DCIT, V. M/s Amba Research (India) Pvt. Ltd.,

ITA 622/BANG/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8578 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 16-03-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 03-05-2013
• Court: TRIBUNAL
• Department Lawyers: DR G MANOJ KUMAR
• Keywords: Transfer pricing; International transaction
• Section: 115JB; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI NARENDRA KUMAR CHOUDHURY, JUDICIAL MEMBER IT(TP)A NO. 622/BANG/2013 ASSESSMENT YEAR : 2008-09 DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(1), BANGALORE VS. M/S. AMBA RESEARCH (INDIA) P. LTD., 12 TH FLOOR, CONCORDE (TOWER C), UB CITY, BANGALORE PAN: AAECA9391N APPELLANT RESPONDENT REVENUE BY : DR. G. MANOJ KUMAR, ADDL. CIT ASSESSEE BY : SHRI CHAVALI NARAYAN, CA DATE OF HEARING : 16-03-2016 DATE OF PRONOUNCEMENT : 18-03-2016 O R D E R PER B. RAMAKOTAIAH, ACCOUNTANT MEMBER THIS APPEAL IS PREFERRED BY REVENUE AGGRIEVED ON TH E ORDER OF LD. COMMISSIONER OF INCOME TAX(APPEALS)-IV, BENGALURU D ATED 25-02-2013. REVENUE HAS RAISED THE FOLLOWING GROUNDS: 2. THE LEARNED CIT(A) ERRED IN REJECTING THE DIMIN ISHING REVENUE FILTER USED BY THE TPO TO EXCLUDE COMPANIES THAT DO NOT REFLECT THE NORMAL INDUSTRY TREND. 3. THE LEARNED CIT(A) ERRED IN EXCLUDING M/S. INFOS YS BPO LTD., WIPRO LTD (SEG) AS COMPARABLES IN THE CASE OF TAXPAYER HOLDIN G THAT THE SIZE AND TURNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TR EATING A COMPANY AS A COMPARABLE. 4. THE LD.CIT(A) ERRED IN EXCLUDING ADITYA BIRLA MI NACS WORLDWIDE LTD., CORAL HUBS LTD., ECLERX SERVICES LTD., JINDAL INTEL LICOM PVT. LTD., MOLD-TEK TECHNOLOGIES LTD., ALLSEC TECHNOLOGIES LTD., FROM THE LIST OF COMPARABLES IT(TP)A NO. 622 /BANG/2013 PAGE 2 OF 9 ON THE BASIS OF ABNORMAL PROFIT WITHOUT DEFINING WH AT CONSTITUTES ABNORMAL PROFIT FILTER AND HOW THE SAME IS DETERMINED. 5. THE LD.CIT(A) HAS ERRED IN NOT APPRECIATING THAT THE DIFFERENT YEAR ENDING FILTER APPLIED BY THE TPO IS NECESSARY TO EX CLUDE COMPANIES WHICH DO NOT HAVE THE SAME OR COMPARABLE FINANCIAL CYCLE AS THE TESTED PARTY. 6. THE LEARNED CIT(A) ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE, ERRED IN REJECTING M/S. ACCENTIA TECHNOLOGIES LTD., AS A COMPARABLE IN THE CASE OF THE TAXPAYER, HOLDING THAT EVENTS OF ACQUIS ITIONS AND AMALGAMATIONS HAS IMPACTED ITS PROFITABILITY. 7. THE LEARNED CIT(A), ON THE FACTS AND IN THE CIRC UMSTANCES OF THE CASE, ERRED IN DIRECTING THE AO TO DELETE M/S. GENESYS IN TERNATIONAL CORPORATION LTD., FROM THE FINAL SET OF COMPARABLES IN THE ITES SEGMENT. 