M/s ACI Worldwide Sokutions Pvt. Ltd., Bangalore V. ACIT, Bangalore

ITA 652/BANG/2012

• Counselvise Citation: 65221114 RSA 2012
• Duration Of Justice: 2 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2004-2005
• Appeal Filed On: 10-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P DHIVAHAR JT
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 92E

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT(TP)A NO. 652/BANG/2012 ASSESSMENT YEAR : 2004-05 M/S. ACI WORLDWIDE SOLUTIONS PRIVATE LTD., (FORMERLY VISUAL WEB SOLUTIONS PVT. LTD.), NO.9, SALARPURIA CAMBRIDGE MALL, ULSOOR, BANGALORE 560 038. PAN: AAACV 7566R VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(5), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, C.A. RESPONDENT BY : SHRI P. DHIVAHAR, JT. CIT(DR) DATE OF HEARING : 25.03.2015 DATE OF PRONOUNCEMENT : 10.04.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 29.3.2012 OF THE CIT(APPEALS)-IV, BANGALORE RELATING TO ASSESSME NT YEAR 2004-05. 2. THE ASSESSEE IS A PRIVATE LIMITED COMPANY. IT I S A 100% SUBSIDIARY OF AN AMERICAN COMPANY. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF IT(TP)A NO.652/BANG/2012 PAGE 2 OF 8 DEVELOPING SOFTWARE SOLUTIONS FOR THE BANKING INDUS TRY. DURING THE PREVIOUS YEAR, THE ASSESSEE HAD ENTERED INTO AN INTERNATIONA L TRANSACTION WITH ITS AE VIZ., TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES. THE CONSIDERATION RECEIVED BY THE ASSESSEE FOR RENDERIN G OF SUCH SERVICES HAS TO THEREFORE SATISFY THE ALP OF THE TRANSACTION IN QUESTION FILED AN AUDIT REPORT U/S. 92E IN FORM 3CEB CERTIFYING THE PRICE C HARGED IN THE INTERNATIONAL TRANSACTION AS AT ARMS LENGTH. 3. THE METHOD ADOPTED BY THE ASSESSEE COMPANY JUSTI FYING THE PRICE CHARGED WAS THE COST PLUS METHOD. THE SAID METHOD WAS ADOPTED AS IT WAS ENGAGED IN RENDERING OF SERVICES OVER A LONG DU RATION OF TIME AND THE GUIDELINES OF THE OECD ISSUED IN THIS REGARD RECOMM ENDED THE COST PLUS METHOD BEING ADOPTED UNDER SUCH CIRCUMSTANCES. 4. THE TRANSFER PRICING OFFICER REJECTED ADOPTION OF THE COST PLUS METHOD ON THE GROUND THAT THE WORKINGS OF THE DIREC T AND INDIRECT COSTS OF PRODUCTION IN CASE OF THE ASSESSEE AND THE COMPARAB LE COMPANIES ARE NOT CLEAR. THE TRANSFER PRICING OFFICER HAS CONCLUDED T HAT SINCE CORRECT AND COMPLETE DATA OF ALL DIRECT AND INDIRECT COSTS THAT HAVE GONE INTO COST OF PRODUCTION, IN THE CASE OF COMPARABLES ARE NOT AVAI LABLE, THE COST PLUS METHOD IS TO BE REJECTED. INSTEAD, THE TPO PROPO SED THE ADOPTION OF TRANSACTION NET MARGIN METHOD (TNMM) AND IN THE PRO CESS RELIED ON THE AVERAGE PERCENTAGE OF NET MARGIN TO COST OF 12 COMP ANIES SELECTED AS COMPARABLES BY HIM. A LETTER DATED 03-11-2006 WAS SENT TO THE ASSESSEE, IT(TP)A NO.652/BANG/2012 PAGE 3 OF 8 PROPOSING THE ADOPTION OF THE TNMM. THE ASSESSEE VI DE ITS LETTER DATED 25- 11-2006 