M/s Century Link Technologies India Private Limited, Bangalore V. DCIT, Bangalore

ITA 688/BANG/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9235 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 6 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 09-01-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 17-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; Principle of natural justice
• Section: 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH A, BANGALORE BEFORE SHRI A. K. GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER IT (TP) A NO.688(BANG) 2012 (ASSESSMENT YEAR : 2005-06) M/S CENTURY LINK TECH.INDIA PVT.LTD. (FORMERLY QWEST TELECOM SOFTWARE SERVICES PVT. LTD. ) SALARPURIA HALLMARK, BLOCK-B, I & II FLOOR, 2B WING SURVEY, NO.15/3 & 16, KADUBEESANA HALLI, VARTHUR HOBLI, BANGALORE-560 087 PAN NO.AAHCS7683M APPELLANT VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE RESPONDENT AND (IN IT(TP)A NO.789(BANG)/2012 (ASSESSMENT YEAR : 2005-06) (BY REVENUE) ASSESSEE BY : SHRI PADAM CHAND KHINCHA, CA REVENUE BY : SHRI KAMALADHAR SR. COUNSEL DATE OF HEARING : 09-01-2017 DATE OF PRONOUNCEMENT : -01-2017 O R D E R PER SHRI A.K.GARODIA, AM THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND T HE REVENUE WHICH ARE DIRECTED AGAINST THE ORDER OF THE LD.CIT( A)-IV, BANGALORE DATED 16-03-2012 FOR ASSESSMENT YEARS : 2005-06. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND IN ITS APPEAL; 1. THE ORDER OF THE LD. CIT(A)-IV TO THE EXTENT PREJUDICIAL TO THE APPELLANT IS BAD IN LAW. IT(TP)A NOS.688 & 789(B)/2012 2 2. THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ORDER OF THE LOWER AUTHORITIES WHICH WAS PASSED DISREGARDING THE PRINCIPLE OF NATURAL JUSTICE. 3. THE LD. AO HAS ERRED IN MAKING A REFERENCE TO TPO FOR DETERMINING ARMS LENGTH PRICE WITHOUT DEMONSTRATING AS TO WHY IT WAS NECESSARY AND EXPEDIENT TO DO SO. THE LD. CIT(A)-IV HAS ERRED IN CONFIRMING THE ACTION OF THE AO. 4.THE LD. CIT(A)IV HAS ERRED IN CONFIRMING THE ORDER PASSED BY THE LOWER AUTHORITIES. A. WITHOUT DEMONSTRATING THAT THE APPELLANT HAD MOTIVE OF TAX EVASION. B. NOT APPRECIATING THAT THE CHARGING OR COMPUTATION PROVISION RELATING TO INCOME UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X AND THEREFORE ADDITION MADE UNDER CHAPTER X IS BAD IN LAW. C. WITH APPRECIATING THAT THE LOWER AUTHORITIES HAD ADOPTED A FLAWED PROCESS FOR ISSUING NOTICES U/S 133(6) AND RELYING ON THE SAME WITHOUT PROVIDING THE INFORMATION TO THE IT(TP)A NOS.688 & 789(B)/2012 3 APPELLANT OR AN OPPORTUNITY TO CROSS EXAMINE THE COMPANIES CONCERNED. 5. THE LD. CIT(A)-IV HAS ERRED IN CONFIRMING THE ORDER PASSED BY THE LOWER AUTHORITIES. A. REJECTING CUP METHOD ADOPTED Y THE APPELLANT WITHOUT COGENT REASONS AND ON UNJUSTIFIABLE GROUNDS. B. REJECTING TRANSFER PRICING ANALYSIS OF THE APPELLANT AND SELECTING TNMM AS THE MOST APPROPRIATE METHOD. C. REJECTING THE COMPARABLES OF THE APPELLANT UNDER TNMM ON UNJUSTIFIABLE GROUNDS. 6. THE LD., CIT(A)-IV ERRED IN CONFIRMING THE ORDER PASSED BY THE LOWER AUTHORITIES. A. PERFORMING FRESH TRANSFER PRICING ANALYSIS AND ADOPTING INAPPROPRIATE FILTERS IN DOING FRESH TRANSFER PRICING ANALYSIS. B. ADOPTING COMPANIES AS COMPARABLES EVEN THOUGH THEY ARE NOT COMPARABLE TO THE APPELLANT. IT(TP)A NOS.688 & 789(B)/2012 4 C. NOT APPRECIATING THAT THE LAW DOES NOT COMPEL ADOPTING MANY (OR ANY MINIMUM) COMPANIES AS COMPARABLES AND THAT THE APPELLANT COULD JUSTIFY THE PRICE PAID/CHARGED ON THE BASIS OF ANY ONE COMPARABLE. D. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEVEL AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. E. NOT APPRECIATING THAT THERE WAS UNDER UTILIZATION O THE EMPLOYEES AND INFRASTRUCTURE AND NOT MAKING ADJUSTMENT FOR THIS DIFFERENCE IN DETERMINING THE ARMS LENGTH PRICE. F. NOT APPROPRIATELY COMPUTING THE WORKING CAPITAL ADJUSTMENT WHILE COMPUTING THE ARMS LENGTH PRICE. 7. THE LD. CIT(A)-IV HAS ERRED IN A. CHANGING THE FILTERS APPLIED BY THE TPO WITHOUT GIVING AN OPPORTUNITY OF BEING HEARD TO THE APPELLANT. B. NOT APPRECIATING THAT INSIGNIFICANT RELATED PART Y TRANSACTION CANNOT BE HELD TO HAVE SIGNIFICANT INFLUENCE ON PROFITABILITY OF COMPARABLE COMPANIES. IT(TP)A NOS.688 & 789(B)/2012 5 C. CONFIRMING SANKHYA INFOTECH LTD. AS A COMPARABLE. 8. WITHOUT PREJUDICE TO THE ABOVE, THE BENEFIT OF THE +/-5% RANGE AS PER THE PROVISO TO SEC.92C(2) SHOULD BE GIVEN. 9. PRAYER ON AN OVERALL CONSIDERATION OF THE FACTS OF THE CASE,. AND THE LAW APPLICABLE, THE ALP AS DETERMINED BY THE TRANSFER PRICING OFFICER, AS ADOPTED BY THE AO AND AS MODIFIED BY THE CIT(A) BEING NOT CORRECT IS TO BE QUASHED AND THE FIGURES AS DETERMINED AND RETURNED BY THE APPELLANT BEING CORRECT ARE TO BE ACCEPTED. 10. THE LD. AO HAS ERRED IN LEVYING INTEREST U/S 234B. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, INTEREST U/S 24B IS NOT LEVIABLE. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUNDS/SUB-GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD , AL T ER , AMEND, THE ABOVE GROUNDS OF THE APPEAL, AT ANY TIME BEFORE OR AT, THE TIME OF HEARING, OF THE APPEAL, S O AS TO ENABLE THE INCOME TAX APPELLATE TRIBUNAL TO DECIDE THE APPEALS ACCORDING TO LAW. IT(TP)A NOS.688 & 789(B)/2012 6 THE APPELLANT PRAYS ACCORDINGLY. 3. SIMILARLY IN ITA NO789(B)/2012, THE REVENUE RAI SED THE FOLLOWING GROUNDS:- 1. THE ORDER OF THE LD. CIT(A) IS OPPOSED TO LAW A ND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN HOLDING THAT THE TPO OUGHT TO HAVE EXCLUDED COMPARABLES HAVING ANY RELATED PARTY TRANSACTIONS, NOT ONLY THOSE WITH MORE THAN 25% RELATED PARTY TRANSACTIONS ON SALES. 3. THE CIT(AO ERRED IN HOLDING THAT THE SIZE & TURNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS A COMPARABLE AND ACCORDINGLY, ERRED IN EXCLUDING M/S IGATE SOLUTIONS L:TD. FLEXTONICS SOFTWARE LTD. L&T INFOTECH LTD. SATYAM COMPUTER SERVICES LTD. AND INFOSYS TECHNOLOGIS LTD. IN SOFTWARE SEGMENT AS COMPARABLES. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN HOLDING THAT PROFIT ON COST OF M/S EXENSYS SOFTWARE SOLUTIONS LTD. & THIRDWARE SOLUTIONS LTD RESPECTIVELY IS ABNORMAL AND DIRECTIN G TO EXCLUDE THESE COMPANIES FROM THE LIST OF COMPARABLE. IT(TP)A NOS.688 & 789(B)/2012 7 5. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE AO MAY BE RESTORED. 6. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND/OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 4. AT THE VERY OUTSET, IT WAS SUBMITTED BY THE LD. AR OF THE ASSESSEE THAT IN THE PRESENT CASE, THE CUP METH OD IS BETTER METHOD WHEREAS THE LD. CIT(A) HELD THAT TNMM SHOULD BE ADOPTED. HE ALSO SUBMITTED THAT THE LD. CIT(A) H AS NOT GRANTED THE ADJUSTMENT ON ACCOUNT OF UNDER UTILIZAT ION OF EMPLOYEES AND INFRASTRUCTURE AS WELL AS WORKING CAP ITAL ADJUSTMENT. HE FURTHER SUBMITTED THAT IN THE APPEAL OF THE REVENUE, THE GRIEVANCE OF THE REVENUE IS REGARDING ADOPTING 0% RPT FILTER AND THE REVENUE IS PROPOSING FOR 25% RPT FILTER BUT THE TRIBUNAL IS TAKING A CONSISTENT VIEW THAT 1 5% RPT FILTER SHOULD BE ADOPTED. HE ALSO SUBMITTED THAT TH E LD.CIT(A) HAS ADOPTED TURNOVER FILTER OF RS.1.00 CRORE AND RS .200 CRORES, WHEREAS NOW THE TRIBUNAL IS CONSISTENTLY AD OPTING THE TURNOVER FILTER OF 1/10 TH OR 10 TIMES OF THE TURNOVER OF THE ASSESSEE COMPANY BEING TESTED PARTY. AT THIS JUNCT URE, IT WAS PROPOSED BY THE BENCH THAT UNDER THESE FACTS, IT IS IT(TP)A NOS.688 & 789(B)/2012 8 BETTER TO RESTORE THE ENTIRE MATTER BACK TO THE FIL E OF THE TPO FOR A FRESH DECISION BECAUSE WHEN THE ADOPTING OF MOST APPROPRIATE METHOD IS IN DISPUTE ALONG WITH THE ADJ USTMENT ON ACCOUNT OF LOW CAPACITY UTILIZATION AND WORKING CAPITAL ADJUSTMENT COUPLED WITH ADOPTION OF PROPER FILTER, SUCH AS APPROPRIATE RPT FILTER AND APPROPRIATE TURNOVER FIL TER WHICH WILL RESULT INTO RESTORATION OF VARIOUS COMPARABLE S REJECTED BY THE LD. CIT(A) BY APPLYING THESE TWO FILTERS ON A WRONG BASIS, IT IS BETTER TO RESTORE THE ENTIRE MATTER BA CK TO THE FILE OF THE TPO FOR FRESH DECISION. IN REPLY, THE LD. A R OF THE ASSESSEE AGREED TO THIS PROPOSITION PUT FORTH BY TH E BENCH. 5. THE LD. DR OF THE REVENUE HAD NOTHING TO SAY. 6. IN VIEW OF ABOVE DISCUSSION, WE SET ASIDE THE O RDER OF THE LD. CIT(A) AND RESTORE THE ENTIRE MATTER BACK T O THE FILE OF THE TPO FOR FRESH DECISION WITH THE DIRECTION THAT HE SHOULD DECIDE THE ENTIRE TP ISSUES AFRESH INCLUDING THE MO ST APPROPRIATE METHOD, RPT FILTER AND TURNOVER FILTER ALONG WITH THE FUNCTIONAL SIMILARITY OF COMPARABLES. HE SHOULD ALSO EXAMINE AND DECIDE THE CLAIM OF THE ASSESSEE REGARD ING THE ADJUSTMENT ON ACCOUNT OF LOW CAPACITY UTILISATION A ND WORKING CAPITAL ADJUSTMENT. WE WANT TO MAKE IT CLE AR THAT WE EXPRESS NO OPINION ON ANY OF THESE ASPECTS AND T HE TPO IT(TP)A NOS.688 & 789(B)/2012 9 SHOULD PASS NECESSARY ORDER AS PAW, AFTER AFFORDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE . 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE AS WE LL AS OF THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. (VIJAY PAL RAO) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER PLACE: BANGALORE: D A T E D : .01.2017 AM * COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE IT(TP)A NOS.688 & 789(B)/2012 10 1. DATE OF DICTATION 2. , , DATE ON WHICH TYPED DRAFT IS PLACED BEFORE THE DICT ATING MEMBER .. 3. !' # . $ %# / $ %# # & DATE ON WHICH THE APPROVED DRAFT COMES TO THE PS/SR .PS. 4. ''() & * + DATE ON WHICH THE ORDER IS PLACED BEFORE THE DICTAT ING MEMBER FOR PRONOUNCEMENT 5. * . %# / # . . %# # + DATE ON WHICH THE ORDER COMES BACK TO THE PS/SR.PS .. 6 * !', + DATE OF UPLOADING THE ORDER ON WEBSITE .. 7. ! !', ' , - ) IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO . 8. .% / 0 + DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. * 1'2 / 34 & 5 + DATE ON WHICH ORDER GOES FOR XEROX &ENDORSEMENT 10. 0 6 / + DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 11. * 7 & 0 8 + THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 12. !) * 9() & 0 9() /#5 . + THE DATE ON WHICH THE FILE GOES TO DESPATCH SECTION FOR DESPATCH OF THE TRIBUNAL ORDER 13. * 9() + DATE OF DESPATCH OF ORDER .