ACIT 10(1), MUMBAI V. VISTAAR SYSTEMS P.L TAD, MUMBAI

ITA 6089/MUM/2011

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9242 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2015
• Appeal Filed By: Department
• Bench Allotted: K
• Next Hearing Date: 07-01-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 02-09-2011
• Court: TRIBUNAL
• Department Lawyers: N PADMANABAN
• Assessee Lawyers: V CHANDRASEKHAR; HARSHAD SHAH
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Fair market value
• Section: 80C; 143(3); 10

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI . . , , BEFORE : SHRI R.C.SHARMA, AM & SHRI AMIT SHUKLA , JM ./ ITA NO. 5979 / MUM/20 1 1 ( / ASSESSMENT YEAR : 20 0 8 - 0 9 ) VISTAAR SYSTEMS PVT. LTD., RAHEJA POINT 1, WING - A, J.N.ROAD, SANTACRUZ (EAST), MUMBAI - 400055 VS. ACIT, CIRCLE - 10(1), MUMBAI ./ ./ PAN/GIR NO. : A A BCV 0613 J ( / APPELLANT ) .. ( / RESPONDENT ) AND ./ ITA NO. 6089 / MUM/20 11 ( / ASSESSMENT YEAR :2008 - 09 ) ACIT, CIRCLE - 10(1), MUMBAI VS. VISTAAR SYSTEMS PVT. LTD., RAHEJA POINT 1, WING - A, J.N.ROAD, SANTACRUZ (EAST), MUMBAI - 400 055 ./ ./ PAN/GIR NO. : AABCV 0613 J ( / APPELLANT ) .. ( / RESPONDENT ) /ASSESSEE BY : SHRI V.CHANDRASEKHAR & SHRI HARSHAD SHAH /REVENUE BY : SHRI N.PADMANABAN / DATE OF HEARING : 07 / 0 1 /201 5 / DATE OF PRONOUNCEMENT : 27 /0 3 /2015 / O R D E R PER R.C.SHARMA ( A .M.) : TH ESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A) DATED 29 - 6 - 2011 FOR THE ASSESSMENT YEAR 20 0 8 - 0 9 , IN THE MATTER OF ORDER PASSED U/S. 143(3) OF THE I.T.ACT . ITA NO S . 5979&6089 /20 1 1 2 2. THE ASSESSEE IN ITS APPEAL (ITA NO.5979/M/2011) HAS TAKEN FOLLOWING GROUNDS : - 1. THE ORDER OF THE AUTHORITIES BELOW IN SO FAR AS IT IS AGAINST THE APPELLANT ARE OPPOSED TO LAW, WEIGHT OF EVIDENCE, NATURAL JUSTICE, FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE ASSESSMENT IS BAD IN LAW AS THE MANDATORY CONDITIONS TO INVOKE JURISDICTION UNDER SECTION 92CA OF THE ACT DID NOT EXIST AND CONSEQUENTLY TH E ASSESSMENT MADE IS BAD IN LAW AS THE REASONS RECORDED FOR INVOKING THE PROVISIONS OF SECTION 92CA OF THE ACT DID NOT EXIST UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. WITHOUT PREJUDICE THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL) HAS ERRED IN MAKING A ADJUSTMENT OF RS. 51,20,400 / - TO THE VALUE OF INTERNATIONAL TRANSACTIONS BY ACCEPTING THE CUP METHOD ADOPTED BY APPELLANT BUT REJECTING THE APPELLANT'S ADJUSTMENTS TO COMPARABLE UNCONTROLLED PRICES ON LAW AND FACTS OF THE CASE. 4. WITHOUT PREJUD ICE THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL) HAS ERRED IN CONFIRMING LEARNED ASSESSING OFFICER'S ORDER OF ADJUSTING THE BROUGHT FORWARD LOSSES AGAINST THE INCOME OF SECTION 10 A UNIT, BEFORE DEDUCTION U/S. 10A UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 3 . THE REVENUE IN ITS APPEAL (ITA NO.6089/M/2011) HAS TAKEN FOLLOWING GROUNDS : - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITIONS TO THE VALUE OF INTERNATIONAL TAXATION AMOUNTING TO RS.73,46,647/ - 2. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) IN THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 4. GROUND NOS.1 & 2 OF ASSESSEES APPEAL WERE NOT PRESSED BY LD. AR, THE SAME ARE, THEREFORE, DI SMISSED IN LIMINE AS NOT PRESSED. 5 . WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORD. FACTS IN BRIEF ARE THAT T HE ASSESSEE IS 99.997% SUBSIDIARY OF USA BASED COMPANY AND IS INTO SOFTWARE DEVELOPMENT HAVING A SOFTWARE TECHNOLOGICAL PARK ITA NO S . 5979&6089 /20 1 1 3 AS EOU IN VA SHI, NAVI - MUMBAI APPROVED ON 11.8.2000 . IN THE COURSE OF SCRUTINY ASSESSMENT U/S.143(3), THE AO OBSERVED THAT PERUSAL OF THE RETURN OF INCOME AND THE AUDITED ACCOUNTS ENCLOSED THEREW ITH, PARTICULARLY ANNEXURE TO FORM NO. 3CEB, IT IS CLEAR THAT THE ASSESSEE COMPANY HAS DEVELOPED SOFTWARE WHICH IS SOLD TO M/S. VISTAAR TECHNOLOGIES INC., USA AND THE AMOUNT RECEIVED/RECEIVABLE IS RS.4 ,49 ,94 ,476 / - FOR SUCH EXPORT. THE METHOD USED FOR DETERMINING THE ARMS LENGTH PRICE IS COMPARABLE UNCONTROLLED PRICE METHOD (CUP) . IT IS NOTICED THAT EVEN DURING THE EARLIER ASSESSMENT YEARS 2003 - 04 2004 - 05, 2005 - 06, 2006 - 07 AND 2007 - 08, UNDER SIMILAR CIRCUMSTANCES, THE CUP METHOD FOR VALUING THE INTERNATIONAL TRANSACTION WAS REJECTED BY THE DEPARTMENT AND TNMM METHOD WAS APPLIED AF TER DETAILED DISCUSSIONS MADE IN THOSE ORDERS. IT WAS OBSERVED IN THOSE ORDERS THAT THE ASSESSEE HAD FAILED TO EXPLAIN OR PROVIDE DETAILS WHETHER THE THIRD PARTY TRANSACTIONS ARE COMPARABLE TO ITS INTERNATIONAL TRANSACTIONS IN EVERY RESPECT WHICH IS AN ESS ENTIAL PREREQUISITE FOR ADOPTING THE CUP METHOD. I N VIEW OF THE ABOVE, THE AO MADE TP ADJUSTMENT OF RS.73,46,697/ - . 6 . BY THE IMPUGNED ORDER CIT(A) GIVEN RELIEF OF RS. 22,26,247/ - ON ACCOUNT OF TP ADJUSTMENT AND CONFIRMED THE BALANCE, AFTER HAVING THE FOLLO WING OBSERVATION : - 2.4,12 IN VIEW OF THE AFORESAID DISCUSSION, COMMERCIAL ADJUSTMENT SOUGHT BY THE APPELLANT OR THE CONSIDERATION OF THE WEIGHTED AVERAGE OF THE COMPARABLE PRICES AS HAS BEEN CONTENDED TO BE APPLICABLE BY THE APPELLANT IS NOT FOUND TO BE ACCEPTABLE. ACCORDINGLY, UNADJUSTED RATE PER HOUR AND THE DATA FOR THE ACCOUNTING PERIOD ENDED ON 31.03.2008 ALONE HAS TO BE CONSIDERED FOR THE PURPOSE OF COMPARABILITY. IT IS THE SUBMISSION OF THE ASSESSEE AND BENCH MARK ANALYSIS CONDUCTED BY THE APPELLAN T THAT ITA NO S . 