M/sTE Connectivity Global Shared Services India Private Limited, Bangalore V. DCIT, Bangalore

ITA 644/BANG/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5566 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 28-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO
• Assessee Lawyers: UMASHANKAR GOUTHAM
• Keywords: Transfer pricing; Principle of natural justice
• Section: 143(3); 143(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BENGALURU BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER IT(TP)A NO.644/BANG/2016 (ASSESSMENT YEAR: 2011-12) M/S.COMMSCOPE CONNECTIVITY INDIA PVT.LTD. (FORMERLY KNOWN AS TE CONNECTIVITY GLOBAL SHARED SERVICES INDIA PVT. LTD. #59/2, GURUDAS HERITAGE, BLOCK-B, KADRENAHALLI, 100 FT RING ROAD, BANASHANKARI 2 ND STAGE, BENGALURU-560 070. PAN:AACCA9228R VS. APPELLANT DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 7(1)(1), BENGALURU. RESPONDENT APPELLANT BY : SHRI UMASHANKAR GOUTHAM, ADVOCATE RESPONDENT BY : SHRI C.H.SUNDAR RAO, CIT(DR) DATE OF HEARING: 28/01/2019 DATE OF PRONOUNCEMENT: 31/01/2019 O R D E R PER PAVAN KUMAR GADALE, JM : THE ASSESSEE HAS FILED THE APPEAL AGAINST THE ASSE SSMENT ORDER PASSED U/S 143(3) R.W.S. 144C(13) OF THE INCO ME-TAX ACT,1961 ['THE ACT' FOR SHORT] DATED 29/01/2016 IN PURSUANCE OF DIRECTIONS OF DRP ORDER. THE ASSESSEE HAS FILED RE VISED GROUNDS OF APPEAL. AT THE TIME OF HEARING, LEARNED AR HAS NOT PRESSED THE GROUNDS NO.1, 2, 3, 4, 5, 8, 10, 11 AND 12. THE ONL Y EFFECTIVE REVISED GROUNDS ARE GROUNDS NO.6, 7 AND 9 WHICH ARE AS UNDER: IT(TP)A NO.644/BANG/2016 PAGE 2 OF 7 6. THAT THE LEARNED AO/ LEARNED TPO ERRED IN CON SIDERING COMPANIES IN THE COMPARABILITY ANALYSIS (FOR SOFTWARE DEVELOP MENT SERVICES SEGMENT AND INFORMATION TECHNOLOGY ENABLED SERVICES SEGMENT) WHICH DO NOT SATISFY THE TEST OF COMPARABILITY. INFORMATION TECHNOLOGY: I. ACROPETAL TECHNOLOGIES LIMITED II. E-INFOCHIPS LIMITED III. I C R A TECHNO ANALYTICS LIMITED INFORMATION TECHNOLOGY ENABLED SERVICES: I. ACCENTIA TECHNOLOGIES LIMITED II. ACROPETAL TECHNOLOGIES LIMITED III. E4E HEALTHCARE BUSINESS SERVICES PRIVATE LIMITED IV. I C R A ONLINE LIMITED V. JEEVAN SCIENTIFIC TECHNOLOGY LIMITED 7. THAT THE LEARNED AO/ LEARNED TPO ERRED IN REJ ECTING COMPANIES SIMILAR TO THE APPELLANT WHILE PERFORMING THE COM PARABILITY ANALYSIS (FOR SOFTWARE DEVELOPMENT SERVICES SEGMENT AND INFORMATION TECHNOLOGY ENABLED SERVICES SEGMENT). INFORMATION TECHNOLOGY: I. AKSHAY SOFTWARE TECHNOLOGIES LIMITED II. COMP-U-LEARN TECH INDIA LIMITED III. LGS GLOBAL LIMITED IV. THINKSOFT GLOBAL SERVICES LIMITED INFORMATION TECHNOLOGY ENABLED SERVICES: I. INFORMED TECHNOLOGIES INDIA LIMITED 9. THAT THE LEARNED AO/LEARNED TPO/ LEARNED DRP E RRED IN THE COMPUTATION OF WORKING CAPITAL ADJUSTMENT. IN ADDIT ION, THE LEARNED AO/LEARNED TPO/LEARNED