ECI TELECOM INDIA P.LTD, MUMBAI V. ASST CIT 8(1), MUMBAI

ITA 7552/MUM/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2938 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 09-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 21-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: WAMAN KALE SHRI KINJAL DOSHI
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 92D

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K , MUMBAI , , BEFORE SHRI R C SHARMA , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JU DICIAL MEMBER ITA NO. : 7552 /MUM/20 1 2 (ASSESSMENT YEAR: 200 8 - 09 ) ECI TELECOM INDIA PRIVATE LIMITED , 5 TH FLOOR, UNIVERSAL BUSINESS PARK, CHANDIVALI FARM ROAD, SAKINAKA, ANDHERI (EAST), MUMBAI - 400 072 PAN: AABC E 27 07 J VS ASST . CIT - RANGE - 8 (1) , AAYAKAR BHAVAN, M K MARG, MUMBAI - 400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI WAMAN KALE SHRI KINJAL DOSHI RESPONDENT BY : SHRI N K CHAND /DATE OF HEARING : 15 - 06 - 201 6 / DATE OF PRONOUNCEMENT : 14 - 09 - 2016 ORDER , : PER AMIT SHUKLA , J M: THE AFORESAID APPEAL HA S BEEN FILED BY THE ASSESSEE A GAINST FINAL ASSESSMENT ORDER DATED 9 TH OCTOBER, 201 2 , PASSED BY JT. COMMISSIONER OF INCOME - TAX [OSD - (8(1)] MUMBAI (AO) UNDER SECTION 143(3) R.W.S. 144C(13) FOR THE ASSESSMENT YEAR 2008 - 09 , PASSED IN PURSUANCE OF DIRECTION GIVEN BY THE DISPUTE RESOLUTION P ANEL I, MUMBAI (DRP) VIDE 2 ECI TELECOM INDIA PRIVATE LIMITED ITA 7552 /MUM/ 2012 ORDER DATED 30.08.2012. IN THE GROUNDS OF APPEAL, FOLLOWING GROUNDS HAVE BEEN RAISED: - ADDITION TO TOTAL INCOME RS. 99,13,649 : - 1 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TRANSFER PRICING OFFICER (T PO') AND THE LEARNED ASSESSING OFFICER (AO') UNDER DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL ('DRP'), ERRED IN MAKING AN ADDITION TO THE APPELLANT'S TOTAL INCOME BASED ON THE PROVISIONS OF CHAPTER X OF THE INCOME - TAX ACT, 1961 (THE ACT'). INCORREC T SELECTION OF COMPARABLES BY THE LEARNED TPO : - 2 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING I CONFIRMING THE ACTION OF TPO IN SELECTION OF THE COMPANIES IN CASE OF MARKE TING AND CUSTOMER SUPPORT SERVICES WHICH ARE NOT COMPARABLE DESPITE DETAILED SUBMISSIONS FILED BY THE APPELLANT. 3 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING I CONFIRMIN G THE ACTION OF TPO IN CHERRY PICKING FEW COMPANIES FROM THE SET OF COMPARABLE COMPANIES USED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY REPORT IN CASE OF SOFTWARE RESEARCH AND DEVELOPMENT SERVICES. INCORRECT REJECTION OF APPELLANT'S BENCHMARKING ANAL YSIS AND COMPARABLES : - 4 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO I AO ERRED AND THE DRP FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LEARNED TPO / AO OF DISREGARDING SOME OF THE COMPARABLE COMPANIES SELECTE D BY THE APPELLANT BASED ON THE CONTEMPORANEOUS DATA IN THE TRANSFER PRICING STUDY REPORT MAINTAINED AS PER SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME - TAX RULES, 1962 AND THE VARIOUS SUBMISSIONS MADE BY THE APPELLANT. INCORRECT MARGIN OF COMP ARABLES : - 5 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO / AO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LEARNED TPO / AO OF MAKING INCORRECT ADJUSTMENT IN THE MARGIN OF SOME OF THE ALL EGED COMPARABLE COMPANY COMPUTED FROM THE ANNUAL REPORT AVAILABLE IN THE PUBLIC DOMAIN. DISREGARD OF MULTIPLE YEAR DATA CONTENTION : - 6 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO / AO ERRED AND THE HON'BLE DRP FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LEARNED TPO / AO IN REJECTING THE WITHOUT PREJUDICE CONTENTION OF THE APPELLANT TO COMPUTE THE MARGIN OF THE ALLEGED COMPARABLE COMPANIES BASED ON MULTIPLE YEAR FINANCIAL DATA. 3 ECI TELECOM INDIA PRIVATE LIMITED ITA 7552 /MUM/ 2012 TAX EVASION MOTIVE NOT DEMONSTRAT ED : - 7 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO / AO ERRED IN AND THE HON'BLE DRP FURTHER, ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LEARNED TPO / AO IN FAILING TO APPRECIATE THAT THE APPELLANT WAS CLAIMING TAX DE DUCTION UNDER SECTION 10A OF THE ACT IN CASE OF SOFTWARE RESEARCH AND DEVELOPMENT ACTIVITY UNDERTAKEN THROUGH ITS MUMBAI UNIT AND ACCORDINGLY HAD NO INTENTION TO SHIFT SUCH PROFITS OUTSIDE INDIA WHICH IS A PRE - REQUISITE CONDITION TO MAKE ANY ADJUSTMENT UND ER THE PROVISION OF CHAPTER X OF THE ACT. THE APPELLANT PRAYS THAT THE ADDITION MADE BY THE LEARNED AO / TPO BE DELETED . 2. BEFORE US, THE LD. COUNSEL SUBMITTED THAT, THE MAIN DISPUTE WITH REGARD TO THE TRANSFER PRICING ADJUSTMENT REVOLVES AROUND INCLU SION AND EXCLUSION OF CERTAIN COMPARABLES BY THE TPO. 3. THE FACTS IN BRIEF ARE THAT, THE ASSESSEE, ECI TELECOM INDIA PVT . LTD (ECI INDIA) IS WHOLLY OWNED SUBSIDIARY OF ECI TELECOM LIMITED, ISRAEL. THE ASSESSEE IS MAINLY IN THE BUSINESS OF INSTALLATION , COMMISSIONING AND AFTER SALES SERVICE IN RESPECT OF TELECOM EQUIPMENT SUPPLIED BY ITS ASSOCIATED ENTERPRISES (AE S ) TO BASIC WIRED AND WIRELESS TELECOMMU NICATION OPERATORS IN INDIA AND SUPPLY OF TELECOMMUNICATION EQUIPMENT ACCESSORIES. THE ASSESSEE ALSO P ROVIDES MARKETING SUPPORT AND CUSTOMER SERVICES IN RELATION TO THE INDIAN MARKET AND SOFTWARE RESEARCH AND DEVELOPMENT SERVICES TO ITS AE. THE INTERNATIONAL TRANSACTIONS REPORTED DURING THE FINANCIAL YEAR 2007 - 08 WERE AS UNDER: - S.NO. NAME OF INTERNATIONA L TRANSACTION AMOUNT (IN INR) MOST APPROPRIATE METHOD 1 PURCHASE OF EXPANSION 694,628 TRANSACTIONAL NET MARGIN METHOD TNMM 4 ECI TELECOM INDIA PRIVATE LIMITED ITA 7552 /MUM/ 2012 2 SALE OF GOODS 1,818,970 TNMM 3 PURCHASE OF LAB EQUIPMENT AND SOFTWARE 52,707,039 TNMM 4 * RENDERING OF SOFTWARE RESEAR CH AND DEVELOPMENT SERVICES 62,138,724 TNMM 5 * RENDERING OF MARKETING AND CUSTOMER S UPPORT SERVICES 40,863,007 TNMM 6 TECHNICAL SUPPORT SERVICES AVAILED 19,290,103 TNMM 7 REFERRAL COMMISSION PAID FOR THE SERVICES AVAILED 53,936,065 TNMM 8 INTERE ST PAID ON WORKING CAPITAL L OAN A VAILED 2,181,406 - 9 REIMBURSEMENT OF EXPENSES 722,867 - 10 RECOVERY OF EXPENSES 6,058,650 - (* SEGMENTS/TRANSACTIONS IN DISPUTE) 4. THE DISPUTE REGARDING TRANSFER PRICING ADJUSTMENT IN THE IMPUGNED ORDER I S WITH REGARD TO SEGMENTS F IR STLY , T HE MARKETING SUPPORT/CUSTOMER SUPPORT SERVICES ; AND SECONDLY, SOFTWARE RESEARCH AND DEVELOPMENT SERVICES. FOR RENDERING OF MARKETING AND CUSTOMER SUPPORT SERVICES, THE ASSESSEE HAD SHOWN RECEIPT OF RS.4,08,63,007/ - . FOR THE PURPOSE OF BENCHMARKING TH IS TRANSACTION, THE ASSESSEE HAD SELECTED TNMM AS THE MOST APPROPRIATE METHOD (MAM) AND ADOPTED NET COST + MARK - UP (NCP) AS PROFIT LEVEL INDICATOR (PLI). AFTER CARRYING OUT SEARCH PROCESS FOR SELECTION OF COMPARABLES ON FAR AN ALYSIS, THE ASSESSEE SHORT - LISTED 7 COMPARABLE COMPANIES WITH THE THREE YEARS AVERAGE NCP MARGIN. THE ARITHMETIC MEAN OF SUCH COMPARABLE S W ERE ARRIVED AT 