OBJECTED IN DETAIL, BOTH TO THE METHOD SOUG HT TO BE ADOPTED AS WELL AS THE METHODOLOGY ADOPTED BY THE TPO. THE ASSESSEE HAD ALSO OBJECTED TO THE MANNER OF SELECTING THE COMPARABLES, SINCE T HE COMPARABLES AS SELECTED BY THE TPO WERE DIFFERENT FROM THE ASSESSE E IN VARIOUS ASPECTS. IT WAS ALSO REQUESTED TO AFFORD AN OPPORTUNITY OF BEIN G HEARD PERSONALLY BEFORE PASSING THE FINAL ORDER BY THE TPO. 5. THE TPO, HOWEVER, PASSED AN ORDER UNDER SECTION 92CA OF THE ACT ON 22-12-2006. THE TPO, IN HIS ORDER, ADOPTED THE T NMM FOR DETERMINING ARMS LENGTH PRICE (ALP). NINE COMPANIES WERE SELEC TED AS COMPARABLES (INSTEAD OF TWELVE COMPANIES AS ORIGINALLY PROPOSED ) AND AVERAGE NET PROFIT MARGIN TO COST OF THESE COMPARABLES WAS CALCULATED AT 18.27%. A NEGATIVE ADJUSTMENT OF 2 WAS ALLOWED FOR DIFFERENCES BETWEEN THE ASSESSEE AND THE COMPARABLES TOWARDS LEVEL OF WORKING CAPITAL AND RI SK LEVEL. ALP OF THE INTERNATIONAL TRANSACTION WAS ACCORDINGLY DETERMINE D AT RS. 5,78,48,120. FOR THIS PURPOSE, TOTAL OPERATING EXPENDITURE OF RS .4.97.53,264 WAS INCREASED BY 16.27% BEING THE MARK-UP DETERMINED. T HE AMOUNT CHARGED BY THE ASSESSEE IN RESPECT OF THE ABOVE TRANSACTION WAS RS. 5,08,31,553. THE TPO THEREFORE SUGGESTED A VARIATION TO THE LOSS RETURNED BY RS. 70,16,567/- BEING THE DIFFERENCE IN THE DETERMINED ALP AND THE VALUE/PRICE CHARGED BY THE ASSESSEE. IT(TP)A NO.652/BANG/2012 PAGE 4 OF 8 6. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(APPEALS). THE 9 COMPARABLES CHOSEN BY THE TPO AND THEIR ARITHMETIC MEAN WERE AS FOLLOWS:- SL. NO. COMPANY NAME NET MARGIN TO COST 1. AMEX INFORMATION TECHNOLOGIES LTD. 19.47% 2. FEDERAL TECHNOLOGIES LTD. 39.43% 3. GEBBS INFOTECH LTD. 32.29% 4. LIFETREE CONVERGENCE LTD. 7.86% 5. NEWGEN SOFTWARE TECHNOLOGIES LTD. - 14.04% 6. SYNERGY LOG-IN SYSTEMS LTD. 6.27% 7. THIRDWARE SOLUTION LTD. 60.50% 8. VJIL CONSULTING LTD. 6.99% 9. WTI ADVANCED TECHNOLOGIES LTD. 5.74% ARITHMETIC MEAN 18.27% 7. THE ASSESSEE SOUGHT EXCLUSION OF THREE OUT OF NI NE COMPARABLE COMPANIES CHOSEN BY THE TPO AND THE CIT(APPEALS) AC CEPTED THE STAND OF THE ASSESSEE AND EXCLUDED THE THREE COMPARABLES CHO SEN BY THE TPO. THE CIT(APPEALS), ON HIS OWN, EXCLUDED TWO MORE COM PARABLE COMPANIES CHOSEN BY THE TPO. OUT OF THE 9 COMPARABLES, AFTER THE ORDER OF CIT(A), THUS THE FOLLOWING 4 COMPANIES ALONE REMAINED AS CO MPARABLES:- SL. NO. COMPANY NAME MARGIN OF THE COST 1. AMEX INFORMATION TECHNOLOGIES LTD. 19.47% 2. GEBBS INFOTECH LTD. 32.29% 3. VJIL CONSULTING LTD. 6.99% 4. WTI ADVANCED TECHNOLOGIES LTD. 5.74% ARITHMETIC MEAN 64.94/4 16.12% IT(TP)A NO.652/BANG/2012 PAGE 5 OF 8 8. IN THE APPEAL BEFORE THE TRIBUNAL, THE ASSESSEE HAS NO OBJECTION TO THE ORDER OF CIT(APPEALS) RETAINING THE AFORESAID F OUR COMPANIES AS COMPARABLES. THE REQUEST OF THE LD. COUNSEL FOR TH E ASSESSEE WAS THAT THE ASSESSEE