOWING MANNER BY THE APPELLA NT: (I) BENCHMARKING OF INTERNATIONAL TRANSACTION OF SOFTWA RE DEVELOPMENT SERVICES APPLYING TNMM CONSIDERING INTE RNAL COMPARABLES. ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 4 3.3. BESIDES UNDERTAKING SOFTWARE DEVELOPMENT FOR T HE ASSOCIATED ENTERPRISE, VIZ., HUGHES NETWORK SYSTEMS INC., USA, THE APPELLANT ALSO ENTERED INTO DIRECT CONTRACTS WITH OTHER UNRELATED PARTY CUSTOMERS DURING THE RELEVANT PREVIOUS YEARS. SINCE AN INTERNAL COMP ARABLES WERE AVAILABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF PROVISION OF SOFTWARE DESIGN AND DEVELOPMENT SERVICES, THE APPELLANT APPL IED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METH OD AND CONSIDERED INTERNAL COMPARABLES FOR APPLYING TNMM. THE RESULT OF THE BENCHMARKING ANALYSIS, AS AFORESA ID, IS TABULATED AS UNDER: ONSITE SOFTWARE DEVELOPMENT SERVICES 7.55% - 9.29% OFFSHORE SOFTWARE DEVELOPMENT SERVICES -50.81% -56.73% 3.4. IN RESPECT OF THE INTERNATIONAL TRANSACTIONS O F RENDERING ONSITE SOFTWARE DEVELOPMENT SERVICES TO THE ASSOCIATED ENT ERPRISE, THE APPELLANT EARNED OPERATING PROFIT MARGIN (OP/TC) OF 7.55%, TH E AVERAGE OPERATING PROFIT MARGIN OF ( -) 9.29% EARNED ON SIMILAR TRANSACTIONS WITH UNRELATED PARTIES, SUCH INTERNATIONAL TRANSACTIONS WERE CONSI DERED TO BE AT ARMS LENGTH. 3.5. WHILE RENDERING OFFSHORE SOFTWARE DEVELOPMENT SERVICES TO THE AE, THE APPELLANT EARNED OPERATING PROFIT MARGIN (O P/TC) OF (-) 50.81% AS AGAINST AVERAGE OPERATING PROFIT MARGIN OF (-) 56.37% ON SIMILAR TRANSACTIONS WITH UNRELATED THIRD PARTIES. ACCORDIN GLY, THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DESIGN AND DEV ELOPMENT SERVICES ONSITE AND ALSO OFFSHORE WAS CONSIDERED TO BE AT A RMS LENGTH PRICE. ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 5 (II) BENCHMARKING OF INTERNATIONAL TRANSACTION OF SOFTWA RE DEVELOPMENT SERVICES APPLYING TNMM WITH EXTERNAL COMPARABLES 3.6. FOR THE PURPOSE OF APPLYING TNMM, THE APPELLAN T BY WRITTEN SUBMISSIONS FILED WITH THE TPO, EXTERNAL COMPARABLE S AND THE OPERATING PROFIT MARGIN (OPERATING PROFIT/OPERATING COST RATI O) OF THE APPELLANT ON INTERNATIONAL TRANSACTIONS ENTERED INTO WITH AE (I. E. ON CONTROLLED TRANSACTION) WAS ALTERNATIVELY BENCHMARKED WITH THE OPERATING PROFIT MARGIN (OPERATING PROFIT/OPERATING COST RATIO) OF T HE COMPARABLE COMPANIES. AFTER CONSIDERING THE VARIOUS SELECTION CRITERIA, 17 COMPARABLE COMPANIES WERE IDENTIFIED AS FUNCTIONALL Y COMPARABLE TO THE OPERATIONS OF THE APPELLANT. 3.7. THE OPERATING PROFIT RATIO OF THE APPELLANT FR OM CONTROLLED TRANSACTIONS, I.E., 13.26% (AFTER CONSIDERING ADJUS TMENT ON ACCOUNT OF IDLE CAPACITY) BEING HIGHER THAN THE AVERAGE OF OPERATIN G PROFIT MARGIN OF THE COMPARABLE COMPANIES AT 6.48%, THE INTERNATIONAL TR ANSACTION WAS EVEN OTHERWISE DEMONSTRATED TO BE AT ARMS LENGTH AND NO ADJUSTMENT WAS REQUIRED TO BE MADE. (III) BENCHMARKING OF INTERNATIONAL TRANSACTION OF SOFTWA RE DEVELOPMENT SERVICES APPLYING INTERNAL CUP METHOD. 3.8. THE ASSESSEE ALSO JUSTIFIED THE INTERNATIONAL TRANSACTION OF ONSITE SOFTWARE DEVELOPMENT SERVICES RENDERED TO ASSOCIATE D ENTERPRISE BEING AT ARMS LENGTH, APPLYING CUP. IT WAS CONTENDED THAT W HILE PROVIDING ONSITE SERVICES, THE APPELLANT HAS CHARGED $11,000 PER MON TH FROM ITS ASSOCIATED ENTERPRISE, VIZ, HUGHES NETWORK SYSTEMS AS AGAINST $8000 - $9,000 PER ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 6 MONTH CHARGED FROM UNRELATED PARTY, NAMELY, NOKIA S IEMENS NETWORKS, OY. SINCE THE PRICE CHARGED FROM ASSOCIATED ENTERPR ISE FOR PROVIDING ONSITE SOFTWARE DEVELOPMENT SERVICES WAS HIGHER THA N THE PRICE CHARGED FROM UNRELATED PARTY, SUCH INTERNATIONAL TRANSACTIO N OF RENDERING OF ONSITE SOFTWARE DEVELOPMENT SERVICES WERE TO BE CONSIDERED BEING AT ARMS LENGTH PRICE TPOS/DRPS ORDERS : 3.9. THE TPO IN HIS REPORT DISREGARDED THE INTERNAL BENCHMARKING ANALYSIS UNDERTAKEN BY THE APPELLANT APPLYING TRANS ACTIONAL NET MARGIN METHOD (TNMM), HOLDING THAT TRANSACTIONS WITH UNR ELATED PARTY CONSTITUTED MINOR SHARE OF 20.30% OF THE TOTAL TRAN SACTIONS AND, THEREFORE, DID NOT PROVIDE A ROBUST MEASURE OF COMPARABILITY A ND FURTHER, INTERNAL BENCHMARKING WAS ADOPTED BY THE APPELLANT TO GLOSS OVER ENTITY LEVEL LOSS. 3.10. THE DISPUTE RESOLUTION PANEL (DRP), AFFIRMING THE CONCLUSIONS OF THE TPO, HELD THAT IN VIEW OF DRP, INTERNAL COMPARABLES CAN BE USED BUT ONLY IF THEY PROVIDE A CORRECT MEASURE OF COMPA RABILITY. IF THE TRANSACTION WITH NON AES CONSTITUTES A MINOR SHARE OF 20.60% OF TOTAL TRANSACTION IT CANNOT PROVIDE A ROBUST MEASURE OF C OMPARABILITY AS CONSIDERATIONS OTHER THAN MARKET FACTORS CAN BE EMB EDDED IN IT. 3.11. THE TPO HAS, INSTEAD, UNDERTAKEN THE BENCHMAR KING ANALYSIS APPLYING TNMM CONSIDERING EXTERNAL COMPARABLES. THE TPO, FOR APPLICATION OF TNMM, CARRIED OUT A FRESH SEARCH OF COMPARABLES AND APPLIED ADDITIONAL FILTERS, E.G., WAGES/ SALES RATI O, PERSISTENT LOSSES, ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 7 DECLINING OPERATING PROFIT AND ONSITE REVENUE FILTE R FOR SELECTION OR REJECTION OF EXTERNAL COMPARABLE COMPANIES. 3.12. THE TPO, CONSIDERING AVERAGE OPERATING PROFIT MARGIN (OP/OC%) OF 25 EXTERNAL COMPARABLE COMPANIES AT 24.31% (AFTE R WORKING CAPITAL ADJUSTMENT) AS AGAINST A LOSS OF 6.53% OF THE APPEL LANT, COMPUTED AN ADJUSTMENT OF RS. 3,80,75,810 ALLEGEDLY ON ACCOUNT OF DIFFERENCE IN INTERNATIONAL TRANSACTIONS OF RENDERING OF SOFTWARE DEVELOPMENT SERVICES. 4. AFTER MENTIONING THESE BRIEF FACTS, LD. COUNSEL FOR THE ASSESSEE ADVERTED TO APPLICATION UNDER RULE 29 OF THE ITAT R ULES DATED 18-01- 2013 FOR ADMISSION OF ADDITIONAL EVIDENCE. FOR THE JUSTIFICATION AND ADMISSIBILITY OF THE EVIDENCE IT IS PLEADED THAT: : (I) COPY OF SOFTWARE DEVELOPMENT AGREEMENT ENTERED IN T O BETWEEN THE ASSOCIATE ENTERPRISE OF THE APPELLANT, I.E. HUG HES NETWORK SYSTEMS INC. AND UNRELATED THIRD PARTY, I.E. HUGHES SOFTWARE SYSTEM LIMITED (NOW KNOWN AS ARICENT TECHNOLOGIES H OLDINGS LIMITED) . (II) SAMPLE COPY OF INVOICE RAISED BY HUGHES SOFTWARE SY STEM LIMITED (NOW KNOWN AS ARICENT TECHNOLOGIES HOLDINGS LIMITED) ON HUGHES NETWORK SYSTEMS INC. AGAINST PRO VISION OF SOFTWARE DEVELOPMENT SERVICES . 4.1. IT IS EMPHASIZED THAT THIS IS PRACTICALLY THE FIRST APPEAL BEFORE THE TRIBUNAL AGAINST THE IMPUGNED ASSESSMENT ORDER. THE APPELLANT HAD PLACED BEFORE THE TPO COMPARABLE UNCONTROLLED TRANS ACTIONS FOR APPLICATION OF CUP METHOD IN RESPECT OF ONSITE SOFT WARE DEVELOPMENT SERVICES. HOWEVER, AT THAT TIME, THE APPELLANT DID NOT HAVE IN ITS ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 8 POSSESSION SIMILAR COMPARABLE UNCONTROLLED TRANSACT IONS IN RESPECT OF OFFSHORE SOFTWARE DEVELOPMENT SERVICES RENDERED TO THE ASSOCIATED ENTERPRISE. 4.2. THE TPO, IN HIS ORDER, DID NOT CONSIDER THE AF ORESAID COMPARABLE UNCONTROLLED TRANSACTIONS FOR BENCHMARKI NG OF INTERNATIONAL TRANSACTIONS ONSITE SOFTWARE SERVICES, PLACED BEFOR E HIM NOT APPRECIATING THAT CUP METHOD IS THE MOST DIRECT METHOD WHICH PRO VIDES A RELIABLE MEASURE FOR DETERMINING ARM'S LENGTH RESULT FOR THE CONTROLLED TRANSACTION. THE DRP, TOO, IN ITS ORDERS DID NOT DEAL WITH THE C OMPARABLE UNCONTROLLED TRANSACTIONS, PLACED ON RECORD BY THE APPELLANT AS PART OF THE TRANSFER PRICING DOCUMENTATION. CONSEQUENTLY DRPS ORDER ALS O BECOMES NON SPEAKING IN NATURE. 4.3. CONSEQUENT TO SUCH NON SPEAKING REJECTION OF I TS COMPARABLE, THE ASSESSEE HAS COLLECTED THE AFORESAID ADDITIONAL EVI DENCE FROM ITS ASSOCIATED ENTERPRISE. THE SAME BECOMES NECESSARY F OR CONSIDERATION BY WAY OF ADDITIONAL EVIDENCE. WITHOUT THE CONSIDERATI ON OF THIS EVIDENCE THE T.P. ADJUSTMENT WILL REMAIN LOPSIDED BASED ON S URMISES. 4.4. THE PRICES OF COMPARABLE UNCONTROLLED TRANSACT IONS OF SOFTWARE DEVELOPMENT SERVICES ON OFFSHORE BASIS RECEIVED BY THE ASSOCIATED ENTERPRISE, VIZ., HUGHES NETWORK SYSTEMS INC. AND F ROM UNRELATED PARTY, VIZ. ARICENT TECHNOLOGIES INDIA LIMITED, WHICH ARE LOWER THAN WHAT IS CHARGED BY THE APPELLANT, AS UNDER: NATURE OF SERVICE PER MAN MONTH RATE PAID TO APPELLANT PER MAN MONTH RATE PAID TO UNRELATED PARTY SOFTWARE DEVELOPMENT USD 3834 3700 (TILL 31.12.2007) USD 4000 (01.01.2008 USD 3700 (UP TO DECEMBER, 2010) ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 9 ONWARDS) 4.5. SINCE PRICE PAID BY HUGHES NETWORK SYSTEMS INC . TO THE APPELLANT (USD 3700-4000) IS HIGHER THAN THE PRICE PAID TO UN RELATED PARTIES, I.E. ARICENT TECHNOLOGIES INDIA LIMITED (USD 3700) FOR T HE OFFSHORE SOFTWARE DEVELOPMENT SERVICES, THE INTERNATIONAL TR ANSACTION OF PROVISION OF OFFSHORE SOFTWARE DEVELOPMENT SERVICES UNDERTAKE N BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE TOO ARE TO BE REGARD ED AS AT ARMS LENGTH APPLYING CUP METHOD. TRANSFER PRICING ADJUSTMENT OF RS. 9,12,80,860 IN R ESPECT OF INTERNATIONAL TRANSACTIONS OF PAYMENT OF MARKETING AND MANAGEMENT SUPPORT SERVICES: 4.6. IN ORDER TO REBUT THE CONCLUSION ARRIVED AT BY THE TPO, THE APPELLANT BY WAY OF ADDITIONAL EVIDENCE IN TERMS OF APPLICATION DATED 18- 01-2013 UNDER RULE 29 OF THE ITAT RULES, HAS PLACED ON RECORD, THE FOLLOWING: (I) AFFIDAVIT OF MR. AJAY GUPTA, VICE PRESIDENT (SA LES & MARKETING) OF HUGHES SYTIQUE CORPORATION, USA (HSC , USA) DECLARING THE WORK PERFORMED BY HIM DURING THE YEAR 2006-07 FOR THE APPELLANT (II) AFFIDAVIT OF MR. ANIL SHARMA, VICE PRESIDENT ( OPERATIONS) OF HUGHES SYTIQUE CORPORATION, USA (HSC, USA) DEC LARING THE WORK PERFORMED BY HIM DURING THE YEAR 2006-07 FOR T HE APPELLANT (III) AFFIDAVIT OF MR. PRADEEP PRITHVINATH KAUL, PR ESIDENT AND CHIEF EXECUTIVE OFFICER HUGHES SYTIQUE CORPORATION, USA (HSC, ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 10 USA) DECLARING THE WORK PERFORMED BY HIM DURING TH E YEAR 2006- 07 FOR THE APPELLANT 4.7. IN THE AFFIDAVITS OF THE OFFICIALS OF HUGHES C ORPORATION, USA, NAMELY MR. PRADEEP PRITHVINATH KAUL, MR. ANIL SHARM S AND MR. AJAY GUPTA, AFFIRMS AND RECORDS THE WORK DONE BY THEM PU RSUANT TO THE MARKETING SUPPORT SERVICES AGREEMENT ENTERED INTO B ETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE. IN THE AFORESAID AFF IDAVIT OF THE KEY MANAGERIAL PERSONNEL, ON THE PAY ROLL OF HSC, USA, CLEARLY STATED THAT THE ENTIRE ACTIVITIES OF SUCH INDIVIDUALS BASED IN US, WERE SOLELY DEVOTED TO BUSINESS OPERATION OF THE APPELLANT IN INDIA, IN AS MUCH AS, THESE KEY PERSONNEL WERE ONLY INTERFACING THE CUSTOMERS AND S OLICITING BUSINESS FOR THE APPELLANT IN INDIA. 4.8. IT WOULD BE APPRECIATED THAT THE ASSOCIATED EN TERPRISE HAS PROVIDED WIDE SPECTRUM OF MARKETING SUPPORT SERVICES AND HAS BEEN WORKING ONLY FOR THE APPELLANT. THE ALLEGATION OF THE TPO THAT T HERE WAS NO EVIDENCE OF RECEIPT OF SUCH SERVICES BY THE APPELLANT, IS ALSO CONTRARY TO THE FACT ON RECORD. 4.9. THIS EVIDENCE COULD NOT BE PRODUCED BY ASSESSE E BEFORE TPO AND DRP AS IT WAS PROCURED SUBSEQUENTLY AND ASSESSEE WA S PREVENTED BY SUFFICIENT REASONS IN NOT FILING THE SAME BEFORE LO WER AUTHORITIES. THIS BEING FIRST APPEAL, IN ORDER TO CORRECTLY DECIDE TH E ALP THESE DOCUMENTS ARE VERY RELEVANT. 5. LD. CIT(DR) IS HEARD ON ADMISSION OF ADDITIONAL EVIDENCE, WHO OPPOSED THE ADMISSION OF ADDITIONAL EVIDENCE. 6. ON MERITS, IT IS PLEADED BY THE LD. COUNSEL THAT THE INTERNATIONAL TRANSACTIONS OF RENDERING OF OFFSHORE SOFTWARE DEVE LOPMENT SERVICES AS ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 11 WELL AS ONSITE SOFTWARE DEVELOPMENT SERVICES, THERE FORE, HAVE BEEN VALIDLY DEMONSTRATED TO BE AT ARMS LENGTH APPLYING CUP METHOD. THEREFORE, SUCH ADJUSTMENT CALLS FOR BEING DELETED IN RESPECT OF PRICES OF SUCH INTERNATIONAL TRANSACTIONS ON FOLLOWING CONTEN TIONS: 6.1. REGARDING INTERNATIONAL TRANSACTIONS OF SOFTWA RE DEVELOPMENT SERVICES, LD.COUNSEL CONTENDS THAT: (I) RE: CUP METHOD BEING THE MOST DIRECT METHOD IS TO B E APPLIED. 