ITO, New Delhi V. M/s. Colt Technology Services India Pvt. Ltd., New Delhi

ITA 609/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65691 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 25-07-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 03-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: J S AHLAWATI
• Keywords: Transfer pricing; International transaction; Cost of acquisition
• Section: 92C; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: B : NEW DELHI BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND SHRI I. C. SUDHIR, JUDICIAL MEMBER ITA NO. 609/DEL/2011 ASSESSMENT YEAR: 2005- 2006 ITO VS. COLT TECHNOLOGY SERVICES INDIA P VT. LTD. WARD-3(4) 103, ASHOKA ESTATE NEW DELHI. BARAKHAMBA ROAD NEW DELHI 110 001. PAN NO. AACCC3512G (APPELLANT) (RESPO NDENT) AND CO NO. 81/DEL/2011 ASSESSMENT YEAR : 2005-06 COLT TECHNOLOGY SERVICES INDIA PVT. LTD. VS. ITO 103, ASHOKA ESTATE WARD-3 (4) BARAKHAMBA ROAD, NEW DELHI- 110 001. AACCC3512G (APPELLANT) (RESPO NDENT) APPELLANT BY : SHRI VIKAS SRIVASTAVA , ADVOCATE SHRI MAYANK AGARWAL, CA RESPONDENT BY : SHRI J.S. AHLAWATI , SR. DR. ORDER PER I.C. SUDHIR, JUDICIAL MEMBER ITA NO. 609/D/2011 IN GROUND NO. 1 OF THE APPEAL PREFERRED BY THE REVE NUE THE ACTION OF THE LD. CIT(A) HAS BEEN IMPUGNED IN DELETING THE ADDITI ON OF RS. 4,181,738/- ON ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 2 ACCOUNT OF DIFFERENCE IN ARMS LENGTH PRICE IGNORIN G THAT DETAILED FAR ANALYSIS WAS DONE DURING THE TIME OF TPO ANALYSIS AND IT WAS AFTER THAT THE COMPARABLES WERE TAKEN FOR DECIDING ARMS LENGTH PRICE. 2. THE GROUND NO. 2 OF THE APPEAL IS GENERAL IN NAT URE WHEREIN THE APPELLANT (REVENUE) CRAVES LEAVE FOR RESERVING THE RIGHT TO A MEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) OF APPEAL AT ANY TIME BEFORE O R DURING THE HEARING OF THIS APPEAL. THIS GROUND THUS DOES NOT NEED ANY ADJUDICA TION. GROUND NO. 1 3. THE FACTS IN BRIEF ARE THAT IN ITS RETURN OF INC OME THE ASSESSEE DECLARED INCOME AT NIL UNDER THE HEAD PROFIT AND GAINS OF B USINESS OR PROFESSION AFTER CLAIMING DEDUCTION U/S 10A OF THE ACT AMOUNTING TO RS. 65,896,497. BOOK PROFITS OF THE COMPANY WERE COMPUTED UNDER SECTION 115JB OF THE ACT AT RS. NIL AND 7.5 % OF SUCH BOOK PROFITS AMOUNTING TO RS. NIL. TH E ASSESSMENT WAS FRAMED U/S 143 (3) AND THE AO MADE ADDITION OF RS. 16967314/- ON ACCOUNT OF ADJUSTMENT U/S 92CA(3) ON PROVISION OF IT ENABLED BACK OFFICE SERVICES AND CONTRACT SOFTWARE DEVELOPMENT SERVICES. THE AGGRIEVED ASSESS EE PREFERRED FIRST APPEAL AGAINST THE SAID ADDITION ON THE ISSUE OF TRANSFER PRICING. LD. CIT(A) AFTER DISCUSSING THE ISSUE IN DETAIL HAS HELD THAT THE AS SESSEES INTERNATIONAL TRANSACTIONS ARE PROVED TO BE AT ARMS LENGTH. IN T HE RESULT THE ADDITION MADE BY THE AO HAS BEEN DELETED. THIS ACTION OF THE LD. CI T(A) HAS BEEN QUESTIONED IN THE PRESENT APPEAL BY THE REVENUE. ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 3 4. IN SUPPORT OF THE GROUND THE LD. DR HAS BASICALL Y PLACED RELIANCE ON THE ORDER OF THE TRANSFER PRICING OFFICER (IN SHORT TPO ). HE HAS REFERRED CONTENTS OF PAGE NO. 4, 6 & 14 OF THE ORDER OF THE TPO. AT PAGE NO. 4 IN PARA NO. 6 THE TPO HAS DISCUSSED THE SOFTWARE SEGMENT OF THE ASSESSEE. HE HAS OBSERVED THAT ON PAGE APPENDIX X OF THE TP REPORT AS OP / TC OF THE SOFTWARE SEGMENT HAS BEEN DETERMINED AT 13% AND ON PAGE APPENDIX F THE MARGIN OF THE COMPARABLES HAD BEEN IDENTIFIED AT 13% IN THE FAR ANALYSIS OF THE C OMPARABLES AND THE ASSESSEE, NO WEIGHTAGE HAD BEEN GIVEN TO FUNCTIONS, ASSETS AN D RISKS. THE TPO HAS OBSERVED THAT IN THE ABSENCE OF LOCATION, IT WAS DI FFICULT TO