HAD SOUGHT INCLUSION OF THE FOLLOWING TWO COMPANIES AS COMPARABLES BEFORE THE CIT(A):- (1) ACE SOFTWARE EXPORTS LTD., AND (2) CRESSANDA SOLUTIONS LTD. THE ANNUAL REPORT OF THESE TWO COMPANIES WERE ALSO FURNISHED BY THE ASSESSEE BEFORE THE CIT(APPEALS). A WRITE UP GIV ING BUSINESS DESCRIPTION OF THE ABOVE TWO COMPARABLE COMPANIES WHICH WAS FIL ED BY THE ASSESSEE BEFORE CIT(A) IS AT PAGE 369 OF THE ASSESSEES PAPE R BOOK. 9. IN THE IMPUGNED ORDER OF THE CIT(APPEALS), THE A BOVE SUBMISSIONS WERE NOT CONSIDERED BY THE CIT(APPEALS) AT ALL. WE ARE THEREFORE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO DIREC T THE TPO/AO TO CONSIDER THE COMPARABILITY OF THESE TWO COMPANIES. WE HOLD AND DIRECT ACCORDINGLY. 10. THE NEXT REQUEST MADE ON BEHALF OF THE ASSESSEE WAS THAT THE ASSESSEE PROVIDED DEPRECIATION AT A HIGHER RATE THA N WHAT IS PRESCRIBED UNDER THE INCOME-TAX ACT, 1961, WHEREAS THE COMPARA BLE CASES CHOSEN BY THE TPO CHARGED DEPRECIATION AS PER THE I.T. ACT. THE DETAILS GIVEN BY THE ASSESSEE IN THIS REGARD WERE AS FOLLOWS:- IT(TP)A NO.652/BANG/2012 PAGE 6 OF 8 11. THE ASSESSEE ALSO GAVE IMPACT OF THE DEPRECIATI ON RATES ADOPTED BY THE COMPARABLE COMPANIES BY FILING TWO CHARTS WHICH ARE INDEXED AS ANNEXURE-I & II TO THIS ORDER . IT(TP)A NO.652/BANG/2012 PAGE 7 OF 8 12. THE ASSESSEE ALSO RELIED ON THE DECISION OF THE HONBLE TRIBUNAL IN THE CASE OF EGAIN COMMUNICATIONS PVT. LTD. V. ITO (2008) TIOL 2 82, ITAT, PUNE , WHEREIN IT WAS HELD THAT PROPER ADJUSTMENT HAS TO BE GIVEN WHERE THE RATES OF DEPRECIATION ADOPTED BY THE TESTED PARTY A ND THE COMPARABLE COMPANIES ARE DIFFERENT. 13. THE CIT(APPEALS) DID NOT CONSIDER THE ABOVE SUB MISSIONS, BUT TOOK THE FOLLOWING VIEW:- HAVING HEARD THE CONTENTION OF THE APPELLANT, THE APPELLANT FAILED TO PROVE THAT THE COMPARABLE COMPANIES ARE N OT FOLLOWING THE SIMILAR DEPRECIATION APPROACH. FURTHER, THE DIF FERENCE IN SUCH POLICIES IS TAKEN CARE BY TAKING THE ARITHMETIC MEA N OF THE MARGIN OF THE COMPARABLES. 14. BEFORE US, THE LIMITED REQUEST OF THE LD. COUNS EL FOR THE ASSESSEE IS TO ALLOW PROPER ADJUSTMENTS ON ACCOUNT OF RATES OF DEPRECIATION ADOPTED BY THE COMPARABLE COMPANIES. IN OUR VIEW, THE REQUEST OF THE ASSESSEE IS PROPER AND DESERVES TO BE ACCEPTED IN THE LIGHT OF THE DECISION OF THE PUNE BENCH CITED BY THE LD. COUNSEL FOR THE ASSESSEE SUPRA . WE ACCORDINGLY DIRECT THE TPO TO ALLOW APPROPRIATE ADJUSTMENTS WHI LE WORKING OUT THE MARGINS OF THE ASSESSEE AS WELL AS COMPARABLE CASES . 15. ALL THE OTHER GROUNDS RAISED BY THE ASSESSEE IN THE GROUNDS OF APPEAL WERE NOT PRESSED. IT(TP)A NO.652/BANG/2012 PAGE 8 OF 8 16. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF APRIL, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER ENCL: ANNEXURES I & II. BANGALORE, DATED, THE 10 TH APRIL, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.