DRP ERRED IN LIMITING THE WO RKING CAPITAL ADJUSTMENT INSTEAD OF PROVIDING THE ACTUAL ADJUSTME NT FOR WORKING CAPITAL DIFFERENCES BASED ON THE ACTUAL WORKING CAP ITAL POSITION OF THE APPELLANT WHILE DETERMINING THE ARM'S LENGTH PR ICE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND OTHER SERVICES AND FILED THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2011-12 ON 04/11/2011 DECLARING TOTAL INCOME OF RS.2,60,284/- AND ALSO CLAIMED DEDUCTION U/S 10A OF THE ACT. THE RETURN O F INCOME WAS PROCESSED U/S 143(1) OF THE ACT. SUBSEQUENTLY THE C ASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) AND 142 (1) OF THE ACT IT(TP)A NO.644/BANG/2016 PAGE 3 OF 7 WERE ISSUED. IN COMPLIANCE, THE LEARNED AR APPEARED FROM TIME TO TIME AND SUBMITTED THE DETAILS AS CALLED FOR. T HE AO, ON PERUSAL OF THE FINANCIAL STATEMENTS, FOUND THAT THE ASSESSE E HAS CLAIMED DEDUCTION U/S 10A OF THE ACT AND THE ASSESSEE HAS I NTERNATIONAL TRANSACTIONS WITH ITS AE AND WITH THE PRIOR APPROVA L OF THE CIT, THE MATTER WAS REFERRED TO THE TRANSFER PRICING OFF ICER (TPO) AND THE TPO VIDE ORDER U/S 92CA OF THE ACT, DATED 29/01 /2015 MADE ADJUSTMENTS TO THE ARMS LENGTH PRICE (ALP) TO THE EXTENT OF RS.4,28,89,846/- IN RESPECT OF INTERNATIONAL TRANSA CTION ENTERED WITH ASSOCIATED ENTERPRISES (AE) AND THE AO BASED O N THE DIRECTIONS OF TPO HAS PASSED DRAFT ASSESSMENT ORDER . 3. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER DA TED 29/01/2015 THE ASSESSEE HAS FILED OBJECTIONS BEFORE THE DISPUT E REDRESSAL PANEL (DRP) AND THE ASSESSEE WAS NOT SUCCESSFUL IN RESPECT OF CLAIM OF DEDUCTION U/S 10A. THE DRP PASSED ORDERS WITH THE DIRECTIONS ON 23/11/2015 AND THE AO GAVE EFFECT TO THE DIRECTIONS OF THE DRP AND PASSED ASSESSMENT ORDER U/S 143(3) R .W.S. 144C(13) OF THE ACT DETERMINING THE TOTAL INCOME AT RS.4,33,86,894/-. 4. AGGRIEVED BY THE ORDER, THE ASSESSEE HAS F ILED THE APPEAL BEFORE THE TRIBUNAL. THE LEARNED AR SUBMITTED THAT THE ASSESSEE IS HAVING TWO UNITS BEING SOFTWARE DEVELOPMENT SEGM ENT AND IT ENABLED SERVICES (ITES) SEGMENT AND REQUIRED EXCLUS ION OF IT(TP)A NO.644/BANG/2016 PAGE 4 OF 7 COMPARABLE IN SOFTWARE DEVELOPMENT AND ITES. FURTH ER, LEARNED AR FILED CHART IN RESPECT OF COMPUTATION OF ALP AND EXCLUSION AND FAR ANALYSIS. THE LEARNED AR FURTHER EMPHASIZED TH AT THE ORDER OF THE DRP LACKS CLARITY ON THE DISPUTED ISSUE AND REFERRED TO PAGES 13 & 14 OF THE DRP ORDER AND EXPLAINED THAT T HE DRP HAS NOT MADE ANY ANALYSIS IN RESPECT OF COMPARABLE WHIC H ARE APPLICABLE TO THE ASSESSEE AND THE OBSERVATIONS OF THE DRP ARE ONLY RELATED ON THE FINDINGS OF TPO. NO INDEPENDEN T ANALYSIS WAS MADE AND PRAYED THAT AN OPPORTUNITY BE PROVIDED BEF ORE DRP TO EXPLAIN AND FILE THE DETAILS AND FURTHER RELIED ON THE DECISION OF COCHIN BENCH OF TRIBUNAL IN THE CASE OF M/S.NAVIGANT