APPRECIATE THE SELECTION PROCESS OF THE COMPARABLES AND ALSO INPUT S QUESTION MARKET ON THE COMPARABILITY ANALYSIS. THEREFORE, A FRESH SEARCH W AS CARRIED OUT IN THE PROWESS AND THE CAPITOLINE DATA BASE FOR IDENTIFICATION OF THE COMPARABLES IN THE SOFTWARE SEGMENT ON THE BASIS OF SOME SEARCH CRITERIA. LD. C IT(A) HAS IGNORED THE DETAILED FAR ANALYSIS DONE DURING THE TIME OF TPO A NALYSIS AND THE COMPARABLES TAKEN BY THE TPO FOR DECIDING THE ARMS LENGTH PRICE . THE LD. DR ALSO REFERRED THE CONTENTS OF PAGE NO. 20 AND 26 OF THE FIRST APP ELLATE ORDER. AT PAGE NO. 20 THE LD. CIT(A) HAS DISCUSSED ABOUT THE COMPARABILIT Y ANALYSIS AND AT PAGE NO. 26 LD. CIT(A) HAS GIVEN HIS FINDING ON THE ISSUE. L D. DR SUBMITTED FURTHER THAT THE ASSESSEE IS NOT IN THE ROUTINE ACTIVITIES HENCE IT IS COMPARABLE WITH HIGH TECH COMPANIES AS IT WAS RIGHTLY DONE BY THE TPO. IN SUP PORT HE REFERRED PAGE NO. 75 OF THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE ( IN SHORT PB(A). AT THE SAID ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 4 PAGE 75 OF THE PB (A) HAS BEEN MADE AVAILABLE THE O VERVIEW OF THE GROUP COMPANY. LD. DR SUBMITTED FURTHER THAT NO FACT AND FIGURE WAS FURNISHED BY THE ASSESSEE TO SUPPORT THEIR CLAIM THAT THEY WORKED ON COST PLUS PROFIT AS PER CONTRACT. HE SUBMITTED THAT IN THE CASE OF ASSESSEE TRADING AND DEVELOPMENT BOTH ARE INVOLVED. IN THIS REGARD THE LD. DR REFERR ED THE CONTENTS OF PARA NO. 36 OF THE FIRST APPELLATE ORDER, WHEREIN IT HAS BEEN S TATED THAT THE COMPANY IS ENGAGED IN THE TRADING AND DEVELOPMENT OF SOFTWARE AS PER POINT NO. 3 OF THE NOTES ACCOUNTS DEALING WITH ABOUT QUANTITATIVE DETA ILS. 5. LD. AR ON THE OTHER HAND TRIED TO JUSTIFY THE FI RST APPELLATE ORDER. HE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORIT IES BELOW. HE ASSERTED THAT THE ASSESSEE COMPANY WORKS ON THE BASIS OF COST PLU S PROFIT OF 10% UNDER CONTRACT. IN SUPPORT HE REFERRED PAGE NO. 75,94,99 OF THE PB(A). IT IS THE PART OF TRANSFER PRICING STUDY FOR ASSESSMENT YEAR 2005-06 FURNISHED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AND PLACED AT PAGE NOS . 67 TO 154 OF PB(A). AT PAGE NO. 75 OF THE PB(A) HAS BEEN PLACED THE OVERVI EW OF GROUP AND THE COMPANY. IN PARA NO. 2.2.3 THEREOF IT HAS BEEN STAT ED THAT DURING THE CURRENT FINANCIAL YEAR, COLT INDIA WAS ESSENTIALLY ENGAGED IN PROVIDING IT INPUT COMPANY SERVICES AND CONTRACT SOFTWARE DEVELOPMENT SERVICE S TO ITS GROUP COMPANIES. AT PAGE 94 OF THE PB (A) HAS BEEN MADE AVAILABLE ABOUT THE FUNCTIONS PERFORMED BY COLT INDIA. IN PARA NO. 4.2.10 THEREOF, HAS BEEN ST ATED THAT THE SERVICES PROVIDED BY COLT INDIA DURING THE CURRENT FINANCIAL YEAR, UNDER THE SW SEGMENT ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 5 ESSENTIALLY ENTAILED PROVISION OF APPLICATIONS DEVE LOPMENT SUPPORT AND MAINTENANCE SUPPORT. IT HAS BEEN FURTHER STATED TH AT THESE SERVICES WERE ONLY IN RELATION TO SYSTEMS AND APPLICATIONS USED WITHIN TH E COLT GROUP. IN PARA NO. 4.2.11 THEREOF HAS BEEN STATED THAT THE COMPANY IS BEING REMUNERATED BY ITS GROUP COMPANIES FOR THE RENDERING OF IT ENABLES BA CK OFFICE SERVICES AND CONTRACTS SOFTWARE DEVELOPMENT SERVICES ON A COST P LUS BASIS ( I.E THE REMUNERATION PRICES ON COST INCURRED IN RENDERING T HE RESPECTIVE SERVICES OTHER THAN INTEREST AND TAXES ON INCOME WAS PLUS THE RESP ECTIVE MARKET UPS THEREON) AT PAGE NO. 99 OF THE PB(A) HAS BEEN GIVEN THE CHAR ACTISATION OF THE ASSESSEE. IN PARA NO. 4.5.1 UNDER THE HEAD CHARACTERIZATION I T HAS BEEN STATED THAT IN VIEW OF THE ANALYSIS OF FUNCTIONS PERFORMED, ASSETS EMPL OYED AND RISK ASSUMED BY COLT INDIA, FOR TRANSFER PRICING