IMedX Informaton Services Pvt.Ltd., Hyd, Hyderabad V. ITO, Ward-2(3), Hyd, Hyderabad

ITA 577/HYD/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6253 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-01-2017
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 06-09-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 22-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K.V.N. CHARYA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. ASST. YEAR APPELLANT RESPONDENT 577/HYD/2016 2011 - 12 IMEDX INFORMATION SERVICES PRIVATE LIMITED HYDERABAD [PAN: AABCI3550P] THE INCOME TAX OFFICER, WARD-2(3), HYDERABAD 617/HYD/2016 2011 - 12 THE INCOME TAX OFFICER, WARD-2(3), HYDERABAD IMEDX INFORMATION SERVICES PRIVATE LIMITED HYDERABAD [PAN: AABCI3550P] FOR ASSESSEE : MR. SAMPAT RAGHUNATHAN, AR FOR REVENUE : MR. K.V.N. CHARYA, CIT-DR DATE OF HEARING : 08-12-2016 DATE OF PRONOUNCEMENT : 18-01-2017 O R D E R PER B. RAMAKOTAIAH, A.M. : THESE ARE CROSS-APPEALS BY ASSESSEE AND REVENUE FOR AY. 2011-12 AGAINST THE ORDER(S) OF THE ASSESSING OFFICER (AO) PASSED U/S.143(3) R.W.S. 92CA OF THE INCOME TAX ACT (ACT), C ONSEQUENT TO THE DIRECTIONS GIVEN U/S. 144C(5) OF THE ACT BY THE DIS PUTE RESOLUTION PANEL [DRP], BENGALURU. 2. BRIEFLY STATED, ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING MEDICAL TRANSCRIPTION SERVICES AND ALLIED SOFTWARE DEVELOPMENT AND SUPPORT SERVICES TO ITS ASSOCIATED ENTERP RISE [AE]. I.T.A. NOS. 577 & 617/HYD/2016 IMEDX INFORMATION SERVICES PRIVATE LIMITED :- 2 -: THE TAXPAYER IS BEING REMUNERATED ON COST + 11% BASIS . IT HAS INTERNATIONAL TRANSACTIONS REPORTED AS UNDER: AE NATUR E OF TRANSACTION AMOUNT (RS.) IMEDX INC PROVISION OF ITES IN THE AREA OF MEDICAL TRANSCRIPTION 13,20,80,068 IMEDX INC DEVELOPMENT & MAINTENANCE OF MEDICAL TRANSCRIPTION SOFTWARE TOOLS 2,63,56,949 TOTAL: 15,84,37,017 3. ASSESSEE IN ITS TP STUDY, ADOPTED CUP METHOD AND RE LIED ON SEVENTEEN INDIAN COMPANIES WHICH HAVE PROVIDED MEDI CAL TRANSCRIPTION SERVICES. THE AVERAGE RATE CHARGED BY THEM HAS BEEN ARRIVED AT 0.046 USD/LINE AS AGAINST ITS WORKING OF 0 .51 USD/LINE. FOR THE TRANSACTION OF PROVISION OF SOFTWARE DEVELOPME NT SERVICES, ASSESSEE HAS USED TRANSACTIONAL NET MARGIN METHOD [T NMM] AND SELECTED 10 COMPARABLES, WHOSE ARITHMETIC MEAN WAS CO MPUTED AT 9.53% AS AGAINST ITS PLI OF 10.52%. ACCORDINGLY, A SSESSEE SUBMITTED THAT INTERNATIONAL TRANSACTIONS ARE AT ARMS LEN GTH. THE TRANSFER PRICING OFFICER [TPO] HOWEVER, DID NOT AGRE E WITH THE CUP METHOD ADOPTED BY ASSESSEE TO ITS ITES BUSINESS. HE WA S OF THE OPINION THAT SINCE ASSESSEE IS ALSO INVOLVED IN DEVEL OPMENT OF SOFTWARE FOR THE PURPOSE OF MEDICAL TRANSCRIPTION, E NTIRE ACTIVITY OF ASSESSEE HAS TO BE AGGREGATED AND TO BE CONSIDERED AS ITES ONLY, ACCORDINGLY, REJECTED THE OBJECTIONS OF ASSESSEE. HE HAS SELECTED 13 COMPARABLES FROM THE ITES SEGMENT AND ARRIVED AT ARITH METIC MEAN AT 25.73% AND AFTER PROVIDING WORKING CAPITAL ADJ USTMENT THE NET ALP AT 23.31% WAS DETERMINED AND ON THE ABOVE TP ADJUSTMENT WAS ARRIVED AT RS. 1,80,09,647/-. AFTER THE DRAFT ASSESSMENT ORDER, ASSESSEE FILED OBJECTIONS BEFORE THE LD. DRP. I.T.A. NOS. 577 & 617/HYD/2016 IMEDX INFORMATION SERVICES PRIVATE LIMITED :- 3 -: DRP HOWEVER, REJECTED ASSESSEES MAIN CONTENTIONS THAT ASSESSEE CANNOT BE CATEGORISED AS ITES AND ALSO REJECTION OF C UP METHOD. 