6.2. RULE 10B(1)(A) OF THE INCOME-TAX RULES (THE R ULES) PROVIDES THAT FOR APPLICATION OF CUP, THE PRICE CHARGED OR PAID F OR SERVICES PROVIDED IN A COMPARABLES UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS ARE TO BE COMPARED WITH PRICE CHARGED FROM INTERNAT IONAL TRANSACTION UNDERTAKEN BY THE ENTERPRISE (TESTED PARTY) FROM TH E INTERNATIONAL TRANSACTION UNDERTAKEN WITH AN ASSOCIATED ENTERPRIS E. RULE 10B(1)(A) OF THE RULES READS AS FOLLOWS: 10B . (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL T RANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEIN G THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFE RRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERE NCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISE S ENTERING INTO ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 12 SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT TH E PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAU SE (II) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; 6.3. CUP METHOD EVALUATES WHETHER THE AMOUNT CHARGE D IN A CONTROLLED TRANSACTION IS AT ARM'S LENGTH WITH REFERENCE TO TH E AMOUNT CHARGED IN A COMPARABLE UNCONTROLLED TRANSACTION. THE CUP SEEKS TO PROVIDE A DIRECT ESTIMATE OF THE PRICE THE PARTIES WOULD HAVE AGREED TO, HAD THEY RESORTED DIRECTLY TO AN OPEN MARKET ALTERNATIVE TO THE CONTR OLLED TRANSACTION. THE RESULTS DERIVED FROM APPLYING CUP METHOD GENERALLY WILL BE THE MOST DIRECT AND RELIABLE MEASURE OF AN ARM'S LENGTH RESU LT FOR THE CONTROLLED TRANSACTION. 6.4. THE OECD GUIDELINES ALSO PROVIDE IN PARAGRAPH 2.7 THAT . WHERE IT IS POSSIBLE TO LOCATE COMPARABLE UNCONTROL LED TRANSACTIONS, THE CUP METHOD IS THE MOST DIRECT AND RELIABLE WAY TO APPLY THE ARMS LENGTH PRINCIPLE. CONSEQUENTLY, IN SUCH CASES THE CUP METHOD IS PREFERABLE OVER ALL OTHER METHODS . 6.5. THE CUP METHOD PROVIDES THE MOST DIRECT COMPAR ISON FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF IN TERNATIONAL TRANSACTIONS AND IS TO BE PREFERRED OVER THE OTHER PROFIT BASED METHODS. RELIANCE IS PLACED IN THIS REGARD ON THE FOLLOWING DECISIONS: - AZTEC SOFTWARE TECHNOLOGIES SERVICES LTD. VS. ACIT 107 ITR 141 - UCB INDIA PVT. LTD. VS ACIT (2009) 30 SOT 95(MUM) - GHARDA CHEMICALS VS DCIT (2009) 35 SOT 406 (MUM) ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 13 - INTERVET INDIA PVT. LTD. VS. ACIT :130 TTJ 301(MUM) - ACIT VS DUFON LABORATORIES: (2010) 39 SOT 59 (MUM) 6.6. RELIANCE IS ALSO PLACED ON THE DECISION OF THE HONBLE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. MSS INDIA (P) LTD.: 123 TTJ 657 , WHEREIN, THE APPELLANT HAD DETERMINED THE ARMS LEN GTH PRICE OF THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SE APPLYING CUP/ COST PLUS METHOD. THE TPO, HOWEVER, REJECTING THE APPLIC ATION OF CUP/ COST PLUS METHOD BY THE APPELLANT, MADE ADJUSTMENT APPLY ING TNMM. THE TRIBUNAL, WHILE HOLDING THAT THE TPO WAS NOT JUSTIF IED IN REJECTING THE CUP/ COST PLUS METHOD, WHICH WAS TRANSACTIONAL BASE D METHOD, AND INSTEAD MAKING ADJUSTMENT APPLYING TNMM EVEN IF THE ASSESSEE HAS SUFFERED LOSS IN THOSE TRANSACTIONS WITH ITS ASSOCI ATED ENTERPRISE, OBSERVED AS UNDER. HOWEVER, WHENEVER NECESSARY INPUTS FOR APPLYING ON E OF THESE METHODS ARE AVAILABLE AND THERE IS NO DISPUTE ABOUT COMPARABILITY OF THOSE INPUTS, THERE IS NO GOOD REASON TO RESORT TO TRANSACTIONAL PROFIT METHODS. IT WOULD THUS FOLLOW THAT IN A SITU ATION IN WHICH THE ASSESSEE HAS FOLLOWED ONE OF THE STANDARD METHODS O F DETERMINING ALP, SUCH A METHOD CANNOT BE DISCARDED IN PREFERENC E OVER TRANSACTIONAL PROFIT METHODS UNLESS THE REVENUE AUT HORITIES ARE ABLE TO DEMONSTRATE THE FALLACIES IN APPLICATION OF STANDARD METHODS. IN ANY EVENT, ANY PREFERENCE OF ONE METHOD OVER THE OTHER METHOD MUST BE JUSTIFIED BY THE TRANSFER PRICING OF FICER ON THE BASIS OF COGENT MATERIAL AND SOUND REASONING. LET U S, IN THE LIGHT OF THIS FACTUAL POSITION, REVERT TO THE FACTS OF TH IS CASE. 6.7. RELIANCE IN THIS REGARD IS ALSO PLACED ON THE DECISION OF MUMBAI BENCH OF TRIBUNAL IN THE CASE OF SERDIA PHARMACEUTI CALS (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO. 2469/3032/2531 OF MUM), W HEREIN THE ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 14 HONBLE TRIBUNAL WHILE DEALING WITH THE PRIORITY OF APPLICATION OF METHODS, HAS HELD AS UNDER: 64 AS LONG AS CUP METHOD CAN BE REASONABLY APPLI ED IN DETERMINING THE ARMS LENGTH PRICE OF AN INTERNATIO NAL TRANSACTION IN A PARTICULAR FACT SITUATION, AND UNLESS ANOTHER METHOD IS PROVEN TO BE MORE RELIABLE A METHOD VIS--VIS THE FACT SIT UATION OF THAT PARTICULAR CASE, THE CUP METHOD IS TO BE PREFERRED. THE REASON IS SIMPLE. WHEN ASSOCIATED ENTERPRISES ENTER INTO A TR ANSACTION AT SUCH CONDITIONS IN COMMERCIAL AND FINANCIAL TERMS, WHICH ARE DIFFERENT FROM COMMERCIAL AND FINANCIAL TERMS IMPOS ED IN COMPARABLE TRANSACTION BETWEEN INDEPENDENT ENTERPRI SES, THE DIFFERENCES IN THESE TWO SETS OF CONDITIONS IN FINA NCIAL AND COMMERCIAL TERMS ARE ATTRIBUTED TO INTER RELATIONSH IP BETWEEN THE ASSOCIATED ENTERPRISES, AND IT IS THIS IMPACT OF IN TERRELATIONSHIP BETWEEN THE ASSOCIATED ENTERPRISES THAT IS SOUGHT T O BE NEUTRALIZED BY THE TRANSFER PRICING REGULATIONS. AS LONG AS CUP METHOD CAN BE RELIABLY APPLIED ON THE FACTS OF A CASE, IT DOES OF FER MOST DIRECT METHOD OF NEUTRALIZING THE IMPACT OF INTERRELATIONS HIP BETWEEN AES ON THE PRICE AT WHICH THE TRANSACTIONS HAVE BEEN EN TERED INTO BY SUCH AES 6.8. RELYING ON THE DECISION OF SERDIA PHARMA (SUPRA) , THE DELHI BENCH OF TRIBUNAL TOO, IN THE CASE OF M/S CLEAR PLUS INDI A PVT LTD VS. DCIT (ITA NO.3944/D/2010), HELD THAT: 7. IN THE CASE OF SERDIA PHARMACEUTICALS INDIA (P) LIMITED, IT HAS BEEN HELD THAT CUP METHOD IS A PREFERRED MET HOD AND IT LEADS TO MORE RELIABLE RESULTS VISA- VIS THE RESULT S OBTAINED BY APPLYING TRANSACTION PROFIT METHOD. IN THE CASE OF SNF (AUSTRALIA) PTY. LIMITED, IT HAS BEEN HELD THAT THE FOCUS IS ON THE MARKET IN WHICH PRODUCTS ARE ACQUIRED. THE RATIO OF THIS CASE IS APPLICABLE MUTATIS-MUTANDIS TO THE FACTS OF THE CASE AS THE FO CUS IS ON THE MARKET IN WHICH PRODUCTS ARE SOLD. ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 15 6.9. IN THE CASE OF GHARDA CHEMICALS LIMITED VS DCI T, 130 TTJ 556, THE HONBLE INCOME TAX APPELLATE TRIBUNAL (ITAT), TOO, HELD THAT INTERNAL COMPARABLE SHOULD BE PREFERRED OVER EXTERN AL COMPARABLES. THE RELEVANT EXTRACT OF THE JUDGMENT IS REPRODUCED BELO W: INTERNAL CUP METHOD ENVISAGES COMPARING THE UNCONT ROLLED TRANSACTIONS OF THE APPELLANT ITSELF WITH OTHER UNR ELATED PARTIES SO AS TO DETERMINE THE ALP WITH THE AE. HOWEVER THE EX TERNAL CUP METHOD DISREGARDS THE PRICE CHARGED OR PAID BY THE APPELLANT TO OR FROM ITS UNRELATED PARTIES AND CONTEMPLATES THE COM PARISON OF THE PRICE SO CHARGED FROM OR PAID TO ITS AE WITH SOME E XTERNAL INDEPENDENT RELIABLE PRICE DATA UNDER SIMILAR CIRCU MSTANCES OF TRANSACTIONS WITH AE. ORDINARILY THE INTERNAL CUP M ETHOD SHOULD BE PREFERRED OVER THE EXTERNAL CUP METHOD AS IT NEU TRALIZES SEVERAL DISTINGUISHING FACTORS, SUCH AS THE LOCAL FACTORS AND THE ECONOMIES AVAILABLE OR UNAVAILABLE TO THE APPELLANT IN PARTICULAR, HAVING BEARING OVER THE COMPARISON OF PRICE CHARGED FROM UNRELATED PARTIES AND AE. 6.10. IN CASE OF THE APPELLANT, IT WOULD BE APPRECI ATED, THE MOST DIRECT COMPARISON HAS BEEN PROVIDED BY WAY OF COMPARABLE U NCONTROLLED TRANSACTIONS ENTERED INTO BY THE ASSOCIATED ENTERPR ISE WITH UNRELATED PARTIES, IN INDIA, FOR RENDERING SIMILAR SOFTWARE D EVELOPMENT SERVICES. THE AFORESAID INTERNAL COMPARISON UNDISPUTEDLY PROV IDES THE MOST RELIABLE AND DIRECT BENCHMARK FOR ESTABLISHING THE ARMS LENGTH PRICE OF SUCH INTERNATIONAL TRANSACTIONS OF RENDERING SOFTWA RE DEVELOPMENT SERVICES ENTERED INTO BY THE APPELLANT. THEREFORE, IN THE CASE OF THE APPELLANT, CUP COULD APPROPRIATELY BE APPLIED CONSI DERING INTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS ENTERED INTO B Y THE APPELLANT WITH UNRELATED PARTIES. ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 16 6.11. THE TPO WAS NOT JUSTIFIED IN IGNORING THE AFO RESAID COMPARABLE UNCONTROLLED TRANSACTIONS PLACED ON RECORD AND INST EAD EMBARKING UPON A LESS DIRECT BENCHMARKING EXERCISE BY RESORTING TO C OMPARISON OF PROFITS OF EXTERNAL COMPARABLES. WITHOUT PREJUDICE REJECTION OF INTERNAL TNMM BY THE TPO: 6.12. RULE 10B(1)(E) OF THE INCOME-TAX RULES (THE RULES) PROVIDES THAT FOR APPLICATION OF TNMM, THE PROFIT MARGIN REALIZED BY AN ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONT ROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS ARE TO BE COMPARED WI TH NET PROFIT MARGIN REALIZED BY THE ENTERPRISE (TESTED PARTY) FROM THE INTERNATIONAL TRANSACTIONS ENTERED INTO WITH AN ASSOCIATED ENTERP RISE. RULE 10B(1)(E) OF THE RULES READS AS FOLLOWS: TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING RE GARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 17 COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MA RGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 6.13. THE INTERNAL COMPARABLES AVAILABLE IN CASE OF AN ASSESSEE ARE TO BE PREFERRED FOR THE PURPOSE OF BENCHMARKING OF INT ERNATIONAL TRANSACTIONS EVEN IN THE CASE WHERE TNMM IS APPLIED , INSTEAD OF RELYING ON EXTERNAL COMPARABLES, AS PROVIDED IN PARAGRAPH 3 .26 OF THE OECD GUIDELINES WHICH READS AS UNDER: 3.26. THE TRANSACTIONAL NET MARGIN METHOD EXAMINE S THE NET PROFIT MARGIN RELATIVE TO AN APPROPRIATE BASE (E.G. COSTS, SALES, ASSETS) THAT A TAXPAYER REALIZES FROM A CONTROLLED TRANSACTION OR TRANSACTIONS THAT ARE APPROPRIATE TO AGGREGATE UNDE R THE PRINCIPLES OF CHAPTER I). THUS, A TRANSACTIONAL NET MARGIN MET HOD OPERATES IN A MANNER SIMILAR TO THE COST PLUS AND RESALE PRICE METHODS. THIS SIMILARITY MEANS THAT IN ORDER TO BE APPLIED RELIAB LY, THE TRANSACTIONAL NET MARGIN METHOD MUST BE APPLIED IN A MANNER CONSISTENT WITH THE MANNER IN WHICH THE RESALE PRIC E OR COST PLUS METHOD IS APPLIED. THIS MEANS IN PARTICULAR THAT TH E NET MARGIN OF THE TAXPAYER FROM THE CONTROLLED TRANSACTION (OR TR ANSACTIONS THAT ARE APPROPRIATE TO AGGREGATE UNDER THE PRINCIPLES O F CHAPTER I) SHOULD IDEALLY BE ESTABLISHED BY REFERENCE TO THE N ET MARGIN THAT THE SAME TAXPAYER EARNS IN COMPARABLE UNCONTROLLED TRANSACTIONS. WHERE THIS IS NOT POSSIBLE, THE NET MARGIN THAT WOU LD HAVE BEEN EARNED IN COMPARABLE TRANSACTIONS BY AN INDEPENDENT ENTERPRISE MAY SERVE AS A GUIDE. A FUNCTIONAL ANALYSIS OF THE ASSOCIATED ENTERPRISE AND, IN THE LATTER CASE, THE INDEPENDENT ENTERPRISE IS REQUIRED TO DETERMINE WHETHER THE TRANSACTIONS ARE COMPARABLE ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 18 AND WHAT ADJUSTMENTS MAY BE NECESSARY TO OBTAIN REL IABLE RESULTS. (EMPHASIS SUPPLIED) 6.14. THE REVISED OECD TRANSFER PRICING GUIDELINES ISSUED ON 22 ND JULY, 2010, TOO, RECOMMENDED THE USE OF INTERNAL CO MPARABLE DATA FOR BENCHMARKING ANALYSIS, AS UNDER: C.3.4.4 RELIANCE ON DATA FROM THE TAXPAYERS OWN OP ERATIONS (INTERNAL DATA): 2.141 WHERE COMPARABLE UNCONTROLLED TRANSACTIONS O F SUFFICIENT RELIABILITY ARE LACKING TO SUPPORT THE DIVISION OF THE COMBINED PROFITS, CONSIDERATION SHOULD BE GIVEN TO INTERNAL DATA, WHICH MAY PROVIDE A RELIABLE MEANS OF ESTABLISHING OR TESTING THE ARMS LENGTH NATURE OF THE DIVISION OF PROFITS... A.4.2 INTERNAL COMPARABLES: 3.27 STEP 4 OF THE TYPICAL PROCESS DESCRIBED AT PA RAGRAPH 3.4 IS A REVIEW OF EXISTING INTERNAL COMPARABLES, IF ANY. IN TERNAL COMPARABLES MAY HAVE A MORE DIRECT AND CLOSER RELAT IONSHIP TO THE TRANSACTION UNDER REVIEW THAN EXTERNAL COMPARABLES. THE FINANCIAL ANALYSIS MAY BE EASIER AND MORE RELIABLE AS IT WILL PRESUMABLY RELY ON IDENTICAL ACCOUNTING STANDARDS AND PRACTICES FOR THE INTERNAL COMPARABLE AND FOR THE CONTROLLED TRANSACTION. IN A DDITION, ACCESS TO INFORMATION ON INTERNAL COMPARABLES MAY BE BOTH MORE COMPLETE AND LESS COSTLY. A.4.3 EXTERNAL COMPARABLES AND SOURCES OF INFORMATI ON: PARA 3.29 THERE ARE VARIOUS SOURCES OF INFORMATION THAT CAN BE USED TO IDENTIFY POTENTIAL EXTERNAL COMPARABLES. TH IS SUB-SECTION DISCUSSES PARTICULAR ISSUES THAT ARISE WITH RESPECT TO COMMERCIAL DATABASES, FOREIGN COMPARABLES AND INFORMATION UNDI SCLOSED TO TAXPAYERS. ADDITIONALLY, WHENEVER RELIABLE INTERNAL COMPARABLES EXIST, IT MAY BE UNNECESSARY TO SEARCH FOR EXTERNAL ONES, SEE PARAGRAPHS 3.27-3.28. ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 19 3.32 IT MAY BE UNNECESSARY TO USE A COMMERCIAL DAT ABASE IF RELIABLE INFORMATION IS AVAILABLE FROM OTHER SOURCE S, E.G. INTERNAL COMPARABLES. 6.15. RELIANCE IS PLACED IN THIS REGARD ON THE FOLL OWING DECISIONS: (I) THE THIRD MEMBER BENCH OF THE MUMBAI TRIBUNAL, IN T HE CASE OF TECHNIMOUNT ICB PVT. LTD. VS. ACIT (ITA NO. 4608 & 5085/MUM/2010), WHILE EXPLAINING THE IMPORT OF CLAU SE (I) OF RULE 10B(E) OF THE ACT, HELD THAT THE RULE ITSELF PROVID ES THAT PREFERENCE SHALL BE GIVEN TO INTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS VIS- -VIS EXTERNALLY COMPARABLE UNCONTROLLED TRANSACTIO NS. (II) THE HONBLE TRIBUNAL IN THE CASE OF BIRLASOFT (INDI A) LTD. VS. ACIT 136 TTJ 505, TOO, UPHELD THE INTERNAL BENCHMARKING ANALYSIS UNDERTAKEN BY THE APPELLANT WHILE JUSTIFYING THE IN TERNATIONAL TRANSACTIONS OF PROVISION FOR SOFTWARE DEVELOPMENT SERVICES AS AT ARMS LENGTH APPLYING TNMM AS AGAINST EXTERNAL BENC HMARKING REFERRED BY THE TPO. FURTHER, THE REVENUE IS NOT BE FORE THE HIGH COURT ON THE ISSUE OF INTERNAL COMPARABILITY. (III) ON THE SAME LINES, THE CO-ORDINATE BENCH OF DELHI T RIBUNAL IN THE CASE OF DESTINATION OF THE WORLD VS. DCIT [ITA NO 5534/DEL/2010] AND INTERRA INFORMATION TECHNOLOGIES INDIA (P) LTD. VS. DCIT (ITA NO. 5568&5680/DEL/2011), TOO, HE LD THAT TRANSFER PRICING ANALYSIS SHOULD BE DONE BY TAKING RECOURSE TO INTERNAL UNCONTROLLED TRANSACTIONS. ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 20 (IV) RELIANCE IS ALSO PLACED ON THE DECISION OF HONBLE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF UCB INDIA (P) LTD. V ACIT 30 SOT 95 (MUMBAI). 6.16. THE TPO REJECTED THE INTERNAL BENCHMARKING CA RRIED OUT BY THE APPELLANT DISPUTING THE COMPARISON IN RELATION TO V OLUME/QUANTUM OF TRANSACTIONS WITH RELATED AND UNRELATED PARTIES, HO LDING THAT SUCH UNRELATED PARTY TRANSACTIONS CONSTITUTED MINOR SHAR E OF 20.30% OF THE TOTAL REVENUES AND, THEREFORE, DID NOT PROVIDE ROBU ST BENCHMARK. 6.17. IN THE CASE OF THE APPELLANT, THE REVENUE DER IVED FROM UNRELATED PARTY TRANSACTIONS AT 20.30% OF THE AGGREGATE REVEN UE OF THE APPELLANT, CANNOT BE THE REASON FOR DISREGARDING INTERNAL COMP ARABILITY ANALYSIS UNDERTAKEN BY THE APPELLANT. IT WOULD BE APPRECIATE D THAT THE APPELLANT IN THE COURSE OF ITS BUSINESS ENTERS INTO SEVERAL SOFT WARE DEVELOPMENT CONTRACTS OF SMALL VOLUME. IN OTHER WORDS, AGGREGAT E TURNOVER OF THE APPELLANT COMPRISES OF SEVERAL TRANSACTIONS / CONTR ACTS FOR RENDERING OF SOFTWARE DEVELOPMENT SERVICES OF SMALLER VOLUME. 6.18. FURTHER, IT IS NOT THE CASE OF THE TPO THAT S OFTWARE DEVELOPMENT CONTRACTS UNDERTAKEN WITH UNRELATED PARTIES ARE NOT SIMILAR TO SOFTWARE DEVELOPMENT CONTRACTS UNDERTAKEN WITH ASSOCIATED EN TERPRISES, WHICH CONSTITUTE INTERNATIONAL TRANSACTIONS. IT IS ALSO T HE POSITION TAKEN BY THE REVENUE THAT THE MAGNITUDE OF TURNOVER IS NOT THE T EST OF COMPARABILITY FOR IDENTIFYING THE COMPARABLE COMPANIES. 6.19. IN ANY CASE, THE DELHI BENCH OF TRIBUNAL IN T HE CASE OF INTERRA INFORMATION TECHNOLOGIES INDIA (P) LTD. VS. DCIT (I TA NO. 5568&5680/DEL/2011) HELD THAT, TRANSACTION UNDERTAK EN WITH UNRELATED ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 21 THIRD PARTIES, IN EXCESS OF 15% OF THE TOTAL TRANSA CTIONS (REVENUE) IS SUFFICIENT TO UNDERTAKE BENCHMARKING APPLYING TNMM CONSIDERING INTERNAL COMPARABLES. 6.20. IT IS ALSO PERTINENT TO NOTE THAT THE TPO IN HIS ORDER, WHILE CONDUCTING FRESH SEARCH HAS SELECTED COMPANIES WITH TURNOVER IN EXCESS OF 1 CRORE. HOWEVER, THE TPO HIMSELF HAS REJECTED T HE INTERNAL COMPARABLE WITH A TURNOVER OF 2.97 CRORES USED BY T HE APPELLANT FOR BENCHMARKING ANALYSIS, HOLDING IS TO BE VERY SMALL AS AGAINST THE SALES MADE TO ASSOCIATED ENTERPRISE. SINCE THE TPO HIMSEL F HAS ACCEPTED COMPANIES WITH TURNOVER MORE THAN 1 CRORE, THIS ARG UMENT OF THE TPO SEEMS INCONSISTENT WITH HIS OWN APPROACH 6.21. THE INTERNAL BENCHMARKING ANALYSIS UNDERTAKEN BY THE APPELLANT, THEREFORE, HAS WRONGLY BEEN REJECTED BY THE TPO AND THE TRANSFER PRICING ADJUSTMENT MADE IN RESPECT OF THE INTERNATIONAL TRA NSACTION OF SOFTWARE DEVELOPMENT SERVICES RENDERED TO THE ASSOCIATED ENT ERPRISE, CALLS FOR BEING DELETED. 6.22. THE INTERNATIONAL TRANSACTIONS OF RENDERING S OFTWARE DEVELOPMENT SERVICES HAVING BEEN ESTABLISHED TO BE AT ARMS LEN GTH, THE TRANSFER PRICING ADJUSTMENT OF RS.3,80,75,810 MADE BY THE TP O, IS, THEREFORE, LIABLE TO BE DELETED. II. TRANSFER PRICING ADJUSTMENT OF RS. 9,12,80,860 IN RESPECT OF INTERNATIONAL TRANSACTIONS OF PAYMENT OF MARKETING AND MANAGEMENT SUPPORT SERVICES : 6.23. THE APPELLANT HAS ENTERED INTO AN AGREEMENT D ATED 1 ST APRIL, 2006 WITH THE US ASSOCIATED ENTERPRISE, VIZ., HUGHES SYS TIQUE CORPORATION ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 22 (HSC USA) FOR AVAILING THE FOLLOWING MARKETING AN D MANAGEMENT SUPPORT SERVICES: (A) ASSISTING THE APPELLANT WITH SALES PROMOTION OF THE PRODUCTS/ SERVICES. (B) OBTAINS CUSTOMERS AND SOLICIT ORDERS AND SELL THE A PPELLANTS PRODUCTS/ SERVICES, ITS LICENSES AND SERVICES. (C) RENDERING OF STRATEGIC AND LEADERSHIP SERVICES TO T HE APPELLANT, I.E. PERFORMING REGULAR REVIEWS OF OPERATIONS OF THE APP ELLANT AND INCLUDING REVIEWING OF FINANCIAL STATEMENTS, STAFFI NG STATUS, CASH FLOW REQUIREMENT, FACILITIES MANAGEMENT, ETC. (D) FORMULATION OF BUSINESS STRATEGIES FOR THE APPELLAN T AND SUPPORTING THE APPELLANT IN THE EXECUTION OF THE BUSINESS STRA TEGY. (E) ASSISTING APPELLANT IN MAINTAINING THE GOODWILL OF CUSTOMERS, KEEPING CUSTOMERS INFORMED ON CONTRACT PROGRESS, ID ENTIFYING AND RESOLVING CUSTOMERS CONCERNS ABOUT PRODUCTS/ SERVIC ES, MONITORING AND REPORTING ON CUSTOMER SATISFACTION TO THE APPEL LANT. (F) MONITORING AND EXPEDITING THE RECEIPT, CUSTOMS CLEA RANCE, TRANSPORTATION AND INSTALLATION OF PRODUCTS. (G) NOTIFYING THE APPELLANT OF ANY CLAIM/ LITIGATION IN VOLVING PRODUCTS/ SERVICES 6.24. IN TERMS OF THE ARRANGEMENT WITH THE APPELLAN T, THE AFOREMENTIONED COSTS ARE CHARGED OUT ON COST PLUS 7% BASIS TO THE APPELLANT. THE BENEFIT OF ENTIRE COST INCURRED BY THE AE, VIZ., HSC USA, I S TO BE DERIVED BY THE APPELLANT. THE APPELLANT, ACCORDINGLY, DURING THE F INANCIAL YEAR 2006-07 MADE PAYMENT OF A SUM OF RS. 9,12,80,860 TO HSC USA , TOWARDS MARKETING SUPPORT SERVICE FEE. ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 23 6.25. FOR BENCHMARKING THE AFORESAID TRANSACTION, T HE APPELLANT CONDUCTED A SEARCH OF COMPARABLE COMPANIES ON ONES OURCE DATABASE CONSIDERING ITS ASSOCIATED ENTERPRISE, I.E. HSC, US A AS THE TESTED PARTY APPLYING TNMM METHOD. THE AVERAGE RETURN ON TOTAL C OST FOR COMPARABLE COMPANIES IN THE UNITED STATES OF AMERIC A REGION WAS FOUND TO BE AT 15.80%, WHICH WAS HIGHER THAN THE RETURN O N TOTAL COST EARNED BY HSC, USA AT 11.30%, AND ACCORDINGLY, THE INTERNA TIONAL TRANSACTION OF PAYMENT OF MARKETING SUPPORT FEES WAS CONSIDERED TO BE AT ARMS LENGTH PRICE. TPOS/DRPS ORDER : 7. THE TPO, HOWEVER, IGNORING THE BENCHMARKING ANAL YSIS UNDERTAKEN AS ABOVE, HELD THAT THERE WAS NO EVIDENC E FOR RENDERING OF THE MARKETING SUPPORT SERVICES BY THE ASSOCIATED ENTERP RISES TO THE APPELLANT AND AN INDEPENDENT PARTY WOULD NOT HAVE MADE SUCH A PAYMENT IN AN ARMS LENGTH SITUATION. FURTHER, IT HAS BEEN OBSERV ED BY THE TPO THAT EVIDENCE OF MARKET PRICE FOR AVAILING SUCH SERVICES FROM A THIRD PARTY WAS NOT AVAILABLE. THE TPO, ACCORDINGLY, APPLYING CUP M ETHOD DETERMINED THE ARMS LENGTH PRICE OF MARKETING SUPPORT SERVICE AS NIL AND ACCORDINGLY THE INCOME OF THE APPELLANT WAS ADJUSTE D BY A SUM OF RS.9,12,80,860. 7.1. THE DRP AFFIRMING THE ORDER OF THE TPO, HELD A S UNDER: DRP FINDS THAT THE TPO HAS EXAMINED THE ISSUE IN D ETAIL IN HIS ORDER FROM PARAS 24 TO 26. DRP HAS ALSO EXAMINED TH E NATURE OF SERVICES AS TABULATED ABOVE RENDERED BY THE AE T O QUERIST I.E. CLIENT SOLICITED IN THE US. EXCEPT FOR C & D THE OT HER SERVICES CAN BE RENDERED DIRECTLY FROM INDIA IN VIEW OF INST ANT COMMUNICATION FACILITIES AT THE MOST A LIAISON OFFI CE IS REQUIRED. ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 24 SO TO HAVE AN AE EXCLUSIVELY FOR SUCH SERVICES SEEM S INAPPROPRIATE AND IF AE IS SURVIVING ONLY ON MARK U P FOR ITS INCOME, NO WONDER IT IS IN LOSSES. THE LOSSES IN TH E CIRCUMSTANCES APPEAR TO BE CONTRIVED. AS FAR AS C & D IS CONCERNED HOW EFFECTIVELY CAN SUCH SERVICES BE REND ERED IS ALSO A MOOT POINT. THESE SERVICES ARE NEEDED TO BE PERFO RMED LOCALLY EITHER INHOUSE OR BY A LOCAL PARTY WHICH KNOWS LOCA L BUSINESS ENVIRONMENT. SERVICES AT D ARE BEING RENDERED FOR T HE QUERIST IN US AND CAN PERHAPS BE CONSIDERED AS BEING ACTUALLY PROVIDED ACTUALLY. BUT THERE IS NO WAY OF QUANTIFYING THEM A ND ESTABLISHING THEIR VERACITY. SO, ON THE WHOLE AFTER CONSIDERING TPOS REASONS AND OUR OWN ANALYSIS, DRP CONCURS WIT H THE DISALLOWANCE MADE BY THE TPO. ASSESSEES CONTENTIONS ON AO & DRP ORDER: 8. THERE IS NO BAR UNDER THE ACT TO HAVE TRANSACTIO NS WITH THE GROUP COMPANIES AND THE QUERIST IS FREE TO CONDUCT BUSINE SS IN THE MANNER MOST SUITABLE TO IT AND THE COMMERCIAL OR BUSINESS EXPED IENCY OF INCURRING ANY EXPENDITURE IS TO BE SEEN FROM THE ASSESSEES POINT OF VIEW. IT IS ALSO A SETTLED LAW THAT IT IS THE PREROGATIVE OF THE BUSIN ESSMAN TO ORGANIZE ITS AFFAIRS IN A MANNER BEST SUITED TO IT AND THE REVEN UE AUTHORITY CANNOT STEP INTO THE SHOES OF THE BUSINESSMAN. 8.1. IT IS FURTHER SUBMITTED, THAT THE ASSESSEE IS FREE TO CONDUCT BUSINESS IN THE MANNER THAT ASSESSEE DEEMS FIT AND THE COMME RCIAL OR BUSINESS EXPEDIENCY OF INCURRING ANY EXPENDITURE IS TO BE SE EN FROM THE ASSESSEES POINT OF VIEW. ATTENTION IN THIS REGARD IS INVITED TO THE FOLLOWING DECISIONS: - CIT VS. MALAYALAM PLANTATIONS LIMITED: 53 ITR 140 (SC) - CIT V. WALCHAND & CO. ETC. (1967) 65 ITR 381 - J K WOOLLEN MANUFACTURERS V. CIT: 72 ITR 612(SC) - CIT V. BIRLA COTTON SPG. AND WVG. MILLS LTD.: 82 ITR 166 (SC) - MADHAV PRASAD JATIA V. CIT U.P.: 118 ITR 200 (SC) ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 25 - S.A. BUILDERS LTD. VS. CIT : 288 ITR 1 (SC) - CIT V. BHARTI TELEVENTURES LTD: 331 ITR 502 (DEL) - CIT VS. PADMANI PACKAGING (P) LTD. : 155 TAXMANN 268 (DEL) - CIT V. ROCKMAN CYCLE INDUSTRIES LTD.: 331 ITR 401 (P&H) (FB) - CIT VS. EKL APPLIANCES LTD. : ITA NO. 1068/2011 & 1070/2011 (DEL HC) CIT V. DALMIA CEMENT (P.) LTD: 254 ITR 377 (DEL) CIT VS. DALMIA CEMENT (B) LTD. (SUPRA), (DEL) 8.2. AS LONG AS AN ITEM OF EXPENDITURE HAS BEEN INC URRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSE SSEE, WHETHER OR NOT SUCH EXPENDITURE ACTUALLY BENEFITS THE ASSESSEE IS AN IRRELEVANT CONSIDERATION FOR THE PURPOSE OF DETERMINATION OF A LP. 8.3. RELIANCE IS PLACED ON THE DECISION OF DCIT VS EKLA APPLIANCES: (2011-TII-37-ITAT-DEL-TP) WHEREIN THE HONBLE TRIBU NAL HELD THAT THE TPO CANNOT CHALLENGE THE JUDGMENT OF THE ASSESSEE A S TO THE SOURCE FROM WHICH THE TECHNOLOGY IS TO BE OBTAINED AND AT WHAT COST ETC. THE HONBLE DELHI HIGH COURT WHILE UPHOLDING THE DECISION OF TH E HONBLE TRIBUNAL HELD THAT AS LONG AS AN EXPENSE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, IT IS IRRELEVANT AS TO WHETHER SUCH EXPENDITURE ACTUALLY RESULTS IN PROFIT OR NOT. THE HONBLE HIGH COURT HELD AS UNDER: 21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY LEG ITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT O F NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED WHOLLY AND E XCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THAT INTER ALIA FINDS EXPRESSION IN THE OECD GUIDEL INES, IN THE PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 26 SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMO NSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTR ANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES, HE I S EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALL Y FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE D ISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 8.4. THE TRIBUNAL IN THE CASE OF M/S. ERICSSON INDI A PVT. LTD. VS. DCIT (ITA NO. 5141/DEL/2011), TOO, FOLLOWING THE LAW LAI D DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT, HELD THAT .. IT WOULD BE WRONG TO HOLD THAT THE EXPENDITURE SHOULD BE DISALLOWED ONLY ON THE GROUND THAT THESE EXPENSES WERE NOT REQUIRED TO BE INCURRED BY THE ASSESSEE. 8.5. IN THE CASE OF DRESSER RAND INDIA PVT. LTD. VS . ADDL. CIT (ITA NO 8753/MUM/2010) THE HONBLE MUMBAI BENCH OF THE TRIB UNAL, WHILE DEALING WITH SIMILAR MANAGEMENT FEE PAID TO THE ASS OCIATED ENTERPRISE HELD THAT BENEFITS DERIVED BY THE ASSESSEE IS NOT A RELEVANT CRITERIA FOR DETERMINATION OF ARMS LENGTH OF AN EXPENDITURE INC URRED BY THE ASSESSEE. 8.6. FURTHER, IN THE CASE OF LG POLYMERS INDIA PVT. LTD VS ADDL. CIT (ITA NO 524/VIZAG/2010), THE HONBLE VISAKHAPATNAM BENCH OF THE TRIBUNAL HELD AS UNDER 13. WE AGREE WITH THE VIEWS OF THE LEARNED A.R ON THIS ISSUE. AS SUBMITTED BY HIM, IT IS THE PREROGATIVE OF THE ASSE SSEE TO REGULATE ITS BUSINESS AFFAIRS AND IT IS NOT OPEN FOR THE DEP ARTMENT TO QUESTION THE SAME. SIMILAR VIEWS HAVE BEEN EXPRESSED BY THE HON'BLE SUPREME COURT IN THE CASE OF DHANRAJGIRIJI RAJA NAR ASINGIRJI, REFERRED (SUPRA) ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 27 8.7. RECENTLY IN THE CASE OF SC ENVIRO AGRO INDIA L TD VS DCIT (ITA NO 2057 & 2058/MUM/2009) THE MUMBAI BENCH OF THE T RIBUNAL HELD THAT THE TPO HAS TO EXAMINE WHETHER THE PRICE PAID OR A MOUNT PAID WAS AT ARMS LENGTH OR NOT UNDER THE PROVISIONS OF T RANSFER PRICING AND ITS RULES. THE RULE DOES NOT AUTHORIZE THE TPO TO D ISALLOW ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR ASSESSEE TO HAVE INCURRED THE SAME. 8.8. THE HONBLE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF AWB INDIA PVT LTD VS ADDL. CIT (ITA NO 4454/DEL/2011) H ELD AS UNDER: AS ALSO SETTLED BY JUDICIAL DECISIONS (SUPRA), THE REVENUE AUTHORITIES ARE NOT EMPOWERED TO QUESTION THE COMME RCIAL WISDOM OF THE ASSESSEE AND IT IS ENTIRELY FOR THE ASSESSEE TO TAKE SUCH DECISIONS AS FAVOUR THE ADVANCEMENT OF THE ASSESSEE S BUSINESS. 8.9. ATTENTION IS ALSO INVITED TO PARAGRAPH 7.5 OF THE OECD TRANSFER PRICING GUIDELINES, WHICH PROVIDES THAT WHETHER OR NOT PAYMENT FOR INTRA GROUP SERVICES IS JUSTIFIED, DEPENDS UPON THE FOLLO WING TWO QUESTIONS: (I) WHETHER INTRA-GROUP SERVICES HAVE BEEN RENDERED (II) WHETHER THE PRICE PAID FOR SUCH SERVICES SATISFIES THE ARMS LENGTH TEST. (I) WHETHER INTRA-GROUP SERVICES HAVE BEEN RENDERED : 9. THE OECD TRANSFER PRICING GUIDELINES PROVIDE THA T WHETHER OR NOT A SERVICE HAS BEEN RENDERED DEPENDS ON WHETHER THE SERVICE PROVIDES THE RECIPIENT WITH SOME COMMERCIAL OR ECONOMIC VALU E TO ENHANCE ITS COMMERCIAL POSITION. PARA 7.6 OF THE GUIDELINES REA DS AS UNDER: 7.6 UNDER THE ARMS LENGTH PRINCIPLE, THE QUESTION WHETHER AN INTRAGROUP SERVICE HAS BEEN RENDERED WHEN AN ACTIVI TY IS ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 28 PERFORMED FOR ONE OR MORE GROUP MEMBERS BY ANOTHER GROUP MEMBER SHOULD DEPEND ON WHETHER THE ACTIVITY PROVID ES A RESPECTIVE GROUP MEMBER WITH ECONOMIC OR COMMERCIAL VALUE TO ENHANCE ITS COMMERCIAL POSITION. THIS CAN BE DETERM INED BY CONSIDERING WHETHER AN INDEPENDENT ENTERPRISE IN CO MPARABLE CIRCUMSTANCES WOULD HAVE BEEN WILLING TO PAY FOR TH E ACTIVITY IF PERFORMED FOR IT BY AN INDEPENDENT ENTERPRISE OR WO ULD HAVE PERFORMED THE ACTIVITY IN-HOUSE FOR ITSELF. 9.1. THE ASSESSEE DOES NOT CONDUCT ANY SALES OR MAR KETING ACTIVITY FOR PROMOTION OF ITS PRODUCTS AND SERVICES OUTSIDE INDIA. FURTHER, THE APPELLANT DOES NOT HAVE ANY MARKETING OR SALES OFFI CE OUTSIDE INDIA FOR SELLING ITS SERVICES TO INDEPENDENT THIRD PARTIES. HSC, USA ON BEHALF OF THE APPELLANT IS INTER-FACING THE CUSTOMERS AND SOL ICITING THE SOFTWARE DEVELOPMENT BUSINESS. THE ASSOCIATED ENTERPRISE HAS THE NECESSARY CONTACTS AND NETWORK TO REACH THE CUSTOMERS TO GET THE BUSINESS FOR THE APPELLANT. THE APPELLANT ON THE OTHER HAND DOES NOT HAVE ANY OTHER PERSON OR NETWORK AND THEREFORE DEPENDS SOLELY ON HSC USA FOR SELLING THE PRODUCTS AND SERVICES OF THE APPELLANT. 9.2. ASSESSEE DOES NOT HAVE ANY SALES OR MARKETING OFFICE OUTSIDE INDIA AND THEREFORE THE ENTIRE THIRD PARTY BUSINESS OF TH E APPELLANT IS GENERATED AS A RESULT OF THE MARKET SUPPORT SERVICES PROVIDED BY HSC, USA. DURING THE RELEVANT FINANCIAL YEAR THE BUSINESS OF THE APP ELLANT FROM UNRELATED THIRD PARTIES HAS INCREASED TO ALMOST RS. 10 CR FRO M RS 2.97 CR. THE INCREASE IN REVENUE OF MORE THAN 3 TIMES OF THE REV ENUE OF IMMEDIATELY PRECEDING YEAR IS PURSUANT TO THE SIGNIFICANT MARKE TING ACTIVITY UNDERTAKEN BY HSC, USA. (II) WHETHER THE PRICE PAID FOR SUCH SERVICES SATIS FIES THE ARMS LENGTH TEST : ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 29 10. THE ASSOCIATED ENTERPRISE, HSC USA, DOES NOT UN DERTAKE ANY BUSINESS ACTIVITY OF ITS OWN AND WAS CREATED SOLELY FOR THE PURPOSE OF RENDERING MARKETING AND AFORESAID MANAGEMENT SUPPOR T SERVICES TO THE APPELLANT. THE OPERATING COSTS INCURRED BY THE HSC USA RELATE ENTIRELY TO THE OPERATIONS OF THE APPELLANT IN INDIA AND THERE IS NO OTHER REVENUE REFLECTED IN THE PROFIT AND LOSS ACCOUNT OF THE ASS OCIATED ENTERPRISE. NATURE OF COSTS BEING INCURRED BY HSC USA FOR THE A FORESAID SERVICES, ARE, PAYROLL, INSURANCE, GENERAL OFFICE RUNNING EXP ENSES, ETC. 10.1. THE TPODID NOT APPRECIATE THAT THE ARRANGEMEN T WITH THE AE, VIZ. HSC USA, IS ONE OF CHARGING OF ACTUAL COST INCURRED BY THE AE FOR THE PURPOSE OF THE BUSINESS OF THE APPELLANT. IT WOULD ALSO BE APPRECIATED THAT ONLY THE COST INCURRED BY THE AE FOR RENDERING THE MARKETING AND MANAGEMENT SUPPORT SERVICES IS ALLOCATED TO THE APP ELLANT. FURTHER, THE VARIOUS EXPENSES, E.G., SALARY, RENT AND OTHER ESTA BLISHMENT COST ARE INCURRED BY THE AE BY WAY OF MAKING PAYMENT TO UNRE LATED PARTIES. SUCH EXPENSES, THEREFORE, IT WOULD BE APPRECIATED, PROVI DE AN INDEPENDENT THIRD PARTY BENCHMARK OF THE MARKET PRICE FOR AVAIL ING SUCH SERVICES. 