NETHAWK NETWORKS INDIA P.LTD, MUMBAI V. ADDL DIT (IT) RG 2, MUMBAI

ITA 7633/MUM/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71543 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 11-10-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 26-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: M P LOHIA MR MAHESH MANDLECHA
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Working capital adjustments; Initiation of penalty proceedings
• Section: 234B; 133(6)

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . . , . , BEFORE SHRI B.R. MITTAL, JM AND SHRI D. KARUNAKARA RAO, AM ./ I.T.A. NO.7633/M/2012 (AY: 200 8 - 200 9 ) NETHAWK NETWORK S INDIA PRIVATE LIMITED, 5 TH FLOOR, IDCO TOWER, MANCHESWAR INDUSTRIAL ESTATE, BHUBANESHWAR, ORISSA 751010. / VS. THE INCOME TAX OFFICER, WARD NO. 3(2)(1), R.NO.673, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. ./ PAN : AACCN 0994 P ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI M.P. LOHIA, MR MAHESH MANDLECHA AND MR NIKHIL TIWARI / REVENU E BY : SHRI AJEET KUMAR JAIN CIT - DR / DATE OF HEARING : 11 .10.2013 / DATE OF PRONOUNCEMENT : 06 . 11 .2013 / O R D E R PER D. KARUNAKARA RAO, AM: THIS APPE AL FILED BY THE ASSESSEE ON 26.12.2012 AGAINST THE ORDER S OF THE DRP / TPO/ AO FOR THE ASSESSMENT YEAR 2008 - 2009. 2. DURING THE TIMES OF HEARING BEFORE THE TRIBUNAL, A T THE OUTSET, SHRI M.P. LOHIA LD COUNSEL FOR THE ASSESSEE MENTIONED THAT THE ISSUES RAISED IN GROUND NOS. 1, 2, 3, 5, 8 AND 12 A RE NOT PRESSED . ACCORDINGLY, THE SAME ARE DISMISSED AS NOT PRESSED. OTHERWISE, G ROUND NO.1 IS RAISED QUESTION THE DECISION OF REJECTION OF THE COMPARABLES DOCUMENTED IN THE TRANSFER PRICING (TP) STUDY OF THE ASSESSEE. REFERRING TO GROUND NO. 6 AND 7, LD COUNSEL MENTIONED THAT THESE TWO GROUNDS ARE RELATED AND THEY HAVE TO BE ADJUDICATED TOGETHER . FURTHER, REFERRING TO GROUND NO.9 , LD COUNSEL MENTIONED THAT THE ISSUE RELATING TO THE NON - CONSIDERATION OF ADDITIONAL COMPANIES OFFERED BY THE ASSESSEE AS COMP ARABLES WAS NOT ADJU DICATED BY THE DRP. THEREFORE, THE SAME IS REQUIRED TO BE REMANDED TO THE FILES OF THE DRP / TPO / AO FOR FRESH ADJUDICATION WITH A DIRECTION TO PASS A SPEAKING 2 ORDER. CONSIDERING THE SAID PRAYER OF THE LD COUNSEL AND CONSIDERING THE NO OBJECTION FROM THE LD DR, WE REMAND THE SAID GROUND 9 TO THE DRP/TPO/AO WITH A DIRECTION TO ADJUDICATE THE SAME BY PASSING A SPEAKING ORDER AFTER GIVING REQUISITE ANALYSIS / REASONS FOR NON - CONSIDERATION OR REJECTION, IF ANY. ACCORDINGLY, GROUND NO.9 I S ALLOWED FOR STATISTICAL PURPOSES . REFERRING TO GROUND NO.13 , LD COUNSEL MENTIONED THAT THE ISSUES RAISED IN THIS GROUND RELATE TO LEVY OF INTEREST U/S 234B AND 234D OF THE ACT, WHICH REQUIRED TO BE ALLOWED AS CONSEQUENTIAL. LD COUNSEL ALSO MENTIONED THAT THE ISSUES RAISED RELATING TO THE INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT, THE ISSUE BECOMES IN FRUCTUOUS IN VIEW OF ITS VERY NATURE. ACCORDINGLY, THE ISSUE RELATING TO LEVY OF INTEREST ARE ALLOWED AS CONSEQUENTIAL AND THE ISSUE RELATIN G TO PENALTY PROCEEDINGS IS DISMISSED AS INFRUCTUOUS. 3. EVENTUALLY, THE GROUNDS LEFT FOR DETAILED ADJUDICATION BY US IN THIS ORDER ARE GROUND NO.4, 6, 7, 10 & 11 AND THE SAID GROUNDS READ AS UNDER: 4. ADDING CERTAIN COMPANIES ARBITRARILY TO THE COMPARABL E SET OF AY 2008 - 2009 CONTENDING THAT THESE WERE COMPARABLE FOR AY 2007 - 2008. ERRED IN CONSIDERING CERTAIN COMPANIES AS COMPARABLE TO THE APPELLANT FOR AY 2008 - 2009 CONTENDING THAT THESE COMPANIES WERE CONSIDERED AS COMPARABLES BY THE TAX AUTHORITIES FOR A Y 2007 - 2008 WITHOUT APPRECIATING THE FACT THAT THE CASE OF THE APPELLANT WAS NOT SUBJECT TO TRANSFER PRICING ASSESSMENT FOR AY 2007 - 2008. 6. USE OF APPROPRIATE FILTERS FOR SCREENING OF COMPANIES . ERRED IN APPLYING CERTAIN INAPPROPRIATE REJECTION CRITERIA F OR SCREENING OF COMPANIES. 7. ACCEPTING CERTAIN COMPANIES WHICH ARE FUNCTIONALLY NOT COMPARABLE TO THE APPELLANT BASED ON CERTAIN FILTERS. ERRED IN ACCEPTING CERTAIN COMPANY - ES WHICH ARE FUNCTIONALLY NOT COMPARABLE TO THE APPELLANT BASED ON CERTAIN FILTERS . 10. INCORRECT COMPUTATION OF THE APPELLANTS OPERATING MARGIN ERRED IN COMPUTING THE APPELLANTS OPERATING MARGIN. 11. REJECTION OF THE APPELLANTS PLEA FOR THE NEED FOR WORKING CAPITAL AND RISK ADJUSTMENTS. ERRED IN NOT ALLOWING THE WORKING CAPITAL ADJUSTMENT (TO ACCOUNT FOR THE DIFFERENCES IN RECEIVABLES AND PAYABLES OF THE APPELLANT VIS - - VIS COMPARABLE COMPANIES) AND RISK ADJUSTMENT (TO ACCOUNT FOR THE DIFFERENCES IN RISK PROFILE OF THE APPELLANT VIS - - VIS COMPARABLE COMPANIES) REQUESTED BY THE AP PELLANT. 4. B RIEFLY STATED RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES REQUIRED FOR TELECOMMUNICATION 3 RELATED PARTS MANUFACTURED BY ITS PARENT COMPANY I.E., M/S. NETHAWK OYJ, FINLAND . ASSE SSEE IS A 100% CAPTIVE UNIT FOR ITS PARENT AS A SOLITARY CUSTOMER. DURING THE YEAR, ASSESSEE REGISTERED CERTAIN INTERNATIONAL TRANSACTIONS AMOUNTING TO RS. 15,12,69,457/ - ON ACCOUNT OF PROVISION OF PROGRAMMING SERVICES . AS PER THE LEGAL REQUIREMENT U/S 92CA(1) OF THE ACT, AO MADE A REFERENCE TO THE TPO VIDE HIS LETTER DATED 21.12.2010 FOR D ETERMINING ARMS LENGTH PRICE. TPO CONSIDERED THE ASSESSEES TRANSFER PRICING STUDY REPORT AND ITS COMPARABLES AND REJECTED THE SAME EVENTUALLY . OTHERWISE, ASSESSEE APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD WITH OPERATING PROFIT TO TOTAL COST ( OP/ TC) AS THE PROFIT LEVEL INDICATOR (PLI). ACCORDINGLY, ASSESSEE BENCHMARKED THE TRANSACTIONS AT OP OF 11.90% O VER THE TOTAL COST . PLI AT 11.90% IS HIGHER THAN THE MARGINS REPORTED BY THE COMPARABLE COMPANIES CONSIDERED IN THE TP STUDY OF THE ASSESSEE . THUS, THE IMPUGNED INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH AS PER THE ASSESSEE . TH IS DECISION OF THE TPO IS NOW FINAL, SINCE THE ASSESSEES REPRESENTATIVE HAS NOT PRESSED THE GROUND NO.1 AND OTHERS BEFORE THE TRIBUNAL. THEN , THE TPO INVOKED THE PROVISIONS OF SECTION 92C(3) OF THE ACT AND PROCEEDED TO DETERMINE THE ALP. ACCORDINGLY, TPO CONDUCTED HIS SEARCH FOR SUITABLE COMPARABLES ON THE DAT A AVAILABLE IN PROWESS AND CAPITALINE DATABASES AND APPLIED THE FOLLOWING FILTERS. COMPANIES WHOSE DATA IS NOT AVAILABLE FOR AY 2007 - 2008 WERE EXCLUDED. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE S REVENUE IS