ZTE Telecom India Pvt. Ltd., Gurgaon V. ACIT, Gurgaon

ITA 5971/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3001 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2007-2008
• Appeal Filed On: 05-11-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

PAGE | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 : NEW DELHI BEFORE SHRI H.S.SIDHU , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 5971/DEL/2014 (ASSESSMENT YEAR: 2007 - 08 ) ZTE TELECOM INDIA PVT. LTD, TOWER 10B, 6 TH FLOOR, DLF CYBER CITY, PHASE - II, GURGAON PAN: AAACZ1958K VS. ACIT, CIRCLE - 2, GURGAON (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI MANONEET DALAL, AR SHRI VISHU GOEL, AR REVENUE BY: SHRI SANJAY KUMAR YADAV, SR. DR DATE OF HEARING 20/12 /2017 DATE OF PRONOUNCEMENT 1 9 / 0 3 / 2018 O R D E R PER PRASHANT MAHARISHI , A. M. 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD CIT(A) - 2, FARIDABAD DATED 19.08.2014 FOR THE ASSESSMENT YEAR 2007 - 08. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE OR DER PASSED BY THE LD. ASSESSING OFFICER ('AO') IS BAD IN LAW AND VOID AB - INITIO 2. THE LD. AO/LD. TRANSFER PRICING OFFICER ('TPO')/ LD. COMMISSIONER OF INCOME TAX - (APPEALS) ('CIT - A') ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE IN DETERMINING THE ARM'S L ENGTH ADJUSTMENT TO THE APPELLANT'S INTERNATIONAL TRANSACTION FROM ASSOCIATED ENTERPRISES ('AES'), THEREBY RESULTING IN THE ENHANCEMENT OF RETURNED INCOME OF THE APPELLANT BY RS. 15,163,336 3. THAT THE REFERENCE MADE BY THE LD. AO SUFFERS FROM JURISDICTION AL ERROR AS THE LD. AO HAS NOT RECORDED ANY REASONS IN THE ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS 'EXPEDIENT AND NECESSARY' TO REFER THE MATTER TO THE LD. TPO FOR COMPUTATION OF THE ARM'S LENGTH PRICE, AS IS REQUIRED UNDER SE CTION 92CA(1) ZTE TELECOM INDIA PVT. LTD VS. ACIT ITA NO. 5971/DEL/2014 (ASSESSMENT YEAR: 2007 - 08) PAGE | 2 4. THAT THE LD. AO/ LD. TPO/ LD. CIT - (A) ERRED ON FACTS AND IN LAW IN THE ASSESSMENT OF THE ARM'S LENGTH PRICE OF THE APPELLANT'S INTERNATIONAL TRANSACTIONS FROM ASSOCIATED ENTERPRISES IN THE SOFTWARE SUPPORT SERVICES SEGMENT IN THE FOLLOWING MANNER - 4.1 THAT THE LD. AO/ LD. TPO/ LD. CIT - (A) HAS ERRED BY NOT TAKING COGNIZANCE OF THE FUNCTIONAL RESPONSIBILITIES AND ANALYSIS OF ZTE INDIA AND ITS ASSOCIATED ENTERPRISES AS OUTLINED IN THE TRANSFER PRICING DOCUMENTATION AND SUBMISSIONS 4.2 THAT THE LD. AO/ LD. TPO/ CIT - (A) ERRED IN REJECTING THE COMPARABLE COMPANIES SET ADOPTED BY THE APPELLANT ON THE BASIS OF ADDITIONAL QUANTITATIVE FILTERS SELECTED BY THE LD. TPO WHICH LACKED VALID AND SUFFICIENT REASONING 4.2.1 THE LD. AO/ LD. TPO/ LD. CIT(A) ERR ED IN REJECTING COMPANIES WITH PERSISTENT LOSSES FOR THE PERIOD UNDER CONSIDERATION INSTEAD OF BEING GUIDED BY FUNCTIONAL COMPARABILITY 4.2.2 THE LD. AO/ LD. TPO/ LD. CIT(A) ERRED