5979&6089 /20 1 1 4 THE RATES, THE SKILL SET AND JOB DESCRIPTION FOR THE JUNIOR DEVELOPER AND SENIOR DEVELOPER IS COMPARABLE TO THE SERVICES PROVIDED BY THE TCS. THE TCS PROVIDES SUCH SERVICES AT RS. 1000 PER HOUR AND THE RATES CHARGED TO THE AE FOR THE JUNIOR LEVEL DE VELOPER AS PER THE AGREEMENT OF THE APPELLANT WITH ITS AE AND AS MENTIONED IN THE TRANSFER PRICING REPORT IS RS. 850 PER HOUR. THERE IS A DIFFERENCE OF RS. 150 PER HOUR WHICH APPELLANT HAS SOUGHT TO BRIDGE AND ADJUST ON THE BASIS OF COMMERCIAL AND FINANCIA L ADJUSTMENT OR BY CONTENDING TO TAKE WEIGHTED AVERAGE RATE OF THE COMPARABLE PRICE. HOWEVER THE SAME IS NOT FOUND TO BE ACCEPTABLE IN VIEW OF THE DETAILED DISCUSSION GIVEN HEREIN ABOVE. ACCORDINGLY AS PER THE FACTS OF THE CASE, THERE IS A DIFFERENCE IN TH E RATES CHARGED BY THE APPELLANT TO ITS AE WHICH IS AT RS 850 PER HOUR FOR THE LEVEL OF JUNIOR DEVELOPER AND THE COMPARABLE RATE TAKEN BY THE APPELLANT WHICH IS RATE CHARGED BY THE TCS - RS. 1000 PER HOUR. THE NUMBER OF HOURS CHARGED TO THE AE FOR JUNIOR D EVELOPER IS AT 34,136 HOURS. AS MENTIONED ABOVE, THERE IS DIFFERENCE IN THE COMPARABLE RATE VIS - A - VIS THE RATE CHARGED TO THE AE OF RS.150/ - PER HOUR. ACCORDINGLY, AN ADJUSTMENT OF AN AMOUNT OF RS. 51,20,400/ - (RS.150 X NUMBER OF HOURS FOR JUNIOR DEVELOPE R BILLED AT 34136 HOURS) IS REQUIRED TO VALUE OF THIS INTERNATIONAL TRANSACTION TO ARRIVE AT THE ALP OF THE INTERNATIONAL TRANSACTION. THE OTHER RATE CHARGED BY THE APPELLANT ARE HIGHER COMPARED TO THE COMPARABLE RATES TAKEN FOR THE PURPOSE OF COMPARABILI TY AND THUS NEED NO ADJUSTMENT. 2.4.14 THE AO IN HIS ASSESSMENT ORDER HAS MADE AN ADJUSTMENT OR RS.73,46,647/ - . HOWEVER, THE ANALYSIS OF THE AO HAS NOT BEEN FOUND TO BE ACCEPTABLE FOR THE REASON GIVEN EARLIER IN THIS ORDER. HOWEVER THE ADJUSTMENT OF RS. 5 1, 20,400/ - WORKED OUT ON THE BASIS OF THE CUP METHOD AS MENTIONED ABOVE IS REQUIRED TO ARRIVE AT THE ALP OF THE APPELLANT'S INTERNATIONAL TRANSACTION. THEREFORE, THE APPELLANT GETS A RELIEF OF RS. 22, 26,247/ - IN THIS GROUND OF APPEAL. ACCORDINGLY, THIS G ROUND OF APPEAL IS PARTLY ALLOWED. 7 . REGARDING GROUND NO.3, THE ASSESSEE IS AGGRIEVED FOR TP ADJUSTMENT OF RS.51,20,400/ - RETAINED BY CIT(A) BY REJECTING ASSESSEES ADJUSTMENT TO COMPARABLE UNCONTROLLED PRICE. 7 .1 LD. AR PLACED ON RECORD ORDER OF TRIBUN AL IN ASSESSEES OWN CASE FOR THE A.Y.2003 - 04 TO 2007 - 08, DATED 25 - 5 - 2012, WHEREIN THE CUP METHOD WAS ACCEPTED BY THE TRIBUNAL FOR DETERMINING ARMS LENGTH PRICE. THE PRECISE OBSERVATION OF THE TRIBUNAL IN THE AFORESAID CASE WAS AS UNDER : - ITA NO S . 5979&6089 /20 1 1 5 15. THE RATES CH ARGED BY THEM TO AE, ARE COMPARABLE TO THE RATE CHARGED BY THE L&T SOFTWARE AND TCS TO THE ASSESSEE FOR THE VERY SAME JOB WORK. THE UNDISPUTED FACTS ARE THAT L&T SOFTWARE AND TCS ARE GIANTS IN THE SOFTWARE INDUSTRIES AND ARE COMPANIES WITH HIGH REPUTATION. THE AMOUNTS PAID TO THEM, REPRESENT FAIR MARKET VALUE. WHEN THE ASSESSEE ADOPTS THESE RATES AS COMPARABLE UNDER CUP METHOD NO FAULT CAN BE FOUND. IN VIEW OF THE ABOVE DISCUSSION, WE UPHOLD THE FOLLOWING FINDINGS OF THE FIRST APPELLATE AUTHORITY. I) THE R ATES CHARGED BY THE ASSESSEE COMPANY ARE IDENTICAL TO THE RATES CHARGED BY THE THIRD PARTIES IN THE SAME LINE OF BUSINESS