CAE India Pvt Ltd , Bangalore V. Income Tax Officer Ward-2(1)(1), Bangalore

ITA 762/BANG/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7044 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 03-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEERA MALHOTRA II BENGALURU
• Assessee Lawyers: P K PRASAD; UMASHANKAR GAUTAM S
• Keywords: Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) A NO. 762/BANG/2017 ASSESSMENT YEAR : 2012 - 13 CAE INDIA PVT. LTD., SURVEY NO.26-27, BANDARAMANAHALLI VILLAGE, ANNESHWARA PANCHAYAT, KASABA HOBLI, BANGALORE 562 110. PAN: AAECM 3338G VS. THE INCOME TAX OFFICER, WARD 2(1)(1), BANGALORE. APP ELLANT RESPONDENT A PPELLANT BY : S/SHRI P.K. PRASAD & UMA SHANKAR GA UTAM , ADVOCATES REVENUE BY : MS. N EERA MALHOTRA, CIT(DR)(ITAT) - II, BENGALURU DATE OF HEARING : 14 .12.2017 DATE OF PRONOUNCEMENT : 22 .12.2017 O R D E R PER SUNIL KUMAR YADAV, JUDICIAL MEMBER 1. THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINS T THE ASSESSMENT ORDER PASSED CONSEQUENT TO THE ORDER OF THE DRP INTER ALIA ON THE FOLLOWING GROUNDS:- 1. THAT THE ORDER OF THE LEARNED OF INCOME-TAX OFF ICER, WARD - 2(1)(1), BANGALORE ('ASSESSING OFFICER' OR 'AO') PURSUANT TO THE DIRECTION OF THE LEARNED DISPUTE RESOLUTION PAN EL ('DRP') TO THE EXTENT PREJUDICIAL TO THE APPELLANT, IS BAD IN LAW AND LIABLE TO BE QUASHED. IT(TP)A NO.762/BANG/2017 PAGE 2 OF 9 2. THE LEARNED AO AND THE LEARNED DRP ERRED BOTH IN FACTS AND LAW IN UPHOLDING THE APPROACH OF THE LEARNED DE PUTY COMMISSIONER OF INCOME-TAX, TRANSFER PRICING - 1(1) (2), BANGALORE ('TRANSFER PRICING OFFICER' OR 'TPO') OF MAKING AN ADJUSTMENT TO THE TRANSFER PRICE OF THE APPELLANT T O THE TUNE OF INR 28,626,764 IN RELATION TO RELATING TO REVENUE F ROM PROJECT/SERVICE INCOME, HOLDING THAT THE INTERNATIO NAL TRANSACTIONS DOES NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAG ED UNDER THE ACT. IN DOING SO, THE LD. DRP GROSSLY ERRED IN: 2.1. RE-CHARACTERISING THE FUNCTIONS OF CAE INDIA BEING A PROJECT MANAGEMENT SERVICES RELATING TO INSTALLATIO N, UP-GRADATION AND ASSEMBLING AND EXECUTION OF PROJECTS TO A SOFTW ARE DEVELOPMENT SERVICE PROVIDER; 2.2. DISREGARDING THE COMPARABLES CONSIDERED BY T HE APPELLANT AS PER THE TRANSFER PRICING STUDY BEING THE FUNCTIO NALLY COMPARABLE COMPANIES, AND ERRONEOUSLY PROCEEDING TO CONSIDER SOFTWARE DEVELOPMENT COMPANIES AS COMPARABLES. 2.3. UPHOLDING THE APPROACH OF LEARNED TPO OF NOT ALLOWING THE USE OF FINANCIAL PROJECTIONS FOR ARRIVING AT TH E ARM'S LENGTH PRICE AS SUBMITTED BY THE APPELLANT. 