IN REJECTING COMPANIES WITH WAGES/ SALES RATIO OF LESS THAN 40% AND GREATER THAN 80% WITHOUT ANY COGENT BASIS 4.2.3 THE LD. AO/ LD. TPO/ LD. CIT(A) ERRED IN REJECTING COMPANIES WITH DIFFERENT FINANCIAL YEAR ENDING WITHOUT TAKING COGNIZANCE OF THE APPELLANT'S SUBMISSIONS 5 WITHOUT PREJUDICE, THE LD. AO/ LD. TPO/ LD. CIT - (A) HAS E RRED IN APPLYING THE ADDITIONAL FILTERS INCORRECTLY 5.1.1 THE LD. AO/ LD. TPO/ LD. CIT - (A) ERRED IN ACCEPTING K P I T CUMMINS INFOSYSTEMS LTD AS A COMPARABLE EVEN THOUGH IT DOES NOT CLEAR THE FILTER OF WAGES/ SALES OF 40% TO 80% AS ADOPTED BY THE LD. TPO 5.1.2 THE LD. AO/ LD. TPO/ LD. CIT - (A) ERRED IN REJECTING L G S GLOBAL LTD. AND V M F SOFT TECH LTD. DUE TO NON - AVAILABILITY OF DATA, EVEN THOUGH THEIR FINANCIAL DATA IS AVAILABLE IN THE PUBLIC DOMAIN 5.1.3 THE LD. AO/ LD. TPO/ LD. CIT - (A) ERRED IN REJEC TING MAARS SOFTWARE INTERNATIONAL LTD., MELSTAR INFORMATION TECHNOLOGIES LTD. AND V J I L CONSULTING LTD. EVEN THOUGH THESE WERE NOT PERSISTENT LOSS MAKING FOR CONSECUTIVE THREE YEARS (FY 2004 - 05 TO FY 2006 - 07) 6 THAT THE LD. AO/ LD. TPO/ LD. CIT - (A) HAS ERRED IN ERRONEOUSLY INCLUDING IN THE FINAL COMPARABLE SET ONE COMPANY I.E. INFOSYS TECHNOLOGIES LIMITED ('INFOSYS') WITH DIFFERENT FUNCTIONAL AND ECONOMIC PROFILE AS COMPARED TO CAPTIVE SOFTWARE SUPPORT SERVICES PROVIDED BY THE APPELLANT 7 THAT THE LD. A O/ LD. TPO/ LD. CIT - (A) HEREIN ALSO ERRED IN NOT TAKING COGNIZANCE OF THE FRESH SEARCH UNDERTAKEN BY THE APPELLANT WITHOUT PREJUDICE TO ITS CONTEMPORANEOUS ZTE TELECOM INDIA PVT. LTD VS. ACIT ITA NO. 5971/DEL/2014 (ASSESSMENT YEAR: 2007 - 08) PAGE | 3 DOCUMENTATION, TO SEARCH FOR FUNCTIONALLY COMPARABLE COMPANIES WHOSE DATA IS NOW AVAILABLE BUT WAS N OT AVAILABLE AT THE TIME OF DETERMINATION OF THE ARM'S LENGTH PRICE/CREATION OF TRANSFER PRICING DOCUMENTATION 8 THAT THE LD. AO/LD. TPO/ LD. CIT - (A) HAS ERRED IN NOT MAKING AN ADJUSTMENT TO THE ARM'S LENGTH MARGIN FOR DIFFERENTIAL WORKING CAPITAL HELD BY THE APPELLANT AS COMPARED TO EXTERNAL SERVICE PROVIDERS USED FOR THE ARM'S LENGTH ANALYSIS 9 THAT THE LD. AO/ LD. TPO/ LD. CIT - (A) ERRED BY IGNORING THE BUSINESS/COMMERCIAL REALITY THAT SINCE THE APPELLANT IS REMUNERATED ON A COST PLUS BASIS, I.E., IT IS C OMPENSATED FOR ALL ITS COSTS PLUS A PRE - AGREED MARK - UP, THE APPELLANT UNDERTAKES MINIMAL BUSINESS RISKS AS AGAINST COMPARABLE COMPANIES AND CONSEQUENTLY SHOULD HAVE BEEN ALLOWED A RISK ADJUSTMENT 10 THE LD. AO/ LD. TPO/ LD. CIT(A) ERRED IN DISREGARDING TH E MULTIPLE YEAR DATA SELECTED BY THE APPELLANT IN THE TP DOCUMENTATION AND IN SELECTING THE CURRENT YEAR (I.E. FINANCIAL YEAR 2006 - 07) DATA FOR COMPARABILITY DESPITE THE FACT THAT AT THE TIME OF COMPARISON DONE BY THE APPELLANT, THE COMPLETE DATA FOR FINAN CIAL YEAR 2006 - 07 WAS NOT AVAILABLE WITHIN THE PUBLIC DOMAIN 11 THAT THE LD. AO ERRED IN FACTS AND IN LAW IN CHARGING INTEREST UNDER SECTION 234B, 234C AND 234D OF THE ACT 12 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRE D IN INITIATING PENALTY PROCEEDINGS U/S 271(L)(C) OF THE ACT MECHANICALLY AND WITHOUT RECORDING ANY ADEQUATE SATISFACTION FOR SUCH INITIATION . 