8. THE LEARNED CIT(A) ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE, ERRED IN HOLDING THAT THE SET OF 10 COMPANIES LISTE D BY HIM SHOULD BE CONSIDERED FOR DETERMINATION OF AVERAGE MARGIN OF C OMPANIES AND APPROPRIATE WORKING CAPITAL ADJUSTMENT SHOULD BE PR OVIDED. 9. THE LEARNED CIT(A) ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE, ERRED IN HOLDING THAT THE FOREIGN EXCHANGE LOSS/GAI N IS OPERATING IN NATURE WITHOUT APPRECIATING THE FACT THAT SUCH LOSS/GAIN T HOUGH ATTRIBUTABLE TO THE OPERATING ACTIVITY IS NOT DERIVED FROM THE OPERATIN G ACTIVITY. 10. THE CIT(A) ERRED IN ALLOWING THE ASSESSEES APP EAL ON THE ISSUE OF DEDUCTION UNDER SECTION 10A HOLDING THAT THE ACTION OF THE AO CANNOT BE SUSTAINED. THE CIT(A) ERRED IN HOLDING THAT THE DE CISION IN THE TATA ELXSI 349 ITR 98 (KAR) IS SQUARELY APPLICABLE TO THE FACT S OF THE CASE AND THE HON'BLE JURISDICTIONAL HIGH COURTS DECISION IS BIN DING, NOTWITHSTANDING THE APPEAL PENDING IN THE HON'BLE SUPREME COURT. 11. THE CIT(A) ERRED IN DIRECTING THE AO TO EXCLUDE FROM THE TOTAL TURNOVER TELECOMMUNICATION AND TRAVEL EXPENSES THAT ARE ALRE ADY EXCLUDED FROM THE EXPORT TURNOVER AND ACCORDINGLY MODIFY THE COMPUTAT ION OF RELIEF ALLOWABLE UNDER SECTION 10A. 2. BRIEFLY STATED, ASSESSEE IS ENGAGED IN PROVIDING IT ENABLED SERVICES (ITES) TO AMBA INC AND IS REMUNERATED ON COST PLUS MARK UP. AFTER CLAIMING DEDUCTION U/S. 10A, ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 2,63,171/-. HOWEVER, IT ADMITTED INC OME U/S. 115JB OF THE ACT. AS ASSESSEE HAS INTERNATIONAL TRANSACTIONS WI TH AE, THE MATTER WAS REPORTED TO TPO FOR ANALYSIS. TPO AFTER REJECTING ASSESSEES TP STUDY IT(TP)A NO. 622 /BANG/2013 PAGE 3 OF 9 UNDERTOOK FRESH SEARCH WITH VARIOUS FILTERS AND AFT ER GIVING OPPORTUNITY TO ASSESSEE, FINALLY SELECTED THE FOLLOWING 20 COMPANI ES AS COMPARABLES WITH AN ARITHMETIC MEAN OF 24.75%. SL. NO. COMPANY NAME MARGIN AS PER TPOS ORDER (%) 1. ACCENTIA TECHNOLOGIES LIMITED 41.77 2. ACROPETAL TECHNOLOGIES LIMITED 35.30 3. ALLSEC TECHNOLOGIES LIMITED -13.29 4. ASIT C MEHTA FINANCIAL SERVICES LIMITED 9.42 5. CALIBER POINT BUSINESS SOLUTIONS LIMITED 10.97 6. COSMIC GLOBAL LIMITED 23.30 7. CROSSDOMAIN SOLUTIONS PRIVATE LIMITED 27.03 8. DATAMATICS FINANCIAL SERVICES LIMITED 29.11 9. E4E HAELTHCARE BUSINESS SERVICES PRIVATE LIMITED 18.54 10. ECLERX SERVICES LIMITED 58.80 11. GENESYS INTERNATIONAL CORPORATION LIMITED 47.40 12. INFOSYS BPO LIMITED 19.66 13. ISERVICES INDIA PRIVATE LIMITED 10.77 14. JINDAL INTELICOM PRIVATE LIMITED -10.29 15. MOLD - TEK TECHNOLOGIES LIMITED 96.66 16. R