Aithent Technologies Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 6446/DEL/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7056 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 19-09-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 28-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Permanent establishment; Wholly owned subsidiary; Avoidance of tax; Onus to prove
• Section: 143(3); 5(2); 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.6446/DEL/2012 ASSESSMENT YEAR : 2008-09 AITHENT TECHNOLOGIES PVT. LTD., A-16/9, VASANT VIHAR, NEW DELHI. PAN: AAACS2319H VS. DCIT, CIRCLE-1(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AKHILESH GUPTA, ADVOCATE DEPARTMENT BY : SHRI NEERAJ KUMAR, SR. DR DATE OF HEARING : 19.09.2016 DATE OF PRONOUNCEMENT : 21.09.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE EMANATES FROM THE FINA L ASSESSMENT ORDER DATED 31.10.2012 PASSED BY THE ASSESSING OFFI CER (AO) U/S 143(3) ITA NO.6446/DEL/2012 2 READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEA R 2008-09. 2. THE FIRST ISSUE AGITATED IN THIS APPEAL IS AGAIN ST THE DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF TRANSACTI ONS OF THE ASSESSEE WITH ITS BRANCH OFFICE IN CANADA. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS AN INDIAN COMPANY HAVING BRANCH OFFICE IN CANADA. IN ADDITIO N TO THAT, IT HAS A 100% SUBSIDIARY IN USA. THERE WERE CERTAIN TRANSAC TIONS BETWEEN THE ASSESSEE AND ITS BRANCH OFFICE IN CANADA, WHICH WER E TREATED BY THE TRANSFER PRICING OFFICER (TPO)/AO AS INTERNATIONAL TRANSACTIONS AND THEIR ALP WAS DETERMINED. THE ASSESSEE IS AGGRIEVE D AGAINST SUCH DETERMINATION OF ALP OF THE TRANSACTIONS BETWEEN TH E HEAD OFFICE AND BRANCH OFFICE. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS UNDISPUTED THAT THE ASSE SSEE IS AN INDIAN ENTERPRISE HAVING ITS BRANCH OFFICE IN CANADA. UND ER THESE CIRCUMSTANCES, A QUESTION ARISES AS TO WHETHER A SE PARATE DETERMINATION ITA NO.6446/DEL/2012 3 OF ALP OF THE TRANSACTIONS BETWEEN INDIAN HEAD OFFI CE AND BRANCH OFFICE, CANADA, SHOULD BE MADE SO AS TO MAKE AN ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 5. IT IS SIMPLE AND PLAIN THAT NO PERSON CAN TRANSA CT WITH SELF IN COMMON PARLANCE. AS SUCH, ONE CAN NEITHER EARN ANY PROFIT NOR SUFFER LOSS FROM SELF. THE SAME IS TRUE IN THE CONTEXT OF BUSINESS AS WELL. NEITHER ANY PERSON CAN EARN INCOME NOR SUFFER LOSS FROM DEALINGS WITH SELF. IT IS CALLED THE PRINCIPLE OF MUTUALITY. WHEN EXPANDED COMMERCIALLY, THE PROPOSITION WHICH FOLLOWS IS THAT THERE CAN BE NO PROFIT FROM TRADE WITH SELF. THIS HAS BEEN FAIRLY S ETTLED THROUGH A CATENA OF JUDGMENTS FROM THE