3. THE LEARNED AO AND THE LEARNED DRP ERRED BOTH IN FACTS AND LAW IN UPHOLDING THE APPROACH OF THE LEARNED DE PUTY COMMISSIONER OF INCOME-TAX, TRANSFER PRICING 1(1) (2), BANGALORE ('TRANSFER PRICING OFFICER' OR 'TPO') OF MAKING AN ADJUSTMENT TO THE TRANSFER PRICE OF THE APPELLANT T O THE TUNE OF INR 74,475,956 IN RELATION TO TRANSACTION OF CORPOR ATE MANAGEMENT SERVICES AND REIMBURSEMENT OF EXPENSES, HOLDING THAT THE INTERNATIONAL TRANSACTIONS DOES NOT SATISF Y THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. IN DOING SO, THE LD. DRP GROSSLY ERRED IN: 3.1. HOLDING THAT CORPORATE MANAGEMENT SERVICES AND REIMBURSEMENT OF EXPENSES IS IN THE NATURE OF STEWA RDSHIP ACTIVITIES; IT(TP)A NO.762/BANG/2017 PAGE 3 OF 9 3.2. DISREGARDING THE CORPORATE MANAGEMENT SERVICES ARRANGEMENT OF THE APPELLANT WITH CAE INC., CANADA DESPITE FURNISHING A LEGAL AND CONTRACTUALLY BINDING AGREEM ENT WITH RESPECT TO TRANSACTIONS; 3.3. ERRONEOUSLY CONCLUDING THAT NO COMMERCIAL OR ECONOMIC BENEFITS HAVE BEEN RECEIVED BY THE APPELLANT AND DI SREGARDING THE COLLECTIVE EVIDENCES PROVIDED BY THE APPELLANT TO E STABLISH HE BENEFIT RECEIVED FROM SUCH SERVICES PROVIDED; 3.4. NOT CONSIDERING THE INFORMATION/ DOCUMENTS/ C LARIFICATION PROVIDED TO SATISFY BENEFIT TEST FOR THE TRANSACTIO NS IN APPEAL AND ERRED IN COMPUTING THE ARM'S LENGTH VALUE OF THE SA ID TRANSACTION TO BE NIL. 4. GRANTING CREDIT FOR TAX DEDUCTED AT SOURCE AMOUN TING TO INR 23,35,143 WHILE PASSING THE FINAL ASSESSMENT OR DER AS AGAINST INR 37,82,335 CLAIMED BY THE APPLICANT IN I TS RETURN OF INCOME FOR AY 2012-13. 5. CONSEQUENT TO THE ABOVE, THE LEARNED AO ERRED IN CHARGING INTEREST- OF INR 149,910 UNDER SECTION 234 A OF THE ACT. 6. CONSEQUENT TO THE ABOVE, THE LEARNED AO ERRED IN CHARGING INTEREST OF INR 4,347,390 UNDER SECTION 23 4B OF THE ACT. THE ABOVE GROUNDS ARE INDEPENDENT OF, AND WITHOUT P REJUDICE TO, EACH OTHER AND THAT THE APPELLANT CRAVES LEAVE TO A DD, ALTER, AMEND, MODIFY OR WITHDRAW THE GROUNDS OF APPEAL OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. 2. DURING THE COURSE OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE HAS INVITED OUR ATTENTION THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF INTEGRATION OF HARDWARE AND SOFTWARE IN THE SIMULATION AND SERVICES. THEREFORE, THE ASSESSEE H AS CONSIDERED ITSELF TO BE IN THE FIELD OF PROJECT MANAGEMENT, BUT THE T PO HAS CONSIDERED THE ASSESSEE TO BE IN THE FIELD OF SOFTWARE DEVELOP MENT SERVICES. IT(TP)A NO.762/BANG/2017 PAGE 4 OF 9 ACCORDINGLY, THE TP STUDY MADE BY THE ASSESSEE WAS REJECTED BY THE TPO AND HE SELECTED DIFFERENT COMPARABLES ENGAGED I N THE SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEE HAS FILED OBJEC TIONS BEFORE THE DRP AND TRIED TO DEMONSTRATE THAT ASSESSEE IS ENGAG ED IN THE PROVISION OF AIRCRAFT SIMULATION AND TANKS AND GUNN ERY SIMULATION SERVICES TO VARIOUS PLAYERS IN THE CIVIL AND MILITA RY TRAINING SECTORS. THE CUSTOMERS OF ASSESSEE ARE INDEPENDENT PLAYERS IN TH E AEROSPACE AND THE DEFENCE INDUSTRIES. THE