SYSTEMS INTERNATIONAL LIMITED 4.30 17. SPANCO TELESYSTEMS AND SOLUTIONS LIMITED 8.81 18. ADITYA BIRLA MINACS WORLDWIDE LIMITED -4.00 19. VISHAAL INFORMATION TECHNOLOGIES LIMITED 50.68 20. WIPRO LIMITED 30.05 ARITHMETIC MEAN 24.75 TPO PROPOSED AN ADJUSTMENT OF RS. 2,98,73,059/- ON A RECEIPT OF RS. 41.39 CRORES. AO ISSUED DRAFT ORDER ACCORDINGLY. WHILE COMPLETING ASSESSMENT, THE AO ALSO REDUCED THE CLAIM U/S. 10A BY AN AMOUNT OF RS. 10,75,453/- AFTER ADJUSTING THE EXPORT TURNOVER BY REDUCING E XPENDITURE UNDER THE HEAD TELECOMMUNICATIONS, FREIGHT AND INSURANCE. ASSESSE E DID NOT PREFER OBJECTIONS BEFORE DRP BUT PREFERRED AN APPEAL BEFOR E LD.CIT(A). IT(TP)A NO. 622 /BANG/2013 PAGE 4 OF 9 LD.CIT(A) AFTER CONSIDERING THE DETAILED OBJECTIONS HAS GIVEN RELIEF TO ASSESSEE. 3. LD.CIT(A) IN HIS ORDER HAS CONSIDERED THE FOLLOW ING: TRANSFER PRICING MATTERS: I. THE LEARNED CIT(A) APPLIED A TURNOVER FILTER OF RS. 1 CRORE TO RS. 200 CRORES BASED ON BANGALORE TRIBUNAL RULING I N CASE OF GENESYS INTEGRATING SYSTEMS (INDIA) PVT. LTD., VS. DCIT (ITA NO. 1231(BANG)/2010) AND EXCLUDED INFOSYS BPO LIMIT ED AND WIPRO LIMITED AS COMPARABLES. II. THE LEARNED CIT(A) REJECTED THE APPLICATION OF DIMINISHING REVENUE FILTER BY TPO, AS THE FILTER FOCUSES ON THE TREND OF REVENUE EARNED BY COMPANIES OVER A PERIOD OF TIME A ND GOES AGAINST THE LEARNED TPOS OWN STAND THAT ONLY CURRE NT YEARS DATA SHOULD BE USED. III. THE LEARNED CIT(A) REJECTED THE APPLICATION OF DIFFERENT YEAR ENDING FILTER BY TPO (I.E., COMPARABLE COMPANIES HA VING DIFFERENT ACCOUNT PERIOD FROM TESTED PARTY). IV. THE LEARNED CIT(A) DISAGREED WITH THE APPROACH ADOPTED BY ASSESSEE TO USE CONSOLIDATED FINANCIAL STATEMENT FO R RPT CALCULATION WHERE THE STANDALONE REVENUES CONSTITUT ED MORE THAN 75% OF THE CONSOLIDATED REVENUE. V. THE LEARNED CIT(A) UPHELD THE TPOS APPROACH OF OBTAINING INFORMATION UNDER SECTION 133(6) IN ORDER TO CONSID ER CONTEMPORANEOUS DATA FOR THE RELEVANT YEAR. IT(TP)A NO. 622 /BANG/2013 PAGE 5 OF 9 VI. THE LEARNED CIT(A) AGREED TO ASSESSEES CONTENT IONS THAT, COMPANIES THAT HAD ABNORMALLY HIGH PROFITS SHOULD B E REJECTED. FURTHER, THE LEARNED CIT(A) SUO-MOTO REJ ECTED COMPANIES WITH NEGATIVE OPERATING MARGIN. VII. THE LEARNED CIT(A) AGREED WITH ASSESSEES CONT ENTIONS AND REJECTED CERTAIN COMPANIES AS FUNCTIONALLY DIFFEREN T. VIII. THE LEARNED CIT(A) REJECTED THE CLAIM OF ASSE SSEE FOR THE ALLOWANCE OF RISK ADJUSTMENT WHILE COMPUTATION OF T HE MARGIN. IX. THE LEARNED CIT(A) HAS DIRECTED THE AO TO RE-CO MPUTE THE MARGINS OF BOTH ASSESSEE AS WELL AS COMPARABLE COMP ANIES