GOLDMAN SACHS SERVICES P.LTD ( SUCCESSOR TO PATERNOSTER INDIA P.LTD), MUMBAI V. ITO 10(3)(3), MUMBAI

ITA 6969/MUM/2012

• Counselvise Citation: 696919914 RSA 2012
• Duration Of Justice: 2 year(s) 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 28-01-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 19-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: ARVIND SONDE
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3); 234B

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, M UMBAI BEFORE HONBLE S/SHRI JOGINDER SINGH (JM) , AND N. K. BILLAIYA (AM) , . . , ! '# ./I.T.A. NO.6969/MUM/2012 ( $% & / ASSESSMENT YEAR : 2008-09) GOLDMAN SACHS SERVICES PVT.LTD., (SUCCESSOR TO PATERNOSTER INDIA PVT.LTD., 951-A, RATIONAL HOUSE, APPASAHEB MARATHE MARG, PRABHADEVI, MUMBAI-400025 / VS. INCOME TAX OFFICER, WARD 10(3)(3), ROOM NO.430, 4 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, MUMBAI-400020 ( '#'( / APPELLANT) .. ( )*'( / RESPONDENT) ' ./ !+! ./PAN/GIR NO. :AAECP0615K '#'( , / ASSESSEE BY: SHRI ARVIND SONDE )*'( - , /REVENUE BY : SHRI N K CHAND . / - 01 / DATE OF HEARING : 29.1.2015 2&% - 01 /DATE OF PRONOUNCEMENT : 06. 2.2015 / O R D E R PER N. K. BILLAIYA (AM) THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST TH E ASSESSMENT ORDER DATED 12.10.2012 MADE UNDER SECTI ON 143(3) R.W.S.145C(5) OF THE INCOME TAX ACT, 1961 (THE AC T). ITA NO.6969/M/12 2 2. THE SUM AND SUBSTANCE OF THE GRIEVANCE OF THE A SSESSEE IS THAT THE INCOME TAX OFFICER (ITO) ERRED IN MAKING THE ADJUSTMENT OF RS.1,04,68,266/- TO THE ASSESSEES INTERNATIONAL TR ANSACTIONS OF PROVISION OF IT ENABLED SERVICES. 2.1 BRIEFLY STATED THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS IN THE BUSINESS OF PROVIDING INFORMATION TECHNOLOGY ENABLED SERVICES AND OPERATIONS AND BACK END OPERATIONS. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY THE ASSESSEE DECLARING THE TOTAL INCOME OF RS.19,92,500/-. THE RETURN WAS SELECTED F OR SCRUTINY ASSESSMENT. THE ASSESSEE IS REGISTERED UNDER THE SO FTWARE TECHNOLOGY PARKS OF INDIA SCHEME. THE ASSESSEE COM PANY IS A CAPTIVE UNIT OF THE PATERNOSTER GROUP IN INDIA AND PERFORMS A BROAD RANGE OF BACK END OPERATIONS FOR PATERNOSTER UK LIMITED, WHICH INCLUDES ACTUARIAL FINANCE AND INFORMATION TECHNOLO GY SUPPORT OPERATION. 3. WHILE SCRUTINIZING THE RETURN OF INCOME, THE AO REFERRED THE RETURN TO THE TRANSFER PRICING OFFICER (TPO) FOR TH E ISSUE REGARDING THE TRANSFER PRICING. ON RECEIVING THE NOTICE FROM THE AO, THE TPO ISSUED AND SERVED A STATUTORY NOTICE TO THE ASSESSEE. THE TPO FOUND THAT THE ASSESSEE IS ENGAGED IN PROVIDING INFORMATION TE CHNOLOGY ENABLED SERVICES (ITES). THE INTERNATIONAL TRANSA CTIONS ENTERED INTO ITA NO.6969/M/12 3 BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (A E) WERE REPORTED AS UNDER : S. NO. NAME OF THE ASSOCIATED ENTERPRISES (AE) NATURE OF TRANSACTION AMOUNT (RS) METHOD USED 1 PATERNOSTER UK LIMITED RECEIPT OF PAYMENT FOR BACK OFFICE SUPPORT SERVICE 12,95,98,189 TNMM 2 PATERNOSTER SERVICES LIMITED PAYMENT FOR EXPENSES 30,41,928 NA 3 PATERNOSTER SERVICES LIMITED REIMBURSEMENT OF EXPENSES 4,13,363 NA 4 PATERNOSTER SERVICES LIMITED RECOVERY OF EXPENSES 22,29,587 NA THE ASSESSEE BENCHMARKED THESE TRANSACTIONS USING TNMM AS THE MOST APPROPRIATE METHOD AND OPERATING PROFIT TO TOT AL COST WAS TAKEN AS THE APPROPRIATE PROFIT LEVEL INDICATOR (PLI). T HE ASSESSEE IDENTIFIED 12 COMPARABLES USING DATA FOR FY 2005-0 6, 2006-07 AND 2007-08. THE MEAN AVERAGE WAS DETERMINED AT 15.94 % WHICH IS LOWER THAN THAT OF THE ASSESSEE AT 18.36%. THE TPO NOTICED THAT THE ASSESSEE HAS USED MULTIPLE YEAR DATA, THEREFORE, T HE ASSESSEE WAS ASKED TO UPDATE THE MARGIN OF THE COMPARABLE COMPA NIES USING FINANCIAL DATA FOR FY 2007-08 ONLY. THE ASSESSEE FILED UPDATED MARGINS OF THE COMPARABLE COMPANIES. THE MEAN AVE RAGE OF WHICH WORKED OUT AT 12.42%. THE TPO NOTICED THAT SEAR CH PROCESS OF THE ASSESSEE DOES NOT CAPTURE MANY MARKET PLAYERS CLOSE TO THE FUNCTIONS OF THE COMPANY. SECONDLY, AS THIS INDUST RY SEGMENT IS HAVING VERY POSITIVE GROWTH INCLUDING THE ASSESSEE, THE INCLUSION OF ITA NO.6969/M/12 4 THE HEAVY LOSS MAKING COMPANIES DOES NOT REFLECT TH E ACTUAL SCENARIO PREVAILING. 4. THE TPO UNDERTOOK FRESH SEARCH ON CAPITALINE PL US AND PROWESS DATABASES.THE TPO LISTED 21 COMPARABLES. TH E AVERAGE OF WHICH WAS DETERMINED AT 29.25%. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY THE ARMS LENGTH MARK UP MAY NOT BE HELD TO BE 29.25% FOR PROVISION OF IT SERVICES. THE ASSESSE E REPLIED THAT THE COMPARABLES SELECTED BY THE ASSESSEE OUGHT NOT TO H AVE BEEN REJECTED. IT WAS FURTHER CONTENDED THAT MULTIPLE Y EAR DATA SHOULD BE USED AND FURTHER COMPANIES WITH DIFFERENT SCALE OF OPERATIONS SHOULD NOT BE USED. THE TPO DID NOT ACCEPT THESE SUBMISSI ONS OF THE ASSESSEE. THE COMPARABLES USED BY THE ASSESSEE WER E TOTALLY REJECTED. THE TPO USED THE FOLLOWING FINAL SET OF COMPARABLES : S.NO. NAME OF COMPARABLES OP/TC 1 ACCENTIA TECHNOLOGIES LTD (SEG) 41.76% 2 ACROPETAL TECHNOLOGIES (SEG) 35.30% 3 ADITYA BIRLA MINACS WORLDWIDE LTD 2.20% 4 ASIT C MEHTA FINANCIAL SERVICES LTD (SEG) 9.42% 5 CALIBER POINT BUSINESS SOLUTIONS LTD 10.97% 6 CORAL HUBS LTD (FORMERLY VISHAL INFORMATION TECH NOLOGIES LTD) 50.68% 7 COSMIC GLOBAL LTD 23.30% 8 CROSSDOMAIN SOLUTIONS LTD 26.96% 9 DATAMATICS FINANCIAL SERVICES LTD (SEG) 34.87% 10 E4E HEALTHCARE BUSINESS SERVICES LTD 16.72% 11 ECLERX SERVICES LTD 65.88% 12 GENESYS INTERNATIONAL CORPORATION LTD 47.40% 13 HCL COMNET SYSTEMS AND SERVICES LTD (SEG) 32.90 % 14 INFOSYS BPO LTD 