SERVICES PROVIDED BY T HE ASSESSEE AND ITS GROUP ARE PRIMARILY USED FOR IN PILOT TRAINING AND ALSO THE DEFENCE PERSONNELS VIRTUAL WARTIME TRAININGS, ETC. THE C ONTENTIONS OF THE ASSESSEE WERE NOT APPRECIATED BY THE LD. DRP AND TH EY HAVE CONFIRMED THE ORDER OF THE TPO. 3. NOW THE ASSESSEE IS BEFORE US AND INVITED OUR ATTENTION TO THE FUNCTIONS PERFORMED BY THE ASSESSEE AS DESCRIBED IN ITS TP STUDY, ACCORDING TO WHICH, THE ASSESSEE WAS DIVIDED INTO M ARKETING DEPARTMENT, TECHNICAL DEPARTMENT, QUALITY DEPARTMEN T, PRICING DEPARTMENT AND FINANCE, HUMAN RESOURCE AND ADMINIST RATION. IT WAS FURTHER CONTENDED THAT ASSESSEE IS ENGAGED IN THE P ROJECT MANAGEMENT AND NOT THE SOFTWARE DEVELOPMENT SERVICES. THEREFO RE, THE COMPARABLES ADOPTED BY THE TPO/DRP WERE DIFFERENT A ND CANNOT BE CONSIDERED. 4. THE LD. DR, ON THE OTHER HAND, HAS INVITED OUR ATTENTION TO THE TP STUDY WHEREBY IT WAS DESCRIBED THAT ASSESSEE UND ERTAKES INDEPENDENT VERIFICATION AND VALIDATION OF FLIGHT-C RITICAL SOFTWARE INCLUDING DESIGN, CODING AND TESTING IN VARIOUS PRO GRAMMING LANGUAGES. SINCE THE ASSESSEE WAS ENGAGED IN SOFTW ARE DEVELOPMENT SERVICES, THE TPO/AO HAS RIGHTLY CONSIDERED THE ASS ESSEE TO BE IN IT(TP)A NO.762/BANG/2017 PAGE 5 OF 9 SOFTWARE DEVELOPMENT SERVICES AND ALSO RIGHTLY PICK ED UP CERTAIN COMPARABLES. 5. HAVING CAREFULLY EXAMINED THE ORDERS OF AUTHOR ITIES BELOW IN THE LIGHT OF RIVAL SUBMISSIONS, WE FIND THAT THE AS SESSEES FUNCTIONS WERE DESCRIBED IN THE TP STUDY AT PAGE 311 OF THE C OMPILATION, ACCORDING TO WHICH THE ASSESSEE WAS DIVIDED INTO DI FFERENT DEPARTMENTS. FOR THE SAKE OF REFERENCE, WE EXTRACT THE FUNCTIONS DESCRIBED UNDER THE HEAD FUNCTIONS PERFORMED BY A SSESSEE:- 4.2.2. FUNCTIONS PERFORMED BY CAE INDIA THE ORGANISATION STRUCTURE OF CAE INDIA IS DIVIDED INTO THE FOLLOWING DEPARTMENTS: MARKETING DEPARTMENT; TECHNI CAL DEPARTMENT; QUALITY DEPARTMENT; PRICING DEPARTMENT AND FINANCE, HUMAN RESOURCE & ADMINISTRATION. MARKETING DEPARTMENT: CAI; INDIA IS ENGAGED IN THE PROVISION OF AIRCRAFT SIMULATION AND TANKS < D' GUNNERY SIMULATI ON SERVICES TO VARIOUS PLAYERS IN THE CIVIL AND MILITARY TRAINING SECTORS. THE CUSTOMERS OF CAE INDIAS PRODUCTS ARE INDEPENDE NT PLAYERS IN THE AEROSPACE AND THE DEFENCE INDUSTRIES. THE S ERVICE PROVIDED BY CAE INDIA AND ITS GROUP ARE PRIMARILY USED IN PI LOT TRAINING AND ALSO THE DEFENCE PERSONNELS VIRTUAL WARTIME TR AINING ETC. THE CAE GROUP ENTITIES WORLDWIDE HAVE BEEN GEOGRAPH ICALLY DIVIDED ON THE BASIS OF SPECIALIZATION IN THE MARKE T. IN VIEW OF THE SAME, CAE INDIA ASSISTS IN PREPARING BIDS FOR I TS GROUP COMPANIES. FOR THIS PURPOSE A SPECIAL PROPOSAL DEP ARTMENT HAS BEEN SET UP, WHICH PREPARES THE BIDS. THE TEAM COM PRISES A PROPOSAL MANAGER AND AN ENGINEER FOR THE TECHNICAL ASPECTS. TECHNICAL