I Pass India Private Limited, Bangalore V. ITO, Bangalore

ITA 677/BANG/2016

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6481 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 30-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO I
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 144C; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N V VASUDEVAN, VICE PRESIDENT AND S HRI G MANJUNATHA , ACCOUNTANT MEMBE R IT ( TP) A NO. 677/ BANG / 2016 ASSESSMENT YEAR : 2011 - 12 IPASS INDIA PRIVATE LIMITED, LEVEL 5, PRESTIGE SOLITAIRE, NO.6, BRUNTON ROAD, BANGALORE 560 025. P AN: AABCG 3659H VS. THE INCOME TAX OFFICER, WARD 3(1)(4), BANGALORE. APP ELLANT RESPONDENT APP ELLANT BY : SHRI CHAVALI NARAYAN, CA RESPONDENT BY : SHRI C.H. SUNDAR RAO, CIT(DR - I), ITAT , BANGALORE. DATE O F HEARING : 21 . 1 0 .2019 DATE OF PRONOUNCEMENT : 25 . 1 0 .2019 O R D E R PER N V VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE FIN AL ORDER DATED 29.01.2016 OF THE ITO, WARD 3(1)(4), BANGALORE PASS ED U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX ACT, 1961 [THE ACT] RELATI NG TO ASSESSMENT YEAR 2011-12. 2. THE ISSUE PROJECTED BY THE ASSESSEE IN THE VARI OUS GROUNDS OF APPEAL FILED BEFORE THE TRIBUNAL IS WITH REGARD TO THE ADDITION OF RS.2,10,63,030 CONSEQUENT TO DETERMINATION OF ARMS LENGTH PRICE (ALP) OF AN INTERNATIONAL TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES BY IT(TP)A NO.677/BANG/2016 PAGE 2 OF 7 THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE (AE) UNDE R THE PROVISIONS OF SECTION 92 OF THE ACT. 3. THE ASSESSEE WAS INCORPORATED ON 21.12.2000 AS A WHOLLY OWNED SUBSIDIARY OF GOREMOTE INTERNATIONAL CORPORATION, U SA WHICH WAS SUBSEQUENTLY ACQUIRED BY IPASS US IN FEBRUARY, 2006 . THE ASSESSEE PROVIDES SOFTWARE DEVELOPMENT SERVICES (SWD SERVICE S) TO IPASS US AND IS REMUNERATED ON COST + 16% MARK UP BASIS FOR THE ABOVE SERVICES. IN THIS APPEAL, THERE IS NO DISPUTE WITH REGARD TO COMPARAB LE COMPANIES CHOSEN BY THE TPO AND CONFIRMED BY THE DRP. THE ONLY ISSU E THAT WAS PRESSED FOR ADJUDICATION WAS GROUND NO.8 RAISED BY THE ASSE SSEE IN THE GROUNDS OF APPEAL, WHICH READS AS FOLLOWS:- 8. THE LD. AO/TPO ERRED. IN LAW AND IN FACTS, BY PROVIDING THE NEGATIVE WORKING CAPITAL ADJUSTMENT OF WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE IS A CAPTIVE SERVICE PRO VIDER OF THE AE. THE LD. AO/TPO ERRED. IN LAW AND IN FACTS, BY ADOPT ING AN INCONSISTENT APPROACH IN RESTRICTING THE WORKING CA PITAL BENEFIT AND BY NOT PROVIDING A LOWER CAP ON NEGATIVE WORKIN G CAPITAL ADJUSTMENT. IN THIS REGARD, THE ASSESSEE PRAYS THA T SINCE THE WORKING CAPITAL BENEFIT IS RESTRICTED, THERE SHOULD ALSO BE A LOWER CAP ON WORKING CAPITAL ADJUSTMENT AT ZERO PERCENT, AND ACCORDINGLY THERE SHOULD NOT BE A NEGATIVE WORKING CAPITAL ADJUSTMENT. 