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A SUBSIDIARY COMPANY OF ZTE CORPORATION, ENGAGED IN TRADING OF TELECOM EQUIPMENT AND MOBILE HANDSETS. IT IS ALSO ENGAGED IN PROVISION OF MARKETING SUPPORT SERVICES, HARDWARE SUPPORT SERVICES, REPAIR AND MAINTENANCE SERVICES AND SOFTWARE S UPPORT SERVICES. IT FILED ITS RETURN OF INCOME ON 14.11.2007 AT RS. 18291080/ - . DURING THE YEAR IT WAS NOTED THAT ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS AND THEREFORE, THE MATTER WAS REFERRED BY THE LD ASSESSING OFFICER TO LD TRANSFER PRICING OFFICER FOR DETERMINING ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. ZTE TELECOM INDIA PVT. LTD VS. ACIT ITA NO. 5971/DEL/2014 (ASSESSMENT YEAR: 2007 - 08) PAGE | 4 4. THE ASSESSEE HAS ENTERED INTO SEVEN TYPES OF INTERNATIONAL TRANSACTIONS AND WITH RESPECT OF REIMBURSEMENT OF EXPENSES IT DID NOT BENCHMARK ITS TRANSACTION AND FOR ISSUE OF FULLY CONVERTIBLE DEBENTURES IT ADOPTED CUP METHOD. WITH RESPECT TO THE PROVISION OF SERVICES AND IMPORT OF HARDWARE FOR RESALE THE ASSESSEE ADOPTED TNMM METHOD USING OP/ OC AS PLI AND FOR DIFFERENT SEGMENTS IT SELECTED DIFFERENT COMPARABLES AND SUBMITTED THAT INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE ARE AT ARMS LENGTH. THERE IS NO DISPUTE WITH RESPECT TO OTHER SEGMENTS OTHER THAN SOFTWARE SEGMENTS. IN THE SOFTWARE SUPPORT SEGMENT THE ASSESSEE HAS SELECTED 28 COMPARABLES AND THE WEIGHTED AVERAGE M ARGIN FOR THREE YEARS WAS TAKEN AS 14.33% . THE LD TRANSFER PRICING OFFICER REJECTED THE COMPARABILITY STUDY OF THE ASSESSEE AND CARRIED OUT FRESH SEARCH. HE SELECTED THE 4 COMPARABLES IN FINAL SET AND THEIR MARGIN WAS COMPUTED AT 24.10% AND CONSEQUENTLY, F OUND THAT THERE IS A DIFFERENCE OF 12.82% IN THE MARGIN OF THE ASSESSEE. CONSEQUENTLY, AN ADJUSTMENT OF RS. 29861631/ - WAS PROPOSED BY THE LD TRANSFER PRICING OFFICER. 5. THE ASSESSMENT ORDER U/S 143(3) WAS PASSED ON 09.02.2011, WHEREIN THE RETURNED INCOME OF THE ASSESSEE AT RS. 18291080/ - WAS ASSESSED AT RS. 49582150/ - . THE ASSESSEE AGGRIEVED WITH THE ORDER OF THE LD AO PREFERRED APPEAL BEFORE THE LD CIT(A) WHO VIDE ORDER DATED 19.08.2014 PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. THE ASSESSEE FURTHER AGGRIEV ED BY THE ORDER OF THE LD CIT(A) HAS PREFERRED APPEAL BEFORE US. 6. THOUGH ASSESSEE HAS RAISED 12 GROUNDS OF APPEAL BUT IN NUTSHELL IT WAS SUBMITTED THAT ASSESSEE OBJECTS TO INCLUSION OF INFOSYS TECHNOLOGIES LTD AS COMPARABLE TAKEN BY THE LD TRANSFER PRICING OFFICER WHERE THE PLI OF THAT COMPA RA BLE WAS 40.38% AS PER GROUND NO. 6 OF THE