4. APART FROM VARIOUS OBJECTIONS RAISED BY ASSESSEE, THE MAIN CONTENTION OF ASSESSEE IS WITH REFERENCE TO REJECTION O F CUP METHOD IN THE MEDICAL TRANSCRIPTION BUSINESS. IT WAS SUBMITTED THAT CO-ORDINATE BENCH OF ITAT IN ITA NO. 565/HYD/2011 (A Y. 2005-06) IN THE CASE OF ACIT VS. M/S. CKAR SYSTEMS (P) LTD., D T. 19-10-2012 HAS ACCEPTED THE CIT(A)S ORDER THAT CUP METHOD IS ONLY THE APPROPRIATE METHOD AND DISMISSED THE REVENUES APPEAL , WHICH IN TURN WAS UPHELD BY THE HON'BLE HIGH COURT OF ANDHRA P RADESH AND TELANGANA IN ITTA NO. 731 OF 2014 DT.31-12-2014. AS SESSEE HAS SUBMITTED COMPARABILITY WITH THAT OF M/S. CKAR SYSTEMS ( P) LTD., (CKAR INDIA) AS UNDER: FACTS APPELLANT CKAR INDIA NATURE OF BUSINESS MEDICAL TRANSCRIPTION SERVICES MEDICAL TRANSCRIPTION SERVICES CURRENCY UNITED STATES DOLLAR (USD) USD RECIPIENT ENTITY HOLDING COMPANY-IMEDX INC., USA ULTIMATE HOLDING COMPANY-CBAY USA IMPUGNED TRANSACTION APPLICATION OF CUP METHOD FOR MEDICAL TRANSCRIPTION SERVICES APPLICATION OF CUP METHOD FOR MEDICAL TRANSCRIPTION SERVICES INTERNAL CUP AVAILABLE AVAILABLE TRANSFER PRICING OFFICER (TPO)/DISPUTE TPOS FINDINGS TPOS FINDINGS RESOLUTION PANEL (DRP)/INCOME TAX APPELLATE TRIBUNAL (ITAT) FINDINGS LD.TPO REJECTED THE APPLICATION OF CUP METHOD FOR MEDICAL TRANSCRIPTION SERVICES BASED ON THE FOLLOWING REASONING: THE APPELLANT IS REMUNERATED ON COST PLUS 11% BASIS AS PER THE INTERCOMPANY AGREEMENT ARE DIFFERENT LD.TPO REJECTED THE APPLICATION OF CUP METHOD FOR MEDICAL TRANSCRIPTION SERVICES BASED ON THE FOLLOWING REASONING: - RATE CHARGED PER LINE OF TRANSCRIPTION IS DEPENDENT ON THE SIZE OF THE TRANSCRIPTION AND THE SOPHISTICATION OF THE I.T.A. NOS. 577 & 617/HYD/2016 IMEDX INFORMATION SERVICES PRIVATE LIMITED :- 4 -: FROM THE ANALYSES BEING CARRIED OUT. CUP SUFFERS FROM THE DEFECT THAT THE PRICE PER LINE HAS BEEN DETERMINED USING A SINGLE USD RATE AND IS NOT PER INVOICE OR AT THE ACTUAL TIME OF RECEIPT OF PAYMENT. IN CASE OF COMPARABLES THE AE IS REMUNERATING ON THE NUMBER OF LINES TRANSCRIBED AT A FIXED AGREED RATE AND IF THE SAME ANALOGY IS TAKEN TO THE TAXPAYER THE COST PER LINE IN EVERY INVOICE WILL WORK OUT DIFFERENTLY TAKING THE RATE OF USD AT THAT POINT OF TIME. COMPARABLES ARE ASSURED OF THE REVENUES BASED ON THE NUMBER OF LINES TRANSCRIBED BUT IN CASE OF TAXPAYER, REVENUE IS BASED ON COST INCURRED. THE BASIS OF ESTIMATION OF COST OF THE TAXPAYER IS UNKNOWN AND HENCE THE RATE PER LINE DERIVED BY THE TAXPAYER IS SUBJECT TO ASSUMPTIONS. TRANSCRIPTION WORK. - IN THE ABSENCE OF THE SEGMENTAL REVENUE DETAILS OF UNRELATED PARTIES