20.01% 15 ISERVICES INDIA PVT LTD 9.58% 16 MAPLE ESOLUTIONS LTD 20.43% 17 MOLD-TEK TECHNOLOGIES LTD 96.66% 18 R SYSTEMS INTERNATIONAL (SEG) 4.30% 19 SPANCO LTD (SEG) 11.04% 20 TRITON CORP LTD 23.81% 21 WIPRO LTD (SEG) 30.05% 22 FIRSTSOURCE SOLUTIONS LTD 15.25% ITA NO.6969/M/12 5 23 TRANSWORKS INFORMATION SERVICES LTD 2.20% 24 VCUSTOMER SERICES INDIA PRIVATE LIMITED 11.62% 25 VISHAL INFORMATION TECHNOLOGIES LTD 51.79% AVERAGE 27.8% THE AVERAGE WAS DETERMINED AT 27.8%. (1) WHILE USIN G THESE COMPARABLES, THE IMPORTANT FILTERS APPLIED BY THE TPO WERE (1) USE OF RELEVANT FINANCIAL YEAR DATA; (2) THE COMPAN IES WITH THE TURNOVER OF LESS THAN RS.1 CRORE WERE REJECTED; (3 ) THE COMPANIES HAVING MORE THAN 75% OF THE OPERATING REVENUE FROM ITES HAVE BEEN SELECTED; (4) COMPANIES WITH LESS THAN 75% EARNING FROM EXPORT WERE REJECTED; (5) COMPANIES HAVING MORE THAN 25% O F RELATED PARTY TRANSACTIONS WERE REJECTED. 5. THE ASSESSEE STRONGLY RAISED OBJECTIONS BEFORE T HE DISPUTE RESOLUTION PANEL (DRP). THE MAIN OBJECTION WAS (I) THE TPO OUGHT TO HAVE USED MULTIPLE YEAR DATA; (II) THE TPO GROSS LY ERRED IN REJECTING THE ASSESSEES COMPARABLES AND THE COMPARABLES USED BY THE TPO ARE IN FACT NOT COMPARABLES. THE DRP AFTER CONSID ERING THE OBJECTIONS RAISED BY THE ASSESSEE VIS-A-VIS THE ORD ER OF THE TPO DISMISSED THE OBJECTIONS OF THE ASSESSEE. AGGRIEVE D BY THIS, THE ASSESSEE IS BEFORE THE TRIBUNAL. 6. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THE D ETAILED CHART PUTTING FORTH HIS PROPOSITION. THE FIRST PROPOSITIO N MADE BY THE LD.COUNSEL IS THAT, IF THE PROFIT LEVEL INDICATOR OF TWO COMPARABLES USED ITA NO.6969/M/12 6 BY THE TPO VIZ ECLERX SERVICES LTD AND MOLD-TEK TECHNOLOGIES LTD ARE EXCLUDED FROM THE LIST OF COMPARABLES USED BY T HE TPO, THE ARITHMETIC MEAN WOULD COME TO 22.79 % AS AGAINST TH E MARGINS OF THE ASSESSEE SHOWN AT 18.36% MEANING THEREBY THAT T HE MARGIN OF THE ASSESSEE FITS WITHIN THE 5% RANGE AS PROVIDED IN THE ACT. THE SECOND PROPOSITION MADE BY THE LD.COUNSEL IS THAT I F THE PROFIT LEVEL INDICATOR OF COMPANIES WITH EXTRAORDINARY EVENT ARE EXCLUDED FROM THE FINAL LIST OF COMPARABLES THAN THE ARITHMETIC MEAN WOULD BE IN 5% RANGE. THE THIRD PROPOSITION MADE BY THE LD. COUNS EL IS THAT IF THE PLI OF COMPANIES WHOSE DIRECTORS ARE INVOLVED IN FRAUD PLUS COMPANIES WITH EXTRA-ORDINARY EVENT ARE EXCLUDED FROM THE FIN AL LIST OF COMPARABLES. THE PROFIT AVERAGE MEAN WOULD COME TO 21.81% WHICH IS WITHIN 5% RANGE AS PER THE PROVISIONS OF ACT. L ET US NOW CONSIDER, TWO COMPANEIS VIZ FIRST ECLERX SERVICES LTD AS PE R THE AUDIT REPORT OF THIS COMPANY EXHIBITED AT PAGE 258 TO 337 AND IN PARTICULAR PAGE 273, IT IS NOTICED THAT ECLERX SERVICES LTD HAD AC QUIRED UK BASED IGENTICA TRAVEL SOLUTIONS LIMITED (ITS) ON 27.7.200 7. IT