V2 TECH VENTURES P.LTD, NAVI MUMBAI V. DCIT 15(3)(1), MUMBAI

ITA 777/MUM/2016

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 7097 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Assessment Year: 2011-2012
• Appeal Filed On: 14-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing
• Section: 143(3)

Judgement Text

ITA No. 777/Mum/2016 Assessment Years: 2011-12 Page 1 of 4 IN THE INCOME TAX APPELLATE TRIBUNAL "J" BENCH, MUMBAI [Coram: Pramod Kumar, (Vice President) And Amarjit Singh, Judicial Member] ITA No. 777/Mum/2016 Assessment Years: 2011-12 V2 Tech Ventures Pvt. Ltd. ................... Appellant B-103-104, Vashi Infotech Park, Tower A, Above Vashi Railway Station, Vashi, Navi Mumabi [PAN: AABCV9796J] Vs Deputy Commissioner of Income Tax 15 (3)(1) Mumbai .................. Respondent Appearances: Vispi Patel along with Suresh Dhoot for the Appellant Ajit Kumar for the Respondent Date of conclusion of hearing : 15.12.2022 Date of pronouncement of order : 10.03.2022 O R D E R Per Pramod Kumar, VP: 1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 9 th January 2016 passed by the learned Assessing Officer under section 143(3) r.w.s. 144C (13) of the Income Tax Act 1961 for the assessment year 2010-11. 2. The first grievance raised in this appeal is that on and the facts and in the circumstances of the case, the learned Assessing Officer was not justified in making the arm’s length price adjustment (ALP) of Rs. 2,26,10,544 in respect of provision for software development services, and that the Transfer Pricing Officer erred in recommending the said ALP adjustment and the Dispute Resolution Panel erred in confirming the said ALP adjustment. The twelve grounds of appeal, set out in summarized grounds of appeal, are primarily arguments in support of this grievance. 3. To adjustment on this issue in appeal, only a few material points need to be taken note of. The assessee is a private limited company operating in software development industry and is primarily engaged in providing customized software developments services as per end user ITA No. 777/Mum/2016 Assessment Years: 2011-12 Page 2 of 4 requirements. During the relevant previous year, the assessee rendered software support services, valued at Rs. 17,11,18,158 to it’s US based associated enterprises V2 Solutions Inc, USA. The benchmarking was done on the basis of Cost Plus Method (CPM). A reference was made, by the Assessing Officer, to the Transfer Pricing Officer. In the ensuing proceedings, the Transfer Pricing Officer rejected the CPM method and adopted Transactional Net Margin Method (TNMM) as it was stated to be most appropriate method for this case. When assessee submitted that internal TNMM be adopted and submitted documents in support of the same, the TPO rejected it and observed as follows:- The submission of the assessee is carefully perused and considered. However, the segmental accounts as provided by the accounts are not acceptable due the following shortcomings;  The audit report for the FY 2010-11 prepared by M/s. D. T. Samani & Associates dated 05/09.2011 did not contain any segmentation. It also did not say anything regarding capacity utilisation by the assessee company.  The assessee itself has filed two sets of segmental accounts showing assessee’s PLI at 13.79% & 15.39% without any proper explanation regarding their variance.  The segmental audit report dated 28/11/2011 filed by the assessee contains the auditor’s comment as “.................. the information and explanation provide to us ...........”. This is nothing but a disclaimer from the auditory who has signed the audit report on the basis of information provided by the management to him. Hence, its authenticity is not beyond doubt. It has only been created considering the Transfer Pricing auditing in mind by showing the transaction with the AE in good light.  Allocation of expenses have been arbitrarily done resulting in skewed result like AE segment PLI 13.79 – 15.39% and the non-AE segment PLI 8.01- 9.44% and the entity level PLI being 7.14%. Based on the above discussions the segmental audit report of the assessee is rejected and the benchmarking has been done at the entity level and the arm’s length adjustment is computed. 4. Aggrieved, assessee raised the objections before the Dispute Resolution Panel but without any success by making a rather cryptic observation as follows:- On the basis of above finding, the TPO rejected the segmental audit report. Further, he benchmarked the transition at the entity level under TNMM and then derived the Arm’s Length Adjustment as per the provisions of the section. Accordingly, the contention of the TPO is upheld. 5. The assessee is aggrieved and is in appeal before us. While there are many other important and significant aspects of the case, but, for our purposes, it is not really necessary to deal with those aspects at this stage. ITA No. 777/Mum/2016 Assessment Years: 2011-12 Page 3 of 4 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. We are of the considered view that the reasons, for which internal TNMM is rejected, as a most appropriate method (MAM), are not really correct and convincing. The disclaimer by the auditor with respect to “information and explanation provided to us (i.e. the auditor)” is too common a disclaimer which is almost a standard practice, and, in any case, there is no specific information that is sought to be disclaimed vis-à-vis it’s authenticity. It is not a clear as to which is the figure with respect to authenticity of which learned TPO had doubts. It was open to TPO to ask a specific question and deal with the reply thereto, or to at least point out which is the information in respect of which he had issues. This disclaimer may raise a bonafide doubt but that cannot be reason enough to reject the segmental accounts as a whole. Rejecting the internal TNMM on the basis of such a sweeping generalization cannot meet a judicial approval. Similarly, the segmental accounts showing different PLIs in different segments, i.e. 13.79%-153.9% as against 8.01%-9.44%, cannot be reason enough to reject the segmental accounts. Having said that, the observations regarding “allocation of expenses have been arbitrarily done resulting in skewed result”, in our considered view, need to be examined on merits by calling for further explanations of the assessee and taking a call on those explanations in a fair and reasonable manner in accordance with the law and by giving yet another opportunity of hearing we are thus of the considered view that while we must uphold the plea of the assessee in principle, we should remit the matter to the assessment stage so that the matter may be examined afresh, in the terms indicated above. The limited purpose of adjudicating upon the expense allocation basis, and if no defects are found in the same, the internal TNMM will have to be accepted. In any other case, however, all contentions will remain open. With these observations the matter stands restored to the file of the Assessing Officer. As the matter is remitted to the assessment stage for this short reason alone, all other issues raised in the appeal are academic and infructuous as now. 8. The only other grievance raised in the appeal is with respect of Assessing Officer’s declining the depreciation of Rs. 5,455. Looking to the smallness of amount, however, this grievance was not really pressed. 9. In the result, the appeal is allowed for statistical purposes in the terms indicated above. Pronouncement in the open court today on the 10 th March, 2022. Sd/- Sd/- Amarjit Singh Pramod Kumar (Judicial Member) (Vice President) Mumbai, dated the 10 th day of March 2022. ITA No. 777/Mum/2016 Assessment Years: 2011-12 Page 4 of 4 Copies to: (1) The Appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File By order True Copy Assistant Registrar/Sr.PS Income Tax Appellate Tribunal Mumbai benches, Mumbai