PURPOSES, IT IS PO SSIBLE TO CHARACTISE COLT INDIA AS A ROUTINE SERVICES PROVIDER WHICH UNDERTAKES ROU TINE IT ENABLED BACK OFFICE SERVICES AND ROUTINE CONTRACT SOFT WARE DEVELOPMENT SERVICES ASSUMING LESS THAN NORMAL RISK ASSOCIATED WITH CARRYING OUT SUCH BUSIN ESSES, AND EMPLOYING ROUTINE TANGIBLE ASSETS REQUIRED FOR PROVIDING SUCH SERVICE S. THESE PAGES ARE THE PART OF THE TRANSFER PRICING STUDY FOR THE ASSESSMENT YEAR UNDER CONSIDERATION FURNISHED BY THE ASSESSEE. THE COMPLETE COPY HAS BEEN MADE AV AILABLE ON TRANSFER PRICING STUDY HAS BEEN MADE AVAILABLE AT PAGE NOS. 67 TO 15 4 OF THE PB(A) UNDER THE CERTIFICATE THAT IT WAS ALSO FURNISHED BEFORE THE A UTHORITIES BELOW. THE LD. AR SUBMITTED FURTHER THAT TWO COMPANIES HAVING DIFFERE NT WORK CANNOT BE ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 6 COMPARED. IN SUPPORT HE PLACED RELIANCE ON THE DECI SION OF SPECIAL BENCH OF THE TRIBUNAL AT BANGALORE IN THE CASE OF AZTEC SOFIWARE AND TECHNOLOGY SERVICE LTD. VS. ACIT (2007) 107 ITD 141 (BANG) (SB). THE LD. AR REFERRED PAGE NO. 168 OF THE PB(A) I.E. COPY OF EXTRACTS FROM ANNUAL REPORT OF SANKHYA INFOTECH LTD. FOR THE FINANCIAL YEAR 2004-05. HE ALSO REFERRED PAGE N O. 192 PF PB(A) I.E. COPY OF SCHEDULE FORMING PART OF BALANCE SHEET AS ON 31 ST MARCH, 2005 OF THIRDWARE SOLUTION LTD. .THE LD. AR ALSO REFERRED THE CONTENT S OF PAGE NO. 195 OF PB(A) I.E. SCHEDULE 19 OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT OF THIRDWARE SOLUTIONS LTD. UNDER THE HEAD REVENUE RECOGNITION, IT IS STATED THEREIN THAT REVENUE FROM SOFTWARE DEVELOPMENT AND IMPLEMENTATIO N ON TIME AND MATERIAL CONTRACT IS RECOGNIZED AND BILLED TO CLIENTS AS PER THE TERMS OF SPECIFIC CONTRACTS. IT HAS BEEN STATED THAT ON FIXED PRICE CONTRACTS RE VENUE IS RECOGNIZED AND BILLED BASED ON MILESTONES ACHIEVED AS SPECIFIED IN THE CO NTRACTS. LD. AR SUBMITTED THAT THE COMPANIES HAVING NORMAL PROFIT CANNOT BE C OMPARED WITH THE ASSESSEE. HE REFUSED R & D EXPENDITURE FOR THE YEAR IN CASE O F VISUAL SOFT TECHNOLOGY LTD. SHOWN IN ITS ANNUAL REPORT FOR FINANCIAL YEAR 2004- 05, PLACED AT PAGE NO. 166 OF PB(A). AT THIS PAGE UNDER THE HEAD R & D EXPENDITUR E FOR THE YEAR ENDED MARCH 31, 2005 HAS BEEN SHOWN AT 4.44% OF TOTAL REVENUE. THE LD. AR ALSO PLACED RELIANCE ON THE FOLLOWING DECISIONS :- E-GAIN COMMUNICATION PVT. LTD. VS. ITO, 2008 118 TTJ 354 TPUN 2) PHILIPS SOFT WARE CENTER PVT. LTD. VS. ACIT, 200 8 119 TTJ 721 TBAL ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 7 3) SAP LAPS INDIA PVT. LTD. VS. ACIT 2010 TTJ 4 4 ITAT BANG TP. 6. THE LD. AR ALSO REFERRED PAGE NO. 116 OF PB(A) W HEREIN A SUMMARY OF THE DATA BASED SEARCHES EMPLOYING THE SEARCH CRITERIA H AS BEEN PROVIDED. HE ALSO REFERRED PAGE NO. 167 OF PB (A) I.E. COPY OF EXTRAC TS FROM ANNUAL REPORT OF EXENSYS SOFTWARE SOLUTIONS LTD. FOR FY 2004-05. LD. AR ALSO PLACED RELIANCE ON THE DECISION IN THE CASE OF ST MICROELECTRONIS PVT. LTD. VS. CIT, 2011 T11 63 ITAT DEL TP. 7. THE LD. AR ALSO PLACED EMPHASIS ON THE SUBMISSI ON THAT THE ASSESSEE IS NOT DOING HIGH END WORK. HE REITERATED THAT FUNCTIO NAL SIMILARITIES IS IMPORTANT TO LOOK INTO THE COMPARABLES AND NOT THE TRADING. HE S UBMITTED THAT NO RISK IS INVOLVED IN THE CASE OF ASSESSEE WHO WORKS ON LOWER MARGIN OF PROFIT. HE SUBMITTED FURTHER THAT THERE IS NO INVOLVEMENT OF A NY BRAND ETC. 8. LD. DR REJOINED WITH THIS ASSERTION THAT ASSESSE E IS INVOLVED BOTH IN TRADING AND DEVELOPMENT. HE ALSO PLACED RELIANCE ON THE FOLLOWING DECISIONS :- ITA 7894/MUM/2010(ASSESSMENT YEAR 2006-07) ORDER DA TED 31 ST MAY, 2011 IN THE CASE OF SYMANTEC SOFTWARE SOLUTIONS PVT. LTD. V S. ACIT ITA NO. 1806 & 1807/D/2008 & OTHERS (ASSESSMENT YEARS 2003-04, 20 04-05, 2006-07) ORDER DATED 3.6.2011 IN THE CASE OF M/S. ST MICROELECTRO NICS PVT. LTD. VS. CIT & OTHERS. 