ACIT, New Delhi V. M/s. H & S Software Development and Knowledge Mgm. Centre Pvt. Ltd., New Delhi

ITA 6509/DEL/2012

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6942 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-01-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 08-12-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 31-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAMANJANEYULU SENIOR
• Assessee Lawyers: VEENU AGARWAL ARS
• Keywords: Transfer pricing; International transaction; Question of law; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.6509/DEL./2012 (ASSESSMENT YEAR : 2007-08) ACIT, VS. H&S SOFTWARE DEVELOPMENT AND CIRCLE 12 (1), KNOWLEDGE MANAGEMENT CENTRE PVT. LTD. NEW DELHI. MVLI PARK, UNIT NO.501 & 502, 5 TH FLOOR, NEAR RED CROSS SOCIETY, SECTOR 15, PART-II, GURGAON 122 001 (HARYANA). (PAN : AAATH4075Q) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI MANONEET DALAL, GAURAV BHUTAN I, ARVINDER SINGH, YISHU GOEL & VEENU AGARWAL, ARS REVENUE BY : SHRI RAMANJANEYULU, SENIOR DR DATE OF HEARING : 08.12.2016 DATE OF ORDER : 18.01.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1 2 (1), NEW DELHI (HEREINAFTER REFERRED TO AS THE REVENUE ) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORD ER DATED 23.02.2011, PASSED BY THE AO UNDER SECTION 143(3)/1 44C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR ITA NO6509/DEL./2012 2 2007-08 IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO ON THE GROUNDS INTER ALIA THAT :- 1. WHETHER LD. CIT (A) WAS CORRECT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN DIRECTING T O EXCLUDE M/S. MOLD-TEX TECHNOLOGIES FROM THE LIST OF COMPARABLES? 2. WHETHER LD. CIT (A) WAS CORRECT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN RESTRICTING THE ADDITION FROM RS.2,08,34,850/- TO RS.1,63,19,800/- MADE IN THE INCOME OF THE ASSESSEE BEING DIFFERENCE BETWEEN THE ARMS LENGTH PRICE? 3. WHETHER LD. CIT (A) WAS CORRECT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN DIRECTING THE AO TO EXCLUDE THE TELECOMMUNICATION EXPENSES AMOUNTING TO RS.9,15,422/- FROM THE TOTAL TURNOVER WHILE CALCULATING THE DEDUCTION U/S 10A? 2. BRIEFLY STATED THE FACTS OF THIS CASE ARE : H&S SOFTWARE DEVELOPMENT AND KNOWLEDGE MANAGEMENT CENTRE PVT. LT D. (H&S KMC LTD.) IS A WHOLLY OWNED SUBSIDIARY OF HENDRICK & STRUGGLES INC. USA (HSI) WHICH IS IN TURN A SUBSIDIARY OF HEN DRICK & STRUGGLES INTERNATIONAL INC., USA (HSII) AND IS INT O PROVIDING INFORMATION TECHNOLOGY (IT) ENABLED BACK OFFICE SUP PORT SERVICES RELATED TO CREATION AND MAINTENANCE OF DATABASE OF PROSPECTIVE EMPLOYERS AND CANDIDATES WHO HAVE SUBMITTED THEIR R ESUMES TO HSII. THIS DATABASE IS SEARCH PALACE AND HSIIS PR OPRIETARY SOFTWARE TOOL USED TO PERFORM ALL OF HSIIS SERVICE S. HSI IS THE ITA NO6509/DEL./2012 3 OWNER OF INTANGIBLES ASSOCIATED WITH SEARCH PALACE AND IS ALSO RESPONSIBLE FOR MAINTAINING AND DEVELOPING THIS SOF TWARE TOOL AND OTHER RELATED TOOLS. 