FOR THE MEDICAL TRANSCRIPTION WORK AND TOTAL NUMBER OF LINES TRANSCRIBED, THE PER LINE PRICE CANNOT BE USED TO BENCHMARK IN THE CUP METHOD ADOPTED BY THE ASSESSEE. - DATA RELATING TO RATE CHARGED PER LINE OF TRANSCRIPTION AND NUMBER OF LINES DONE WERE NOT AVAILABLE IN PUBLIC DOMAIN WITH RESPECT TO INDEPENDENT ENTERPRISES. (SOURCE: PARA 4, ITA NO. 565/HYD/2011) CIT(A) FINDINGS - SIMILAR SERVICES WAS AVAILED BY THE HOLDING COMPANY FROM THIRD PARTY ENTITIES IN INDIA ON IDENTICAL TERMS AND CONDITIONS. HENCE INTERNAL CUP IS AVAILABLE. - CUP METHOD WAS CORRECTLY APPLIED BY THE ASSESSEE TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS AS PER OECD GUIDELINES. - CIT(A) DELETED THE TP ADJUSTMENT SINCE THE RATES PAID BY THE ASSESSEE COMPANY WERE WELL COMPARABLE WITH THE RATES PAID BY AE TO OTHER THIRD ENTITIES IN INDIA. I.T.A. NOS. 577 & 617/HYD/2016 IMEDX INFORMATION SERVICES PRIVATE LIMITED :- 5 -: (SOURCE: PARA 7, ITA NO. 565/HYD/2011) (SOURCE: PARA 2.1, PAGE 14 OF THE TPO ORDER) DRP FINDINGS THE DRP DID NOT AGREE TO THE OBJECTIONS OF THE APPELLANT AND REJECTED THE APPLICATION OF CUP METHOD. (SOURCE: PARA 2.3, PAGE 3 OF THE DRP ORDER) ITATS ADJUDICATION CIT(A) HAS PASSED A WELL-REASONED ORDER, ELABORATELY DISCUSSING THE VARIOUS ISSUES RAISED BY THE TPO AND ULTIMATELY CAME TO A CONCLUSION THAT THE CUP METHOD IS THE MOST APPROPRIATE METHOD FOR COMPUTING THE ALP FOR THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT WITH ITS AE. WE FULLY AGREE WITH THE ORDER OF THE CIT(A) IN THIS BEHALF. WE ACCORDINGLY UPHOLD THE SAME AND REJECT THE GROUND OF THE REVENUE ON THIS ISSUE. (SOURCE: PARA 11, ITA NO. 565/HYD/2011) APPELLANTS CONTENTIONS/SUBMISSIONS THE NATURE OF TRANSACTION WAS SIMILAR, I.E., MEDICAL TRANSCRIPTION SERVICES. CKAR IS WHOLLY OWNED SUBSIDIARY OF CBAY SYSTEMS LTD., USA. CBAY USA ENTERED INTO ARRANGEMENTS FOR AVAILING MEDICAL TRANSCRIPTION SERVICES FROM ITS SUBSIDIARY CKAR INDIA AND ALSO FROM INDEPENDENT THIRD PARTIES BASED IN INDIA, WHICH IS A SIMILAR FACT IN THAT OF THE IMEDX INDIA. CUP ANALYSIS WAS DONE BY COMPARING THE AVERAGE PRICE PER LINE OF THE TRANSACTIONS GENERATED FROM CBAY USA AGAINST AVERAGE PRICE REALIZED FROM UNRELATED PARTIES, WHICH IS SAME AS IN THE CASE OF THE IMEDX INDIA. LD.TPO HAS ACCEPTED THE FACT THAT CUP METHOD IS THE MOST DIRECT AND RELIABLE METHOD TO APPLY FOR DETERMINING THE ALP IN THE CURRENT CASE. WHEN INFORMATION AND DATA ARE AVAILABLE, THE I.T.A. NOS. 577 & 617/HYD/2016 IMEDX INFORMATION SERVICES PRIVATE LIMITED :- 6 -: LD.TPO SHOULD NOT HAVE REJECTED THE CUP METHOD. HIGH COURTS ADJUDICATION THE HON'BLE HIGH COURT OF ANDHRA PRADESH AND TELANGANA HAS DISMISSED THE REVENUES APPEAL AND UPHELD CKAR INDIAS ITAT ORDER WHEN IT WAS HELD THAT ASSESSEE FOLLOWED ONE PERMISSIBLE METHOD OF COMPUTING THE ARMS LENGTH PRICE AND THE SAME WAS HELD TO BE VALID BY THE TRIBUNAL AND WE SEE NO REASON TO INTERFERE WITH THE ORDER IN SO FAR AS THIS ASPECT IS CONCERNED. (SOURCE: I.T.T.A. NO. 731 OF 2014) 4.1. IN VIEW OF THAT, IT WAS SUBMITTED THAT THE TPO MAY B E DIRECTED TO ADOPT CUP METHOD FOR ITS MEDICAL TRANSCRIPTI ON BUSINESS. IT IS ALSO FAIRLY ADMITTED THAT ASSESSEE HAS NO OBJECTION FOR ADOPTING TNMM FOR THE SOFTWARE DEVELOPMENT WORK AND HOWEVER, IT WAS FAIRLY SUBMITTED THAT AO/TPO HAS TO RE-D O THE EXERCISE OF TP STUDY. 