9. WE HAVE CONSIDERED THE ARGUMENTS ADVANCED BY THE PARTIES IN VIEW OF THE ORDERS OF THE AUTHORITIES BELOW, MATERIAL AVAIL ABLE ON RECORD AND THE ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 8 DECISIONS RELIED UPON. IT APPEARS FROM THE RECORD T HAT THE COALT TECHNOLOGY SERVICES IN INDIA PVT. LTD. (THE ASSESSEE) WAS INCO RPORATED IN INDIA ON APRIL 1 2004 AND FINANCIAL YEAR 2004-05 WAS THE FIRST YEAR OF OPERATION OF THE COMPANY. DURING THE FINANCIAL YEAR (FY) 2004-05, COLT INDIA WAS ENGAGED IN PROVIDING INFORMATION TECHNOLOGY (IT) ENABLED BACK OFFICE SER VICES AND CONTRACT SOFTWARE DEVELOPMENT SERVICES TO COLT GROUP OF COMPANIES. DU RING THE RELEVANT FY, THE APPELLANT UNDERTOOK THE FOLLOWING INTERNATIONAL TRA NSACTIONS WITH ITS ASSOCIATED ENTERPRISES: SL. NO. INTERNATIONAL TRANSACTION VALUE (IN RS.) 1. PROVISION OF CONTRACT SOFTWARE DEVELOPMENT SERVICES TO GROUP COMPANIES 5,46,96,766 2. PROVISION OF IT ENABLED BACK OFFICE SERVICES TO GROUP COMPANIES 27,60,52,192 3. RECEIPT OF SERVICES FROM GROUP COMPANIES 11,57,327 4. RECHARGES FROM GROUP COMPANIES 5,59,79,900 5. RECHARGE TO GROUP COMPANIES 2,14,69,637 6. INTEREST ON LOAN RECEIVED FROM GROUP COMPANIES 32,05,128 10. THE ASSESSEE APPLIED THE TRANSACTIONAL NE T MARGIN METHOD (TNMM) TO CONFIRM THE ARMS LENGTH PRICING OF ITS INTER-COMPA NY TRANSACTIONS IN THE ITES AND CONTRACT SOFTWARE DEVELOPMENT (SW) SEGMENTS. OPERATING PROFIT / TOTAL COST (OP/TC) WAS USED AS THE RELEVANT PROFIT LEVEL INDICATOR (PLI). THE FOLLOWING ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 9 TABLE SUMMARISES THE RESULTS OF THE COMPARABLE SEAR CH AND THE FINANCIAL AND ECONOMIC ANALYSIS UNDERTAKEN BY THE ASSESSEE FOR IT S CATEGORY I AND II TRANSACTIONS: CATEGORY I (ITES) CATEGORY II(SW) NO. OF COMPANIES 22 87 MEAN (AVERAGE) OP/ TC 14% 14% APPELLANTS OP/TC 13% 13% 11. AS A PART OF THE INCOME TAX ASSESSMENT PRO CEEDINGS, A REFERENCE WAS MADE BY THE AO UNDER SECTION 92CA(1) OF THE ACT TO THE TPO. IN THE TRANSFER PRICING (TP) ORDER, THE TRANSFER PRICING OFFICER (TPO) MADE AN ADJUSTMENT OF RS. 12,785,576) AND RS. 4,181,738 TO THE INCOME FRO M ITES AND SW SEGMENTS RESPECTIVELY WHILE ALL THE OTHER TRANSACTIONS WERE ACCEPTED TO BE AT ARMS LENGTH. HOWEVER, FURTHER TO THE RECTIFICATION APPLICATION U /S 154 DATED FEBRUARY 6, 2009 FILED BY THE ASSESSEE, THE ADJUSTMENT TO THE ITES SE GMENT WAS DELETED BY THE TPO VIDE ORDER DATED JULY 22, 2009 UNDER SECTION 15 4 R/W 92CA(5) OF THE ACT. HENCE, THE TP DISPUTE REMAINED IS IN RELATION TO TH E TP ADJUSTMENT OF RS. 4,181,738 MADE BY THE TPO / AO TO THE SW SEGMENT. 12. TO DETERMINE THE ARMS LENGTH PRICE THE T PO INITIALLY TOOK 19 COMPARABLES AS DISCUSSED BY HIM AT PAGE NO. 4 TO 6 AND 14 OF HIS ORDER AND FINALLY SELECTED 12 THEREFROM. OUT OF THESE 12 COMP ARABLES THE ASSESSEE ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 10 CONTENDED THAT THE FOUR COMPANIES LIKE EXENSYS SOFT WARE SOLUTIONS LTD., SANKHYA INFOTECH LTD., THIRDWARE SOLUTIONS LTD., AND VISUAL SOFT TECHNOLOGIES LTD. ARE NOT COMPARABLES WITH THE ASSESSEE. THE ASSESSEE HOWEVER ACCEPTED THE OTHER COMPARABLES SELECTED BY THE TPO. THESE COMPARABLES WITH THE STAND OF THE ASSESSEE ARE BEING REPRODUCED HEREUNDER FOR A READY REFERENCE:- S.NO. TPO COMPANIES APPELLANTS STAND 1. BODHTREE CONSULTING LTD. ACCEPTED 2. AKSHAY SOFTWARE TECHNOLOGIES LIMITED ACCEPTED 3. LANCO GLOBAL SYSTEMS LTD. ACCEPTED 4. EXENSYS SOFTWARE SOLUTIONS LTD. OWN BRAND WORTH RS. 5 CRORES AS AGAINST TURNOVER OF RS. 7.5 CRORES. DEVELOPMENT OF PROPRIETARY SOFTWARE PRODUCTS/SOLUTIONS. 