FOR THE SAME JOB AND THE ASSESSEE HAS PROVED THE SAME WITH EVIDENCE. II) THE TPO HAS NOT BROUGHT OUT ANY MATERIAL ON RECORD TO PROV E THAT THE PER HOUR RATE CHARGED BY THE ASSESSEE COMPANY IS LOWER THAN THAT CHARGED BY THE THIRD PARTIES IN THE SAME LINE OF BUSINESS; III) NO REASON IS GIVEN FOR REJECTING THE CUP METHOD; IV) OECD GUIDELINES STATE THAT CUP METHOD IS MOST DIRECT AND RELIABLE METHOD WHEN COMPARABLE UNCONTROLLED TRANSACTIONS ARE AVAILABLE; V) THE ASSESSING OFFICER HAS NOT GIVEN ANY REASON THAT TNM IS THE BE ST METHOD AND THE CUP METHOD IS NOT APPROPRIATE; VI) THE TPO HAS NOT DEALT WITH THE ARGUMENTS OF THE ASSESSEE THAT THE ASSESSEE IS NOT A NORMAL SOFTWARE SERVICE COMPANY AND IS IN FACT ENGAGED IN B.I/ERP PROJECT DEVELOPMENT WHICH IS A KIND OF R&D ACTIVITY FOR WHICH THE REVENUE WOULD ARISE ONLY AFTER DEVELOPMENT OF THE PROJECT FULLY; VII) THE TPO IGNORED THE AGR EEMENT OF THE ASSESSEE WITH THE AE THAT IT HAS BEEN GIVEN ABSOLUTE RIGHT FOR EXPLOITATION OF THE PROJECT IN THE INDIAN REGION AND NEARBY T ERRITORY AFTER ITS DEVELOPMENT; 7 .2 WE HAVE CONSIDERED RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF AUTHO RITIES BELOW AND FOUND FROM THE RECORD THAT D URING THE COURSE OF SCRUTINY ASSESSMENT THE AO REJECTED CUP METHOD FOLLOWED BY ASSESSEE. ON THE BASIS OF EARLIER YEARS ORDER THE AO ADOPTED TNM METHOD AND MADE TP ADJUSTMENT OF RS.73,46,647/ - . BY THE IMPUGNED OR DER, THE CIT(A) ACCEPTED CUP METHOD BUT MADE ADJUSTMENT BY REFERRING TO THE RATE CHARGED BY OTHER PROVIDER OF SIMILAR SERVICES. THE CIT(A) FOUND ITA NO S . 5979&6089 /20 1 1 6 THAT TCS PROVIDES SUCH SERVICES AT RS.1000/ - PER HOUR WHEREAS RATES CHARGED BY ASSESSEE FROM ITS AE AS MENTIONE D IN THE TRANSFER PRICING REPORT IS RS.850/ - PER HOUR. BY APPLYING THE RATE DIFFERENCE OF RS.150/ - PER HOUR TO THE NUMBER OF HOURS CHARGED TO AE AT 34,136, THE CIT(A) ARRIVED AT ADJUSTMENT OF RS.51,20,400/ - AS AGAINST ADJUSTMENT OF RS.73,46,647/ - MADE BY A O. WE FOUND THAT IN ASSESSEES OWN CASE IN A.Y.2003 - 04 TO 2007 - 08 VIDE ORDER DATED 25 - 5 - 2012 THE TRIBUNAL HAD DELETED THE ADJUSTMENT MADE BY TPO BY ACCEPTING CUP AS MOST APPROPRIATE METHOD. THE TRIBUNAL HAS ALSO RECORDED A CATEGORICAL FINDING TO THE EFFECT THAT THE TPO HAS NOT BROUGHT OUT ANY MATERIAL ON RECORD TO PROVE THAT THE PER HOUR RATE CHARGED BY THE ASSESSEE COMPANY IS LOWER THAN THAT CHARGED BY THIRD PARTY IN THE SAME LINE OF BUSINESS. HOWEVER, IN THE INSTANT CASE, AFTER RECORDING CATEGORICAL FINDI NG REGARDING RATE DIFFERENCE OF RS.150 PER HOUR, THE TP ADJUSTMENT HAS BEEN RESTRICTED BY THE CIT(A) TO RS.51,20,400/ - AS AGAINST ADJUSTMENT OF RS.73,46,647/ - MADE BY TPO. DETAILED FINDING RECORDED BY CIT(A) AT PARA 2 OF HIS ORDER HAS NOT BEEN CONTROVERTED BY LD. AR BY BRINGING ANY POSITIVE MATERIAL ON RECORD. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS RECORDED BY THE CIT(A) RESULTING INTO ADDITION OF RS.51,20,400/ - . 