IS STATED THAT THIS ACQUISITION IS CONSISTENT WITH COMPANYS STRATEGY OF LOOKING FOR INORGANIC GROWTH VIA BOLT ON ACQUISITIONS WHI CH FIT WELL WITH THE EXISTING STRENGTHS OF THE COMPANY. THE ITS HAS PROV IDED THE COMPANY WITH A SET OF 28 LARGE CUSTOMERS, PRIMARIL Y IN EUROPE, THIS STRENGTHENING THE COMPANYS PRESENCE IN THAT GEOGRA PHY. IT HAS ALSO ITA NO.6969/M/12 7 GIVEN THE COMPANY AN ENTRY PLATFORM INTO A NEW VERT ICAL-TRAVEL AND HOSPITALITY, BESIDES CONSOLIDATING THE COMPANYS PO SITION IN THE RETAIL AND MANUFACTURING SPACE. 7. IN OUR CONSIDERED OPINION, THIS AMOUNT TO EXTRA ORDINARY EVENT WHICH MAKES THIS COMPANY NON COMPARABLE. THE BANGA LORE BENCH OF THE TRIBUNAL IN THE CASE OF SYMPHONY MARKETING SOLUTIONS PVT LTD (2013) 27 ITR(T) 753 (BANGALORE-TRIB) HAS FOLLOWED THE DECISION OF HYDERABAD BENCH IN THE CASE OF CAPITAL IQ INFORMAT ION SYSTEMS (INDIA) PVT.LTD 25 ITR (T) 185, WHEREIN THE TRIBUNA L HAS HELD THAT EXTRAORDINARY EVENT OCCURRED DURING THE PREVIOUS YE AR MAKES THE COMPANY INCOMPARABLE. AS MENTIONED HEREINABOVE, TH E EXTRAORDINARY EVEN HAS TAKEN PLACE IN THE CASE OF ECLERX SERVICES LTD WHICH EXCLUDES THIS COMPANY AS A COMPARABLE. WE, THEREFORE, HOLD THAT THIS COMPANY CANNOT BE CONSIDERED AS CO MPARABLE. THE SIMILAR VIEW WAS TAKEN BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF STREAM INTERNATIONAL SERVICES PVT.LTD V/S A CIT IN ITA NO.8290/MUM/2010 (AY-2007-08) DATED 10.10.2014 AT P AGE 7 PARA 4 OF THE ORDER AND ALSO THE DECISION OF HYDERABAD BEN CH OF THE TRIBUNAL IN THE CASE OF M/S HYNDAI MOTORS INDIA V /S DCIT IN ITA NO.255/HYD/2014 (AY-2009-10) DATED 31.7.2014 ON PA GE 16 AT PARA 16. CONSIDERING THE FACTS OF THE CASE, AND IN THE LIGHT OF THE JUDICIAL ITA NO.6969/M/12 8 PRONOUNCEMENTS MENTIONED HEREINABOVE, WE DIRECT FOR THE EXCLUSION OF THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. 8. THE SECOND COMPANY IS MOLD-TEK TECHNOLOGIES LTD . THE ANNUAL REPORT OF THIS COMPANY IS EXHIBITED AT PAGE S 338 TO 424 OF THE PAPER BOOK. AT PAGE 348 OF THE PAPER BOOK, INTERNA L PAGE 9 OF ANNUAL REPORT , THE DIRECTORS HAVE POINTED OUT THA T THE SCHEME OF ARRANGEMENT INVOLVING AMALGAMATION BETWEEN TECH-MEN TOOLS PRIVATE LIMITED (TTPL), WHICH IS THE TRANSFEROR COMPANY AND MOLD/TEK TECHNOLOGIES LIMITED(MTL), WHICH IS THE T RANSFERRED COMPANY AND THE DEMERGER BETWEEN MTL, THE DEMERGED COMPANY AND MOLDTEK PLASTIC LIMITED (MPL) HAS SANCTION OF THE HONBLE ANDHRA PRADESH HIGH COURT. THE APPOINTED DATE FO R AMALGAMATION AND THE DEMERGER WERE 1.10.2006, AND 1.4.2007 RESP ECTIVELY. THE BUSINESS AND THE ASSETS AND LIABILITIES OF TECH-MEN TOOLS PRIVATE LIMITED STAND TRANSFERRED TO AND VESTED IN MOLD T EK TECHNOLOGIES LIMITED W.E.F.1.10.2006. IN OUR CONSIDERED OPINION , THIS IS DEFINITELY AN EXTRAORDINARY EVENT WHICH MAKE THIS COMPANY EXCL UDED FROM FINAL LIST OF COMPARABLES ON SIMILAR LINES AS DISCUSSED B Y US IN THE CASE OF ECLERX SERVICES LTD AND THE SAME JUDICIAL DECISION AS CONSIDERED IN THE CASE OF ECLERX SERVICES LTD , WE DIRECT FOR THE EXCLUSION OF THIS COMPANY FROM THE FINAL LIST OF THE COMPARABLES. ITA NO.6969/M/12 9 9. HAVING EXCLUDED ECLERX SERVICES LTD AND MOLD-TEK TECHNOLOGIES LTD FROM THE FINAL LIST OF COMPARABLES AS PER THE PROPOSITION OF LD.COUNSEL AND AS PER THE DETAILS PR ESENTED BY HIM AND THE ARITHMETIC MEAN AND AFTER EXCLUDING THESE TWO C OMPANIES COMES TO 22.79% AS AGAINST 18.36% SHOWN BY THE ASSESSEE . CONSIDERING THESE PLIS, WE HAVE NO HESITATION TO HOLD THAT THE ASSESSEES ALP FITS WITHIN 5% RANGE AS PER THE PROVISIONS OF ACT. WE DIRECT ACCORDINGLY. THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 10. SINCE WE HAVE ALLOWED THE APPEAL OF THE ASSESSE E BY EXCLUDING TWO COMPANIES AS PER DETAILED DISCUSSION AND ACCEPT ING THE PROPOSITION MADE BY THE LD. COUNSEL FOR THE ASSESSE E, WE DO NOT FIND IT NECESSARY TO DISCUSS THE OTHER ISSUES RAISED BY THE ASSESSEE IN ITS APPEAL. 11.. THE ASSESSEE HAS ALSO RAISED FOUR ADDITIONAL GROUNDS OF APPEAL. GROUND NO.6 RELATES TO DENIAL OF WORKING C APITAL ADJUSTMENT MADE BY THE TPO TO THE INTERNATIONAL TRANSACTIONS . 12. THIS GROUND BECOME INFRUCTUOUS IN THE LIGHT OF OUR DISCUSSION AND DECISION IN RESPECT OF ADJUSTMENT MADE IN INTER NATIONAL TRANSACTIONS OF THE ASSESSEE. THIS GROUND IS DISMIS SED AS INFRUCTUOUS. ITA NO.6969/M/12 10 13. THE NEXT ADDITIONAL GROUND RELATES TO SHORT CR EDIT OF TDS. IN OUR CONSIDERED OPINION, THIS ISSUE NEEDS TO BE VERI FIED AT THE ASSESSMENT LEVEL. WE, THEREFORE, RESTORE THIS ISSU E TO THE FILE OF AO. THE AO IS DIRECTED TO GRANT CREDIT FOR THE TDS AS P ER TDS CERTIFICATE FURNISHED BY THE ASSESSEE IN THE LIGHT OF THE PROVI SIONS OF LAW. THIS GROUND IS TREATED AS ALLOWED FOR STATISTICAL PURPOS ES. 14. THE NEXT ADDITIONAL GROUND RELATES TO LEVY OF I NTEREST U/S 234B AND 234C OF THE ACT. IN OUR HUMBLE OPINION CHARGING OF INTEREST IS MANDATORY THOUGH CONSEQUENTIAL IN THIS CASE. THE A O IS DIRECTED TO LEVY INTEREST AS PER THE PROVISIONS OF LAW 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT O N 6TH FEB, 2015. 2&% . 45 676TH FEB , 2015 - / > SD SD ( /JOGINDER SINGH) ( . . , / N. K. BILLAIYA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER 4 . / MUMBAI: 6TH FEB,2015. . . ./ SRL , SR. PS ITA NO.6969/M/12 11 A BCDE FEGD / COPY OF THE ORDER FORWARDED TO : 1. '#'( / THE APPELLANT 2. )*'( / THE RESPONDENT. 3. ! ! . @0 ( '# ) / THE CIT(A)- CONCERNED 4. ! ! . @0 / CIT CONCERNED 5. 6. AB )0 $ , ! '#1 ' $% , 4 . / / DR, ITAT, MUMBAI CONCERNED C D/ / GUARD FILE. !E . / BY ORDER, TRUE COPY # (ASSTT. REGISTRAR) ! '#1 ' $% , 4 . / /ITAT, MUMBAI