APPEAL . THE LD AR REITERATED THE SUBMISSIONS MADE BEFORE THE LD CIT(A). HE SUBMITTED THAT THE HON'BLE DELHI HIGH COURT IN AGNITY INDIA TECHNOLOGIES PVT. LTD (TS - 189 - S C - 2013 - DEL - TP) HAS HELD THAT INFOSYS SHOULD BE REJECTED. HE FURTHER SUBMITTED THAT THERE IS A WIDE VARIATION ZTE TELECOM INDIA PVT. LTD VS. ACIT ITA NO. 5971/DEL/2014 (ASSESSMENT YEAR: 2007 - 08) PAGE | 5 BETWEEN THE NATURE OF SERVICES PROVIDED BY THE INFOSYS, RISK PROFILE AND HUGE BRAND VALUE. HE FURTHER REFERRED THE VARIOUS EXPENDITURE INCURRED BY THAT COMPA NY ON BRAND PROMOTION AND R&D. HE FURTHER REFERRED TO TURNOVER OF THE APPELLANT WITH THE TURNOVER OF INFOSYS HOLDING THAT IT IS 564 TIMES COMPARED TO THE ASSESSEE. IN THE END HE SUBMITTED THAT THIS COMPARABLE DESERVES TO BE EXCLUDED. 7. THE LD DEPARTMENTAL R EPRESENTATIVE VEHEMENTLY RELIED ON THE ORDER OF THE LD AO AND CIT(A). HE SUBMITTED THAT THE FUNCTIONAL COMPARABILITY OF INFOSYS AND THE ASSESSEE IS SAME. HE FURTHER REFERRED TO THE DECISION OF THE COORDINATE BENCH HOLDING THAT MERELY THE TURNOVER CANNOT BE THE REASON FOR EXCLUSION OF INFOSYS TECHNOLOGIES LTD. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND ALSO PERUSED THE ORDERS OF THE LOWER AUTHORITIES. AS THE LD AR HAS PRESSED ONLY THE EXCLUSION OF INFOSYS TECHNOLOGIES LTD FROM THE COMPARABILITY ANALYSIS FOR THE SOFTWARE SUPPORT SEGMENT AND DID NOT PRESS ANY OTHER GROUNDS. THEREFORE , OTHER THAN THE ABOVE CONTENTIONS ALL THE GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED AS SOME OF THEM ARE NOT PRESSED AND SOME OF THEM SUCH AS INTEREST AND INITIATION OF PENALTY ARE PREMATURE. 9. NOW WE STRAIGHTWAY COME TO THE ISSUE OF WHETHER THE INFOSYS LTD CAN BE EXCLUDED FROM THE COMPARABILITY ANALYSIS FOR THE SOFTWARE SUPPORT SERVICES SEGMENT OR NOT IS THE LIMITED ISSUE BEFORE US. IT IS IMPORTANT TO NOTE THAT ASSESSEE HIMSELF HAS SELECTED INFOSYS TECHNOLOGIES LTD AS A COMPARABLE COMPANY IN ITS TRANSFER PRICING STUDY REPORT. THAT SHOWS THAT AT THE TIME OF PREPARATION OF TRANSFER PRICING STUDY REPORT ASSESSEE FIND HIMSELF THAT INFOSYS IS HAVING THE SIMILAR FAR AS COMPARED TO THE ASSESSEE. BEFORE THE LD TRANSFER PRICING OFFICER THE UPDATED MARGINS WERE ALS O PROVIDED OF THIS COMPANY AND NO OBJECTIONS WERE TAKEN. THIS FACT IS EVIDENT FROM THE LETTER OF TRANSFER PRICING OFFICER DATED 31.08.2010 ADDRESSED TO THE ASSESSEE. FURTHERMORE, BEFORE THE TRANSFER PRICING OFFICER VIDE LETTER DATED 13.10.2010 HAS ACCEPTED THE COMPARABLE WITHOUT ANY COMMENT. THEREFORE, IT IS APPARENT THAT ASSESSEE HAS NOT CHALLENGED THIS ZTE TELECOM INDIA PVT. LTD VS. ACIT ITA NO. 5971/DEL/2014 (ASSESSMENT YEAR: 2007 - 08) PAGE | 6 COMPARABLE BEFORE THE LD TPO. HOWEVER, FOR THE FIRST TIME IT WAS CHALLENGED BEFORE THE LD CIT(A) ON THE ABOVE GROUND. THE FUNCTIONAL PROFILE OF THE ASSESSE E OF THE SOFTWARE SUPPORT SEGMENT IS THAT ASSESSEE IS