HyperQuality India Pvt. Ltd., Gurgaon V. ACIT, New Delhi

ITA 5630/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77660 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 20-02-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 15-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: YOGESH KUMAR VERMA
• Assessee Lawyers: JAI DAFTUAR CFO
• Keywords: Business income; Depreciation; Transfer pricing; Advance ruling; Valuation report
• Section: 143(3); 80HHC; 234B; 10B; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I NEW DELHI BEFORE SHRI R.P. TOLANI: JUDICIAL MEMBER AND SHRI B.C. MEENA : ACCOUNTANT MEMBER ITA NO. 5630/DEL/2011 ASSTT. YR: 2007-08 HYPERQUALITY INDIA PVT. LTD., VS. ACIT CIR. 12(1 ), 34, PHASE IV, UDYOG VIHAR, NEW DELHI. GURGAON. PAN: AABCH 7962 E ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI DIVYANSHU AGRAWAL CA SHRI SUDHIR DASH CA & SHRI JAI DAFTUAR CFO RESPONDENT BY : SHRI YOGESH KUMAR VERMA CIT(DR ) DATE OF HEARING: 20-02-2014 DATE OF ORDER: 11 TH APRIL, 2014. O R D E R PER R.P. TOLANI, J.M: : THIS IS ASSESSEES APPEAL AGAINST THE ASSESSMENT OR DER DATED 28-10- 2011 PASSED U/S 143(3) READ WITH SECTION 144C CONS EQUENT TO THE DIRECTION ISSUED BY DRP U/S 144C. THE ISSUES AGITATED PERTAIN TO TP ADJUSTMENT AS WELL AS CORPORATE ADDITIONS. EFFECTIVE GROUNDS RAIS ED ARE AS UNDER: 1. T P ADJUSTMENTS CONFIRMED BY DRP AND THE DIRECTI ONS WHICH ARE NOT COMPLIED TPO 2. OTHER INCOME EXCLUDED FROM THE BUSINESS PROFIT F OR DEDUCTION U/S 10A 2 3. DISALLOWANCE OF DEPRECIATION ON COMPUTER PERIPHE RALS 4. INTEREST UNDER SECTION 234A, 234B AND 234C OF TH E ACT. 2. BRIEF FACTS ARE, HYPER QUALITY (INDIA) PRIVATE LIMITED I.E. ASSESSEE IS ENGAGED IN PROVIDING BACK OFFICE SUPPORT SERVICES T O HYPERQUALITY INC., USA IN RENDERING QUALITY EVALUATION SERVICES TO ITS CLIENTS. HYPERQUALITY US MARKETS THE SERVICES IN THE US AND MANAGES CUSTO MER RELATIONSHIP AND FOR THIS PURPOSE SEEKS THE SUPPORT SERVICES FROM H YPERQUALITY INDIA. THE US CUSTOMERS POST CALLS FOR EVALUATION ON THEIR DED ICATED FILE TRANSFER PROTOCOL (SFTP) IN US, WHICH ARE DOWNLOADED FROM FT P TO A LOCAL DRIVE OF ASSESSEE AND SUBSEQUENTLY, UPLOADED IN THE HQ US TO OL. ASSESSEE'S EMPLOYEES EVALUATE THESE CALLS AND SUBMIT THE EVALU ATION FORM IN HQ US TOOL, WHICH IN TURN GENERATES THE FINAL EVALUATION REPORT TO BE DELIVERED TO THE CUSTOMER. DURING THE RELEVANT ASSESSMENT YEAR THE A PPELLANT COMPANY WAS HAVING TWO OPERATING UNITS LOCATED AT 6 TH FLOOR, MPD TOWER, BUILDING-II, PHASE-V, GURGAON AND 34, PHASE-IV, UDYOG VIHAR. THE APPELLANT COMPANY IS ENTITLED TO EXEMPTION OF ITS BUSINESS INCOME UND ER SECTION 10A FOR THE PROFITS IT EARNS FROM THE ABOVE TWO UNITS. 3. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE F ILED ITS RETURN OF INCOME AT RS. 482,739/- WHICH WAS PROCESSED UNDER S ECTION 143(1) OF THE ACT, AND THEREAFTER, TAKEN UP FOR SCRUTINY BY ISSUE OF NOTICE UNDER SECTION 143(2) OF THE ACT DATED 12.05.2009. THE CASE WAS FU RTHER, REFERRED TO THE TRANSFER PRICING OFFICER LD. TPO. THE APPELLANT R ECEIVED THE DRAFT ORDER U/S 144C READ WITH SECTION 143(3) OF THE IT ACT, 19 61 WITH THE FOLLOWING PROPOSED ADDITIONS/DISALLOWANCES. 3 A) TRANSFER PRICING ADDITIONS : RS. 216,81,6 65/- B) DISALLOWANCES FROM EXPORT TURNOVER RS.22,85,685/- C) ADDITIONS OF OTHER INCOME RS. 90,01,593/- D) DISALLOWANCES OF DEPRECIATION RS.1,26,000/- 4. ASSESSEE FILED IT OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP-I), WHICH ISSUED DELETIONS OF SOME ADDITIONS UNDER B) I .E. EXPORT TO ABOVE AND DIRECTED RE-COMPUTATION OF ARMS LENGTH PRICING BAS ED ON THE ALP SUBMITTED BY THE APPELLANT OTHER ADDITIONS HAS BEEN AFFIRMED. AG GRIEVED ASSESSEE IS IN APPEAL BEFORE THE ITAT. 5. THE APPELLANT BEING A CONTRACT SERVICE PROVIDER TO ITS US BASED PARENT COMPANY, BILLS ITS PARENT COMPANY AT A TOTAL COST P LUS OF 11%, WHICH IS BASED ON THE COMMERCIAL CHARACTER OF THE TRANSACTION OF SERV ICE IT DELIVERS TO ITS AE. ASSESSEE CONDUCTED A TRANSFER PRICING STUDY BY AN I NDEPENDENT EXTERNAL PROFESSIONAL (BSR & CO.), THEIR REPORT IS BASED ON APPROPRIATE INDUSTRY SCENARIO AND THE COMPLIANCE OF ARMS LENGTH PRICING (ALP) BY THE APPELLANT. 6. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, LD TPO OBJECTED TO THE ALP WORKED OUT ON THE PROFIT SPLIT METHOD (PSM) AND PROPOSED TO APPLY TRANSACTIONAL NET MARGIN METHOD (TNMM) AND WAS ASK ED TO PROVIDE THE JUSTIFICATION OF ALP. THE APPELLANT IN ITS REPLY D ATED 18 TH JANUARY, 2010 PROVIDED THE CONSOLIDATED FINANCIALS AND THE JUSTIF ICATION OF THE ALP ADOPTED BY IT. IGNORING THE SAME LD. TPO ERRED IN IGNORING TH E APPELLANT APPROPRIATE METHOD AND ADOPTING TRANSACTIONAL NET MARGIN METHOD WITHOUT VALID REASONS. 4 7. LD. TPO ERRED IN EVALUATING FAR (FUNCTIONS PERFO RMED, ASSETS EMPLOYED AND RISK ASSUMED) ANALYSIS WHICH HAS BEEN SUMMARILY CONFIRMED BY DRP. TO SUPPORT ITS CASE, ASSESSEE FURNISHED SPLIT FINANCIALS OF THE APPELLANT AND ITS AE. WHEREAS THE APPELLANT HAS BEEN ABLE TO EARN PROFIT IN INDIA ITS COUNTERPART THE AE HAS CONTINUOUSLY SUSTAINED LOSSE S. THERE BEING NO ELEMENT OF PROFIT IN THE HANDS OF THE AE, THERE IS NO CASE OF SHIFTING OF PROFITS, PRACTICABLE OR PROBABLE. INVOKING A HIGHER ALP ON T HE APPELLANT IS ONLY ANTICIPATORY AND COMPLETE IGNORANCE OF FACT. THE FA CTS AND FIGURES PRODUCED BEFORE THE LD. TPO ESTABLISH THAT THERE IS NO COMME RCIAL PROFIT AVAILABLE IN THE HANDS OF THE AE. IN ABSENCE OF PROFIT AVAILABILITY, THE ANY ENHANCEMENT OF THE ALP RESULTS IN ARTIFICIAL PROFIT ANTICIPATED BY THE LD. TPO AND NOT EARNED BY THE APPELLANT. THE ORDER OF THE LD, TPO IN ENHANCING TH E ALP OFFERED BY THE APPELLANT IS IN IGNORANCE OF VALID FAR AND FACTUAL CONSIDERATIONS AND IS BAD IN LAW AND FACTS. 