M/s Sysarris Software (India) Private Limited, Bangalore V. DCIT, Bangalore

ITA 639/BANG/2012

• Counselvise Citation: 63921114 RSA 2012
• Duration Of Justice: 2 year(s) 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 09-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE , ACCOUNTANT MEMBER IT (TP) A NO. 639 / BANG/20 1 2 (ASSESSMENT YEAR: 200 4 - 05 ) M/S.SYSARRIS SOFTWARE (INDIA) PVT. LTD., SKR TOWER, 19/2, 15 TH CROSS, IV PHASE, J P NAGAR, DOLLARS COLONY, BANGALORE - 560078. APPELLANT PAN:AABCP 2952 J VS. DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 12(3), BANGALORE. RESPONDENT APPELLANT BY: SHRI PADAMCHAND KHINCHA, CA RESPONDENT BY: DR. P.K.SRIHARI, ADDL.CIT(DR) DATE OF HEARING : 31 / 03 /2015 . DATE OF PRONOUNCEMENT: 17 / 04 / 2015 . O R D E R PER SMT. P.MADHAVI DEVI, JM : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A) - IV, BANGALORE, D ATED 29/03/2012 FOR THE ASSESSMENT YEAR 2004 - 05. THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE CIT(A) IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT MADE BY THE ASSESSEE. IT (TP) A NO . 639 /BANG/201 2 M/S.SYSARRIS SOFTWARE (INDIA) PVT.LTD. PAGE 2 OF 6 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE - COMPANY WHICH IS ENGAGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT OF SOFTWARE, HAD FILED ITS RETURN OF INCOME DECLARING NIL INCOME. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE INCOME - TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT' FOR SHORT] THE ASSESSING OFFICER (AO) OBSERVED THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISE(AE) TO CARRY OUT BUSINESS LIKE SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES. THEREFORE, THE AO, AFTER OBTAINING THE APPROVAL OF THE CIT REFERRED THE MAT TER TO THE ADDL. DIRECTOR OF INCOME - TAX (TRANSFER PRICING), BANGALORE TO EXAMINE THE TRANSACTIONS BETWEEN THE ASSESSEE - COMPANY AND ITS AFFILIATES AND TO SUGGEST ANY ADJUSTMENT IN RESPECT OF ARMS LENGTH PRICE (ALP) U/S 92CA OF THE ACT. THE TRANSFER PRICING OFFICER (TPO), VIDE ORDER DATED 22/12/2006 DETERMINED THE ALP AT RS.11,22,54,575/ - AS AGAINST RS.9,64,05,510/ - DETERMINED BY THE ASSESSEE AND MADE THE ADJUSTMENT OF THE DIFFERENCE OF RS.1,49,91,300/ - . 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSES SEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 4. THE LEARNED COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO THE FACT THAT THE ASSESSEE WAS CARRYING ON THE ACTIVITI ES OF SOFTWARE DEVELOPMENT AND ALSO HAS A BIO DIVISION . HE SUBMITTED THAT THE ASSESSEE HAD CARRIED OUT TP STUDY USING IT (TP) A NO . 639 /BANG/201 2 M/S.SYSARRIS SOFTWARE (INDIA) PVT.LTD. PAGE 3 OF 6 CUP METHOD WHICH WAS REJECTED BY THE TPO, WHO ADOPTED THE TNMM AS THE MOST APPROPRIATE METHOD. IT WAS SUBMITTED THAT BY LETTER DATED 11/ 07/2006, THE ASSESSEE HAD SUBMITTED THAT IT HAD EARNED A NET PROFIT OF RS.1,03,31,319/ - FROM INTERNATIONAL TRANSACTION WHICH WORKS OUT TO A NET MARGIN OF 11.34% O N COST AND FURTHER THAT IT HAD SUFFERED LOSS IN BIO DIVISION, WHERE IT HAS TRANSACTED ONLY WIT H UNRELATED CUSTOMERS DURING THE YEAR. THE TPO, HOWEVER, WAS NOT CONVINCED BY THE ASSESSEE S CONTENTION AND OBSERVED THAT NO MATERIAL WAS MADE AVAILABLE IN SUPPORT OF ASSESSEE S CLAIM. HE FURTHER HELD THAT SINCE NO SEGMENTAL PROFIT AND LOSS ACCOUNT ACCOU NTS FOR SOFTWARE AND BIO DIVISION WAS FILED AND THERE IS NO BASIS FOR WORKING OUT THE LOSS OF BIO DIVISION AND PROFIT AT 11.34% IN SOFTWARE DIVISION , THE SEGMENTAL DATA FILED BY THE ASSESSEE CANNOT BE ACCEPTED. THEREAFTER, SEARCH FOR SUITABLE COMPARABLE S IN THE DATABASE PROWESS WAS MADE AND AFTER APPLYING THE RELATED PARTY TRANSACTION FILTER, TPO ADOPTED CERTAIN COMPANIES AS COMPARABLES AND ARRIVED AT THE NET AVERAGE MARGIN AT 18.44% AND MADE SUITABLE ADJUSTMENT TO THE ALP. THE LEARNED COUNSEL FOR THE ASS ESSEE SUBMITTED THAT THE ASSESSEE HAD CLEARLY STATED BEFORE THE TPO THAT THE ASSESSEE HAD NOT ENTERED INTO ANY TRANSACTIONS WITH ITS AE IN BIO - DIVISION AND THEREFORE THE EN TITY LEVEL MARGIN OF THE ASSESSEE SHOULD NOT HAVE BEEN CONSIDERED BY THE TPO. HE SU BMITTED THAT THE SAID GROUND WAS TAKEN BEFORE THE CIT(A) AS WELL AND THE CIT(A) HAD CALLED FOR A REMAND REPORT FROM THE TPO BUT THE TPO DID NOT IT (TP) A NO . 