TECHSOURCE SERVICES P.LTD, MUMBAI V. ITO RG 9(3)(3), MUMBAI

ITA 6966/MUM/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8901 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 18-05-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 14-11-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHIDDARAMAPPA KAPPATTANAVARDR
• Assessee Lawyers: JITENDRA SINGH
• Keywords: Transfer pricing; International transaction
• Section: 92C; 92

Judgement Text

, , , , INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , ,, , , , , , , ,, , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND SAKTIJIT DEY,JUDICIAL MEMBER / ITA NO.6966/MUM/2014 : /ASSESSMENT YEAR-2011-12 TECHSOURCE SERVICES PRIVATE LIMITED 601/603, DHEERAJ SAVERA TOWER, KHATAU MILLS COMPOUND OF WESTERN EXPRESS HIGHWAY, BORIVALI (EAST) MUMBAI-400 066. PAN:AAJCS 8556 P VS. INCOME TAX OFFICER, RANGE-9(3)(3) MUMBAI. REV ENUE BY: SHRI SHIDDARAMAPPA KAPPATTANAVAR-DR ASS ESSEE BY: SHRI JITENDRA SINGH / DATE OF HEARING: 06.10.2016 / DATE OF PRONOUNCEMENT: 04.01.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , ! / PER RAJENDRA A.M. - CHALLENGING THE ORDERS DATED 06.08.2014 OF THE CIT( A)- 15,MUMBAI,THE ASSESSEE HAS FILED PRESENT APPEAL FOR THE ABOVE MENTIONED ASSESSMENT Y EAR (AY). ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF RENDERING TECHNICAL AND SOFTWARE SUPPORT SERVICES,FILED ITS RETURN OF INCOME ON 30.11.2011,DECLARING TOTAL INCOME AT RS.30,690/- .THE ASSESSING OFFICER(AO)COMPLETED THE ASSESSMENT U/S.143(3) OF THE ACT,ON 07.02.2014, DETERMINING ITS INCOME AT RS.3.36 LAKHS. 2. FIRST EFFECTIVE GROUND OF APPEAL DEALS WITH ADJUSTM ENT OF RS.3.06 LAKHS. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESS EE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS(IT.S)WITH ITS ASSOCIATED ENTERPRISES ( AE.S) WORTH RS. 12.54 LAKHS. HE DIRECTED THE ASSESSEE TO FURNISH THE DETAILS OF TRANSACTIONS AND THE METHOD ADOPTED FOR DETERMINING THE ARMS LENGTH PRICE (ALP).THE ASSESSEE STATED THAT I T HAD APPLIED COST PLUS METHOD (CPM) FOR DETERMINING THE ALP ON THE BASIS OF THE AGREEME NT ENTERED INTO WITH THE AE.S.,THAT THE BASIS ADAPTED AS PER THE AGREEMENT WAS THE MARKUP O F 23.45% ON THE SALARY AND RENT EXPENSES INCURRED BY THE ASSESSEE.THE AO DIRECTED THE ASSESS EE TO EXPLAIN AS TO WHY THE MARKUP SHOULD NOT BE APPLIED TO THE ENTIRE COST INCURRED S INCE THE ASSESSEE WAS RENDERING THE EXCLUSIVE SERVICES TO THE AE.S.IN ITS REPLY,THE ASS ESSEE STATED THAT IT HAD FILED THE AUDIT REPORT ERRONEOUSLY,THAT DUE TO CHANGES IN THE SHAREHOLDING PATTERNS AND THE DIRECTORS OF THE AE.S IT COULD BE CONCLUDED THAT IT HAD NOT ENTERED INTO ANY IT.S WITH THE AE.S. IN ITS SUPPORT THE ASSESSEE SUBMITTED A COPY OF CERTIFICATE ISSUED BY THE CHARTERED ACCOUNTANT OF THE FOREIGN 6966/M/14-TECHSOURCE SERVICES PVT.LTD. 2 ENTITY. AS PER THE AO,THE ASSESSEE DID NOT FILE AN EXPLANATION WITH REGARD TO PROPOSED MARKUP ADJUSTMENT.CONSIDERING THE AVAILABLE MATERIAL,THE A O HELD THAT ASSESSEE HAD NOT SUBMITTED ANY DOCUMENTARY EVIDENCE LIKE TRANSFER OF SHARES,AP POINTMENT OF NEW DIRECTORS TO SUBSTANTIATE ITS CLAIM,THAT THE CERTIFICATE OF THE CHARTERED ACC OUNTANT OF THE FOREIGN ENTITY WAS WITHOUT ANY AUTHORITY,THAT ONE OF THE DIRECTORS IN THE COMPANY WAS THE EXISTING