5. SANKHYA INFOTECH LTD. DEVELOPMENT OF PROPRIETARY SOFTWARE PRODUCTS / SOLUTIONS 6. SASKEN NETWORK SYSTEMS LTD. ACCEPTED 7. GEBBS INFOTECH LIMITED ACCEPTED 8. VJIL CONSULTING ACCEPTED 9. THIRDWARE SOLUTION LIMITED DIFFERENT FAR - ALSO SELLS SOFTWARE PRODUCTS / LICENSES-FAR AT VARIOUS PLACES STATES THAT ENGAGED IN TRADING OF SOFTWARE AND PROVISION OF IT SERVICES ALSO PURCHASE OF SOFTWARE IS 32 PERCENT OF THE TOTAL COST OF THE COMPANY. ABNORMALLY HIGH ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 11 OP / TC 10. VISUAL SOFT TECHNOLOGIES LTD. DETAILS R & D / SALES FILTER (4.5%) 11. SAKEN COMMUNICATION TECHNOLOGIES LTD. (SEG) ACCEPTED 12. L & T INFOTECH LTD. ACCEPTED AVERAGE 21.64 % 13. THUS THE ISSUE BEFORE US IS AS TO WHETHER THE L D. CIT(A) WAS JUSTIFIED IN AGREEING WITH THE ASSESEE THAT THE ABOVE STATED FOU R COMPARABLES SEARCHED BY THE TPO WERE NOT AKIN TO THE CASE OF THE ASSESSEE T O DETERMINE THE ARMS LENGTH PRICE FOR THE ASSESSEE. NOW WE HAVE TO EXAMINE AS T O HOW THE FOUR COMPARABLES SEARCHED BY THE TPO WERE NOT COMPARABLE WITH THE AS SESEE, AS HELD BY THE LD. CIT(A).THE ASSESSEE TRIED TO DISTINGUISH ITS CASE W ITH THESE COMPARABLES MAINLY ON THE BASIS THAT THE ASSESSEE IS ENGAGED IN THE PR OVISION OF CONTRACTS SOFTWARES DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISE. IT WAS CLAIMED THAT THE COMPANY IS A CAPTIVE UNIT THAT PROVIDE SOFTWARE DEV ELOPMENT SERVICES TO SUIT THE REQUIREMENT TO ITS ASSOCIATED ENTERPRISES. THE SERV ICES PROVIDED BY THE ASSESSEE DURING THE FINANCIAL YEAR ESSENTIALLY ENTAILED PROV ISION OF APPLICATIONS DEVELOPMENT SUPPORT AND MAINTENANCE SUPPORT. BUSINE SS SYSTEM SERVICES DIVISION OF THE ASSESSEE IS RESPONSIBLE FOR APPLICA TIONS DEVELOPMENT, MAINTENANCE AND SUPPORT OF ALL SYSTEMS AND APPLICATIONS. THIS D IVISION SUPPORTS COLT GROUPS INTERNAL USERS SUCH AS BILLING SYSTEM, CUSTOMERS OR DERS DIRECT FEATURES , INSTRUCTIONS TO VIEW COURSE, ETC. ORACLE PLATFORM. IT WAS ALSO SUBMITTED THAT THE ASSESSEE PROVIDES VARIOUS SERVICES LIKE ORACLE SERV ICES, INTEGRATION SERVICES, DATA ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 12 AND SOFTWARE SERVICES AND TESTING SERVICES. IT WAS CONTENDED THAT THE ASSOCIATED ENTERPRISES ARE RESPONSIBLE FOR IDENTIFYING AND RET AINING CLIENTS AND THEREFORE THE MARKET RISK WOULD LIE WITH THEM. IN RELATION TO CO NTRACT SOFTWARE DEVELOPMENT BY THE ASSESSEE, THE FINAL PRODUCTS ARE PRIMARILY FOR CAPTIVE CONSUMPTION , THEREFORE, THERE IS NO MARKETING FUNCTION PERFORMED BY THE ASS ESSEE. HOWEVER THE ASSESSEE ASSUMES LIMITED MARKET RISKS TO THE EXTENT THAT A F ALL IN THE BUSINESS OF THE ASSOCIATED ENTERPRISE WOULD ALSO LEAD TO A FALL IN THE BUSINESS OF THE ASSESSEE. SERVICE DELIVERY RISK IS CAUSED BY NONCONFORMITY OF THE SERVICE PERFORMED WITH CLIENT SPECIFICATIONS. ANY DEFAULT IN SERVICES REND ERED MAY LEAD TO PENALTIES BEING IMPOSED ON THE SERVICE PROVIDER. TO AVOID TECHNOLOG Y RISK THE ASSESSEE HAS TO ENSURE THAT THIS SOFTWARE DEVELOPMENT CENTERS ARE C OMPLETELY UPDATED THAT STATE OF THE ART INFRASTRUCTURE AND ITS TECHNICAL PERSONN EL ARE AWARE OF THE LATEST PROCESS, INFORMATION ETC. THE ASSOCIATED ENTERPRISE S FACE LIMITED RISK SINCE THEY DEPEND COMPLETELY ON ASSESSEE FOR THEIR SOFTWARE DE VELOPMENT NEEDS. REGARDING FOREIGN EXCHANGE IT WAS SUBMITTED THAT THE ASSESSEE EARNS ITS REVENUE IN EUROS OR GVP AND INCURS ITS EXPENSES IN INR. THUS IT IS E XPOSED TO THE RISK OF FLUCTUATIONS IN SAFE. THE ASSOCIATED ENTERPRISES DO NOT BEAR SUCH RISKS. REGARDING CREDIT RISK IT WAS SUBMITTED THAT THE