BPM(INDIA) PVT. LTD. VS. ACIT IN IT(TP)A NO.57/COCH/2016 DATED 23/10/2018 AND PRAYED THAT THE OPPORTUNITY BE PROVIDED TO THE ASSESSEE. CONTRA, LEARNED DR SUPPORTED THE ORDER OF THE DRP. 5. WE HEARD RIVAL SUBMISSIONS AND PERUSED MA TERIAL ON RECORD. LEARNED AR HAS ARGUED GROUND 1 FOR EXCLUSION OF COM PARABLE AND GROUND NO.7 FOR INCLUSION OF COMPARABLE BY THE ASSE SSEE. WE FOUND THAT THE ASSESSEE HAS RAISED THESE ISSUES BEF ORE THE DRP AND THE DRP IN PARA. 8.2.1 HELD AS UNDER: 8.2.1 THE TPO SELECTED A FINAL LIST OF COMPARABL ES AND WORKED OUT THE ALP AS INDICATED ABOVE BOTH IN RESPE CT OF SOFTWARE DEVELOPMENT AND ITES SECTORS. THE ASSESSEE STRONGLY OBJECTED TO THE TPOS GROUNDS FOR REJECTION. IT(TP)A NO.644/BANG/2016 PAGE 5 OF 7 6. SIMILARLY, IN THE CASE OF REJECTION OF COMP ARABLE AND WORKING CAPITAL ADJUSTMENT, DRP HAS REJECTED THE ASSESSEES CLAIM WHEREAS IN RESPECT OF ECONOMIC ANALAYSIS OF ASSESSE ES COMPARABLES REJECTED BY THE TPO, THE DRP HAS DEALT ON THIS ISSUE AND OBSERVED AT PARA. 11.1 AS UNDER: 11. DISCUSSION AND DECISION ONE OF THE OBJECTIONS OF THE ASSESSEE IS THAT THE T PO HAS RIOT CONSIDERED THE TURNOVER AND SIZE OF THE COMPARABLES SELECTED BY IT. SIMILAR OBJECTION WAS RAISED BY THE ASSESSEE FOR AY 2010-11 BEFORE DRP AND IN ITS ORDER DRP HAD FOLLOWE D THE DECISION OF HONBLE BANGALORE ITAT IN THE CASE OF GENISYS INTEGRATING SYSTEMS (1714 NO.2231(BANG.)/2010) WHERE A GUIDELINE IN THE MATTER OF TURNOVER FILTER WAS SUGG ESTED AND THAT THE CATEGORIZATION OF SOFTWARE COMPANIES IN TH E DUN & BRAD STREET STUDY BE ADOPTED AS A METHOD OF CLASSIF ICATION OF COMPANIES K SIZE. ACCORDING TO THIS STUDY, 3 CATEGO RIES OF FIRMS WERE IDENTIFIED I.E. SMALL WITH TURNOVER LESS THAN RS.200 CRORE, 'MEDIUM' WITH TURNOVER RS.200 TO RS.2000 CRO RE AND 'LARGE' WITH TURNOVER GREATER THAN RS.2,000 CRORE. ON THIS ISSUE A DETAILED FINDING HAS BEEN GIVEN BY THE TPO IN HIS ORDER, JUSTIFYING THAT THERE IS NO CORRELATION BETWEEN HIG H TURNOVER AND PROFIT MARGINS OF A COMPANY. FURTHER, THE ITAT MUMBAI IN THE CASE OF THE CAPGEMINI INDIA PUT LTD US ACLU (ITA NO. 7861/MUM/2011 FOR AY 2007-08) HAD HELD THAT THE CONCEPT OF ECONOMY OF SCALE CANNOT HE APPLIED TO SERVICE DE LIVERING COMPANIES AND THAT THERE IS NO EMPIRICAL EVIDENCE T O SUGGEST THAT MARGINS ARE RELATED TO TURNOVER, HOWEVER FOLLO WING THE DECISION OF THE JURISDICTIONAL ITAT THE OBJECTION (2.5) OF THE ASSESSEE IS ACCEPTED. THE TAXPAYER COMPANY WOULD FA LL IN THE CATEGORY OF A 'SMALL' SIZED FIRM, AS PER THE DUN & BRAD STREET CATEGORIZATION. COMPANIES WITH A TURNOVER LOWER THA N RS 1 CRORE AND HIGHER THAN RS. 200 CRORES, THEREFORE, SH OULD BE EXCLUDED FROM THE COMPARABILITY ANALYSIS. 