3. DURING THE YEAR UNDER ASSESSMENT, ASSESSEE COMPA NY HAS DECLARED AN INCOME OF RS.2,07,56,617/- UNDER THE HE AD PROFIT AND GAINS OF BUSINESS OR PROFESSION AND INCOME OF RS.3, 534/- I.E. INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER S OURCES. THE ASSESSEE COMPANY HAS MADE CLAIM FOR DEDUCTION U/S 1 0A OF THE ACT AMOUNTING TO RS.2,07,56,617/- BY FILING FORM NO.56F ALONG WITH THE RETURN OF INCOME. 4. HOWEVER, PURSUANT TO THE ORDER PASSED BY THE TR ANSFER PRICING OFFICER (TPO), AO MADE AN ADDITION ON ACCOU NT OF ARMS LENGTH PRICE (ALP) TO THE TUNE OF RS.2,08,34,850/- QUA INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SES (AES) DURING FINANCIAL YEAR 2006-07. 5. ASSESSEE COMPANY BY USING TRANSACTIONAL NET MARG IN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH O PERATING PROFIT / OPERATING COST (OP/OC) AS THE PROFIT LEVEL INDICATOR (PLI) BY SELECTING 11 COMPARABLES WITH THREE YEARS WEIGHT ED AVERAGE MARGIN AT 6.88% VIS--VIS ASSESSEES MARGIN AT 12.2 0% AND FOUND ITS INTERNATIONAL TRANSACTION AT ARMS LENGTH. ITA NO6509/DEL./2012 4 6. TPO ACCEPTED THE TNMM WITH OP/OC AS PLI AS APPLI ED BY THE ASSESSEE COMPANY, BUT REJECTED SEVEN COMPARABLE COMPANIES SELECTED BY THE ASSESSEE COMPANY AND IDENTIFIED 21 COMPANIES BY MAKING INDEPENDENT SEARCH ON THE BASIS OF FUNCTIONS , ASSETS AND RISKS OF THE ASSESSEE COMPANY AND FINALLY CHOSEN 25 COMPARABLE COMPANIES. TPO ALSO USED CURRENT YEAR DATA AS AGAI NST THREE YEARS DATA USED BY THE ASSESSEE COMPANY. AS PER TPO STUD Y, ARITHMETIC MEAN OF PLI CAME TO 29.05% AND THEREBY MADE ADJUSTM ENT OF RS.2,08,34,850/- TO MAKE THE INTERNATIONAL TRANSACT IONS OF THE ASSESSEE COMPANY AT ARMS LENGTH. 7. ASSESSEE COMPANY CARRIED THE MATTER BEFORE THE L D. CIT (A) WHO HAS UPHELD THE ORDER PASSED BY TPO EXCEPT EXCLU DING MOLD- TEK TECHNOLOGIES LIMITED AS A COMPARABLE, OUT OF WH ICH MARGIN OF THE MARGIN COMPANIES CAME DOWN TO 25.40% AND THEREB Y DETERMINED THE ALP OF ASSESSEE COMPANYS INTERNATIO NAL TRANSACTION AT RS.15,51,19,800. FEELING AGGRIEVED, ASSESSEE COMPANY HAS COME UP BEFORE THE TRIBUNAL BY WAY OF F ILING THE PRESENT APPEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO6509/DEL./2012 5 GROUNDS NO.1 & 2 9. LD. DR FOR THE REVENUE CONFINED HIS ARGUMENTS ON THE ISSUE THAT THE CIT (A) HAS ERRED ON FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW TO EXCLUDE MOLD-TEK TECHNOLOGIES LIMITED FROM THE LIST OF COMPARABLES AND THEREBY RESTRICTING THE ADDITION FROM RS.2,08,34,850/- TO RS.1,63,19,800/-. NOW WE ARE T O EXAMINE IF MOLD-TEK TECHNOLOGIES LTD. IS A VALID COMPARABLE FO R THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE (ALP) OF INTER NATIONAL TRANSACTIONS OF THE ASSESSEE. THIS IS TPOS COMPAR ABLE WHO HAS OBSERVED THAT AS PER THE INFORMATION AND ANNUAL REP ORT SUBMITTED BY THE COMPANY, THE IT DIVISION OF THE COMPANY IS M AINLY ENGAGED IN ITES, IT QUALIFIES ALL FILTERS APPLIED AND AS SU CH, IS A VALID COMPARABLE. HOWEVER, LD. AR FOR THE ASSESSEE RAISE D OBJECTIONS BEFORE THE TPO FOR INCLUSION OF THIS COMPANY ON THE GROUND THAT THE MARGINS ARE ABNORMALLY HIGH. 10. HOWEVER, CIT (A) ACCEPTED THE ASSESSEES CONTEN TION AND HAS DIRECTED TO EXCLUDE THIS COMPANY FORM THE LIST OF COMPARABLES BY MAKING FOLLOWING OBSERVATIONS :- 6.9 I HAVE CONSIDERED THE SUBMISSION AND THE ORDER OF THE TPO. THE SEGMENTAL REPORTING OF THE COMPANY AS QUOTED I N THE EARLIER PARAGRAPHS CREATES A SUFFICIENT DOUBT ABOUT THE TRU THFULNESS OF THE RESULTS OF ITES SEGMENT. ITA NO6509/DEL./2012 6 THIS COMPANY HAS TWO SEGMENTS, ITES AND PLASTIC DIV ISION. ITES IS HAVING 100% EXEMPTION WHEREAS ON THE PROFIT S OF PLASTIC DIVISION THE COMPANY HAS TO PAY TAX. IT IS NOT UNCO MMON TO SEE SUCH FINANCIAL RESULTS WHERE THE TAX EXEMPT UNIT HA S EXTRAORDINARY PROFIT WHILE THE TAXPAYING UNIT SUFFERS LOSSES UNDE R, THE SAME MANAGEMENT CONTROL. THE EXTRAORDINARY PROFIT IN THE ITES SEGMENT REACHING UPTO 113% FOR THE FY 2006-07 IS A POINTER IN THIS DIRECTION. IN THE SUBSEQUENT AUDITED ACCOUNTS, THIS FACT OF ENDING THE TAX HOLIDAY FOR ITES SEGMENT IS MENTIONED BY TH E ANNUAL REPORT AND SOME CORRECTIVE ENTRIES HAVE BEEN PASSED. THE EMPLOYEE COST FILTER MIGHT NOT HAVE BEEN USED B Y THE TPO BUT IN THE PRESENCE OF EXTRAORDINARY DEVIATION FROM THE RATIO OF EMPLOYEE COST TO SALES OF THE APPELLANT'S CASE C ANNOT BE SIMPLY BRUSHED ASIDE. AS SUBMITTED BY THE APPELLANT, THIS RATIO (EMPLOYEE' COST / SALES) IS 48.93% IN THE CASE OF THE APPELLAN T AND 7.6% IN THE CASE OF MOLD-TEK TECHNOLOGIES LTD. BY IMPLICATION, EITHER MOLD- TEK TECHNOLOGIES LTD. HAS EMPLOYED LARGER CAPITAL A GAINST THE MAN POWER TO GET THE KIND 'OF PRODUCTIVITY TO GENERATE PROFIT OF 113% OR THE EMPLOYEES ARE SO EXTRAORDINARY THAT THEY HAVE A CCEPTED THE LOWER WAGES AND SO HARD FOR THE COMPANY TO GENERATE THAT KIND OF PROFITABILITY. IN EITHER SITUATION, THE COMPANY BEC OMES NOT COMPARABLE TO THE APPELLANT. EVEN ON FUNCTIONALITY GROUND MOLD-TEK TECHNOLOGIES LTD. IS NOT COMPARABLE BECAUSE THE APPELLANT IS IN THE B ACK OFFICE RESEARCH SERVICES AREA WHEREAS THIS COMPARABLE IS M AINLY DEALING IN ENGINEERING DESIGN AND DETAILING SERVICES, WEBSI TE DESIGN SERVICES, SOFTWARE TESTING, IN-HOUSE SOFTWARE DEVEL OPMENT ETC. THEREFORE, I HOLD THAT THIS COMPANY SHOULD BE EXCLU DED FROM THE LIST OF COMPARABLES. 