12.75%, WHEREAS, THE ASSESSEE HAD DISCLOSED THE NCP OF 9.48%. SINCE THE MARGIN EARNED FROM REN DERIN G O F MARKETING SUPPORT SERVICES VIS - - VIS THE ARITHMETIC MEAN OF COMPARABLES WAS FALLING WITHIN THE 5% RANGE AND HENCE THE TRANSACTION WA S REPORTED AT ARMS LENGTH PRICE RANGE. THE TPO AFTER ANALYZING THE TRANSFER PRICING STUDY REPORT FOUND THAT MOST OF THE FILTERS APPLIED BY THE ASSESSEE COMPANY IN THE SELECTION PROCESS 5 ECI TELECOM INDIA PRIVATE LIMITED ITA 7552 /MUM/ 2012 WERE NOT APPROPRIATE. THE TPO HA D DISCUSSED THE APPROPRIATENESS OF SUCH FILTERS IN THE FOLLOWING MANNER: - SR. NO. PARTICULARS REMARK OF THE TPO 1 FINANCIAL INFORMATION AVAILABLE PERTAININ G TO A PERIOD PRIOR TO FEBRUARY 2006/ NO FINANCIAL DATA AVAILABLE IT IS PERTINENT TO MENTION HERE THAT THE TPO USED ONLY THE DATA FOR THE FY 2007 - 08. THUS THE TPO EXCLUDED THOSE COMPANIES WHOSE DATA WAS NOT AVAILABLE FOR THE FY 2007 - 08 2 REJECTED COMPAN IES WHOSE SALE IS GREATER THAN 500 CRORES THE TPO HAS SELECTED THOSE COMPANIES WHOSE SALES IS GREATER THAN RS.1 CRORE FOR THIS P URPOSE 3 COMPANIES WHOSE MANUFACTURING SALES WERE GREATER THAN 75% OF THEIR TOTAL SALES IN THE LATEST YEAR FOR WHICH FINANCI AL DATA WAS AVAILABLE WERE REJECTED NOT AN APPROPRIATE FILTER. THIS OFFICE HAS APPLIED A MORE APPROPRIATE FILTER IN THIS REGARD. THE COMPANIES WHOSE SERVICE INCOME IS MORE THAN 75% OF THEIR OPERATING REVENUES FOR THE FY 2007 - 08 WERE SELECTED AS COMPARABL ES. 4 REJECTED COMPANIES WITH POSSIBLE CONTROL PARTY CONNECTIONS THE TPO HAS APPLIED A THRESHOLD LIMIT OF 25% TO T HE RELATED PARTY TRANSACTIONS AS PER THE PROVISIONS OF SECTION 92A(20(A) 5 COMPANIES HAVING DIFFERENT BUSINESS PROFILE AND INSUFFICIENT I NFORMATION WERE REJECTED FUNCTIONAL COMPARABILITY IS AN IMPORTANT FILTER. HENCE IT IS ACCEPTED. 6 COMPANIES NOT DISCLOSING SEGMENTAL FINANCIALS, WHOSE SERVICES APPEARED DIFFERENT FROM THAT OF TAXPAYER THIS IS CONSIDERED AN APPROPRIATE FILTER SINCE THIS FILTER WILL HELP TO IDENTIFY COMPANIES WHICH ARE SIMILAR IN FUNCTION (MSS) TO ARRIVE AT APPROPRIATE COMPARABLES. WHEREVER SEGMENTAL INFORMATION IS AVAILABLE, THE SAME IS CONSIDERED AS A COMPARABLE 7 COMPANIES EXCLUDED FOR OTHER REASONS (BASED ON INFO RMATION CONTAINED IN THE PRODUCT PROFILE, DIRECTORS REPORT AND OTHER INFORMATION IN THE DATABASE THIS IS TO BE SEEN CASE BY CASE. THIS OFFICE HAS TRIED TO OBTAIN MAXIMUM INFORMATION USING POWERS U/S 133(6). IF SUFFICIENT INFORMATION IS NOT OBTAINED, T HE DECISION IS TAKEN BASED ON THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. OUT OF 7 COMPARABLE CHOSEN BY THE ASSESSEE COMPANY, THE TPO REJECTED 6 COMPARABLE COMPANIES, EXCEPT FOR IDC (INDIA) LTD. THE REASONS FOR SUCH REJECTION OF COMPARABLES HAVE BEE N GIVEN AT PAGE 4 OF THE TPOS ORDER. THEREAFTER, THE ASSESSEE WAS REQUIRED TO CARRY OUT FRESH SEARCH OF COMPARABLES. IN THE SECOND SEARCH PROCESS, THE ASSESSEE IDENTIFIED 8 COMPARABLE COMPANIES WITH ARITHMETIC MEAN OF 12.16%. THEREAFTER, TPO AGAIN ANALYZE THE COMPARABLE COMPANIES WHICH HAVE BEEN 6 ECI TELECOM INDIA PRIVATE LIMITED ITA 7552 /MUM/ 2012 DISCUSSED AT PAGE 6 OF THE ORDER AND AGAIN REJECTED ALL THE COMPARABL ES, EXCEPT FOR IDC (INDIA) LTD. THEREAFTER, THE TPO CARRIED OUT HIS OWN SEARCH PROCESS AFTER APPLYING FOLLOWING FILTERS: - ( I ) COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 2007 - 08 ARE TO BE EXCLUDED; ( II ) COMPANIES WHOSE BUSINESS SUPPORT SERVICE INCOME