8 . THE NEXT GRIEVANCE OF THE ASSESSEE WAS THAT THE AO WAS NOT JUST IFIED IN ADJUSTING THE BROUGHT FORWARD LOSSES AGAINST THE INCOME OF SECTION 10A UNIT , BEFORE DEDUCTION U/S.10A . 8.1 WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT ISSUE UNDER CONSIDERATION IS SQUARELY COVERED BY THE DECISION OF HONBLE BOMBAY ITA NO S . 5979&6089 /20 1 1 7 HIGH COU RT IN THE CASE OF BLACK & VEATCH CONSULTING PVT. LTD., ITA NO.1237 OF 2011, DATED 9 TH APRIL, 2012 , WHEREIN IT WAS HELD THAT THE DEDUCTION U/S.10A HAS TO BE GIVEN AT THE STAGE WHEN PROFITS AND GAINS OF BUSINESS ARE COMPUTED FOR THE FIRST INSTANCE. THE PRECI SE OBSERVATION OF THE HONBLE HIGH COURT ARE AS UNDER : - SECTION 10A, IN OUR VIEW, HAS TO BE GIVEN EFFECT TO AT THE STAGE OF COMPUTING THE PROFITS AND GAINS OF BUSINESS. THIS IS ANTERIOR TO THE APPLICATION OF THE PROVISIONS OF SECTION 72 WHICH DEALS WITH THE CARRY FORWARD AND SET OFF OF BUSINESS LOSSES. A DISTINCTION HAS BEEN MADE BY THE LEGISLATURE WHILE INCORPORATING THE PROVISIONS OF CHAPTER VI - A. SECTION 80A(1) STIPULATES THAT IN COMPUTING THE TOTAL INCOME OF AN ASSESSEE, THERE SHALL BE ALLOWED FROM HI S GROSS TOTAL INCOME, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THE CHAPTER, THE DEDUCTIONS SPECIFIED IN SECTIONS 80C TO 80U. SECTION 80B(S) DEFINES FOR THE PURPOSES OF CHAPTER VI - A 'GROSS TOTAL INCOME' TO MEAN THE TOTAL INCOME COMPUTED IN ACCORD ANCE WITH THE PROVISIONS OF THE ACT, BEFORE MAKING ANY DEDUCTION UNDER THE CHAPTER. WHAT THE REVENUE IN ESSENCE SEEKS TO ATTAIN IS TO TELESCOPE THE PROVISIONS OF CHAPTER VI - A IN THE CONTEXT OF THE DEDUCTION WHICH IS ALLOWABLE UNDER SECTION 10A, WHICH WOULD NOT BE PERMISSIBLE UNLESS A SPECIFIC STATUTORY PROVISION TO THAT EFFECT WERE TO BE MADE. IN THE ABSENCE THEREOF, SUCH AN APPROACH CANNOT BE ACCEPTED. IN THE CIRCUMSTANCES, THE DECISION OF THE TRIBUNAL WOULD HAVE TO BE AFFIRMED BE GIVEN AT THE STAGE WHEN T HE PROFITS AND GAINS OF BUSINESS ARE COMPUTED IN THE FIRST INSTANCE. 8.2 RESPECTFULLY FOLLOWING THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT, WE DO NOT FIND ANY MERIT IN THE ORDER OF LOWER AUTHORITIES FOR ADJUSTING BROUGHT FORWARD LOSSES AGAINST INC OME OF SECTION 10A UNIT, BEFORE DEDUCTION U/S.10A. ACCORDINGLY, THE AO IS DIRECTED TO ALLOW CLAIM OF DEDUCTION U/S.10A ON THE PROFIT OF ELIGIBLE UNIT BEFORE ADJUSTING THE BROUGHT FORWARD LOSSES AGAINST THE INCOME OF SECTION 10A UNIT. WE DIRECT ACCORDINGLY. 9 . IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED WHEREAS APPEAL OF THE ASSESSEE IS ALLOWED IN PART . ITA NO S . 5979&6089 /20 1 1 8 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 27 TH MARCH . 201 5 . SD/ - SD/ - ( ) ( AMIT SHUKLA ) ( . . ) ( R.C.SHARM A ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 27 / 0 3 /201 5 . . /PKM , . / PS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//