HONBLE APEX COURT INCLUDING SIR KIKABHAI PREM CHAND VS CIT (1953) 24 ITR 506 (SC) AND ALSO THE HONBLE HIGH COURTS. IN BETTS HARTLEY HUETT & CO. LTD. (1979) VS. CIT 116 ITR 425 (CAL) , IT HAS BEEN HELD THAT THERE CANNOT BE A VALID TRA NSACTION OF SALE BETWEEN BRANCH OFFICE AND HEAD OFFICE AND HENCE PRO FIT ON SUCH SALES IS NOT INCLUDIBLE IN ASSESSEE'S COMPUTATION OF TOTAL I NCOME. SIMILAR VIEW HAS BEEN TAKEN IN RAM LAL BECHAIRAM VS. CIT (1946) 14 ITR 1 (ALL). ITA NO.6446/DEL/2012 4 6. COMING TO THE CONTEXT OF TRANSFER PRICING PROV ISIONS, IT IS NOTICED THAT SECTION 92B(1) DEFINES `INTERNATIONAL TRANSACTION TO MEAN A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE O R PROVISION OF SERVICES. GOING BY THIS DEFINITION, THERE CAN BE AN INTERNATI ONAL TRANSACTION ONLY BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES (AES). S INCE BRANCH OFFICE IS NOT A SEPARATE ENTERPRISE, THERE CAN BE NO QUESTION OF TREATING TRANSACTION BETWEEN HEAD OFFICE AND BRANCH OFFICE AS AN INTERNA TIONAL TRANSACTION. AT THIS JUNCTURE, IT IS PERTINENT TO NOTE THAT SECTION 92F(III) DEFINES 'ENTERPRISE' TO MEAN `A PERSON (INCLUDING A PERMAN ENT ESTABLISHMENT OF SUCH PERSON) WHO IS.. ENGAGED IN ANY ACTIVITY, RE LATING TO THE PRODUCTION, STORAGE, SUPPLY, DISTRIBUTION, ACQUISIT ION OR CONTROL OF ARTICLES OR GOODS..OF WHICH THE OTHER ENTERPRISE I S THE OWNER OR IN RESPECT OF WHICH THE OTHER ENTERPRISE HAS EXCLUSIVE RIGHTS.. WHETHER SUCH ACTIVITY OR BUSINESS IS CARRIED ON, DIRECTLY O R THROUGH ONE OR MORE OF ITS UNITS OR DIVISIONS OR SUBSIDIARIES, OR WHETHER SUCH UNIT OR DIVISION OR SUBSIDIARY IS LOCATED AT THE SAME PLACE WHERE THE E NTERPRISE IS LOCATED OR ITA NO.6446/DEL/2012 5 AT A DIFFERENT PLACE OR PLACES. WHEN WE CONSIDER T HE DEFINITION OF `INTERNATIONAL TRANSACTION U/S 92B(1) IN JUXTAPOS ITION TO THE DEFINITION OF `ENTERPRISE U/S 92F(III), THE POSITION WHICH PRIMA FACIE APPEARS IS THAT SINCE A BRANCH OFFICE WHICH IS SELLING GOODS O R PROVIDING SERVICES IS AN `ENTERPRISE AS A PERMANENT ESTABLISHMENT OF T HE GENERAL ENTERPRISE, ALL THE TRANSACTIONS BETWEEN THE BRANCH OFFICE AND THE GENERAL ENTERPRISE BE SUBJECTED TO THE TRANSFER PRICING PROVISIONS. HO WEVER, THIS PRIMA FACIE IMPRESSION LOSES ITS SUBSTANCE WHEN THE GENERAL ENT ERPRISE IS AN INDIAN ENTITY AND THE BRANCH OFFICE IS LOCATED OUTSIDE IND IA. IT IS SO FOR THE REASON THAT SECTION 5 DEFINING SCOPE OF TOTAL INCOM E PROVIDES THROUGH SUB-SECTION (1) THAT `SUBJECT TO THE PROVISIONS OF THIS ACT, THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RE SIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH (A) IS R ECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR O N BEHALF OF SUCH PERSON ; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR ; OR (C) ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING SUCH YEAR. THUS IT IS APPARENT THAT A RESID ENT ASSESSEE IS LIABLE TO ITA NO.6446/DEL/2012 6 TAX FOR ITS WORLD INCOME, WHICH NOT ONLY COMPRISES OF INDIAN INCOME BUT ALSO THE INCOME WHICH `ACCRUES OR ARISES TO HIM OUT SIDE INDIA DURING SUCH YEAR. THE FINAL ACCOUNTS OF FOREIGN BRANCH OF FICE, INCLUDING ALL THE ITEMS OF INCOME, EXPENSES, ASSETS AND LIABILITIES A RE MERGED WITH THE ACCOUNTS OF HEAD OFFICE AND THE ACCUMULATED INCOME SO DETERMINED IS LIABLE TO TAX IN INDIA. WHEN THE SALE MADE BY THE I NDIAN HEAD OFFICE IS CONSIDERED AS PURCHASE OF THE FOREIGN BRANCH OFFICE AND THE FIGURES OF HEAD OFFICE AND BRANCH OFFICE ARE CONSOLIDATED, ANY UNDER OR OVER INVOICING BECOMES TAX NEUTRAL. EVEN IF FOR A MOMENT , WE ACCEPT THE CONTENTION OF THE REVENUE AS CORRECT THAT THE HEAD OFFICE EARNED PROFIT FROM ITS BRANCH OFFICE, THEN SUCH PROFIT EARNED WOU LD CONSTITUTE ADDITIONAL COST OF THE BRANCH OFFICE. ON AGGREGAT ION OF THE ACCOUNTS OF THE HEAD OFFICE AND BRANCH OFFICE, SUCH INCOME OF T HE HO WOULD BE SET OFF WITH THE EQUAL AMOUNT OF EXPENSE OF THE BO, LEA VING THEREBY NO SEPARATELY IDENTIFIABLE INCOME ON ACCOUNT OF THIS T RANSACTION. THIS CAN BE UNDERSTOOD WITH THE HELP OF A SIMPLE EXAMPLE. SUPPO SE THE INDIAN HEAD OFFICE PURCHASES GOODS WORTH RS.95 AND TRANSFERS TH E SAME TO FOREIGN ITA NO.6446/DEL/2012 7 BRANCH OFFICE AT RS.100, WHICH ARE IN TURN SOLD BY THE BRANCH OFFICE FOR A SUM OF RS.120. THE PROFIT OF THE HEAD OFFICE WILL B E RS.5 (RS.100 MINUS RS.95) AND THE PROFIT OF THE BRANCH OFFICE WILL BE RS.20 (RS.120 MINUS RS.100). THE INDIAN GENERAL ENTERPRISE WILL BE CHAR GEABLE TO TAX IN INDIA ON ITS WORLD INCOME OF RS.25 (RS.5 PLUS RS.20). IF FOR A MOMENT, IT IS PRESUMED THAT THE ALP OF THE GOODS TRANSFERRED TO T HE BRANCH OFFICE IS RS.110 AND NOT RS.100 AND THE FIGURE IS ACCORDINGLY ALTERED, THE PROFIT OF THE HEAD OFFICE WILL BECOME RS.15 (RS.110 MINUS RS .95) AND THAT OF THE BRANCH OFFICE AT RS.10 (RS.120 MINUS RS.110). AGAI N THE INDIAN GENERAL ENTERPRISE WILL BE CHARGEABLE TO TAX IN INDIA ON IT S WORLD INCOME OF RS.25 (RS.15 PLUS RS.10). THERE CAN NEVER BE ANY REASON FOR AN INDIAN ENTERPRISE TO OVER OR UNDER INVOICE THE GOODS OR SE RVICES TO ITS FOREIGN BRANCH OFFICE BECAUSE BY VIRTUE OF SECTION 5(1), IT IS ITS WORLD INCOME WHICH IS GOING TO BE CHARGED TO TAX IN INDIA, WHICH IN ALL CIRCUMSTANCES WILL REMAIN SAME AT RS.25 IN THE ABOVE EXAMPLE. SO THE OVER OR UNDER INVOICING BETWEEN THE INDIAN HEAD OFFICE AND FOREIG N BRANCH OFFICE IS ALWAYS INCOME-TAX NEUTRAL IN THE CASE OF AN INDIAN ENTERPRISE HAVING A ITA NO.6446/DEL/2012 8 PERMANENT ESTABLISHMENT OUTSIDE INDIA. MAKING A TRA NSFER PRICING ADJUSTMENT IN RESPECT OF THE INTERNATIONAL TRANSACT IONS BETWEEN THE INDIAN HEAD OFFICE AND THE FOREIGN BRANCH OFFICE WILL RESU LT INTO CHARGING TAX ON INCOME WHICH IS MORE THAN LEGITIMATELY DUE TO THE E XCHEQUER. OBVIOUSLY, THIS IS IMPERMISSIBLE. 7. THE RATIONALE IN NOT APPLYING THE PROVISIONS O F CHAPTER-X ON TRANSACTIONS BETWEEN THE HEAD OFFICE AND BRANCH OFF ICE IS LIMITED ONLY ON AN INDIAN ENTERPRISE HAVING BRANCH OFFICE ABROAD. I T IS NOT THE OTHER WAY AROUND. IF A FOREIGN GENERAL ENTERPRISE HAS A BRAN CH OFFICE IN INDIA, SUCH INDIAN BRANCH OFFICE WILL BE CONSIDERED AS AN `ENTE RPRISE U/S 92F(III) AND THE TRANSACTIONS BETWEEN THE FOREIGN HEAD OFFICE A ND THE INDIAN BRANCH OFFICE WILL BE `INTERNATIONAL TRANSACTIONS IN TER MS OF SECTION 92B. THIS IS FOR THE REASON THAT THE TOTAL INCOME OF A NON-RE SIDENT IN TERMS OF SECTION 5(2) INCLUDES ALL INCOME FROM WHATEVER SOUR CE DERIVED WHICH (A) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN IND IA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON ; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR. THUS IT IS ONLY THE INDIAN ITA NO.6446/DEL/2012 9 INCOME OF A NON-RESIDENT, WHICH IS CHARGEABLE TO TA X IN INDIA. IN SUCH CIRCUMSTANCES, THERE CAN BE AN ALLUREMENT TO SOME N ON-RESIDENT ASSESSES TO RESORT TO UNDER OR OVER-INVOICING SO AS TO MITIG ATE THE TAX BURDEN IN INDIA. IT IS WITH THIS BACKGROUND IN MIND THAT THE LEGISLATURE INTRODUCED CHAPTER X WITH THE CAPTION `SPECIAL PROVISION RELAT ING TO AVOIDANCE OF TAX SO TO ENSURE THAT THE INTERNATIONAL TRANSACTIO NS ARE REPORTED AT ALP. SOME FOREIGN ASSOCIATED ENTERPRISE INSTEAD OF HAVIN G AN INDIAN ENTERPRISE MAY OPT TO HAVE A BRANCH OFFICE IN INDIA AND THEN CLAIM THAT SINCE THE INDIAN BRANCH OFFICE IS NOT A SEPARATE EN TERPRISE, THE TRANSFER PRICING PROVISIONS SHOULD NOT BE APPLIED. SECTION 92F(III) HAS BEEN INCORPORATED TO ENSURE THAT NOT ONLY THE TRANSACTIO NS BETWEEN THE FOREIGN ENTERPRISE AND ITS INDIAN ASSOCIATED ENTERPRISE BUT ALSO THE TRANSACTIONS BETWEEN THE FOREIGN ENTERPRISE AND ITS BRANCH OFFIC E IN INDIA ARE ALSO DETERMINED AT ALP SO THAT THE INDIAN TAX KITTY IS N OT DEPRIVED OF THE RIGHTFUL AMOUNT OF TAX DUE TO IT. THUS, THE DEFINIT ION OF `ENTERPRISE AS PER SECTION 92F(III) AS ALSO INCLUDING ITS PERMANEN T ESTABLISHMENT FOR THE ITA NO.6446/DEL/2012 10 TRANSFER PRICING PROVISIONS IS CONFINED ONLY IN RES PECT OF A FOREIGN GENERAL ENTERPRISE HAVING A BRANCH OFFICE IN INDIA AND NOT VICE VERSA . 