8. IT IS VEHEMENTLY ARGUED THAT AE OF THE APPELLANT COMPANY IS RESIDENT IN USA WHICH HAS A HIGHER TAX RATE IN INDIA, THEREF ORE, THERE WILL BE LITTLE COMMERCIAL PRUDENCE ON THE PART OF THE APPELLANT TO SHIFT PROFIT OUT OF INDIA. FURTHER, THE FACT THAT THE APPELLANT COMPANY IS ENT ITLED FOR TAX INCENTIVE UNDER SECTION 10A OF THE INCOME TAX ACT, IT IS IN F ULL BUSINESS INTEREST OF THE APPELLANT AS WELL AS THE AE TO ALLOW MORE PROFIT TO THE APPELLANT COMPANY. RELIANCE IS PLACED ON DCIT VS. INDO AMERICAN JEWELLERY LTD ( AIT-2010- 219-ITAT), THE MUMBAI INCOME TAX APPELLATE TRIBUNAL 5 (TRIBUNAL/ITAT) (PAGE 432 TO 442) HOLDING THAT UNLESS PROPER METHOD IS FOLLOWED, COMPARABLES ARE CHOSEN AND SELECTED AF TER DOING A PROPER FAR STUDY AS WELL AS ADJUSTMENTS ARE MADE TO THE EXTENT POSSIBLE IT WOULD BE UNFAIR TO SUMMARILY REJECT THE TRANSFER PRICING ANA LYSIS MADE BY THE ASSESSEE. THE RELEVANT PARAGRAPH OF THE ORDER IS AS BELOW. WE ALSO FIND MERIT IN THE SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE THAT SINCE THE TAX RATES WERE HIGH ER IN USA COMPARED WITH THOSE OF INDIA, THEREFORE, THERE WOUL D NOT BE ANY INCENTIVE TO TRANSFER THE PROFITS TO HIGHER TAX CHARGEABLE REGIONS ESPECIALLY WHEN THE COMPANY ENJOYS DEDUCTIO N U/S. 80HHC OF THE ACT. FURTHER THE AES HAVE EARNED MEAGR E PROFIT OR INCURRED LOSSES AS COMPARED TO THE PROFIT OF THE ASSESSEE AND, THEREFORE, THE SUBMISSION OF THE ASSE SSEE THAT THERE WAS NO TRANSFER OF PROFIT BY THE ASSESSEE OUT SIDE INDIA FINDS MERIT. IT HAS BEEN HELD BY VARIOUS JUDICIAL PRONOUNCEMENTS THAT UNLESS PROPER METHOD IS FOLLOWE D, COMPARABLES ARE CHOSEN AND SELECTED AFTER DOING A P ROPER FAR STUDY AS WELL AS ADJUSTMENTS ARE MADE TO THE EX TENT POSSIBLE IT WOULD BE UNFAIR TO SUMMARILY REJECT THE TRANSFER PRICING ANALYSIS MADE BY THE ASSESSEE. WE FIND IN T HE INSTANT CASE THE ASSESSING OFFICER/TPO HAS NOT MADE OUT A C ASE TO ESTABLISH THAT THE COMPARABLES USED BY THE ASSESSEE DESERVE TO BE REJECTED. 9. IN THE CASE OF CIT VS. KRMTT THIAGARAJA CHETTY & CO. REPORTED IN 24 ITR 525 (SC) & MORVI INDUSTRIES LTD. VS. CIT REP ORTED IN 82 ITR 835 (SC) , IT WAS HELD THAT FOR THE PROPOSITION THAT LIABILIT Y TO TAX CAN ARISE ONLY WHEN THERE IS INCOME. NO TAX CAN BE CHARGED AS NOTI ONAL INCOME ON ACCRUAL. 10. FURTHER RELIANCE IS TO BE PLACED UPON THE RULIN G OF AUTHORITY FOR ADVANCE RULINGS DELIVERED IN THE CASE OF VENEBURG G ROUP B.V. VS. CIT 727 6 OF 2006 FOR THE PROPOSITION THAT IN THE ABSENCE OF ANY INCO ME, TRANSFER PRICING PROVISIONS BEING MACHINERY PROVISION SHALL NOT APPLY. 11. IT IS NOT DISPUTED THAT ASSESSEE IS A CAPTIVE S ERVICE PROVIDER TO ITS AE IN US WHO IS PROVIDING CALL EVALUATION AND MONITORING SERVICES TO OTHER CALL CENTERS. THE APPELLANTS BUSINESS IS EXPERIMENTAL A ND NEW IN THIS LINE AND HAS THEREFORE THE HARDSHIP TO PENETRATE THE MARKET AND CREATE DEMAND FOR ITS SERVICE. THIS IS THE REASON FOR THIN BUSINESS AND L ACK OF DEMAND HAS RESULTED IN NO OTHER PLAYERS VENTURING INTO THIS KIND OF BUS INESS. THUS THERE IS NO OTHER COMPANY IN THE MARKET WHICH CAN BE COMPARED W ITH THE APPELLANT COMPANY IN TERMS OF ITS BUSINESS FUNCTIONALITY. IN THE ABSENCE OF AN APPROPRIATE COMPARABLE TO BENCHMARK THE FINANCIAL R ESULT THAT TOO TO A 10A EXEMPT COMPANY HAS RESULTED IN FUTILE EXERCISE AND ARBITRARY TP ADJUSTMENTS. THE TRANSACTIONAL NET MARGIN METHOD, WHICH WARRANTS EXTERNAL BENCHMARKING AT NET PROFIT LEVEL WILL NOT BE AN APP ROPRIATE METHOD GIVEN CONSIDER TO THE FACT THAT THERE IS NO OTHER COMPANY IN INDIA WHICH ARE INTO THE LINE OF BUSINESS OF THE APPELLANT COMPANY. BESIDES THE NEW LINE OF BUSINESS INVOLVES UNIQUE INTANGIBLES USED BY THE AE SUCH THA T INDEPENDENT EVALUATION OF PERFORMANCE IS NOT POSSIBLE. SINCE THE SERVICE O F THE APPELLANT AND ITS AE ARE COINED TOGETHER AS A SERVICE DELIVERY TO END CL IENTS. IN SUCH A SITUATION THE NET OUTCOME SHOULD BE A SUBJECT MATTER OF TAX APPOR TIONMENT IN INDIA. RULE 10B OF THE INCOME TAX RULE IS VERY CLEAR IN THIS RE GARD. 7 12. SINCE THE A E IN CONJUNCTION WITH THE ASSESSEE ARE YET TO EARN ANY PROFITS AND AE IS STILL IN THE STAGE OF ACCUMULATING LOSSES WHILE THE APPELLANT COMPANY IS EARNING PROFIT, THE TP REPORT SUBMITTED BY ASSES SEE WAS SELF EXPLANATORY. IN THIS EVENTUALITY, REFERENCE MAY NOT HAVE BEEN MADE TO THE TRANSFER PRICING OFFICER. IT IS IN THIS PERSPECTIVE THAT SECTION 92( 3) WAS ENACTED TO CHAPTER X OF THE INCOME TAX ACT, FOR MAKING THE TPR NOT APPLICAB LE IN CASE THE TRANSACTION AMONGST THE MULTI NATIONAL ENTERPRISE HAS RESULTED IN HIGHER TAXABLE PROFIT. 13. THE APPELLANT BY ITS SUBMISSION DEMONSTRATED T HAT IT BILLS THE AE AT TOTAL COST PLUS 11%. THUS THE ALP ADOPTED BY THE APPELLAN T IS OPERATING PROFIT TO TOTAL COST (OP/TC). THE LD. TPO VIDE ITS ORDER DATE D HAS ADOPTED OPERATING COST TO OPERATING EXPENSES (OP/OE). THE LD. DRP ON SUBMISSION BY THE APPELLANT HAS DIRECTED (PARAGRAPH 3.2 OF ITS ORDER DATED 3 RD SEPTEMBER, 2011) THE TPO TO REVISIT THE CASE OF THE APPELLANT AND RE COM PUTE THE ALP ACCORDINGLY. THE LD. TPO HAS FAILED TO FOLLOW THE DIRECTION OF T HE DRP WHILE PASSING ITS FINAL ORDER DATED 28 TH OCTOBER, 2011. 14. APROPOS OTHER INCOME EXCLUDED FROM THE BUSINESS PROFIT FOR DEDUCTION U/S 10A LD. COUNSEL CONTENDS THAT EVEN THE PROFITS ARE INCREASED ASSESSEE BEING ELIGIBLE TO EXEMPTION U/S 10A ENTIRE EXERCISE BECOM ES TAX NEUTRAL. WITHOUT PREJUDICE IT IS PRAYED THAT THESE ADDITIONS BE TREA TED AS EXEMPT ACCORDINGLY. 15. DISALLOWANCE OF DEPRECIATION ON COMPUTER PERIPH ERALS (GROUND NO. 4). THE UPS ALLEGED TO BE PLANT AND MACHINERY BY THE LD. AO IS EXCLUSIVELY USED BY THE APPELLANT COMPANY TO ENSURE UNINTERRUPTED POWER SUP PLY TO THE COMPUTER. THE 8 APPELLANT COMPANY BEING AN IT ENABLED SERVICE PROVI DER, THE UPS IS AN INTEGRAL PART OF THE COMPUTER SYSTEM FOR THE APPELLANT TO RU N ITS BUSINESS. RELIANCE IS PLACED ON HONBLE DELHI HIGH COURT JUDGMENT IN THE CASE OF BSES YAMUNA POWERS 358 ITR 47 ALLOWING DEPRECIATION @ 60% ON UP S AND OTHER COMPUTER PERIPHERALS AND ACCESSORIES. 16. LD COUNSEL CONTENDS THAT ASSESSEE FILED ITS OF INCOME ON 31 ST OCTOBER, 2007 I.E. WITHIN THE DUE DATE MANDATED UNDER SECTIO N 139(1) OF THE INCOME TAX ACT. THE LD. AO HAS THUS ERRED IN LEVYING INTEREST UNDER SECTION 234A OF THE INCOME TAX ACT, 1961. INTEREST UNDER SECTION 234B A ND 234C OF THE INCOME TAX ACT IS PLEADED TO BE CONSEQUENTIAL. 17. LD CIT(DR) SUPPORTED THE ORDERS OF LOWER AUTHOR ITIES. 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN OUR CONSIDERED VIEW THE TP ADJUSTMENTS M ADE TO ASSESSES ALP IS NOT JUSTIFIED IN VIEW OF FOLLOWING REASONS: I. ASSESSEE FURNISHED ITS SPLIT FINANCIALS ALONG WITH AE. WHEREAS THE APPELLANT HAS EARNED PROFIT IN INDIA, ITS AE HAS CO NTINUOUSLY SUSTAINED LOSSES. THUS WITH NO ELEMENT OF PROFIT IN THE HANDS OF THE AE, IN ALL FAIRNESS THERE IS NO CASE OF SHIFTING OF PROFITS, P RACTICABLE OR PROBABLE. II. AE IS RESIDENT IN USA WHICH HAS A HIGHER TAX RATE I N INDIA, THEREFORE, WE SEE LITTLE COMMERCIAL PRUDENCE TO SHI FT PROFIT OUT OF INDIA. III. THE FAR HAS NOT BEEN PROPERLY EVALUATED BY TPO AND DRP. IV. PROPER JUSTIFICATIONS FOR APPLYING TNMM METHOD HAVE NOT BEEN ASSIGNED BY LOWER AUTHORITIES. 9 V. NO OBJECTIVE JUSTIFICATIONS ARE PROVIDED BY LOWER A UTHORITIES AS TO WHY AND HOW, PSM METHOD APPLIED BY ASSESSEE IN THE ABOVE PECULIARITIES OF BUSINESS WAS NOT AN APPROPRIATE METHOD. 19. ASSESSEES RELIANCE ON THE ITAT JUDGMENTS IN TH E CASE OF DCIT VS. INDO AMERICAN JEWELLERY LTD; CIT VS. KRMTT THIAGARAJA CH ETTY & CO. MORVI INDUSTRIES LTD. VS. CIT (SUPRA) IS WELL PLACED WHIC H WE RESPECTFULLY FOLLOW. IN VIEW THEREOF WE DELETED THE TP ADJUSTMENTS ADDED TO THE INCOME OF THE ASSESSEE. 20. APROPOS THE ISSUE OF UPS AND COMPUTER PERIPHERA L, RESPECTFULLY FOLLOWING HONBLE DELHI HIGH COURT JUDGMENT IN THE CASE OF BSES (SUPRA) WE HOLD THE ASSEESSEE IS ELIGIBLE FOR DEPRECIATION @60 % ON THESE ITEMS. 21. APROPOS GROUNDS ABOUT 10A EXEMPTION CLAIM, SINC E WE HAVE DELETED THE TP ADJUSTMENT THIS GROUND BECOMES CONSEQUENTIAL. 22. APROPOS INTEREST U/S 234A THE SAME IS DELETED A ND REMAINING ISSUE ABOUT 234B AND 234C BECOMES CONSEQUENTIAL. 23 IN THE RESULTS ASSESSES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 11-04-2014. SD/- SD/- ( B.C. MEENA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 11-04-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR 10