11. WHEN WE EXAMINE THE FUNCTIONAL PROFILE OF ASSES SEE COMPANY VIS--VIS MOLD-TEK TECHNOLOGIES LTD., BOTH ARE FUNCTIONALLY DIS-SIMILAR. UNDISPUTEDLY, ASSESSEE C OMPANY IS INTO ITES SERVICES AS A CAPTIVE SERVICE PROVIDERS WHEREA S MOLD-TEK IS OPERATING IN TWO BUSINESS SEGMENT I.E. (I) PLASTIC DIVISIONS WHICH IS INTO MANUFACTURING OF LUBE AND OILS, PAINTS, PET PROJECTS, CONSUMER PRODUCTS ETC.; AND ITA NO6509/DEL./2012 7 (II) IT DIVISION SPECIALIZED IN PROVIDING STRUCTUR AL DESIGN AND DETAILING SERVICES WHICH COULD BE CATEGORIZED AS STRUCTURAL ENGINEERING SERVICES. CIT (A) HAS ALSO EXCLUDED THIS COMPANY AS COMPARABL E ON GROUND OF ABNORMAL GROWTH WHICH IS 204% IN FY 2006-07 WITH A CAGR OF 113% FOR 3 YEARS. 12. ASSESSEE RELIED UPON THE DECISIONS RENDERED BY ITAT, HYDERABAD BENCH IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDIA) PRIVATE LTD. (ITA NO.1961/HYD/2011) (AVAILABLE AT PAGES 812 TO 839 OF THE PAPER BOOK-III, WHEREIN COMPARABI LITY OF MOLD- TEK TECHNOLOGIES LTD. HAS BEEN EXAMINED WITH CAPITA L IQ INFORMATION SYSTEMS (INDIA) PRIVATE LTD. (SUPRA) AN D ITES COMPANY ALMOST ON IDENTICAL ITES COMPANY. COORDINA TE BENCH IN CAPITAL IQ INFORMATION SYSTEMS (INDIA) PRIVATE LTD. (SUPRA) WHILE TAKING INTO CONSIDERATION THE FACTUM OF MERGE R FROM 01.10.2006 IMPACTING RESULTS OF THE COMPANY AND ALS O THAT THE ACTIVITY OF THE COMPANY IS FUNCTIONALLY DIFFERENT, IT BEING ENGAGED IN PROVIDING HIGH END ENGINEERING CONSULTING SERVIC ES AND STRUCTURAL ENGINEERING CONSULTING SERVICES WHICH AR E IN THE NATURE OF KPO SERVICES AND THAT THE COMPANY WAS HAVING SUP ER-ABNORMAL PROFIT AT 113% AND BY FOLLOWING THE DECISION RENDER ED BY ITAT, DELHI BENCH IN ADOBE SYSTEMS INDIA PVT. LTD. (ITA ITA NO6509/DEL./2012 8 NO.5043/DEL/2000 DATED 21.01.2011), ORDER TO EXCLUD E THIS COMPANY FROM THE LIST OF COMPARABLES. 13. THE CONTENTION OF THE LD. DR THAT THE FINDINGS OF THE CIT (A) ARE BASED UPON CONJECTURES AND SURMISES IS NOT TENA BLE IN THE LIGHT OF THE FACTS DISCUSSED HEREIN ABOVE. SO, KEEPING I N VIEW THE FUNCTIONAL DISPARITY AND FACTUM OF SUPER ABNORMAL P ROFIT AND BY FOLLOWING THE DECISION RENDERED BY ITAT, HYDERABAD BENCH IN CASE CITED AS CAPITAL IQ INFORMATION SYSTEMS (INDIA) PRIVATE LTD. (SUPRA), WE HEREBY UPHOLD THE ORDER PASSED BY CIT ( A). GROUND NO.3 14. EXPENSES OF RS.9,05,422/- ON