DIRECTOR AND SHAREHOLDER IN THE ASSESSEE COMPANY IS ON THE CLOSE OF THE BALANCE SHEET DATE I.E. 31/03/2011,THAT THE AUDIT REPORT WAS FILED ALMOST AFTER ONE AND HALF YEAR FRO M THE DATE OF ENTRY OF THE SHAREHOLDERS/DIRECTORS OF THE FOREIGN ENTITIES, THA T THERE WAS NO REASON AS TO WHY THE ASSESSEE HAD NOT DISCLOSED SUCH VITAL FACTS OF THE TIME OF F ILING THE AUDIT REPORT. HE REJECTED THE CLAIM OF THE ASSESSEE AND HELD THAT THE TWO ENTITIES WERE AE.S OF THE ASSESSEE AND THE TRANSACTIONS ENTERED BY IT WITH THEM WERE SQUARELY COVERED UNDER THE DEFINITION OF IT WITHIN THE MEANING OF PROVISIONS OF SECTION 92 OF THE ACT. 2.1. AS REGARDS THE PROPOSED ADJUSTMENT AND WORKING OF C PM, THE AO HELD THAT THE ASSESSEE HAD NOT SUBMITTED ANY EXPLANATION AS TO WHY OTHER T HAN SALARY AND RENT HAD NOT BEEN INCLUDED IN THE INVOICES RAISED AND THE MARKUP HAD BEEN CHAR GED THEREON,THAT THE ASSESSEE WAS INTO SERVICE SECTORS AND WAS PROVIDING SOFTWARE RELATED SERVICES TO THE AES INVOLVING LEAD RESTRICTIVE UTILITIES, THAT THE METHOD FOLLOWED BY THE ASSESSEE WAS NOT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, THAT THE ENTIRE COST WAS REQ UIRED TO BE TAKEN INTO CONSIDERATION FOR APPLYING MARKUP UNDER THE CPM, THAT THE ASSESSEE HA D FAILED TO DO SO, THAT TOTAL AMOUNT OF EXPENDITURE DEBITED TO THE P&L ACCOUNT HAD TO BE CO NSIDERED AS QUALIFYING AMOUNT FOR THE MARKUP ON THE INVOICES TO BE RAISED ON AES AS PER THE METHOD APPLIED BY IT. HE FOUND THAT ASSESSEE HAD DEBITED TOTAL EXPENDITURE OF RS.12,63, 947/-, THAT IT HAD CONSIDERED SALARY AND RENTAL EXPENSES AMOUNTING TO RS. 10.15 LAKHS. BY AP PLYING THE MARK UP AT THE RATE OF 23.45% ON THE TOTAL EXPENDITURE,THE AO WORKED OUT THE GROS S VALUE OF THE TRANSACTION AT RS. 15.60 LAKHS AND MADE AN UPWARD ADJUSTMENT OF RS. 3.06 LAK HS TO THE TOTAL INCOME OF THE ASSESSEE UNDER SECTION 92C (4) OF THE ACT. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM,THE ASSESSEE MA DE ELABORATE SUBMISSIONS CONTENDING THAT STAR BRANDS LTD.(STAR) AND DYNAMIC TECHNOLOGIE S LTD (DTL) WERE NOT THE AE.S COVERED BY THE DEFINITION UNDER SECTION 92 OF THE ACT, THAT THE AUDITORS HAD ERRONEOUSLY INCLUDED THEM IN THE LIST OF AE.S.,THAT THE CERTIFICATE FROM AUDI TOR OF THE FOREIGN ENTITY WAS FILED IN THAT REGARD, THAT MARKUP COULD NOT BE ADJUSTED FOR TOTAL EXPENSES OF THE ASSESSEE,THAT SAME WAS TO 6966/M/14-TECHSOURCE SERVICES PVT.LTD. 3 BE APPLIED FOR SPECIFIED EXPENSES AS PER THE CONTRA CTUAL RELATIONSHIP OF THE ASSESSEE,THAT EVEN IF THE STAND OF THE AO WAS TO BE APPLIED THE MARKUP COULD BE CHARGED OF RS.58,154/-ONLY. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER, HE HELD THAT THE ASSESSEE HAD ARGUED THAT STAR AND DTL WERE NOT ITS AE.S,THAT IT HAD MERELY SUBMITTED A COPY OF CERTIFICATE ISSUED BY THE CHARTERED ACCOUNTANT O F THE AE,THAT THE CERTIFICATE WAS NOT SUPPORTED BY ANY DOCUMENTARY EVIDENCE LIKE TRANSFER OF SHARES,THAT THE ARGUMENT WAS NOT ACCEPTABLE, THAT EVEN DURING THE STAYS OF APPELLATE PROCEEDINGS THE ASSESSEE HAD NOT FILED ANY DOCUMENTARY EVIDENCE, THAT THE RETURNS FILED IN IND IA BY ONE OF THE DIRECTORS PROVE THAT THERE WAS NO CHANGE IN THE SHAREHOLDING PATTERN OF THE FO REIGN ENTITIES, THAT THE AUDIT REPORT FILED BY THE ASSESSEE ALSO MENTIONED THAT THE ASSESSEE HAD E NTERED INTO