PROVIDING SERVICES OF COMMISSIONING OF SOFTWARE EMBEDDED IN THE EQUIPMENT SUPPLIED BY ZTE CORPORATION TO ITS CUSTOMERS IN INDIA. THE SERVICES PERFORMED BY THE APPELLANT ALSO INCLUDE LOCALIZATION AND CUS TOMIZATION OF APPELLANT IS ENGAGED IN PROVIDING LOW END SOFTWARE SERVICES LIKE DIAGNOSIS OF SOFTWARE, UPDATION OF SOFTWARE, INSPECTION OF SOFTWARE, ROUTINE MAINTENANCE OF SOFTWARE ETC. THUS, REQUIREMENTS OF AND SPECIFICATIONS PROVIDED BY THE AE(S) THAT ZTE INDIA PROVIDES SOFTWARE SUPPORT SERVICES. THUS, NEITHER IS IT ENGAGED IN END TO END DEVELOPMENT OF A PRODUCT NOR DOES IT OWN ANY PRODUCTS. THE ASSESSEE DIAGNOSIS AND CORRECT THE SOFTWARE AND FURTHER UPDATED FOR THE BUGS IN THOSE SOFTWARE. IT ALSO PERFORMS ROUTINE MAINTENANCE FOR THE SOFTWARE. WHEREAS, THE INFOSYS TECHNOLOGIES OPERATES AT FULL FLEDGED RISK AND PERFORMS THE SERVICES OF APPLICATION DESIGN, SOFTWARE ENGINEERING AND THE TECHNOLOGY LAPSE. AS PER THE MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEA R ENDED ON 31.03.2007 IT GENERATES REVENUE ON FIXED TIME FRAME. IT ALSO HAS REVENUE FROM SALE OF USER LICENSES FOR SOFTWARE APPLICATIONS. IT HAS THE SOFTWARE DEVELOPMENT EXPENDITURE ALSO AND ITS PRIME SOFTWARE IS FINACLE WHICH IS USED WORLDWIDE AS PIONEER IN BANKING INDUSTRY. THE DIRECTORS REPORT STATES THAT THIS PARTICULAR SOFTWARE CURRENTLY WORKS IN 54 COUNTRIES AND 91 BANKS. THE FINACLE SOFTWARE IS A MODULAR SOLUTION TO THE CORE BANKING AND TREASURY, WEALTH MANAGEMENT, CONSUMER AND CORPORATE E - BANKING R EQUIREMENTS OF UNIVERSAL RETAIL AND CORPORATE BANKS WORLDWIDE. FURTHERMORE, THE HON'BLE DELHI HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD 36 TAXMANN.COM 289 (DEL) WHEREIN, IN PARA NO. 6 ON THE SIMILAR ARGUMENTS HAS APPROVED THE ORDER OF THE CO ORDINATE BENCH FOR EXCLUSION OF THIS COMPANY COMPARED WITH A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE. IN THE PRESENT CASE THE ASSESSEE IS NOT EVEN THE DEVELOPER OF THE SOFTWARE BUT MERELY ZTE TELECOM INDIA PVT. LTD VS. ACIT ITA NO. 5971/DEL/2014 (ASSESSMENT YEAR: 2007 - 08) PAGE | 7 PROVIDING SOFTWARE SUPPORT SERVICES. IN VIEW OF THIS RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE DELHI HIGH COURT WE DIRECT THE LD TRANSFER PRICING OFFICER TO EXCLUDE INFOSYS TECHNOLOGIES LTD FROM THE COMPARABILITY ANALYSIS OF SOFTWARE SUPPORT SYSTEMS SEGMENT OF THE ASSESSEE WHILE DETERMI NING ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. IN THE RESULT WE ALLOW THE PLEA OF ASSESSEE AS PER GROUND NO. 6 OF THE APPEAL AND ACCORDINGLY, ALLOW THAT GROUND. 10. ALL OTHER GROUNDS OF THE APPEAL OTHER THAN GROUND NO. 6 ARE DISMISSED AS NOT PRESSED. 11. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 9 / 0 3 / 2018 . - S D / - - S D / - ( H.S.SIDHU ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 9 / 03 / 2018 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI