M/s SAP Labs India Private Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-6(1)(1), Bangalore

ITA 684/BANG/2017

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 0099 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 3 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 01-07-2021
• Assessment Year: 2012-2013
• Appeal Filed On: 24-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 92C; 37(1); 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO.684/BANG/2017 ASSESSMENT YEAR : 2012 13 M/S SAP LABS INDIA PVT. LTD., NO.138, EXPORT PROMOTIONS INDUSTRIAL PARK, WHITEFIELD, BENGALURU-560 066. PAN AAFCS 3649 P VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-6(1)(1), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI ALIASGAR RAM PURAWALA, C.A RESPONDENT BY : MS. NEERA MALHOTRA, CIT DATE OF HEARING : 01-07-2021 DATE OF PRONOUNCEMENT : 23-07-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST T HE FINAL ASSESSMENT ORDER DATED 31/01/2017 PASSED BY LD. DCI T CIRCLE 6 (1) (1), BANGALORE FOR ASSESSMENT YEAR 2012-13 ON F OLLOWING GROUNDS OF APPEAL: PAGE 2 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 3 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 4 OF 25 IT(TP)A NO.684/BANG/2017 BRIEF FACTS OF THE CASE ARE AS UNDER: 2. THE ASSESSEE FILED HIS RETURN OF INCOME ON 23/11 /2012 DECLARING TOTAL INCOME OF RS.64,48,31,500/-. THE RE TURN WAS PROCESSED UNDER SECTION 143 (1) OF THE ACT. THE CAS E WAS SELECTED FOR SCRUTINY AND NOTICES UNDER SECTION 143 (2) WAS ISSUED TO ASSESSEE, IN RESPONSE TO WHICH, REPRESENTATIVE OF A SSESSEE APPEARED BEFORE THE LD.AO AND FILED REQUISITE DETAI LS AS CALLED FOR. 2.1 DURING THE YEAR UNDER CONSIDERATION, THE LD.AO OBSERVED THAT, ASSESSEE HAD INTERNATIONAL TRANSACTION WITH I TS ASSOCIATED ENTERPRISES THAT EXCEEDED RS. 15 CRORES. ACCORDINGL Y, REFERENCE WAS MADE UNDER SECTION 92C OF THE ACT, TO THE LD.TP O. THE LD. TPO ON RECEIPT OF REFERENCE CALLED UPON ASSESSEE TO FILE ECONOMIC DETAILS OF THE INTERNATIONAL TRANSACTION ENTERED IN TO BY ASSESSEE WITH ITS AE. 2.2 FROM THE DETAILS FILED BY ASSESSEE, LD.TPO OBSE RVED THAT ASSESSEE HAD FOLLOWING INTERNATIONAL TRANSACTION WI TH ITS ASSOCIATED ENTERPRISES: 2.3 THE LD.TPO OBSERVED THAT ASSESSEE CONSIDERED FO LLOWING 12 COMPARABLES HAVING AVERAGE MARGIN OF 10.01%: PAGE 5 OF 25 IT(TP)A NO.684/BANG/2017 2.4 THE ASSESSEE COMPUTED ITS MARGIN AT 4.83% BY US ING OP/TC AS PLI AND TNMM AS MOST APPROPRIATE METHOD. A S MARGIN WAS WITHIN THE PERMISSIBLE RANGE IT HELD ITS TRANSA CTION TO BE AT ARMS LENGTH. 2.5 DISSATISFIED WITH THE SELECTION OF COMPARABLES BY ASSESSEE, THE LD.TPO CARRIED OUT FRESH SEARCH, THEREBY SHORTL ISTED 14 COMPARABLES WITH AVERAGE MARGIN OF 13%. THE ASSESSE E FURTHER FILED ADDITIONAL COMPARABLES FROM WHICH THE LD.TPO ACCEPTED 2 PAGE 6 OF 25 IT(TP)A NO.684/BANG/2017 COMPARABLES. THE FINAL LIST OF COMPARABLES SELECTED BY THE LD. TPO CONSISTED OF FOLLOWING 10 COMPANIES WITH AVERAG E MARGIN OF 23.63% 2.6 THE LD.TPO GRANTED THE WORKING CAPITAL ADJUSTME NT AND COMPUTED THE SHORTFALL AS PROPOSED ADJUSTMENT AT RS.144,21,30,393/- IN THE HANDS OF ASSESSEE. THE LD .TPO ALSO INCLUDED CERTAIN DOMESTIC TRANSACTION TO BE FORMING PART OF THE INTERNATIONAL TRANSACTION. 2.7 ON RECEIPT OF THE TRANSFER PRICING ORDER FROM T HE LD.TPO, THE LD.AO PASSED DRAFT ASSESSMENT ORDER WHEREIN FOL LOWING DISALLOWANCES WERE COMPUTED: DISALLOWANCE OF DEPRECIATION - RS.3,52,663/- DISALLOWANCE OF PROVISION UNDER SECTION 36(1)(VA)-R S.14,97, 807/- ON RECEIPT OF THE DRAFT ASSESSMENT ORDER, ASSESSEE FILED OBJECTIONS BEFORE THE DRP. 2.8 THE DRP ACCEPTED THE OBJECTIONS FILED BY ASSESS EE IN RESPECT OF 3 COMPARABLES BEING DETAMATICS GLOBAL SERVICES L TD., ICRA TECHNO ANALYTICS LTD., RS SOFTWARE (INDIA) LTD. IN RESPECT OF THE OBJECTION RAISED REGARDING THE DOMESTIC TRANSACTION FORMING PART PAGE 7 OF 25 IT(TP)A NO.684/BANG/2017 OF INTERNATIONAL TRANSACTION, THE DRP UPHELD THE OB SERVATIONS OF THE LD.TPO. ON DEPRECIATION ON COMPUTER PERIPHERALS , DRP DIRECTED THE LD.AO TO CONSIDER DEPRECIATION AT 60%, AND IN RESPECT OF DISALLOWANCE UNDER SECTION 36(1)(VA) OF THE ACT IN RESPECT OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND AND ESIC, THE LD.AO WAS DIRECTED TO ALLOW THE DEDUCTION CLAIM ED BY ASSESSEE PROVIDED THE SAME WAS FILED BEFORE THE DUE DATE OF RETURN OF INCOME. 3. ON RECEIPT OF THE DRP DIRECTIONS, LD.AO TO EXCLU DED COMPARABLES DIRECTED BY THE DRP, HOWEVER INCLUDED T HE DOMESTIC TRANSACTION AS A PART OF ADJUSTMENT UNDER SECTION 1 44C OF THE ACT, INSTEAD OF RESTRICTING IT ONLY TO THE INTERNAT IONAL TRANSACTION AS PROVIDED UNDER SECTION 92CA OF THE ACT. 3.1 THE LD.AO THUS MADE ADDITION AMOUNTING TO RS.228,60,42,170/-IN THE HANDS OF ASSESSEE. 4. AGGRIEVED BY THE ORDER PASSED BY THE LD.AO, ASSE SSEE IS IN APPEAL BEFORE US NOW. 4.1 AT THE OUTSET, LD.AR SUBMITTED THAT GROUND NO.1 IS GENERAL AND THEREFORE NEED NOT BE ADJUDICATED. 4.2 LD.AR SUBMITTED THAT ASSESSEE DO NOT WISH TO AR GUE GROUND NO.2- 2.5, IN GROUND 2.6 ASSESSEE DO NOT WISH TO PR ESS SASKEN COMMUNICATIONS TECHNOLOGIES LTD., IN GROUND 2.7, AS SESSEE DO NOT WISH TO PRESS AKSHAY SOFTWARE TECHNOLOGIES LTD. ASSESSEE ALSO DO NOT WISH TO ARGUE GROUND NO.3 AND GROUND NO .4. ACCORDINGLY THESE GROUNDS ARE DISMISSED AS NOT PRES SED. 5. BEFORE WE UNDERTAKE THE COMPARABILITY ANALYSIS I T IS SINE QUA NON TO UNDERSTAND THE FUNCTIONS PERFORMED, ASSETS OWNE D AND RISKS ASSUMED BY ASSESSEE UNDER THE SOFTWARE DE VELOPMENT PAGE 8 OF 25 IT(TP)A NO.684/BANG/2017 SERVICE SEGMENT. THE LD. TPO IN THE TRANSFER PRICIN G ORDER HAS ANALYSED FUNCTIONS PERFORMED BY ASSESSEE WHICH ARE AS UNDER: ASSETS OWNED: 5.1 IN THE TRANSFER PRISING STUDY REPORT AT PAGE 91 OF PAPER BOOK, IT HAS BEEN SUBMITTED THAT ASSESSEE DOES NOT OWN ANY INTANGIBLES AND NEITHER DOES IT UNDERTAKE ANY RESEA RCH AND PAGE 9 OF 25 IT(TP)A NO.684/BANG/2017 DEVELOPMENT ON ITS OWN ACCOUNT THAT LEADS TO THE DE VELOPMENT OF NONROUTINE INTANGIBLES. IT HAS BEEN MENTIONED THAT ASSESSEE USES THE TRADEMARK, PROCESSES, KNOW-HOW, TECHNICAL TATA SOFTWARE, OPERATING/QUALITY STANDARDS ETC THEIR BLEND/OWNED B Y THE AE. IT HAS BEEN SUBMITTED THAT THIS ASSESSEE DOES NOT OWN ANY NONROUTINE INTANGIBLES. OTHER ASSETS OWNED BY ASSES SEE ARE IN RESPECT OF LAND, BUILDINGS, COMPUTER EQUIPMENTS, OF FICE EQUIPMENT FURNITURE FIXTURES ETC WHICH ARE USED TO CARRY OUT DAY TO DAY BUSINESS ACTIVITIES. 5.2 RISK ASSUMED: IN THE TP STUDY REPORT REVEALS THAT ASSESSEE IS A RISK INSULATED COMPANY FOR SWD SERVICES TO ITS AE AND THEIR AFFILIATES. EXCEPT FOR FOREIGN EXCHANGE RISK, ASSES SEE DO NOT UNDERTAKE ANY OTHER RISK AS COMPARED TO ITS AE. 5.3 CHARACTERISATION: BASED ON THE ABOVE ASSESSEE HAS BEEN CHARACTERISED AS A RISK INSULATED COMPANY PROVIDING SERVICES ONLY TO THE AE AND ITS AFFILIATE. 6. IN GROUND 2.6 ASSESSEE CHALLENGES INCLUSION OF FOLLOWING COMPARABLES: INFOSYS LTD. LARSEN AND TOUBRO INFOTECH LTD. PERSISTENT SYSTEMS LTD. GENESIS INTERNATIONAL CORP LTD. 6.1 AT THE OUTSET, THE LD.AR SUBMITTED THAT, ABOVE COMPARABLES HAVE BEEN CONSIDERED BY COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF NXP INDIA PVT.LTD. VS DCIT IN ITA NO. 692/B/2017 BY ORDER DATED 27/04/2020. IT HAS BEEN SUBMITTED THAT NXP INDIA PAGE 10 OF 25 IT(TP)A NO.684/BANG/2017 PVT.LTD., WAS ALSO CHARACTERISED TO BE A CAPTIVE SOFTWARE SE RVICE PROVIDER TO ITS AE. 6.2 THE LD.CIT.DR THOUGH OBJECTED, COULD NOT CONTRO VERT THE OBSERVATIONS OF THIS TRIBUNAL IN CASE OF NXP INDIA PVT. LTD., (SUPRA). 7. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SID ES IN LIGHT OF RECORDS PLACED BEFORE US. WE NOTE THAT THE FUNCTIONAL PROFILE OF THIS ASSESSEE AND THE ASSESSEE IN THE DE CISION CITED BY THE LD.AR ARE SAME. ABOVE COMPARABLES HAVE BEEN DEA LT WITH BY THIS TRIBUNAL AS UNDER: -- SPACE LEFT INTENTIONALLY ---- PAGE 11 OF 25 IT(TP)A NO.684/BANG/2017 PERSISTENT SYSEMS LIMITED PAGE 12 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 13 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 14 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 15 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 16 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 17 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 18 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 19 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 20 OF 25 IT(TP)A NO.684/BANG/2017 PAGE 21 OF 25 IT(TP)A NO.684/BANG/2017 7.1 ABOVE VIEWS HAS BEEN CONSISTENTLY FOLLOWED BY C OORDINATE BENCHES OF THIS TRIBUNAL IN VARIOUS CASE MORE PARTI CULARLY IN CASE OF CGI INFORMATION SYSTEMS AND MANAGEMENT CONSULTANTS PVT. LTD., VS ACIT REPORTED IN (2018) 94 TAXMANN.COM 97 FOR ASSESSMENT YEAR 2012-13. RESPECTFULLY FOLLOWING THE VIEW TAKEN BY THIS TRIBU NAL WE HOLD THAT THE AFORESAID FOR COMPANIES ARE TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH MARGIN. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED IN RESPECT OF THE COMPARABLES CONSIDERED HEREINABOVE. PAGE 22 OF 25 IT(TP)A NO.684/BANG/2017 8. IN GROUND NO. 2.7 ASSESSEE SEEKS INCLUSION OF SANKHYA INFOTECH LTD. 9. WE NOTE THAT THIS COMPARABLE HAS NOT BEEN ANALYS ED BY THE LD.TPO, AND THEREFORE WE DIRECT THIS COMPARABLE TO LD. TPO TO BE CONSIDERED BASED ON FAR WITH THAT OF ASSESSEE. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED FOR STATISTICAL PURPOSES. 10. GROUND NO.5 HAS BEEN RAISED BY ASSESSEE AS THE LD. AO INCLUDED THE VALUE OF DOMESTIC TRANSACTION FOR MAKI NG ADJUSTMENT INSTEAD OF RESTRICTING THE ADJUSTMENT TO THE INTERNATIONAL TRANSACTION. 10.1 IT HAS BEEN SUBMITTED BY THE LD. AR THAT THE M ARGIN HAS BEEN APPLIED IN RESPECT OF ITS DOMESTIC SALES INSTE AD OF RESTRICTING IT TO THE INTERNATIONAL TRANSACTION. STATUTORY PROV ISIONS UNDER CHAPTER X OF THE ACT MANDATES ALP TO BE DETERMINED ONLY IN RESPECT OF TRANSACTIONS WITH ASSOCIATED ENTERPRISES . ANY ADJUSTMENT WHICH IS IN CLOSE OF DOMESTIC TRANSACTIO NS IS UNCALLED FOR UNDER THIS CHAPTER. WE ACCORDINGLY DIRECT THE L D. AO/TPO TO RESTRICT THE ADJUSTMENT IF ANY THAT MAY BE COMPUTED ARE WILDLY OR GIVING EFFECT TO THE ORDER ONLY IN RESPECT OF THE T RANSACTIONS THAT ASSESSEE HAD WITH ITS ASSOCIATED ENTERPRISES. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED FOR STATISTICAL PURPOSES. 11. GROUND NO. 6 IS IN RESPECT OF THE DEPRECIATION DISALLOWED ON COMPUTER PERIPHERALS AT 60%. 12. THE LD.AR SUBMITTED THAT DRP HAD DIRECTED THE L D.AO TO GRANT DEPRECIATION AT 60% ON COMPUTER PERIPHERALS W HICH HAS NOT BEEN FOLLOWED WHILE PASSING THE FINAL ASSESSMEN T ORDER. WE PAGE 23 OF 25 IT(TP)A NO.684/BANG/2017 THUS DIRECT THE LD. AO TO COMPLY WITH THE DIRECTION S OF DRP IN ACCORDANCE WITH LAW. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED FOR STATISTICAL PURPOSES. 13. ASSESSEE VIDE APPLICATION DATED 25/11/2020 HAS RAISED FOLLOWING ADDITIONAL GROUND NO. 8: 13.1 THE ABOVE ADDITIONAL GROUND IS A PART OF THE G ROUNDS RELATING TO THE DETERMINATION OF ASSESSED INCOME IN THE HANDS OF ASSESSEE. IT IS NOT DISPUTE THAT ASSESSEE HAS CLAIM ED THE EXPENSES UNDER SECTION 37(1) TOWARDS THE EDUCATION CESS AND SECONDARY AND HIGHER EDUCATION CESS PAID DURING THE YEAR UNDER CONSIDERATION. THIS AS THEYD BEING STATUTORY NATUR E NEEDS TO BE CONSIDERED WHILE COMPUTING THE TAX PAYABLE IN THE H ANDS OF ASSESSEE IT IS THEREFORE NECESSARY FOR THE GROUND T O BE ADMITTED. THE ADDITIONAL GROUND THEREFORE RAISED BY ASSESSEE IS ADMITTED . 13.2 THE LD.A.R. AT THE OUTSET SUBMITTED THAT THE I SSUE STANDS SQUARELY COVERED BY THE DECISION OF HONBLE RAJASTHAN HIGH COURT PAGE 24 OF 25 IT(TP)A NO.684/BANG/2017 IN CASE OF CHAMBAL FERTILISERS AND CHEMICALS LTD. VS JCIT IN ITA NO. 52/2018 BY ORDER DATED 31/07/2017. 14. LD.CIT.DR COULD NOT CONTROVERT THE ABOVE SUBMIS SIONS OF ASSESSEE. 15. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN LIGHT OF RECORDS PLACED BEFORE US. 15.1 HONBLE RAJASTHAN HIGH COURT IN THE ABOVE REFERRED CASE HAS HELD CESS TO BE AN ALLOWABLE EXPENDITURE IN THE HAN DS OF ASSESSEE. RESPECTFULLY FOLLOWING THE SAME WE DIRECT THE LD.AO TO CONSIDER THE CLAIM OF ASSESSEE IN ACCORDANCE WITH L AW. ACCORDINGLY THE GROUND RAISED BY ASSESSEE STANDS AL LOWED. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS ALLOW ED ONLY IN RESPECT OF THE ISSUE CONTESTED BEFORE THIS TRIBUNAL AS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD JULY, 2021 SD/- SD/- (B. R. BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE, DATED, THE 23 RD JULY, 2021. /VMS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE PAGE 25 OF 25 IT(TP)A NO.684/BANG/2017 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR -07-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -07-2021 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. -07-2021 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS -07-2021 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -07-2021 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -07-2021 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -07-2021 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS *