Aithent Technologies Pvt. Ltd., New Delhi V. DCIT, Circle- 2(1), New Delhi

ITA 7819/DEL/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 5181 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 3 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I1
• Assessment Year: 2007-2008
• Appeal Filed On: 27-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Notional interest
• Section: 143(3); 133(6); 144C; 13; 92CA

Judgement Text

1 ITA NO. 7819/Del/2017 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘I-1’ NEW DELHI BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SHRI. YOGESH KUMAR U.S., JUDICIAL MEMBER I.T.A. No. 7819/DEL/2017 (A.Y 2007-08) Aithent Technologies Pvt. Ltd. A-16/9, Vasant Vihar, New Delhi PAN No. AAACS2319H (APPELLANT) Vs DCIT C. R. Building, I. P. Estate, New Delhi (RESPONDENT) ORDER PER YOGESH KUMAR U.S., JM This is an appeal preferred by the Assessee for the Assessment Year 2007-08 against the final assessment order dated 27/10/2017 passed under Section 143(3) r/w Section 144C of Income tax Act, 1961 (‘the Act’ for short), by DCIT, New Delhi. 2. The assessee had initially raised certain grounds of appeal, subsequently revised the grounds of Appeal on 05/4/2021, which are hereunder:- “ 1. That the order of the Ld. AO is bad in law and on the facts and circumstances of the case. 2. That the Ld. TPO / AO has erred on facts and circumstances of thecae in determining the arm’s length price of the Appellant’s international transaction with its Appellant by Sh. Atul Ninawat, CA Respondent by Sh. Surender Pal, CIT (DR) Date of Hearing 28.03.2022 Date of Pronouncement 06.04.2022 2 ITA NO. 7819/Del/2017 associated enterprise in respect of rendering of software development services to its associated enterprise and thereby resulting in the enhancement of returned income of the Appellant by INR 2,37,16,517/-. 3. The Ld. TPO/ Hon’ble DRP has erred on facts and circumstances of the case in selecting the following comparables:- i. Helios & Matheson Information Technology Ltd. ii. E-Zest Solutions Ltd. iii. Avani Cimcon Technologies Ltd. 4. The Ld. TPO has erred in facts and circumstances of the case in rejecting the TP study submitted by the Appellant. 5. The Ld. TPO has erred in facts and circumstances of the case in rejecting the fresh comparable search process, submitted by the Appellant, in a summary manner. 6. The Ld. TPO has erred on facts and circumstances of the case in rejecting the following comparables selected by the Appellant: i. Melstar Information Technologies Ltd. ii. V & J Softech Ltd. iii. FSL Software Technologies 'Ltd 7. The Ld. TPO has erred in computing the incorrect margin of the selected comparables. 8. The Ld. TPO has erred in not giving effect to the directions of the Hon’ble DRP to treat foreign exchange gain/loss as operating income/expenses. 9. The Ld. TPO has effect to the directions of the Hon’ble DRP to allow the working capital adjustment. 3 ITA NO. 7819/Del/2017 10. The Ld. TPO / Hon'ble DRP has erred in laws and facts of the case by ignoring the idle capacity adjustment made on account of the idle capacity. 11. The Ld. AO has erred in law by initiating penalty proceedings u/s. 271(l)(c) of the Income Tax Act, 1961 without considering the bonafide intentions of the Appellant and prior to the disposal of the matter by the higher authorities. 12. The above grounds are without prejudice to each other.” 3. Brief facts of the case are that, the assessee is a software-consulting, providing software solution to Global clients. The Associated Enterprise, Aithent Inc., is New York based company which identifies the customers and the work is assigned to the Assessee Company. As per Transfer Pricing Report, the assessee is primarily engaged in two types of software development activities viz., off-the-shelf software and specified technical software specifications. The compensation for software development between the two related parties is determined either on time and material contract basis or on fixed price contract basis. The customers are primarily USA, Canada based, and Associates Enterprise determines the pricing for the customers. 4. During the year under consideration, the assessee had international transaction, wherein the assessee had used Transactional Net Margin Method (TNMM) to benchmark the international transaction. 5. The assessee Company was selected for scrutiny & the Ld. AO referred the case to TPO. The Ld. TPO passed an order dated 26.10.2010, wherein the made transfer pricing adjustment of Rs. 9,49,21,677/- on account of following transactions:- 4 ITA NO. 7819/Del/2017 (a) Arm’s Length Price for software services amounting to Rs. 8,61,31,210/- (b) Interest on loan provided to wholly owned subsidiary amounting to Rs. 87,90,467/-. 6. The Ld. AO passed draft assessment order u/s 143(3) r.w.s 144C of the Act on 22-12-2010, by making following additions:- (a) National interest on the security deposit received from the tenant amounting to Rs.11,58,822/- (b) Depreciation on House Property given on rent amounting to Rs. 26,03,665. (c) Arms length price adjustment on software activities and amounting to Rs. 8,61,31,210 (d) Interest on loan given to the subsidiary amounting to Rs. 87,90,467. 7. The assessee company filed its objection to the draft assessment order, and the DRP-1 issued directions u/s 144C(5) of the Act on 03-09-2011 to the AO. The final assessment order has been passed by the AO u/s 143(3) /144C of the Act on 31-10-2011 by making following adjustments.- (a) Transfer Pricing Adjustments amounting to Rs. 9,49,21,677; (b) Depreciation on House Property amounting to Rs. 26,03,665; and (c) Notional interest on the deposits amounting to Rs. 11,58,822. 8. Aggrieved by the final assessment order passed by the Ld. AO dated 31/10/2011, the assessee company filed an appeal before the Tribunal in ITA No. 5846/Del/2011. The Coordinate Bench of this Tribunal while dealing with the issue of addition made on account of transfer pricing adjustment, partly allowed the appeal on 12/06/2015 and remanded the matter to TPO/AO in following manners:- 5 ITA NO. 7819/Del/2017 “11. The assessee has assailed the inclusion of some companies in the list of comparables. The TPO is directed to consider the arguments of the assessee and then decide as per law as to whether such companies ITA No.5846/Del/2011 are comparable or not. Needless to say, the assessee will be allowed a reasonable opportunity of hearing by the TPO/AO.” 9. After the order of remand by the Tribunal, the TPO passed an order u/s 92CA of the IT Act on 05/10/2016, by rejecting the fresh comparables and made proposal for total adjustment of Rs. 8,82,97,299/-. A draft assessment order has been passed on 21/11/2016 by incorporating proposed addition. The DRP has issued directions u/s 144C(5) of the Act, vide order dated 05/08/2017 and based on the direction of the DRP final assessment order has been passed on 27/10/2017. 10. Aggrieved by the final assessment order dated 27/10/2017, the assessee has preferred the present Appeal on the revised grounds mentioned above. The Ground No. 1 is general in nature, which requires no adjudication. 11. The Ground No. 2 & 3 are in respect of determining Arm’s Length Price of international transaction of the assessee with its AE’s for rendering software development services and also against selecting following 3 comparables by the TPO. i. Helios & Matheson Information Technology Ltd. ii. E-Zest Solutions Ltd. iii. Avani Cimcon Technologies Ltd. 6 ITA NO. 7819/Del/2017 12. i. Helios & Matheson Information Technology Ltd. The Ld. Counsel submitted that, the Helios & Matheson Information Technology Ltd. deals with software products and there is no segmental data available for revenue from the sale of software products, on the other hand, assessee is engaged in providing software services. The said Company also failed to clear TPO’s employee cost filter of 25 percentage revenue. Further the Ld. Counsel has also relied on the following decisions. a. ITA No. 5870/Del/2011 for AY 2007-08 dated 17/03/2020 (Infogain India Pvt. Ltd. Vs. DCIT) b. ITA No. 5645/Del/2011 for AY 2007-08 dated 24/08/2014 (Toluna India Pvt. Ltd. Vs. ACIT) c. ITA No 1084/Del./2016 for AY 2007-08 dated 18/11/2019 (M/s Agilent Technologies (International ) Vs. ACIT) 12.1. Per contra, Ld. DR relied on the Orders of the Lower Authorities and justified the reasoning and conclusions made thereon. 12.2 On hearing both the parties, we find force in the argument of the Ld. AR. Admittedly Helios & Matheson Information Technology Ltd. was considered as not comparable in the similar circumstances in the case of Infogain India Pvt. Ltd. Vs. DCIT in ITA No. 5870/Del/2011 for AY 2007-08 vide order dated 17/03.2020, wherein following the order of the Tribunal in the case of Global Logic Pvt. Ltd. (ITA No.5809/Del./2011), held as under:- “56. The Annual Report of this company shows that revenue is from software sales and services. This company is engaged in ITES BPO services, offshore delivery, project management services, public sector services, maritime practices and executive education information systems. No segmental details are available. There being revenue from software sales and services, makes this 7 ITA NO. 7819/Del/2017 company functionally dissimilar from that of the assessee. For similar reasons, the co- ordinate bench in the case of Global Logic India Pvt Ltd [supra] has excluded this company from the final set of comparables. The relevant findings read as under: "15. The TPO considered this company as comparable by observing that it was into the software development services. The assessee's objections were repelled. 16. We find from the Annual accounts of this company that it is engaged in rendering ITES BPO services, application management services, offshore delivery, project management services, public sector services, maritime practices and executive education information system, etc. The above description of the nature of works carried out by this company manifests that the character of services provided by the assessee company cannot at all be considered as comparable with this company. Similar view has been taken by the Tribunal in the case of Toluna India Pvt. Ltd. (supra). Following the same, we direct it to be considered as not comparable." 57. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.” 12.3. Similar views have been taken by the Co-ordinate bench of this Tribunal in the case of Toluna India Pvt. Ltd., in ITA No. 5645/Del/2011, for AY 2007-08 vide order dated 24/08/2014 and in the case of M/s Agilent Technologies (International ) Vs. ACIT in ITA No. 1084/Del./2016 for AY 2007-08 vide order dated 18/11/2019. In view of the above binding decisions of the Tribunal, we hold that Helios & Matheson Information Technology Ltd. to be excluded from the list of comparables and directed accordingly. 8 ITA NO. 7819/Del/2017 13. ii. E-Zest Solutions Ltd. The Ld. Counsel submitted that, the E-Zest Solutions Ltd. is into the business of providing KPO Service. Further, there is no segmental data is available for revenue for KPO Services. The Ld. Counsel has taken us through the website extracts of the said Company to substantiate his contentions and argued that, E-Zest Solutions Ltd. is liable to be excluded from the comparables. Further the Ld. Counsel has also relied on the following decisions. a. IT(TP)A. No. 1231/Bang/2011 for AY 2007-08 dated 16/10/2015 (Meritor LVS India (P) Ltd. Vs. ACIT) b. ITA No. 5870/Del/2011 for AY 2007-08 dated 17/03/2020 (Infogain India Pvt. Ltd. Vs. DCIT) 13.1. On the other hand, Ld. DR relied on the Orders of the Lower Authorities. 13.2. On hearing both the parties, we are agreeing with the argument of the Ld. AR. The E-Zest Solutions Ltd. was considered as not comparable in the similar circumstances in the case of Meritor LVS India (P) Ltd. Vs. ACIT in IT(TP)A. No. 1231/Bang/2011 for AY 2007-08 vide order dated 16/10/2015 held as under:- “2) "E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 9 ITA NO. 7819/Del/2017 14.2 Before us, the learned Authorized Representative contended that this company ought to be excluded from the list of comparables on the IT(TP)A.1231/Bang/2011 Page - 13 ground that it is functionally different to the assessee. It is submitted by the learned Authorized Representative that this company is engaged in 'e- Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorized Representative contends, are high end ITES normally categorized as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorized Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorized Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables 10 ITA NO. 7819/Del/2017 only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e- Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I- Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not IT(TP)A.1231/Bang/2011 Page - 14 comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. /TPO is accordingly directed." 13.3. Similar view has been taken by the Co-ordinate bench of this Tribunal in the case of Infogain India Pvt. Ltd. in ITA No. 5870/Del/2011 for AY 2007- 08 vide order dated 17/03/2020. In view of the above binding decisions of the Tribunal, we hold that the E-Zest Solutions Ltd. to be excluded from the list of comparables, directed accordingly. 14. iii. Avani Cimcon Technologies Ltd. The Ld. Counsel for the assessee contended that, the said company is engaged in developing software products, wherein the assessee has engaged in providing software services in the year under consideration and not engaged in developing the software. There is no segmental data available for the said Company for sale the of software products. Further, this Company has abnormal profit level of 11 ITA NO. 7819/Del/2017 various years from 2005-06 to AY 2008-09. 14.1. The Ld. Counsel taken us through the website extracts of the said Company and submitted that, the said Company is in developing software product since from FY 2000-01 such as: WYSIWYG Website Wizard, Licensing & Contracting System, NEBUPRO (New Business Processing, DXchange, Umrah Booking Solution, Content Management Solutions, etc. On the other hand assessee is engaged in providing software services and not into the development of the software. Therefore, argued that E-Zest Solutions Ltd. is deserves to be excluded by the TPO from the comparables while computing the Arm’s Length Price. Further the Ld. Counsel has also relied on the following decisions. a. ITA No. 5870/Del/2011 for AY 2007-08 (Infogain India Pvt. Ltd. Vs. DCIT) order dated 17/03/2020. b. ITA No. 1054/Bang/2011, AY 2007-08 (Trilogy E-Business Software India Pvt. Ltd. order dated 23/11/2012. c. ITA No. 6200/Del/2012, AY 2007-08 (Headstrong Services India Vs. DCIT) order dated 11.02.2016. 14.2. Per contra, Ld. DR submitted that, the Assessee is capable of developing the software and by relying on the findings and conclusion of the Lower Authorities, justified the orders of the Lower Authorities. 14.3. We have heard the parties and perused the records on the issue in dispute; we find force in the argument of the Ld. AR. Merely because the assessee is capable of developing software doesn’t mean that the assessee had developed the software in the year under consideration. Further the Avani Cimcon Technologies Ltd. was considered as not comparable in the similar circumstances in the case of Infogain India Pvt. Ltd. ITA No. 5870/Del/2011 for AY 2007-08 vide order da ted 17/03/2020, wherein held as under:- 12 ITA NO. 7819/Del/2017 “Avani Cimcon Technologies Ltd. “54. The Annual Report of this company shows that this company derives revenue from both software development services and sale of software products [D Exchange] without any segmental details which makes this company functionally dissimilar. For similar reasons, the co-ordinate bench in the case of Global Logic India Pvt. Ltd [supra] has excluded this company from the final set of comparables. The relevant findings read as under: “9. The TPO observed on page 89 of his order that this company is also a software development and consulting company. In his opinion, all the filters applied by him were fulfilled and, as such, this company was liable to be considered as comparable. The assessee objected to the inclusion of this company before the DRP by contending that not only the turnover of this company was much lower, but also the profits were extremely high. Rejecting the assessee’s contentions, the DRP upheld the TPO’s view on the inclusion of this company in the final set of comparables. 10. It can be seen from the Annual accounts of this company, a copy of which is available on record, that albeit it is a pure software development service provider, but, is utilizing its own softwares in rendering such services. The Tribunal in Motorola 42 Solutions India Pvt. Ltd., has held this company to be incomparable by accepting the assessee’s contention that the high operating margins of this company were on account of difference in its asset base. It is further relevant to note that this company, apart from rendering software development services, is also engaged into the sale of software products and the accounts maintained by it are on entity level without there being any segregation for software development 13 ITA NO. 7819/Del/2017 segment. As the TPO has considered the entity level figures of this company for making a comparison with the assessee company, such a course of action cannot be permitted because of the inclusion of profit from sale of software products into the overall profitability of this company. Neither separate profits are available, nor there is any measure provided for segregating profit on sale of software products from the overall profit of this company for finding out a comparable segment similar with that of the assessee company. As the profits of the software development portion cannot be ascertained, we hold that it cannot be considered as comparable on entity level. We, therefore, order for the exclusion of this company from the final set of comparables.” 55. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.” 14.4. Similar views have been taken by the Bangalore bench of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. ITA No. 1054/Bang/2011, AY 2007-08 vide order dated 23/11/2012 and the Coordinate Bench of this Tribunal in the case of Headstrong Services India in ITA No. 6200/Del/2012 vide order dated 11.02.2016. Further, in so far as having abnormal profit level of various years in respect of Avani Cimcon Technologies Ltd. the said issue has been dealt by the Tribunal and held as under. 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company 14 ITA NO. 7819/Del/2017 would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- "7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- 15 ITA NO. 7819/Del/2017 Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable.” 14.5. In view of the above binding decisions of the Tribunal, we hold that the Avani Cimcon Technologies Ltd. to be excluded from the list of comparables and directed accordingly. 14.6. Accordingly the Grounds of Appeal No. 2 & 3 are allowed. 16 ITA NO. 7819/Del/2017 15. The Ground No. 4 to 6 are against rejection of comparables selected by the assessee. We have gone through the order of the Tribunal in the first round in ITA No. 5846/Del/2011 dated 12/06/2015 and found that, the Tribunal while remanding the matter to the A.O, only remanded the Companies which are included in the list of comparables, which were assailed thereon but the Tribunal has not remanded issue of excluded companies. Further the Ld. AR has also not pressed those grounds. Accordingly, we dismissed Grounds No. 4 to 6. 16. The Ground No. 7 is in respect of computing incorrect margin of selected comparables, Ground No. 8 & 9 are in respect of not giving effect to the direction of DRP. The Ld. Counsel for the assessee drawn our attention to para 3.4 of the DRP wherein the following directions have been given to the TPO. “3.4. The TPO is directed to redraw the list of comparable cases, in light of the observations above, compute correct operational margin of the shortlisted comparables considering that forex gains/loss of the assessee as well as comparable companies, is taken as operational in nature both for revenue and expenditure. The TPO is further directed to work out the working capital adjustment based on the shortlisted comparables company’s data.” The Ld. Counsel submitted that, though there was specific direction to the TPO to compute operational margin of comparable and also to work out the working capital adjustment based on the short listed comparable company data, the Ld. TPO has not followed the said direction of the Tribunal. We are agreeing with the contentions of the Ld. AR. Ergo, we hereby direct the TPO to redraw the list of comparable cases, in light of the observations above, compute correct operational margin of the shortlisted comparables considering that forex gains/loss of the assessee as well as comparable companies, is taken as operational in nature both for revenue and 17 ITA NO. 7819/Del/2017 expenditure. The TPO is further directed to work out the working capital adjustment based on the shortlisted comparables company’s data in accordance with law. Accordingly, Grounds No. 7 to 9 are allowed for statistical purpose. 17. The Ground No. 10 is in respect of adjustment made on account of idle capacity, Ground No. 11 is in respect of initiating penalty proceedings u/s 271(1)(c) of the Act which have been not pressed by the AR. Accordingly, Grounds No. 10 & 11 are dismissed. 18. Ground No. 12 & 13 are general in nature. Accordingly, Grounds No. 12 & 13 are dismissed. 19. In the result, appeal of the assessee is partly allowed for statistical purpose. Order pronounced in the Open Court on this 06th Day of April, 2022 Sd/- Sd/- (ANIL CHATURVEDI) (YOGESH KUMAR U.S.) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 06/04/2022 R. Naheed * Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 18 ITA NO. 7819/Del/2017