CABLE & WIRELESS (INDIA) LTD, BANGALORE V. ADDL DIT(IT) RG 1, MUMBAI

ITA 822/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75491 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 05-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 31-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: SUNIL M LALA
• Keywords: Related party transaction; Transfer pricing; International transaction

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K B ENCH, MUMBAI . . , , !'# , $ % BEFORE SHRI I.P. BANSAL, JM AND SHRI N.K. BILLAI YA, AM ./ I.T.A. NO.822/MUM2013 ( & & & & / ASSESSMENT YEAR : 2008-09 M/S. CABLE & WIRELESS (INDIA) LTD., UNIT 1A & 1B, CREATOR BLOCK ITPL, WHITEFIELD ROAD, BANGALORE-560 066 / VS. THE ADIT (INTERNATIONAL TAXATION), RANGE-1, MUMBAI ' $ ./ () ./ PAN/GIR NO. : AAACC 6133F ( '* / APPELLANT ) .. ( +,'* / RESPONDENT ) '* - / APPELLANT BY: SHRI SUNIL M. LALA +,'* . - / RESPONDENT BY: SHRI AJEET KUMAR JAIN . /0$ / DATE OF HEARING :05.02.2014 12& . /0$ / DATE OF PRONOUNCEMENT :05.02.2014 3 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER O F THE LD. CIT(A)- 15, MUMBAI DT.16.11.2012 PERTAINING TO A.Y. 2008-0 9. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) - 15 ITA NO. 822/M/13 2 [CIT(A)] HAS ERRED IN CONFIRMING THE ACTION OF TH E ADDITIONAL DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION -RA NGE 1 (AO) AND ADDITIONAL COMMISSIONER OF INCOME-TAX (TRANSFER PRICING) - 1(2) (TPO) OF MAKING AN UNJUSTIFIED TRANSFER PRIC ING ADJUSTMENT OF RS. 6,08,81,192. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF LEARNED AO/ TPO RETAINING ZENITH INFOTECH LIMITED A S A COMPARABLE COMPANY WITHOUT CONSIDERING THE FUNCTION AL COMPARABILITY AND OTHER RELEVANT FACTORS. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS ERRED IN MISINTERPRETING THE GROUNDS OF APPEAL FILED BY THE APPELLANT WITH REGARD TO LOS S MAKING COMPANIES REJECTED BY THE TPO WITHOUT CONSIDERING T HE FUNCTIONAL COMPARABILITY AND OTHER RELEVANT FACTORS. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS ERRED IN NOT CONSIDERING THE ADDITIONAL COMPARABLES REQUESTED BY THE APPELLANT BY MISINTERP RETING THE GROUNDS OF APPEAL FILED BY THE APPELLANT AND WITHOU T CONSIDERING THE FUNCTIONAL COMPARABILITY AND OTHER RELEVANT FAC TORS. CIT(A) HAS FURTHER ERRED IN REJECTING THE ADDITIONAL COMPARABL ES ON THE REASON OF ABSENCE OF GROUNDS OF APPEAL WITH REGARD TO SAME . 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS ERRED IN NOT GRANTING AN OPPORTUNITY TO THE APPELLANT TO FILE ADDITIONAL GROUNDS WITH REGAR D TO ACCEPTABILITY OF ADDITIONAL COMPARABLES AND INTERNA L TNMM. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS ERRED IN NOT CONSIDERING THE SUBMISSIONS OF THE APPELLANT WITH REGARD TO ACCEPTA BILITY OF TRANSACTIONAL NET MARGIN METHOD BY COMPARING THE MA RGINS OF THE APPELLANT FROM THE TRANSACTIONS WITH ASSOCIATED ENT ERPRISES WITH THAT OF THIRD PARTY TRANSACTIONS (INTERNAL TNMM), MERELY ON THE REASON OF NON- AVAILABILITY OF GROUNDS OF APPEAL WI TH REGARD TO SAME. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS ERRED IN NOT ASKING THE AO / TPO TO ITA NO. 822/M/13 3 VERIFY THE CONTENTION OF THE APPELLANT WITH REGARD TO ACCEPTABILITY OF INTERNAL TNMM. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE AO/TPO IN DISREGARDING THE APPLICATION OF MULTIPLE- YEAR DATA WHILE COMPUTING THE MARGINS OF ALLEGED COMPARABLE C OMPANIES AS SUCH DATA HAD AN INFLUENCE IN DETERMINING THE PRI CING POLICY OF THE APPELLANT. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE AO/TPO IN NOT GRANTING THE BENEFITS OF PROVISO TO S ECTION 92C(2) OF THE ACT TO THE APPELLANT. 3. GROUND NO. 1 IS GENERAL IN NATURE AND NEEDS NO S EPARATE ADJUDICATION. 4. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STA TED THAT THE ASSESSEE IS NOT KEEN IN PURSUING THE GRIEVANCE RAISED VIDE G ROUND NO. 3 & GROUND NO. 8. THESE GROUNDS ARE ACCORDINGLY DISMISSED AS NOT PRESSED. 5. THE SURVIVING GROUNDS REVOLVE AROUND TWO ISSUES. A) RETENTION OF ZENITH INFOTECH LTD. AS COMPARABLE COMPANY AND B) NOT GRANTING AN OPPORTUNITY TO THE ASSESSEE WITH REGARD TO ACCEPTABILITY OF ADDITIONAL COMPARABLES AND INTERN AL TNMM. 6. THE ASSESSEE IS ENGAGED IN PROVIDING ANCILLARY T ELECOM SERVICES COMPRISING NETWORK DESIGN AND PROJECT IMPLEMENTATIO N, PRIVATE NETWORK MANAGEMENT AND MAINTENANCE SERVICES AND OTHER TECHN ICAL SERVICES TO VARIOUS CORPORATE CUSTOMERS. TRANSACTION WITH ASSOC IATE ENTERPRISE (AE) IS ONLY IN THE FORM OF TELECOM ANCILLARY SERVICES P ROVIDED BY THE ASSESSEE TO ITS ASSOCIATED COMPANIES I.E. GROUP COMPANIES. DURING THE YEAR UNDER ITA NO. 822/M/13 4 CONSIDERATION, THE ASSESSEE ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AE. S. NO. NAME AND ADDRESS OF ASSOCIATED ENTERPRISES (AES) DESCRIPTION OF TRANSACTION WITH AES AMOUNT PAID/PAYABLE RECEIVED/ RECEIVABLE AS PER BOOKS OF ACCOUNT (RS.) 1 CABLE & WIRELESS GLOBAL LTD. UK, 124 THEOBAIDS ROAD, LONDON WCIX8RX UNITED KINGDOM DATA AND VOICE NETWORK DESIGNING, INTEGRATION & IMPLEMENTATION, NETWORK MANAGEMENT/SALE OF TELECOM EQUIPMENTS 1,30,650,615 2. CABLE & WIRELESS GLOBAL BUSINESS SERVICES PTY LTD. AUSTRALIA LEVEL 12, 3 SPRING STREET, SYDNEY, NSW 2000 DATA AND VOICE NETWORK DESIGNING, INTEGRATION & IMPLEMENTATION, NETWORK MANAGEMENT 799,116 3. CABLE & WIRELESS GLOBAL PTE LTD SINGAPORE TEMASEK AVE. # 14- 00,CENTENNIAL TOWER, SINGAPORE 039190 DATA AND VOICE NETWORK DESIGNING, INTEGRATION & IMPLEMENTATION, NETWORK MANAGEMENT 191,299,269 7. HAVING ENTERED INTO THE AFORESTATED INTERNATIONA L TRANSACTION, THE ASSESSEE SUBMITTED STATUTORY REPORTS AS PER THE PRO VISIONS OF THE ACT. THE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (T NMM) AS THE MOST APPROPRIATE METHOD. TAKING OPERATING MARGIN AS THE PROFIT LEVEL INDICATOR (PLI), THE ASSESSEE USED FIVE BROADLY COMPARABLE IN DEPENDENT COMPANIES AS STATED HEREINABOVE. S. NO. COMPANY NAME 2005-06 OPM% 2006-07 OPM% 2007-08 OPM% WEIGHTED AVERAGE ITA NO. 822/M/13 5 1. ANTELEC LTD. 10.88 NA NA 10.88 2. CANVASM TECHNOLOGIES LTD. NA 34.43 -35.43 -22.76 3. TATA TECHNOLOGIES LTD. 7.65 3.55 NA 5.54 4. WTI ADVANCED TECHNOLOGY LTD. 4.44 NA NA 4.44 5. ZENITH INFOTECH LTD. 34.14 46.96 40.27 41.34 ARITHMETICAL MEAN 7.89 8. DURING THE COURSE OF TRANSFER PRICING PROCEEDIN GS, THE ASSESSEE ALSO SUBMITTED ITS SEGMENTAL ACCOUNT WITH AE WHICH READ AS UNDER: PARTICULARS RELATED PARTY TRANSACTIONS THIRD PARTY TRANSACTIONS SEGMENTAL REVENUE(A) 385,324 223,823 COST OF GOODS SOLD 93,114 96,428 OPERATING EXPENSES 157,649 177,243 ALLOCATION OF UN-ALLOCATED EXPENSES 103,735 60,257 TOTAL EXPENSES (B) 354,498 333,928 OPERATING PROFIT(C=A-B 30,826 110,105 OPERATING PROFIT MARGIN(C/A X 100) 8.00% (49.20)% 9. THE TPO SOUGHT CLARIFICATION FROM THE ASSESSEE I N RESPECT OF THESE FIVE COMPARABLES. THE ASSESSEE WAS ASKED TO SUBMIT UPDATED MARGIN OF WTI ADVANCED TECHNOLOGY LTD. ASSESSEE FAILED TO UP DATE THE SAME. THE UPDATED MARGIN OF REMAINING 4 COMPARABLES GAVE OPER ATING MARGIN OF 8.9%. ACCORDING TO THE TPO M/S. CANVASM TECHNOLOGI ES LTD. FAILED TO MEET 25% RELATED PARTY TRANSACTION FILTER AS ALMOST 100% OF THIS CONCERNS TRANSACTION IS WITH ITS ASSOCIATED ENTERPRISES. TH E TPO DID NOT ACCEPT THE SAME AS A COMPARABLE FOR THE PURPOSE OF BENCHMA RKING TRANSACTION. ITA NO. 822/M/13 6 10. DURING THE COURSE OF THE PROCEEDINGS, THE ASSES SEE REJECTED ONE OF ITS OWN COMPARABLES WHICH WAS SELECTED BY IT EARLIE R WHICH PERTAINS TO ZENITH INFOTECH LTD. THE REASON GIVEN BY THE ASSES SEE IS THAT THE SAID COMPANY IS NOT FUNCTIONALLY COMPARABLE AND HAS HIGH ABNORMAL MARGIN. THE ASSESSEE ALSO REQUESTED FOR THE INCLUSION OF AD DITIONAL COMPARABLES NAMELY (I) GTL LTD., (II) M/S. ORG INFORMATICS LTD AND (III) WIRELESS T.T. INFO SERVICES LTD. THIS CLAIM OF THE ASSESSEE WAS NOT ENTERTAINED BY THE TPO WHO WAS OF THE OPINION THAT THE ASSESSEE IT SELF IN ITS