TRANSACTION WITH ITS AES NAMELY STAR AND DTL,THAT ASSESSEE HAD NOT FILED ANY CERTIFICATE/CONFIRMATION FROM THE AUDITORS WHO HAD SIGNED FORM NUMBER 3 CEB STATING T HAT THE ABOVE-MENTIONED TWO COMPANIES WERE NOT THE AE.S OF THE ASSESSEE. HE FUR THER HELD THAT THE ASSESSEE HAD NOT FILED AN EXPLANATION WITH REGARD TO MARKUP RATE OF 23.45% FOR THE EXPENSES OTHER THAN SALARY AND RENT,THAT THE ASSESSEE HAD NOT PRODUCED ANY DOCUMEN TARY EVIDENCE WITH REGARD TO ANNUAL REPORTS OF THE OTHER COMPANIES FOR VERIFICATION, TH AT IT HAD NOT FILED ANY TP STUDY REPORT DURING THE ASSESSMENT PROCEEDINGS FOR THE APPELLATE PROCEE DINGS, THAT IT HAD NOT FOLLOWED THE PROVISIONS OF SECTION 92, THAT THE ASSESSEE HAD NOT DISCHARGED ITS PRIMARY ONUS OF BENCHMARKING THE TRANSACTION. HE REFERRED TO THE CA SE OF AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD. (294 ITR-AT-32) AND UPHELD THE ORDER OF THE AO. 4. BEFORE US,THE AUTHORISED REPRESENTATIVE (AR) ARGUED THAT STAR AND DTL WERE NOT AE.S, THAT THERE WAS ERROR IN THE AUDIT REPORT.ON A SPECI FIC QUERY BY THE BENCH ABOUT CONTACTING AND CORRECTING THE AUDITOR THE ALLEGED INCORRECT AUDIT REPORT THE AR COULD NOT THROW ANY LIGHT. THE DEPARTMENTAL REPRESENTIVE (DR) SUPPORTED THE ORDER OF THE AO AND THE FAA. WITH REGARD TO THE MARK UP ,THE AR ARGUED THAT THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE FOR THE YEAR UNDER CONSIDERATION EXCEPT FOR RENT AN D SALARY, THAT THE AO WAS NOT JUSTIFIED IN INCLUDING FURTHER THREE ITEMS FOR MARK-UP.THE DR LE FT THE ISSUE TO THE DISCRETION OF THE BENCH. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE ASSESSEE HAD FILED AUDITED ACCOUNTS FOR YE AR UNDER APPEAL ALONG WITH ITS RETURN OF INCOME,THAT IT HAD CLAIMED THAT IT.S WERE ENTERED I NTO WITH ITS AE.S, THAT LATER ON IT CLAIMED THAT STAR AND DTL WERE NOT ITS AE.S,THAT NO DOCUMEN TARY EVIDENCE WAS PRODUCED BEFORE THE REVENUE AUTHORITIES IN SUPPORT OF ITS CLAIM,THAT IT DID NOT FILE ANY CONFIRMATION OR CERTIFICATE 6966/M/14-TECHSOURCE SERVICES PVT.LTD. 4 FROM THE AUDITORS ABOUT THE INCORRECTNESS OF THE AU DIT REPORT ESPECIALLY ABOUT THE EXISTENCE OF AE.S.THEREFORE,WE ARE OF THE OPINION THAT ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL INFIRMITY.CONFIRMING THE SAME, WE DECIDE THE FIRST GROUND OF APPEAL AGAINST THE ASSESSEE. WITH REGARD TO THE MARKUP OF 23.45%,WE FIND THAT TH E ASSESSEE HAD INCLUDED ONLY TWO OF THE ITEMS OF THE PROFIT AND LOSS ACCOUNT I.E. SALARY AN D THE RENT, THAT IT HAD NOT INCLUDED THE OTHER CHARGES FOR DETERMINING THE ALP.WE ARE OF THE OPINI ON THAT THE MATTER NEEDS FURTHER VERIFICATION ON PART OF THE AO.IF THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE FOR THE ALLEGED THREE ITEMS SAME SHOULD NOT BE CONSIDERED FOR MARK- UP PURPOSES. THE ISSUE IS RESTORED BACK TO THE FILE OF THE AO FOR THE LIMITED PURPOSES I.E. TO DECIDE AS TO WHETHER THE ASSESSEE HAD CLAIMED EXPENDITURE UNDER THE HEAD SALARY AND RENT ONLY FOR MARK-UP PURPOSES. IF SO, NECESSARY ORDERS MAY BE PASSED. AS A RESULT APPEAL FILED BY THE ASSESSEE STANDS PAR TLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH JANUARY, 2017. 04 , 2017 SD/- SD/- ( / SAKTIJIT DEY ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 04.01.2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.