ASSESSEE PERF ORM SERVICES FOR ITS ASSOCIATED ENTERPRISES, HENCE RISK OF DEFAULT OF SERVICE FEE R ECOVERABLE IS A .LITTLE. THE ASSOCIATED ENTERPRISES BEAR MUCH HIGHER RISK SINCE THEY PROVIDE SERVICES TO THIRD PARTIES. IN SUMMARY IT WAS SUBMITTED THAT THOUGH IN THE CASE OF ASSESSEE, ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 13 TECHNOLOGY RISK AND FOREIGN EXCHANGE RISK ARE THERE BUT MARKET RISK, SERVICE DELIVERY RISK AND CREDIT RISK ARE LIMITED ONLY. AT THE SAME TIME THERE ARE MARKET RISK, SERVICE DELIVERY RISK AND CREDIT RISK IN THE CASE OF ASSOCIATED ENTERPRISES AND THERE IS NO FOREIGN EXCHANGE RISK AND TECHNOLOGY RI SK IS ALSO LIMITED IN THEIR CASE. 14. WE FIND THE SUBMISSIONS OF THE ASSESSEE DIFFERE NTIATING ITS CASE WITH THE CLAIMED COMPARABLES (I) EXENSYS SOFTWARE SOLUTIONS LTD. 2) SANKHYA INFOTECH LTD. 3) THIRD WARE SOLUTION LTD. AND 4) VISUAL SOFT TECHNOLOGIES LTD. (SEG) SEARCHED BY TPO, WHICH HAVE BEEN ACCEPTED BY THE LD . CIT(A), HAVE NOT BEEN SUCCESSFULLY REBUTTED BY THE DEPARTMENT BEFORE US. REGARDING EXENSYS SOFTWARE SOLUTIONS LTD. THE SUBMISSION OF THE ASSESSEE REMAI NED THAT THE SAID COMPANY OWNS BRANDS WORTH RS. 5 CRORES AS AGAINST ITS TURN OVER OF RS. 7.37 CRORES DURING THE FINANCIAL YEAR 2004-05, HENCE THE COMPAN Y IS A BRAND OWNER OF THE PRODUCTS DEVELOPED BY IT. THE SAID COMPANY IS ALSO ENGAGED IN SECTION R & D AND OWNS SEVERAL SOFTWARE PRODUCTS SUCH AS X MIGRAT E, INTEGRATION WORKBENCH , AND REPORT DESIGNER ETC. REGARDING SANKHYA INFOTECH LTD., IT WAS SUBMITTED THAT THEY OWN THE INTELLECTUAL PROPERTY RIGHTS IN THE FO RM OF SOFTWARE PRODUCTS DEVELOPED BY IT AND BEARS SUBSTANTIAL RISK ASSOCIAT ED WITH THE SUCCESS / FAILURE OF THESE PRODUCTS IN THE MARKET. THESE SUBMISSIONS WERE MADE ON THE BASIS OF ITS ANNUAL REPORT FOR THE RELEVANT FINANCIAL YEAR. IT WAS ALSO SUBMITTED THAT AS A PART OF ITS BUSINESS OPERATIONS THE SAID COMPANY IS ENGAGED IN AND FOCUSES ON DEVELOPMENT OF NICHE PRODUCTS FOR THE TRANSPORTATIO N AND AVIATION INDUSTRY AND ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 14 ACCORDINGLY SPENDS HEAVILY ON DEVELOPMENT OF SOFTWA RE PRODUCTS. IT WAS ALSO SUBMITTED THAT THE SAID COMPANY OWNS SOFTWARE PRODU CTS. THIS INFORMATION WAS BASED ON A REVIEW OF THE SCHEDULE 4 OF ITS BOOKS OF ACCOUNTS ON FIXED ASSETS. REGARDING THIRDWARE SOLUTIONS LTD. IT WAS SUBMITTED THAT THE SAID COMPANY HAS A DIVERSIFIED FUNCTIONAL PROFESSIONAL PROFILE AND IS ALSO ENGAGED IN SALE OF SOFTWARE LICENSES. THEY INVEST IN R&D AND ALSO PROVIDES / SE LLS SOFTWARE LICENSES AND THERE ARE NO SEGMENTAL RESULTS AVAILABLE IN ITS AUDITED F INANCIALS TO SEGREGATE PROFITABILITY FROM PROVISION OF SOFTWARE DEVELOPMEN T SERVICES AND FROM SALE OF SOFTWARE LICENCES.. THESE INFORMATIONS WERE SUPPORT ED BY THE ANNUAL REPORT FOR FINANCIAL YEAR 2004-05 OF THE SAID COMPANY. IN ITS ANNUAL REPORT A GENERIC DISCLOSURE WAS MADE THAT THE COMPANY IS INVOLVED IN TRADING OF SOFTWARE AND PROVISION OF IT SERVICES. SCHEDULE 14 OF THE FINANC IAL STATEMENT OF THE SAID COMPANY PROVIDE INFORMATION ON DETAILS OF PURCHASES AS PER WHICH THE TOTAL PURCHASE COST INCURRED BY THE COMPANY WAS ABOUT RS . 