ACCOUNT OF COMMUNI CATION EXPENSES HAS BEEN DISALLOWED BY THE AO FROM THE EXP ORT TURNOVER BUT ALLOWED BY THE LD. CIT (A). THE LD. DR FOR THE REVENUE BY RELYING UPON THE ORDER PASSED BY THE AO CONTENDED T HAT THE LD. CIT (A) HAS ERRED IN DIRECTING THE AO TO EXCLUDE THE TE LECOMMUNICATION EXPENSES AMOUNTING TO RS.9,05,422/- FROM THE TOTAL TURNOVER WHILE CALCULATING THE DEDUCTION U/S 10A OF THE ACT. 15. THE LD. AR FOR THE ASSESSEE TO SUPPORT THE ORDE R PASSED BY LD. CIT (A) RELIED UPON THE DECISIONS RENDERED B Y THE ITAT, DELHI BENCH IN (I) DCIT VS. GLOBAL LOGIC INDIA (P) LTD. (2013) 56 SOT 373; AND (II) DCIT VS. BINARY SEMANTI CS LTD. ITA NO6509/DEL./2012 9 109 TTJ 556; AND HONBLE KARNATAKA HIGH COURT IN CASE OF CIT VS. TATA ELXSI LTD. 115TTJ 423 (KARNATAKA) . 16. THE ISSUE, AS TO WHETHER TELECOMMUNICATION EXPENSES ARE REQUIRED TO BE EXCLUDED FROM THE TOTAL TURNOVER WHILE CALCULATING THE DEDUCTION U/S 10A HAS ALREADY BEEN ADDRESSED BY THE ITAT, DELHI BENCH IN CASE OF DCIT VS. GLOBAL LOGIC INDIA (P) LTD. (SUPRA) AND DCIT VS. BINARY SEMANTICS LTD. (SUPRA) WHEREIN THE ISSUE HAS BEEN DECIDED IN FAVOU R OF THE ASSESSEE BY HOLDING THAT FREIGHT, TELECOMMUNICATION AND INSURANCE CHARGES DURING THE YEAR THAT ARE REDUCED FROM THE EXPORT TURNOVER THEN SUCH SUM WILL ALSO HAVE TO BE REDUCED FROM THE TOTAL TURNOVER OF THE COMPANY FOR THE PURP OSES OF COMPUTATION OF DEDUCTION U/S 10A. 16. HONBLE BOMBAY HIGH COURT IN JUDGMENT CITED AS CIT VS. GEM PLUS JEWELLERY INDIA LTD. 330 ITR 175 (BOM.) ALSO ANSWERED THIS ISSUE IN FAVOUR OF THE ASSESSEE BY MA KING FOLLOWING OBSERVATIONS :- 10. FREIGHT AND INSURANCE DO NOT HAVE AN ELEMENT O F TURNOVER. FOR THIS REASON IN ADDITION, THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURNOVER PARTICULARLY IN TH E ABSENCE OF A LEGISLATIVE PRESCRIPTION TO THE CONTRARY. THE FIRS T QUESTION OF LAW WOULD THEREFORE, HAVE TO BE ANSWERED AGAINST THE RE VENUE AND IN FAVOUR OF THE ASSESSEE. 17. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, THE CIT (A) HAS RIGHTLY DIRECTED THE AO TO EXCLUDE THE TELECOMMUNIC ATION EXPENSES ITA NO6509/DEL./2012 10 AMOUNTING TO RS.9,05,422/- FROM THE TOTAL TURNOVER WHILE CALCULATING THE DEDUCTION U/S 10A OF THE ACT. SO, THIS GROUND IS DETERMINED AGAINST THE REVENUE. 18. SO, FINDING NO ILLEGALITY AND PERVERSITY IN THE IMPUGNED ORDER PASSED BY LD. CIT (A), WE HEREBY DISMISS THE APPEAL FILED BY THE REVENUE. ORDER PRONOUNCED IN OPEN COURT ON THIS 18 TH DAY OF JANUARY, 2017. SD/- SD/- (S.V. MEHROTRA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 18 TH DAY OF JANUARY, 2017 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.