4. THE TPO AFTER CHOOSING COMPARABLE COMPANIES ARRI VED AT THE ARMS LENGTH MEAN MARGIN ON COST OF COMPARABLE COMPANIES AT 24.82%. HE THEN COMPUTED THE WORKING CAPITAL ADJUSTMENT TO BE MADE TO THOSE MARGINS BY COMPARING THE WORKING CAPITAL REQUIREMENTS OF THE A SSESSEE AS WELL AS THE COMPARABLE COMPANIES. BY DOING SO, THE TPO ARRIVED AT A NEGATIVE WORKING CAPITAL ADJUSTMENT OF (-) 5.80%. THIS WAS ADDED TO THE ARMS LENGTH MEAN MARGIN OF THE COMPARABLE COMPANIES AND THE ALP WAS DETERMINED BY THE TPO AS FOLLOWS:- IT(TP)A NO.677/BANG/2016 PAGE 3 OF 7 ARM S LENGTH MEAN MARGIN ON COST 24.82% LESS: WORKING CAPITAL ADJUSTMENT (AS PER ANNEX. C) - 5.80% ADJUSTED MARGIN 30.62% OPERATING COST 171,434,124 ARMS LENGTH PRICE (ALP) 1 ( 130.62% OF OPERATING COST) 223,826,253 PRICE RECEIVED 202,864,223 SHORTFALL BEING ADJUSTMENT U/S. 92CA 21,063,000 5. INSOFAR AS THE ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL IS CONCERNED, THE ASSESSEE SUBMITTED BEFORE THE DRP TH AT THE ASSESSEE WAS CAPTIVE SERVICE PROVIDER OF THE AE. THE ASSESSEE S UBMITTED THAT IT IS NOT AN ENTREPRENEUR, BUT A CAPTIVE SERVICE PROVIDER; ALL E XPENSES INCURRED ARE RECOVERED ALONG WITH A MARK-UP. FURTHER, THE ASSESS EE DOES NOT HAVE BORROWINGS FROM AES OR THIRD PARTIES. RELEVANT EXTR ACTS OF THE FINANCIAL STATEMENT OF THE ASSESSEE WERE FURNISHED AS FOLLOWS :- SOURCES OF FUNDS SHAREHOLDERS FUNDS SHARE CAPITAL 1 11,976,710 11,9 76,710 RE SERVES AND SU RPLUS 2 203,970,758 17 0,619,427 TOTAL 215,947,468 182,596,137 SCHEDULE 9: CURRENT LIABILITIES SUNDRY CREDITORS TOTAL OUTSTANDING DUES OF MICRO AND SMALL ENTERPRISES (R EFER NOTE 10 TO S CHEDULE 14) - - TOTAL OUTSTANDING DUES OF OTHER CREDITORS 12,995,591 15,080,742 DUES TO RELATED PARTIES IPASS INC. USA* 26,883,658 26,895,538 DEFERRED REVENUE 12,284,376 - OTHER LIABILITIES 3 ,156,607 2,36 2 ,317 55,320,607 44,338,597 IT(TP)A NO.677/BANG/2016 PAGE 4 OF 7 * LIABILITY IS RELATED TO FINANCIAL YEARS 2008-09 AND 2009-10 TOWARDS EXPATRIATE SERVICES CROSS CHARGED. THE COMPANY IS M AKING ARRANGEMENTS FOR PAYMENTS AFTER TAKING NECESSARY APPROVALS. 6. THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE ITAT HYDERABAD BENCH IN THE CASE OF ADAPTEC (INDIA) PVT. LTD. V. ACIT, ITA NO.206/HYD /2014 WHEREIN IT WAS HELD THAT WHEN BUSINESS IS CARRIED O N WITHOUT WORKING CAPITAL RISK BY THE ASSESSEE AND WH EN COMPARABLE COMPANIES HAVE SUCH RISK, WORKING CAPITAL ADJUSTMEN T, IF AT ALL, HAS TO BE MADE ONLY ON A POSITIVE ADJUSTMENT AND HAS TO BE MA DE TO THE COMPARABLES SO THAT THEY ARE BROUGHT ON PAR WITH TH E ASSESSEE. THE TRIBUNAL THEREFORE HELD THAT NEGATIVE WORKING CAPIT AL ADJUSTMENT TO THE ARITHMETIC MEAN MARGIN ON COMPARABLES SHOULD NOT BE MADE. THIS ARGUMENT DID NOT FIND FAVOUR WITH THE DRP AND THE D RP UPHELD THE ACTION OF TPO WITH THE FOLLOWING OBSERVATIONS:- WE PERUSED THE ANNEXURE-C OF THE ORDER OF THE T PO IN WHICH THE NEGATIVE WORKING CAPITAL ADJUSTMENT AT 5.80% HAS BEEN ARRIVED AT IN APPLYING THE SIMILAR PRINCIPLES WHICH HAVE BEEN APPLIED IN THE PRECEDING ASSESSMENT YEAR WHICH RESU LTED IN POSITIVE WORKING CAPITAL ADJUSTMENT. THE ASSESSEE CANNOT TAKE A CONTRADICTORY STAND BY ACCEPTING THE POSITIVE WORKI NG CAPITAL ADJUSTMENT IN THE PRECEDING YEAR (WHICH RESULTED IN REDUCTION OF ADJUSTMENT U/S 92CA) AND NOT ACCEPTING THE NEGATIVE WORKING ADJUSTMENT COMPUTED ON THE SAME PRINCIPLES (WHICH R ESULTED IN ENHANCEMENT OF ADJUSTMENT U/S 92 CA OF THE INCOME T AX ACT) FOR THE CURRENT ASSESSMENT YEAR. THE TPO HAS APPLIED A CONSISTENT APPROACH, WHICH CANNOT BE FAULTED WITH. AS REGARD T O THE RELIANCE OF THE ASSESSEE, ON THE DECISION OF THE HON'BLE ITA T, BENQALURU IN THE CASE OF LAM RESEARCH (INDIA) PRIVATE LTD, IS CONCERNED, IT APPEARS TO US THAT THE ISSUE OF ALLOWING THE POSITI VE WORKING CAPITAL ADJUSTMENT IN THE PRECEDING ASSESSMENT YEAR , WAS NOT BEFORE THE HONBLE ITAT AND THEREFORE, THE HONBLE ITAT HAS NOT EXAMINED THE ISSUE OF CONSISTENCY IN ALLOWING T HE WORKING CAPITAL ADJUSTMENT. THE OBJECTION IS THEREFORE NOT ACCEPTABLE, HOWEVER, THE MEAN OF WORKING CAPITAL ADJUSTMENT, HA S TO BE IT(TP)A NO.677/BANG/2016 PAGE 5 OF 7 MODIFIED BY THE TPO BASED ON THE COMPARABLE RETAINE D, ON GIVING EFFECT TO THE DIRECTIONS CONTAINED IN THIS ORDER. 7. AGGRIEVED BY THE AFORESAID ORDER OF DRP, THE ASS ESSEE RAISED GROUND NO.8 BEFORE THE TRIBUNAL. 8. AT THE TIME OF HEARING, IT WAS BROUGHT TO OUR NO TICE BY THE LD. COUNSEL FOR THE ASSESSEE THAT IDENTICAL ISSUE HAD COME UP FOR CONSIDERATION IN ASSESSEES OWN CASE FOR THE AY 2012-13 IN ITA NO.20 93/BANG/2017 AND THE TRIBUNAL BY ITS ORDER DATED 19.7.2019 WAS PLEAS ED TO HOLD THAT NEGATIVE WORKING CAPITAL ADJUSTMENT SHOULD NOT BE MADE. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- 12. GROUND NO. 1 IS GENERAL IN NATURE AND THEREF ORE DO NOT REQUIRE ANY ADJUDICATION. 13. BOTH PARTIES SUBMITTED THAT ONLY EFFECTIVE GROU ND IN REVENUES APPEAL IS IN RESPECT OF GROUND NO. 2-4 IS IN RESPEC T OF NEGATIVE WORKING CAPITAL ADJUSTMENT WORKED OUT BY THE LD. AO /TPO. 14. LD.AR SUBMITS THAT THIS ISSUE STANDS COVERED IN FAVOUR OF ASSESSEE BY DECISION OF THIS TRIBUNAL IN CASE OF F & F INDIA PRIVATE LIMITED IN ITA NO.195/BANG/2016 & 495/BANG /2017 FOR ASSESSMENT YEAR 2011-12 AND 2012-13 PASSED ON 03/07 /19. 14.1 LD. CIT DR PLACED RELIANCE UPON THE AUTHORITIE S BELOW HOWEVER COULD NOT CONTROVERT THAT THIS ISSUE IS COV ERED BY DECISIONS RELIED UPON BY LD.AR. WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY LD SIDES IN THE LIGHT OF RECORDS PLACED BEFORE US. 14.2 WE HAVE ALSO PERUSED THE DECISION RELIED UPON BY LD. COUNSEL. IT IS OBSERVED THAT THIS ISSUE HAS BEEN DE CIDED BY THIS TRIBUNAL IN F & F INDIA PVT.LTD.,(SUPRA) AS UNDER: '14. GROUND NO.11 : NEGATIVE WORKING CAPITAL ADJUSTMENT - MAKING A NEGATIVE WORKING CAPITAL ADJUSTMENT WITHOU T APPRECIATING THE FACT THAT THE COMPANY DOES NOT BEA R ANY WORKING CAPITAL RISKS. ON THIS ISSUE, THE ASSESSEE SUBMITTE D AS UNDER : IT(TP)A NO.677/BANG/2016 PAGE 6 OF 7 'THE LEARNED TPO DETERMINED THE ALP FO R THE INTERNATIONAL TRANSACTIONS WITH A.ES BY MAKING A NE GATIVE WORKING CAPITAL ADJUSTMENT FOR THE DIFFERENCES IN W ORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPANIES CONSIDERED A S COMPARABLES. THE ASSESSEE DOES NOT AGREE WITH THE L EARNED TPO AS THE COMPANY DOES NOT BEAR ANY WORKING CAPITAL RI SK SINCE IT IS BEEN FULLY FUNDED BY IT'S A.E. FROM ITS INCEPTI ON AND HAS NO WORKING CAPITAL CONTINGENCIES. THE COMPANY HAS NEV ER TAKEN ANY LOANS TILL DATE FROM THE DATE OF INCORPORATION NOR HAS INCURRED ANY EXPENSE FOR MEETING THE WORKING CAPITAL REQUIREMENT .' WE HAVE GONE THROUGH THE SUBMISSIONS AND THE ORDER OF THE TPO. THE ASSESSEE PLEADED THAT THE DRP HAS ACCEDED SUCH A PLEA IN SOME OTHER CASE. ON EXAMINATION, WE FIND THAT THE D RP, HYDERABAD IN THE CASE OF CORDYS SOFTWARE INDIA P. L TD., FOR A.Y. 2008-09 IN ITS DIRECTIONS DATED 03.08.2012 HAS GIVE N A FINDING AS UNDER : '7.7. 4 THUS, WORKING CAPITAL ADJUSTMENT IS MADE FOR THE TIME VALUE OF MONEY LOST WHEN CREDIT TIME IS PROVID ED TO THE CUSTOMERS. THE APPLICANT IS NOT AN ENTREPRENEUR BUT A CAPTIVE SERVICE PROVIDER. ITS ENTIRE FUNDING NEEDS ARE PROV IDED BY THE A.E. THIS BEING SO, THE APPLICANT DOES NOT STAND TO LOSE ANYTHING AS IT IS COMPENSATED ON A TOTAL COST PLUS BASIS. TH E TPO PROBABLY WAS CARRIED AWAY BY THE LARGE AMOUNT OF RECEIVABLES APPEARING IN THE BOOKS OF THE APPLICANT. BUT THE APPLICANT IS RU NNING ITS BUSINESS WITHOUT ANY WORKING CAPITAL RISK WHILE COM PARABLE COMPANIES HAVE SUCH A RISK FOR THEM. IF AT ALL ANY WORKING CAPITAL ADJUSTMENT IS TO BE MADE TO THIS SITUATION, ONLY A POSITIVE ADJUSTMENT HAS TO BE MADE TO THE COMPARABLES SO THA T THEY ARE BROUGHT ON PAR WITH THE APPLICANT. IN VIEW OF THE S AME, THE PANEL DIRECTS THAT NEGATIVE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES SHALL NOT BE MADE.' IN VIEW OF THE ABOVE, THE PANEL DIRECTS THAT NEGATI VE WORKING CAPITAL ADJUSTMENT TO THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES SHALL NOT BE MADE.' IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT AS SESSEE'S CASE BEING SIMILAR, THERE IS NO NEED FOR MAKING ANY NEGA TIVE WORKING CAPITAL ADJUSTMENT WHEN ASSESSEE DOES NOT CARRY ANY WORKING CAPITAL RISK. IN FACT, TPO SHOULD HAVE DONE NECESSA RY WORKING IT(TP)A NO.677/BANG/2016 PAGE 7 OF 7 CAPITAL ADJUSTMENT TO THE PROFITS OF THE SELECTED C OMPARABLES SO AS TO MAKE THEM COMPARABLE TO THE ASSESSEE. IN VIEW OF THIS, WE DIRECT THE TPO NOT TO MAKE NEGATIVE WORKING CAPITAL ADJUSTMENT. RESPECTFULLY FOLLOWING THE SAME WE DIRECT LD.AO TO GRANT WORKING CAPITAL ADJUSTMENT AS DISCUSSED HEREINABOV E. ACCORDINGLY THIS GROUND RAISED BY REVENUE STANDS DI SMISSED. IN THE RESULT, THE APPEAL FILED REVENUE STANDS DISM ISSED. 9. FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL AND ALSO TAKING NOTE OF THE FACT THAT THE FACTS AND CIRCUMSTANCES IN THE PRESENT ASSESSMENT YEAR BEING SIMILAR, WE DIRECT THE AO NOT TO MAKE ANY NEG ATIVE WORKING CAPITAL ADJUSTMENT AS DIRECTED BY THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE AY 2012-13. GROUND NO.8 IS ACCORDINGLY TREATED AS ALL OWED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 25 TH DAY OF OCTOBER, 2019. SD/- SD/- ( G MAN JUNATHA ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VI CE PRESIDENT BANGALORE, DATED, THE 25 TH OCTOBER, 2019. / D ESAI S MURTHY / COPY TO: 1 . APPELLANT 2 . RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALO RE. 6. GU ARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.