LISTED BY INCLUDING THE FOREIGN EXCHANGE GAINS OR L OSSES IN OPERATIONAL COSTS. CORPORATE TAX MATTERS: THE CIT(A), FOLLOWING THE JUDGMENT GIVEN BY THE JUR ISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD., [349 ITR 98] ( KAR) HAS DIRECTED THE AO TO REDUCE THE TELECOMMUNICATION EXPENSES, INSURANCE EXPENSES, FREIGHT AND FOREIGN CURRENCY TRAVEL EXPENSES THE COMMUNICAT ION EXPENSES FROM BOTH EXPORT TURNOVER AS WELL AS TOTAL TURNOVER AND RE-COMPUTE THE DEDUCTION U/S. 10A. 3.1. AGGRIEVED ON THE ORDER OF LD.CIT(A) PRESENT APPEAL WAS PREFERRED BY REVENUE. ASSESSEE IS NOT IN APPEAL AS INFORMED BY L D. COUNSEL. 4. GROUND NO. 2 ON DIMINISHING REVENUE FILTER, GROU ND NO. 5 ON DIFFERENT YEAR FILTER, GROUND NO. 8 ON MARGIN/WORKI NG CAPITAL ADJUSTMENT ARE GENERAL IN NATURE AND THESE PRINCIPLES ARE FOLLOWED BY LD.CIT(A) FOLLOWING IT(TP)A NO. 622 /BANG/2013 PAGE 6 OF 9 VARIOUS CO-ORDINATE BENCH DECISIONS. SO, THERE IS NO NEED TO INTERFERE WITH THE SAME. THESE PRINCIPLES ALSO ARE CONSIDERED IN THE ACCEPT / REJECT MATRIX OF VARIOUS COMPARABLES WHICH ARE DEALT WITH SEPARATELY. 5. THE MAIN CONTENTIONS OF REVENUE ARE ON REJECTION OF VARIOUS COMPARABLE COMPANIES ADOPTING VARIOUS FILTERS. IT WAS SUBMITTED THAT THE CO-ORDINATE BENCHES IN THE FOLLOWING CASES HAS CONS IDERED EACH OF THE COMPARABLES AND EXCLUDED THEM, SO THERE IS NO NEED TO RECONSIDER THEM. I. SYMPHONY MARKETING SOLUTIONS INDIA PVT. LTD., IN IT(TP)A NO. 1316/BANG/2012; II. FLAGSTONE UNDERWRITING SUPPORT SERVICES INDIA P VT. LTD., IN ITA NO. 990/HYD/2013. 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PER USED THE ORDERS OF LD.CIT(A) AND DOCUMENTS PLACED ON RECORD. EVEN THO UGH LD.CIT(A) HAS EXCLUDED THE FOLLOWING COMPARABLES ON VARIOUS FACTO RS AND FILTERS, NOW THE SAME COMPARABLES WERE EXAMINED IN DETAIL IN VARIOUS ORDERS. THE SUMMARY OF REASONS FOR EXCLUSION ARE AS UNDER: IT(TP)A NO. 622 /BANG/2013 PAGE 7 OF 9 COMPANIES REASONS FOR EXCLUSION I. INFOSYS BPO LIMITED & II. WIPRO LIMITED (SEG) THESE TWO COMPANIES ARE HAVING TURNOVER OF MULTIPLE NUMBER OF TIMES AND HAS HUGE BRAND VALUE. THEY ALSO HAVE SIGNIFICANT INTANGIBLES. IN THE CASE OF SYMPHONY VIDE PARA 24 & 25, THESE TWO COMPANIES ARE CONSIDERED AND EXCLUDED. III.ACCENTIA TECHNOLOGIES LIMITED (SEG) MERGER OF COMPANY EFFECTING THE PROFITS. IV.ECLERX SERVICES LIMITED INVOLVED IN DATA MANAGE MENT SERVICES ACQUIRED COMPANIES DURING THE YEAR. V.GENESYS INTERNATIONAL CORPORATION LIMITED ENGAGED IN HIGH END GLOBAL INFORMATION SYSTEM SERVICES, PHOTO GEOMETRY. VI.MOLD-TEK TECHNOLOGIES LIMITED PROVIDES HIGH-END STRUCTURAL ENGINEERING KPO SERVICES. ACQUIRED COMPANY AND DEMERGER DURING THE YEAR. VII.CORAL HUBS LIMITED ENGAGED IN E-PUBLISHING BUS INESS. OUTSOURCED ITS PORTION OF BUSINESS. WE APPROVE EXCLUSION OF THE ABOVE COMPARABLES, FOLL OWING THE ANALYSIS ALREADY DONE BY THE CO-ORDINATE BENCHES AS STATED A BOVE. REVENUES GROUNDS ON THESE COMPARABLES ARE ACCORDINGLY REJECT ED. 7. REVENUE IN GROUND NO. 4 HAS CONTESTED ON THE REA SON OF EXCLUDING ON THE ABNORMAL PROFITS ON THE FOLLOWING THREE CO MPANIES: I. ADITYA BIRLA MINACS WORLDWIDE LIMITED; II. JINDAL INTELLICOME PVT LIMITED,; AND III. ALLSEC TECHONOLGIES LIMITED IT(TP)A NO. 622 /BANG/2013 PAGE 8 OF 9 AS SEEN FROM THE ORDER OF CIT(A) THE REASONS FOR R EJECTION ARE THAT THEY ARE HAVING NEGATIVE MARGINS/ LOSSES. THEREFORE, GROUN DS RAISED BY THE REVENUE ARE NOT MAINTAINABLE. HENCE, REJECTED. 8. GROUND NO. 9 IS ON THE DIRECTION OF LD.CIT(A) IN INCLUSION OF FOREIGN EXCHANGE GAIN/LOSS AS OPERATING IN NATURE. THIS IS SUE IS HELD IN FAVOUR OF ASSESSEE AND AGAINST REVENUE IN ALL THE CASES AS TH E FOREIGN EXCHANGE GAIN/LOSS IS ACCRUING AS PART OF BUSINESS ACTIVITY AND ON THE BILLING/BILLED AMOUNT. SO, THE SAME IS RIGHTLY TREATED AS PART OF OPERATING INCOME. THE ABOVE PRINCIPLE IS UPHELD IN THE FOLLOWING CASES: I. CISCO SYSTEMS (INDIA) P. LTD., IT(TP)A NO. 271/B ANG/2014; II. SAP LABS INDIA P. LTD., [44 SOT 156 (BANG)]; AN D III. CIT VS. GEM PLUS JEWELLERY INDIA [330 ITR 175 (MUM)]. THE REVENUES GROUND IS ACCORDINGLY REJECTED. 9. GROUND NOS. 10 & 11 IS ON THE ISSUE OF EXCLUSION OF TELECOMMUNICATION CHARGES FOR EXPORT TURNOVER AND T OTAL TURNOVER. AO EXCLUDED THE TELECOMMUNICATIONS CHARGES AND TRAVELL ING CHARGES FROM ESTIMATED TURNOVER. LD.CIT(A) FOLLOWING THE CO-ORD INATE BENCH DECISION HAS DIRECTED THE AO TO EXCLUDE THE SAME FROM TOTAL TURNOVER AS WELL. THIS DIRECTION IS AS PER THE PRINCIPLES ON THE SUBJECT. THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI [349 ITR 98 (KAR)] HAS HELD THAT WHATEVER IS EXCLUDED FROM ESTIMATED TURNOVER SHOULD ALSO BE EXCLUDED IT(TP)A NO. 622 /BANG/2013 PAGE 9 OF 9 FROM TOTAL TURNOVER. THE DIRECTION OF LD.CIT(A) IS UPHELD. GROUNDS ARE REJECTED. 10. GROUND NOS. 1, 12 AND 13 ARE GENERAL IN NATURE AND DOES NOT REQUIRE ANY ADJUDICATION. 11. IN THE RESULT, REVENUES APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 18 TH DAY OF MARCH, 2016 SD/- (NARENDRA KUMAR CHOUDHURY) SD/- (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTA NT MEMBER BANGALORE, DATED, THE 18 TH MARCH, 2016 TNMM COPY TO: 1. APPELLANT 2 RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.