DEPARTMENT: THE TECHNICAL DEPARTMENT IS ENGAGED IN THE ACTUAL EXECUTION OF CONTRACTS BID, WHICH ARE EX ECUTED BY CAE INDIA. THE FOLLOWING FUNCTIONS ARE PERFORMED BY CA E INDIA; IT(TP)A NO.762/BANG/2017 PAGE 6 OF 9 CONTRACT EXECUTION : DEPENDING ON THE QUANTUM OF THE PROJECT CAE INDIA EXECUTES THE PROJECTS WITH THE AS SISTANCE OF CAE GROUP ENTITIES. CAE INDIA PROVIDES BASIC FACT F INDING AND COST BENEFIT ANALYSIS (CBA) FOR THE BID AND THE FINAL DECISION ON THE ACTUAL BIDDING AND EXECUTION OF THE CONTRACT IS DONE BY CAE GROUP. ALSO IN THE EVENT OF WINNING THE CONTRACT FOR THE SERVICES, CAE INDIA WOULD PERFORM THE TASK WITH THE TECHNICAL AND MANAGEMENT ASSISTANCE FROM C AE GROUP. THE MARKETING TEAM BIDS AND SIGNS THE CONTRA CT AND SUBSEQUENTLY HANDS OVER THE EXECUTION TO THE PROGRA MME MANAGEMENT TEAMS IN CAE INDIA, WHICH MAINLY CONSTIT UTE OF ENGINEERS. DEVELOPMENT OF SIMULATORS : THE SIMULATORS ARC BUILT IN KITS. THE VARIOUS COMPONENTS ARE SUBSEQUENTLY ASSEMBLED L ATER ON AT THE PLACE OF INSTALLATION. INSTALLATION/ COMMISSIONING : CAE INDIA IS A PROVIDER OF SIMULATION AND MODELLING TECHNOLOGIES AND INTEGRATE D TRAINING SERVICES FOR CIVIL AVIATION AND DEFENCE CU STOMERS IN THE INDIAN MARKET. IT ALSO SUPPLIES CIVIL FLIGHT SI MULATORS TO AIRLINES, AIRCRAFT MANUFACTURERS, TRAINING CENTRES AND MILITARY FULL-MISSION SIMULATORS. IN THIS REGARD CAE INDIA G IVES A COMPREHENSIVE PACKAGE RANGING FROM THE VISUAL SOFTW ARE TO THE FINAL INSTALLATION AND COMMISSIONING OF THE SIM ULATORS. TANK PROGRAMME : AS MENTIONED EARLIER, THE CAF. GROUP'S OPERATIONS ARE DIVIDED BASED ON MARKET SPECIALIZATI ON AND ALSO GEOGRAPHICALLY. AS A GROUP COMPANY, CAE UK SPECIALIZES IN THE TANK SIMULATION MARKETS. CAE IND IA RECEIVES SERVICES AND PAYS TECHNICAL ASSISTANCE FEE S TO CAE UK FOR THE ASSISTANCE RECEIVED WITH RESPECT TO THE TANK PROGRAMME. CAE INDIA PROCURES ALL THE METAL CASTING S LOCALLY FOR THIS ACTIVITY. LIAISON BETWEEN THE MARKETING DEPARTMENT AND THE TECHNICAL DEPARTMENT : A COMMUNICATION CHANNEL IS OPENED BETWEEN THE MARKETING AND TECHNICAL &IMMINENT FOR A ) FUTURE IT(TP)A NO.762/BANG/2017 PAGE 7 OF 9 BIDS, B) IMPROVING CUSTOMER RELATIONSHIPS C) EVALUA TION OF NEWER TECHNOLOGIES AND APPRISING THE CUSTOMERS ON T HE SAME. 6. SIMILARLY, THE LD. DR HAS ALSO INVITED OUR ATT ENTION TO THE DESCRIPTION WITH REGARD TO FUNCTIONS OF ASSESSEE GI VEN IN THE TP STUDY APPEARING AT PAGE 304 OF THE COMPILATION OF THE ASS ESSEE. FOR THE SAKE OF REFERENCE, WE EXTRACT THE RELEVANT RELEVANT PORTION TO WHICH OUR ATTENTION WAS INVITED BY THE LD. DR:- CAE INDIA IS A SUBSIDIARY OF FLIGHT TRAINING DEVI CE (MAURITIUS) LIMITED, WHICH HOLDS 76% STAKE IN THE COMPANY. THE REMAINING 24% STAKE IS HELD BY MACMET INDIA PRIVATE LIMITED A ND MACMET INTERACTIVE TECHNOLOGY (P) LIMITED. THE