56871743/- AS AGAINST THE TOTAL COST OF RS. 175527264/- WHICH IS ABOUT 3 2% OF THE TOTAL COST. BESIDES THE SAID COMPANY EARNED ABNORMALLY HIGH OP / TC MAR GIN OF 66.11% DURING FINANCIAL YEAR 2004-05 INDICATING RISK DISSIMILARI TY VIS A VIS THE ASSESSEE WHICH CLAIMED TO BE A COST PLUS LOW RISK CAPTIVE WHICH C ANNOT BE EXPECTED TO EARN SUCH HIGH PROFITABILITY. REGARDING VISUAL SOFT TECH LTD. (SEG) IT WAS SUBMITTED THAT COMPANY IS ENGAGED IN UNDERTAKING SUBSTANTIAL R & D ACTIVITIES AND HENCE SHOULD BE EXCLUDED FROM THE FINAL SET OF COMPARABLE S SINCE ITS RETURN INCLUDES A ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 15 RETURN ON ACCOUNT OF THE R & D FUNCTION. IT WAS DEM ONSTRATED BY THE FACT THAT DURING FINANCIAL YEAR 2004-05, THE SAID COMPANY WAS HAVING A HIGH R & D / SALES SPEND OF 4.5% (FAILS THE R /& D FILTER OF 3%AS APPL IED BY THE ASSESSEE). THE LD. CIT(A) ON THE BASIS OF INDIAN TP REGULATIONS, OECD G UIDELINES AND JUDICIAL DECISIONS CAME TO THE CONCLUSION THAT IN MUCH AS TH ESE COMPANIES OWNING SOFTWARE PRODUCTS AND UNDERTAKING R & D COMMAND A P REMIUM RETURN COMPARED TO ANY ROUTINE CONTRACT SOFTWARE DEVELOPMENT SERVIC E PROVIDER, THEY SHOULD NOT BE TAKEN AS COMPARABLE FOR A CONTRACT SOFTWARE DEV ELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. AFTER EXCLUSION OF THE ABOVE COMPANIES FROM THE COMPARABLES THE LD. CIT(A) HAS WORKED OUT THE FOLLO WING RESULT :- S.NO. TPO COMPANIES OP/TC CONCLUSION 1. BODTHTREE CONSULTING LIMITED 24.85% 24.85% 2. AKSHAY SOFTWARE TECHNOLOGIES LIMITED 7.72% 7.72% 3. LANCO GLOBAL SYSTEMS LTD. 13.78% 13.78% 4. EXENSYS SOFTWARE SOLUTIONS LTD. 30.36% REJECTED BASED ON DIFFERENT FUNCTIONAL PROFILE (OWNS SOFTWARE PRODUCTS) 5. SANKHYA INFOTECH LTD. 27.35% REJECTED BASED ON DIFFERENT FUNCTIONAL PROFILE (OWNS SOFTWARE PRODUCTS) 6. SASKEN NETWORK SYSTEMS LTD. 16.64% 16.64% 7. GEBBS INFOTECH LIMITED 16.52% 16.52% 8. VJIL CONSULTING LTD. 6.68% 6.68% ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 16 9. THIRDWARE SOLUTION LIMITED 66.11% REJECTED BASED ON DIFFERENT FUNCTIONAL PROFILE-TRADING OF SOFTWARE LICENSES 10 VISUAL SOFT TECHNOLOGIES LTD. (SEG) 23.52% REJECTED BASED ON DIFFERENT FUNCTIONAL PROFILE UNDERTAKES SIGNIFICANT R & D 11 SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG) 14.42% 14.42% 12. L & T INFOTECH LTD. 11.72% 11.72% AVERAGE 21.64% 14.04% 15. IN CONCLUSION THE LD. CIT(A) IN PARA 47 OF THE FIRST APPELLATE ORDER HAS HELD THAT WITH THE MEAN OP / TC MARGIN OF 14.04%, A FTER AVAILING THE BENEFIT OF THE (+/-) 5 PERCENT RANGE, THE ASSESSEES INTERNATI ONAL TRANSACTIONS ARE PROVED TO BE AT ARMS LENGTH. 16. THE DECISIONS RELIED UPON BY THE LD. DR HAVING DISTINGUISHABLE FACTS ARE NOT HELPFUL TO THE REVENUE. IN THE CASE OF ST MICRO ELCTRONICS PVT. LTD. (SUPRA) THE ASSESSEE TRIED TO ESTABLISH THAT THE ROLE OF THE AS SESSEE IN PRODUCING SEMICONDUCTOR (IC) WAS LIMITED QUA THE ROLE PERFORM ED BY ST GROUP WHICH WAS NOT ACCEPTED BY THE TRIBUNAL WITH THIS OBSERVATION THAT THE ASSESSEE HAD EMPLOYED MORE THAN 1600 PERSONS AND IT WAS HAVING O NE OF THE LARGEST DESIGN CENTRES OUT OF THE EUROPE AND THUS THE OPERATIONS CA RRIED OUT BY THE ASSESEE WITHIN INDIA WERE TOBE COMPARED WITH OTHER ASSESSES AND NOT WITH ST GROUP. THUS THE ASSESSEE FAILED TO ESTABLISH THAT THIS CAS E WAS NOT COMPARABLE WITH THE ST GROUP. THE TRIBUNAL OBSERVED FURTHER THAT THE A SSESSEE COULD HAVE PRODUCED ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 17 THE REPORT OF AN EXPERT INDICATING THE WORK PERFORM ED BY IT WAS NEGLIGIBLE IN COMPARISON TO OTHER SOFTWARE DEVELOPMENT COMPANIES. SIMILARLY IN THE CASE OF SYMANTEC SOFTWARE SOLUTIONS PVT. LTD. (SUPRA) RELIE D UPON BY THE LD. DR THE TRIBUNAL DID NOT FIND ANY MERIT AND SUBSTANCE IN TH E SUBMISSION OF THE ASSESSEE FOR ADJUSTMENT IN RESPECT OF RISK AND FUNCTIONAL DI FFERENCES. THE TRIBUNAL HELD THAT WHAT IS RELEVANT IS THE MARGIN/PROFIT THE ASSE SSEE EARNED FROM INTERNATIONAL TRANSACTION AND COMPARISON OF THE SAME WITH THE UNC ONTROLLED TRANSACTIONS. THE TRIBUNAL HELD THAT IF NET REVENUE OF THE AE IS NEGAT IVE THEN THE ASSESSEE WOULD GET NO REMUNERATION, WHICH