8. ADVERTING TO THE FACTS OF THE INSTANT CASE, W E FIND THAT THE EXTANT ASSESSEE IS ALSO AN INDIAN RESIDENT AND AS SUCH IS LIABLE FOR TAX IN RESPECT OF THE INCOME EARNED IN INDIA (THROUGH ITS HEAD OFF ICE IN INDIA) AND ALSO THE INCOME ACCRUING FROM OUTSIDE INDIA (THROUGH ITS BRANCH OFFICE IN CANADA). THE ASSESSEE HAS RIGHTLY OFFERED INCOME FO R TAXATION NOT ONLY THE AMOUNT EARNED BY THE INDIAN HEAD OFFICE, BUT AL SO WHOLE OF THE INCOME EARNED BY CANADA BRANCH OFFICE. THIS POSITIO N CAN BE ASCERTAINED FROM THE ANNUAL ACCOUNTS OF THE ASSESSEE, WHOSE COP Y HAS BEEN PLACED ON RECORD. PAGE C-6 OF THE PAPER BOOK IS COPY OF TH E PROFIT & LOSS ACCOUNT OF THE ASSESSEE, WHICH GIVES A FIGURE OF R EVENUE FROM SERVICES RENDERED. THIS FIGURE HAS BEEN DEPICTED AT RS.45.4 2 CRORE. ITS BREAK-UP IS AVAILABLE ON PAGE C-19, FROM WHERE IT IS DISCERN IBLE THAT REVENUE EARNED BY THE INDIAN HEAD OFFICE FROM EXPORTS STAND S AT RS.9.50 CRORE AND REVENUE OF CANADIAN FOREIGN BRANCH AT RS.35.92 CRORE. NOT ONLY THE INCOME BUT, ALSO THE EXPENSES AND ALL THE ITEMS OF BALANCE SHEET OF ITA NO.6446/DEL/2012 11 BRANCH OFFICE, CANADA HAVE ALSO BEEN MERGED WITH TH E FIGURES OF HEAD OFFICE. IT IS THE TOTAL INCOME AS ALSO INCLUDING T HE TOTAL REVENUE EARNED BY BRANCH OFFICE CANADA, WHICH HAS BEEN OFFERED FOR TAXATION. UNDER SUCH CIRCUMSTANCES AND IN THE BACKDROP OF THE FOREG OING DISCUSSION, THE TRANSFER PRICING PROVISIONS CANNOT APPLY IN RESPECT OF TRANSACTIONS BETWEEN THE INDIAN HEAD OFFICE AND BRANCH OFFICE IN CANADA. THE IMPUGNED ORDER IS SET ASIDE PRO TANTO . 9. THE NEXT ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION DUE TO TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.2,59,26 ,400/-. SUCCINCTLY, THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT SERVICES WITH ITS AE, NAMELY, AITHENT INC., USA. THE ASSESSEE ADOPTED TR ANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH PROFIT LEVEL INDICATOR (PLI) OF OP/OC. CERTAIN COMPARABLE S WERE CHOSEN AFTER APPLYING CERTAIN FILTERS, WHICH HAVE BEEN LISTED ON PAGE 3 OF THE TPOS ORDER. THAT IS HOW, THE ASSESSEE CLAIMED THAT ITS I NTERNATIONAL TRANSACTIONS WERE AT ALP. NOT SATISFIED, THE AO MAD E REFERENCE TO THE ITA NO.6446/DEL/2012 12 TPO FOR DETERMINATION OF THE ALP OF THIS INTERNATIO NAL TRANSACTION. THE TPO DISAGREED WITH CERTAIN FILTERS ADOPTED BY THE A SSESSEE AND FINALLY APPLIED THE FOLLOWING FILTERS FOR SELECTING THE COM PARABLE COMPANIES : - COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 20 07-08 WERE EXCLUDED. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE REVENU E IS LESS THAN 75% OF THE TOTAL OPERATING REVENUES WERE EXCLU DED. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE REVENU E