7. THE LEARNED AR REFERRED TO THE CHART AND EXP LAINED WITHOUT GOING INTO THE MERITS HAS MENTIONED THAT THERE ARE COMPARABLES WHICH ARE TO BE EXCLUDED DUE TO VARIOUS FILTERS AND CERTAIN COMPARABLES HAVE TO BE INCLUDED. LEARNED AR HAS NO T ENVISAGED IT(TP)A NO.644/BANG/2016 PAGE 6 OF 7 ARGUMENT ON THIS GROUND AS HE PRAYED THAT AN OPPORT UNITY BE PROVIDED BEFORE THE DRP, AS THE DRP ORDER COULD NOT EMANATE A CLEAR PICTURE ON ISSUES. WE FOUND ON PERUSAL OF TH E ORDERS AND THE SUBMISSIONS OF THE LEARNED AR THAT THERE IS NO CLARITY IN RESPECT OF TESTING OF COMPARABLES FOR INCLUSION AND EXCLUSION AND THE DRP HAS RELIED ONLY ON TPO FINDING AND NO INDEP ENDENT OBSERVATIONS ARE GIVEN. AS RIGHTLY POINTED OUT BY THE LEARNED AR, THE MATTERS REQUIRES FURTHER CLARIFICATION AND THE DECISION, RELIED BY THE LEARNED AR, TO WHICH ONE OF US VIZ., THE ACC OUNTANT MEMBER IS A PARTY, SUPPORTING ON THIS ISSUE IS APPLICABLE. WE FIND THAT IN THE CASE OF M/S.NAVIGANT BPM(INDIA) PVT. LTD. (SUPRA) IN PARA. 7.4 IT WAS OBSERVED AS UNDER: 7.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. WE FIND THAT THE OBJECTIONS RAISED BY THE ASSESSEE HAVE BEEN DISPOSED OFF BY TH E DRP WITHOUT PASSING A SPEAKING ORDER. THE ASSESSEE HAS RAISED VARIOUS CONTENTIONS WHY THE ABOVEMENTIONED COMPANIES ARE NOT COMPARABLE COMPANIES. THE OBJECTIONS WITH REGARD TO NON-AVAILABILITY OF SEGME NTAL ACCOUNT DETAILS FOR THE ABOVE COMPARABLES, PRESENCE OF INTANGIBLES FOR ABOVE MENTIONED COMPANIES AND FAILU RE TO SATISFY CERTAIN FILTERS ADOPTED BY THE TPO HIMSE LF WERE NOT DISCUSSED IN TPO'S ORDER NOR IN DRP'S ORDE R. THE DRP ON ITS PART HAS MERELY CONFIRMED THE TPO'S ORDER WITHOUT PASSING A SPEAKING ORDER. THEREFORE, WE DEEM IT APPROPRIATE TO RESTORE THIS ISSUE TO THE FI LES OF THE TPO. THE ASSESSEE SHALL RAISE ALL THE CONTENTIO NS RAISED BEFORE US AND SHALL PLACE NECESSARY EVIDENCE TO PROVE ITS CASE THAT THE ABOVEMENTIONED COMPANIES SHOULD NOT BE ADOPTED AS COMPARABLE COMPANIES. IT(TP)A NO.644/BANG/2016 PAGE 7 OF 7 8. WE, HAVING CONSIDERED THE ARGUMENTS OF THE LEARNED AR, PROVISIONS OF LAW, JUDICIAL DECISIONS AND THE COMPA RABLE CHART FILED BY THE ASSESSEE AND THE DECISION OF THE TRIBUNAL, A RE OF THE OPINION THAT THE REVENUE SHALL NOT BE AT LOSS IF AN OPPORTUNITY BE PROVIDED TO THE ASSESSEE THEREFORE IN THE INTEREST OF SUBSTANTIAL JUSTICE AND PRINCIPLES OF NATURAL JUSTICE WE RESTOR E THE ENTIRE DISPUTED ISSUE TO FILE OF THE DRP TO CONSIDER THE A SSESSEES SUBMISSIONS AND ADJUDICATE AFRESH AND PASS A REASON ED AND SPEAKING ORDER AND WE ORDER ACCORDINGLY. 9. IN THE RESULT, THE ASSESSEES APPEAL IS AL LOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY, 2019. SD/- SD/- ( CHANDRA POOJARI ) ( PAVAN KUMAR GADALE ) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : BENGALURU D A T E : 31/01/2019. SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)- 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME-TAX APPELLATE TRIBUNAL BANGALORE