5. LD. DR HOWEVER, RELIED ON THE ORDERS OF THE TPO AN D DRP. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE DOCUMENTS PLACED ON RECORD. ASSESSEE AND CKAR INDIA ARE IN THE SAME LINE OF BUSINESS I.E., MEDICAL TRANSCRIPTION SE RVICES AND CO-ORDINATE BENCH IN THE ABOVE SAID CASE OF ACIT VS. M/S. CKAR SYSTEMS (P) LTD., HAS UPHELD THE LD.CIT(A)S ORDER THAT CUP METHOD IS THE MOST APPROPRIATE METHOD FOR COMPUTING ALP F OR THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY ASSESSEE WITH ITS AE IN THAT CASE. SINCE THE FACTS ARE SIMILAR, WE ARE OF THE O PINION THAT TPO SHOULD HAVE ADOPTED CUP METHOD ONLY FOR ANALYSING THE ASSESSEES INTERNATIONAL TRANSACTIONS. ACCORDINGLY, WE UPHOLD ASSESSEES OBJECTIONS WITH REFERENCE TO THE ADOPTION OF METHOD AND DIRECT THE AO/TPO TO ADOPT CUP METHOD FOR THE MEDICAL I.T.A. NOS. 577 & 617/HYD/2016 IMEDX INFORMATION SERVICES PRIVATE LIMITED :- 7 -: TRANSCRIPTION SERVICES AND TNMM FOR THE SOFTWARE DEVE LOPMENT SERVICES. AO/TPO IS DIRECTED TO RE-DO THE EXERCISE AFRESH GIVING DUE OPPORTUNITY TO ASSESSEE AND DETERMINE THE ALP AC CORDINGLY. HE IS ALSO DIRECTED TO KEEP IN MIND THE ORDERS IN OTHE R CASES FOR THE SAME ASSESSMENT YEAR, WHILE DOING THE STUDY. WITH THES E DIRECTIONS, THE GROUNDS OF ASSESSEE ARE CONSIDERED AL LOWED FOR STATISTICAL PURPOSES. ITA NO. 617/HYD/2016 : 7. THIS IS REVENUES APPEAL ON THE DIRECTIONS OF THE DRP WITH REFERENCE TO EXCLUSION OF CERTAIN COMPANIES SELECTED IN ITES SEGMENT. SINCE WE HAVE NOT ACCEPTED THE METHOD ADOPTED BY THE TPO AND DIRECTED THE AO/TPO TO RE-DO THE ENTIRE EXERC ISE AFRESH, APPEAL OF REVENUE BECOMES INFRUCTUOUS. REVENUE, HOW EVER, IS FREE TO RAISE ANY ISSUE IN CASE IT IS AGGRIEVED ON THE TPO/ DRPS ORDERS IN THE CONSEQUENTIAL PROCEEDINGS. WITH THESE OBSERVATI ONS, REVENUES APPEAL IS CONSIDERED INFRUCTUOUS ACCORDING LY, DISMISSED. 8. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED FOR S TATISTICAL PURPOSES AND APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH JANUARY, 2017 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEM BER HYDERABAD, DATED 18 TH JANUARY, 2017 TNMM I.T.A. NOS. 577 & 617/HYD/2016 IMEDX INFORMATION SERVICES PRIVATE LIMITED :- 8 -: COPY TO : 1. IMEDX INFORMATION SERVICES PRIVATE LIMITED, 7-1- 62/2, S.K. ROAD, DHARAM KARAM ROAD, AMEER PET, HYDERABAD. 2. THE INCOME TAX OFFICER, WARD-2(3), HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. THE DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATI ON, INCOME TAX TOWERS, HYDERABAD. 5. THE ADDL. COMMISSIONER OF INCOME TAX (TRANSFER P RICING), HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.