IS HOWEVER IRRELEVANT FO R THE PURPOSE OF ALP DETERMINATION. ACTUALLY THIS DECISION OF MUMBAI BEN CH RELIED UPON BY THE LD. DR IS HELPFUL TO OPPOSE THE CONTENTION OF THE LD. AR T HAT THE LOANS ARE NORMALLY PART OF BUSINESS AND THE LOSS MAKING COMPANIES SHOULD HA VE ALSO BEEN CONSIDERED AS COMPARABLES BY THE TPO. 17. WE THUS IN ABSENCE OF A SUCCESSFUL REBUTTAL BY THE DEPARTMENT THAT AFORESAID FOUR COMPARABLES SEARCHED BY THE TPO WERE NOT COMPARABLE WITH THE ASSESSEE, ARE NOT INCLINED TO INTERFERE WITH THE AB OVE FINDING OF THE LD. CIT(A) ON THE ISSUE. THE SAME IS UPHELD. THE GROUND IS THUS R EJECTED. 18. CONSEQUENTLY APPEAL IS DISMISSED. CO NO. 81/DEL/2011 19. THE ASSESSEE HAS RAISED FOLLOWING OBJECTIONS AG AINST THE FIRST APPELLATE ORDER :- ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 18 1. THE LEARNED ASSESSING OFFICER (LD. AO) A ND LEARNED TRANSFER PRICING OFFICER (LD. TPO) HAVE ERRED IN LAW AS WELL AS FA CTS OF THE CASE IN REJECTING THE ARMS LENGTH ANALYSIS CONDUCTED BY TH E RESPONDENT WITHOUT ANY BASIS AND CARRYING OUT A FRESH ARMS LENGTH ANA LYSIS. 2. THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS) (LD. CIT(A)), LD. AO AND LD. TPO HAVE ERRED IN LAW BY IGNORING THE FA CT THAT THE RESPONDENT IS ENTITLED TO DEDUCTION U/S 10A OF THE INCOME TAX ACT, 1961 (THE ACT) ON ITS PROFITS FROM PROVISION OF INFORM ATION TECHNOLOGY ENABLED SERVICES (ITES) AND SOFTWARE DEVELOPMENT SE RVICES TO OVERSEAS ASSOCIATED ENTERPRISES AND THERE IS NO UNT OWARD MOTIVE TO DERIVE ANY TAX ADVANTAGE BY MANIPULATING TRANSFER P RICES OF INTERNATIONAL TRANSACTION UNDERTAKEN BY IT WITH ITS ASSOCIATED ENTERPRISES. 3. THE LD. CIT(A) / LD. AO / LD. TPO HAS ER RED IN DETERMINING THE ARMS LENGTH PRICE (ALP) ON THE BASIS OF DATA FOR FINANC IAL YEAR 2004-05 ONLY AND IGNORING THE DATA FOR TWO PRIOR FINANCIAL YEARS I.E FY 2002-03 AND FY 2003-04 4. THE LD. TOP HAS ERRED IN REJECTING ALL T HE LOSS MAKING COMPANIES WHILE UNDERTAKING FRESH SEARCH OF COMPARABLES IGNORING T HE FACT THAT LOSSES ARE NORMAL PART OF BUSINESS AND THUS, COMPANIES SHO ULD NOT BE AUTOMATICALLY EXCLUDED DUE TO THEIR LOSSES. 5. THE LD. CIT(A) / LD. AO / LD. TPO HAS ER RED IN NOT ALLOWING THE BENEFIT OF AN ADJUSTMENT ON ACCOUNT OF DIFFERENTIAL RISK P ROFILE OF THE RESPONDENT VIS A VIS THE COMPARABLE COMPANIES. 6. THE LD. CIT(A) HAS ERRED IN NOT ADJUDICA TING THAT THE BENEFIT OF +- 5% MENTIONED IN THE PROVISO TO SECTION 92C (2) OF THE ACT SHOULD BE MADE IF THE DIFFERENCE IN THE VALUE OF ALP AND INTERNATIONA L TRANSACTION IS MORE THAN +- 5% OF THE ALP. 20. AT THE OUTSET OF HEARING THE LD. DR SUBMITTED T HAT THE ISSUE RAISED IN OBJECTION NO. 4 WAS NOT RAISED BEFORE THE AUTHORITI ES BELOW. HENCE IT IS NOT MAINTAINABLE. ITA NO. 609/DEL/2011 & CO NO. 81/DEL/2011 19 21. LD. AR ON THE OTHER HAND REITERATED THE SUBMISS ION MADE BEFORE THE AUTHORITIES BELOW IN SUPPORT OF THE ISSUE RAISED IN OTHER GROUNDS. 22. HAVING GONE THROUGH THE ORDERS OF THE AUTHORITI ES BELOW WE FIND THAT THE LD. CIT(A) HAD ALREADY ACCEPTED THAT THE ASSESSEES INTERNATIONAL TRANSACTIONS ARE PROVED TO BE AT ARMS LENGTH, NOW APPROVED HERE IN ABOVE BY THE TRIBUNAL. THE ISSUES RAISED IN THE CROSS OBJECTIONS HAVE THUS BECOME ACADEMIC ONLY. ADJUDICATIONS OF THESE OBJECTIONS ARE THUS NOT REQU IRED. 23. CONSEQUENTLY CROSS OBJECTION IS DISMISSED. IN SUMMARY BOTH THE APPEAL AND CROSS OBJECTION ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD OCTOBER, 2012. SD/- SD/- ( G.D. AGRAWAL) ( I. C. SUDHIR ) VICE PRESIDENT JUDICIAL MEMBER DATE 23.10.2012 *VEENA COPY OF ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER DEPUTY REGISTRAR, ITAT