10.2. THE INTERNATIONAL TRANSACTIONS OF RENDERING O F MARKETING AND MANAGEMENT SUPPORT SERVICES BY THE ASSOCIATED ENTER PRISE HAS INDEPENDENTLY BEEN DEMONSTRATED TO BE AT ARMS LENG TH APPLYING TNMM, TAKING ASSOCIATED ENTERPRISE AS THE TESTED PARTY. S UCH INTERNATIONAL TRANSACTIONS UNDERTAKEN IN THE TRANSFER PRICING STU DY, HAS OTHERWISE NOT BEEN DISPUTED BY THE TPO. 10.3. IT IS SUBMITTED THAT THE APPELLANT DERIVED SI GNIFICANT BENEFITS FROM THE MANAGEMENT SERVICES PROVIDED BY THE ASSOCIATED ENTERPRISE AND ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 30 THEREFORE, THE SERVICES PROVIDED BY THE ASSOCIATED ENTERPRISE SATISFIES THE TESTS AS LAID DOWN BY THE OECD GUIDELINES. 10.4. THE TRANSFER PRICING ADJUSTMENT MADE BY THE T PO IN RESPECT OF INTERNATIONAL TRANSACTIONS OF PAYMENT OF MARKETING AND MANAGEMENT SUPPORT SERVICES AMOUNTING TO RS.9,12,80,860, THERE FORE, IS NOT SUSTAINABLE AND IS LIABLE TO BE DELETED. RE: GROUND OF APPEAL NOS. 4: 11. THE APPELLANT IN THE RELEVANT PREVIOUS YEAR CLA IMED DEPRECIATION @60% ON THE PURCHASES OF COMPUTER ACCESSORIES AND P ERIPHERALS AMOUNTING TO RS. 4,329,055. 11.1. THE ASSESSING OFFICER RESTRICTED THE CLAIM OF DEPRECIATION ON COMPUTER PERIPHERALS AT 15% AS AGAINST 60% CLAIMED BY THE APPELLANT STATING IT TO BE A PART OF PLANT AND MACHINERY AND ACCORDINGLY MADE THE DISALLOWANCE OF RS. 1,495,560. 11.2. IT IS A SETTLED PROPOSITION THAT A COMPUTER SYSTEM COMPRISES OF NOT ONLY THE CENTRAL PROCESSING UNIT (CPU) BUT ALSO ALL INPUT / OUTPUT DEVICES INCLUDING PRINTER, MONITOR AND OTHER DEVICES, ETC. REFERENCE IS MADE TO CIT VS. IBM WORLD TRADE CORPORATION : 130 ITR 739 ( MUM). 11.3. FURTHER, THE ISSUE STANDS COVERED BY THE DECI SION OF SPECIAL BENCH OF MUMBAI TRIBUNAL IN THE CASE OF DCIT VS. DATACRAF T INDIA LTD. (2010) 6 TAXMAN.COM 85 AND DELHI HIGH COURT IN THE CASE OF CIT V. BSES RAJDHANI POWERS LLD.: ITA 1266/2010, WHEREIN, DEPRE CIATION AT A HIGHER RATE OF 60% ON COMPUTER ACCESSORIES AND PERI PHERALS WERE ALLOWED. 11.4. THEREFORE, UPS AND OTHER COMPUTER ACCESSORIES SHOULD NOT BE TERMED AS PLANT AND MACHINERY AND SHOULD BE ALLOWED DEPRECIATION ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 31 @60% I.E. AT THE COMPUTER EQUIPMENT RATES. ACCORDIN GLY, THE DISALLOWANCE OF RS. 14,95,560 CALLS FOR BEING DELET ED. 12. GROUND OF APPEAL NOS. 5 IS C ONSEQUENTIAL 13. LD. CIT(DR) SHRI PIYUSH JAIN SUPPORTED THE ORDE RS OF AO AND DRP ON ALL THESE ISSUES. ALTERNATIVELY IT IS PLEADE D THAT IF ADDITIONAL EVIDENCE IS SOUGHT TO BE ADMITTED, IN THAT CASE IT WILL BE DESIRABLE THAT TPO ALSO CONSIDERS THE SAME. THUS, THE MATTER MAY B E SET ASIDE. 14. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. FIRSTLY, WE SHOULD ADJUDICATE WHETHER TH E ADDITIONAL EVIDENCE SHOULD BE ADMITTED OR NOT. THE CLAIM OF THE ASSESSE E IS THAT THESE DOCUMENTS CAME IN ITS POSSESSION AFTER THE ASSESSME NT. IN OUR VIEW, THE ASPECT OF APPLICABILITY OF CUP METHOD HAS NOT BEEN PROPERLY DEALT WITH BY DRP AND TPO ALSO DID NOT CONSIDER CUP METHOD FOR BENCH MARKING OF INTERNATIONAL TRANSACTION. AS THE FACTS EMERGE, THE ORDER OF DRP DOES NOT THROW EFFECTIVE LIGHT TO REJECT THE ASSESSEES CUP METHOD. THE PLEA OF THE ASSESSEE IS THAT THE DOCUMENTS HAVE BEEN SUBSEQ UENTLY PROCURED AND ARE NECESSARY FOR PROPER ASCERTAINMENT OF T.P. ADJU STMENT. UNDER THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT ASSESSEES A PPLICATION FOR ADMISSION OF ADDITIONAL EVIDENCE DESERVES TO BE ADM ITTED. THE ASSESSEE WAS PREVENTED BY SUFFICIENT CAUSE AS THESE DOCUMENT S COULD NOT BE PROCURED BEFORE THE ASSESSMENT PROCEEDINGS. AFTER H AVING ADMITTED THE ADDITIONAL EVIDENCE, THE QUESTION BEFORE US IS WHET HER TO CONSIDER THE ADDITIONAL EVIDENCE AT OUR LEVEL OR SEND IT BACK TO TPO FOR CONSIDERATION OF THIS MATERIAL AND DECIDE THE ISSUE AFRESH. ON TH IS SCORE, WE FIND MERIT IN THE ALTERNATE PLEA RAISED BY LD. CIT(DR) THAT I N THIS EVENTUALITY THE ISSUE ABOUT T.P. ADJUSTMENTS SHOULD BE RESTORED BAC K TO THE FILE OF TPO. ASSESSEE HAS NO OBJECTION ON THAT. IN VIEW THEREOF, WE SET ASIDE GROUND ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 32 NOS. 2 & 3 ABOVE IN RESPECT OF T.P. ADJUSTMENTS FOR BOTH THE YEARS BACK TO THE FILE OF TPO TO DECIDE THE ISSUES AFRESH AFTER G IVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD AND GIVE PROPER REASONS IF THE CUP METHOD IS PROPOSED TO BE NOT CONSIDERED. 14.1. THAT LEAVES GROUND NO. 4 REGARDING DEPRECIATI ON ON COMPUTERS PERIPHERALS. RESPECTFULLY FOLLOWING HONBLE DELHI H IGH COURT JUDGMENT IN THE CASE OF BSES RAJDHANI POWERS LTD. (SUPRA), W E HOLD THAT ASSESSEE IS ELIGIBLE FOR DEPRECIATION @ 60%. THIS GROUND OF THE ASSESSEE IS ALLOWED. 14.2. GROUND NO. 5 I.E. CHARGING OF INTEREST U/S 23 4B & 234C IS CONSEQUENTIAL. 15. IN THE RESULT, ASSESSEES APPEALS ARE PARTLY AL LOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 05-07-2013. SD/- SD/- ( SHAMIM YAHYA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 05-07-2013. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR ITA NOS. 5420/DEL/11 & 6057/DEL/2012 HUGHES SYSTIQUE INDIA PVT. LTD. 33
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