COMPANY FOR MERLY KNOWN AS MACMET TECHNOLOGIES PRIVATE LIMITED WAS AC QUIRED BY CAE GROUP IN JULY 2007. SUBSEQUENTLY WITH EFFECT FR OM JUNE 22, 2009), THE COMPANY CHANGED ITS NAME FROM MACMET TECHNOLOGIES PRIVATE LIMITED TO CAE INDIA PRIVATE L IMITED. CAE INDIA UNDERTAKES INDEPENDENT VERIFICATION AND V ALIDATION OF FLIGHT-CRITICAL SOFTWARE INCLUDING DESIGN, CODING, TESTING IN VARIOUS PROGRAMMING LANGUAGE LIKE C, C++, ADA. CAE INDIA A LSO HAS THE EXPERTISE IN 2D & 3D MODELLING, INTERFACE CHECKS, S HEET METAL DESIGN, ASSEMBLY CREATION AND CATIA V5 & AUTOCAD. CAE INDIA DEALS WITH REAL TIME EMBEDDED SYSTEMS USING O PERATING SYSTEMS VIZ; VXWORKS WITH EXPERTISE IN RTCA DO 178B AND DOD 2167A AND ALSO HAS WIDE EXPERIENCE IN PROVIDING CBTS, CAI AND VATS. CAE INDIA HAS PROVIDED COMPUTER BASE D TRAINING PACKAGES FOR THE INDIAN ARMY AND DRDO. CAE INDIA PRIMARILY CATERS TO THE INDIAN DEFENCE SE CTOR AND IT HAS DEVELOPED INDIA'S FIRST BATTLE TANK GUNNERY TRAINER AND ALSO SUPPLIED A NAVAL TACTICAL TRAINER. CAE INDIA, POST ACQUISITION BY THE CAE GROUP, HAS VENTURED INTO FLIGHT SIMULATOR. CAE INDIA HAS ALSO PROVIDED ASSISTANCE IN IMPLEMENTATION AND COMMISSIONING OF INDIA'S FIRST FULL MISSION FLIGHT SIMULATOR (SEA HARRIER) REFURBISHMENT AND IN IMPLEMENTING INDIAS FIRST 6DOF, AN ELECTRIC MOTION SIMULATOR. IT(TP)A NO.762/BANG/2017 PAGE 8 OF 9 7. DURING THE COURSE OF HEARING, BOTH THE PARTIES HAVE AGREED THAT ALL THESE ASPECTS WERE NOT EXAMINED BY THE TPO /DRP WHILE ADJUDICATING THE MAIN ISSUE WITH REGARD TO FUNCTION AL PROFILE OF THE ASSESSEE. UNDER THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE MATTER SHOULD GO BACK TO THE TPO TO FIRST RE-EXAMIN E THE ISSUE WITH REGARD TO FUNCTIONAL PROFILE OF THE ASSESSEE AND TH EREAFTER ADOPT THE COMPARABLES OF SAME PROFILE. 8. WITH REGARD TO THE REMAINING GROUNDS, THE LD. COUNSEL FOR THE ASSESSEE HAS INVITED OUR ATTENTION THAT THESE GROUN DS WERE NOT EXAMINED BY THE DRP AND IT SIMPLY CONFIRMED THE VIE W TAKEN BY THE TPO/AO. SINCE THE ISSUES WERE NOT EXAMINED BY THE LOWER AUTHORITIES, IT MAY ALSO BE RE-EXAMINED BY THE TPO. FINDING FOR CE IN THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE, WE SET ASIDE T HE FINDINGS OF THE DRP IN THIS REGARD AND WE RESTORE THE MATTER TO THE AO/TPO TO ADJUDICATE THE SAME AS PER LAW. NEEDLESS TO MENTIO N HERE THAT WHILE ADJUDICATING THE AFORESAID ISSUES, OPPORTUNITY OF B EING HEARD SHOULD BE AFFORDED TO THE ASSESSEE. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 22 ND DAY OF DECEMBER, 2017. SD/- SD/- ( INTURI RAMA RAO ) ( SUNIL KUMAR YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 22 ND DECEMBER, 2017. / D ESAI S MURTHY / IT(TP)A NO.762/BANG/2017 PAGE 9 OF 9 COPY TO: 1. APPELLANT 2. R ESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.