639 /BANG/201 2 M/S.SYSARRIS SOFTWARE (INDIA) PVT.LTD. PAGE 4 OF 6 COMMENT ON THE SPECIFIC OBJECTION RAISED BY THE ASSESSEE AND THE CIT(A) HAS MERELY CONFIRMED THE ORDER OF THE AO . THE LEARNED COUNSEL FOR THE ASSESSEE LAID STRESS ON THE POINT THAT WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION S EACH TRANSACTION HAS TO BE CONSIDERED SEPARATELY AND WHEN THE SEGMENTAL DETAILS OF THE SOFTWARE DEVELOPMENT ARE AVAILABLE, TPO OUGHT TO HAVE CONSIDERED THEM SEPARATELY . THUS, ACCORDING TO HIM, THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO IS UNSUSTAINABLE. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED T HAT SINCE THE ASSESSEE FAILED TO FURNISH THE RELEVANT DETAILS BEFORE THE TPO, THE SAME COULD NOT BE EXAMINED BY THE TPO AND THE TPO WAS CONSTRAINED TO TAKE THE ENTITY LEVEL MARGIN FOR DETERMINING THE ALP. HE SUBMITTED THAT SINCE THE ASSESSEE HAS FILED DET AILS BEFORE THE CIT(A) AND THE CIT(A) HAD CALLED FOR A REMAND REPORT , THAT IT WAS ONLY AFTER CONSIDERING THE CONTENT S OF THE REMAND REPORT THE CIT(A) HAS CONFIRMED THE ORDER OF THE AO. THUS ACCORDING TO HIM, THERE WAS NO NEED FOR INTERFERENCE WITH THE OR DER OF THE CIT(A). 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT BEFORE GOING INTO THE ACCEPTABILITY OF THE COMPARABLE S ADOPTED B Y THE TPO, THE BASIC POINT TO BE CONSIDERED IS WHETHER WHILE ADOPTING THE TNMM ME THOD, THE IT (TP) A NO . 639 /BANG/201 2 M/S.SYSARRIS SOFTWARE (INDIA) PVT.LTD. PAGE 5 OF 6 ENTITY LEVEL MARGIN IS TO BE ADOPTED OR ONLY THE MARGIN OF SOFTWARE DEVELOPMENT ACTIVITY IS TO BE CONSIDERED SEPARATELY FROM THE MARGINS OF THE BIO - DIVISION WHICH HAS SUSTAINED LOSS . IT IS NOT IN DISPUTE, AS IS EVIDENT FROM THE RECORD, THAT BIO DIVISION HAD INCURRED A LOSS AND ALSO THAT THERE W ERE NO TRANSACTION S WITH RELATED PARTIES IN BIO DIVISION. AS REGARDS INTERNATIONAL TRANSACTIONS WITH UNRELATED PARTIES, ALP OF SUCH TRANSACTIONS NEED NO DETERMINATION. ADMITTEDLY THERE ARE INTERNATIONAL TR ANSACTIONS WITH AE OF THE ASSESSEE IN THE SOFTWARE DEVELOPMENT DIVISION ONLY . ACCORDING TO THE ASSESSEE, NET MARGIN OF SOFTWARE DEVELOPMENT IS 11% WHICH IS WITHIN + OR - 5% OF THE NET MARGIN OF THE COMPARABLE COMPAN IES AND THEREFORE, IT HAS TO BE ACCEPTED. WE ARE OF THE OPINION THAT ONLY INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES HAVE TO BE CONSIDERED FOR ALP ADJUSTMENT. WHEN BIO DIVISION DOES NOT HAVE ANY INTERNATIONAL TRANSACTION S WITH AES , PROFIT OR LOSS FROM SAID DIVISION SHOULD NOT AFFECT ALP OF THE INTERNATIONAL TRANSACTION IN ANOTHER DIVISION . SINCE NEITHER THE AO NOR THE CIT(A) HAVE REALLY EXAMINED THE ASSESSEE S CONTENTION THAT THERE WAS NO INTERNATIONAL TRANSACTION S WITH AE S IN THE BIO DIVISION BUT HA VE JUST COMBINED THE RESULTS OF B OTH SOFTWARE DEVELOPMENT AS WELL AS BIO DIVISION FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION, WE DEEM IT FIT AND PROPER TO SET ASIDE THE ORDER OF THE AO/TPO AND REMAND THE MATTER BACK TO THE AO WITH A DIRECTION TO REFER THE MATTER TO THE TPO F OR RE - CONSIDERATION OF IT (TP) A NO . 639 /BANG/201 2 M/S.SYSARRIS SOFTWARE (INDIA) PVT.LTD. PAGE 6 OF 6 THE ISSUE IN THE LIGHT OF OUR OBSERVATION S ABOVE. THE AO/TPO SHALL EXAMINE THE ASSESSEE S CONTENTION AND AFTER VERIFYING THE DETAILS, SHALL REC OMPUTE THE ALP OF THE INTERNATIONAL TRANSACTION U/S 92CA OF THE ACT. 7. IN THE RES ULT, THE ASSESSEE S APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRON OUNCED IN THE OPEN COURT ON 17 TH APRIL , 201 5 . S D/ - S D/ - ( ABRAHAM P GEORGE ) ( SMT. P.MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER EKSRIN IVASULU COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE T RIBUNAL BANGALORE