ORIGINAL REPORT HAS TAKEN M/S. ZENITH INFOTECH LTD., AS FUNC TIONALLY COMPARABLE. THE TPO ALSO REJECTED THE CLAIM OF THE INCLUSION OF ADDITIONAL COMPARABLES STATING THAT THE ASSESSEE HAS NOT GIVEN ANY REASONING OR SEARCH STRATEGY FOR INCLUDING THESE NEW COMPARABLE S NOR THE ASSESSEE HAS EXPLAINED WHY THESE COMPARABLES WERE NOT CONSIDERE D IN ORIGINAL TP STUDY. FOLLOWING 3 COMPARABLES FINALLY TAKEN BY T HE TPO COMPARABLY COMPANY OPM FOR F.Y. 2007-08 1. ANTELEC LTD. 14.82% 2. TATA TECHNOLOGIES LTD. 15.87% 3. ZENITH INFOTECH LTD. 40.7% ARITHMETIC MEAN 23.79% AND ACCORDINGLY COMPUTED THE ARMS LENGTH PRICE CAL LING FOR AN UPWARD ADJUSTMENT OF RS. 6,08,81,192/- TO THE VALUE OF INT ERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE. 11. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) AND REITERATED ITS CLAIM AS TAKEN BEFORE THE TPO. SO FAR AS THE CLAIM OF INCLUSION OF ADDITIONAL COMPARABLES IS CONCERNED, T HE LD. CIT(A) OUTRIGHTLY REJECTED IT AS THE CLAIM WAS BEYOND GROU NDS OF APPEAL. IN SO ITA NO. 822/M/13 7 FAR AS THE EXCLUSION OF M/S. ZENITH INFOTECH LTD., AS A COMPARABLE CASE IS CONCERNED, THE LD. CIT(A) AFTER CONSIDERING THE FAC TS AND THE SUBMISSIONS AT PARA-XII ON PAGE-16 OF ITS ORDER HELD THAT : THE CONTENTION OF THE APPELLANT TO EXCLUDE ZENITH INFOTECH LTD FROM THE SET OF COMPARABLES IS NOT FOUND TO BE ACC EPTABLE 12. AGGRIEVED, ASSESSEE IS BEFORE US. THE LD. COUN SEL FOR THE ASSESSEE STRONGLY CONTENDED THAT WHEN INTERNAL TNMM WERE AVA ILABLE, THERE WAS NO REASON TO GO FOR EXTERNAL COMPARABLE TNMM. FOR THIS PROPOSITION, THE LD. COUNSEL RELIED UPON THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TECHNIMONT ICB INDIA (P) LTD. 138 ITD 23. TH E LD. COUNSEL STRONGLY SUBMITTED THAT AT THE TIME OF THE ORIGINAL TP STUDY, THE COMPLETE DETAILS IN RESPECT OF M/S. ZENITH INFOTECH WAS NOT AVAILABLE THOUGH THE SAME WAS TAKEN AS COMPARABLE BY THE ASSESSEE. BUT AFTER PERUSING THE FINANCIAL REPORT OF THE SAID COMPANY, IT WAS NOTICE D THAT THE SAID COMPANY IS FUNCTIONALLY NOT COMPARABLE AND THEREFORE THE A SSESSEE HAS REQUESTED TO EXCLUDE THE SAID COMPANY FROM THE SET OF COMPARA BLES. THE LD. COUNSEL FURTHER STATED THAT THE LOWER AUTHORITIES G ROSSLY ERRED IN NOT ALLOWING THE ASSESSEE TO INCLUDE ADDITIONAL COMPARA BLES WITHOUT PROPERLY EXAMINING THOSE COMPARABLES. 13. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE FINDINGS OF THE LD. CIT(A). 14. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE RELEVANT MATERIAL EVIDENC E BROUGHT ON RECORD IN THE LIGHT OF THE RULE 18(6) OF THE INCOME TAX APPEL LATE TRIBUNAL RULES 1963, IN OUR UNDERSTANDING OF LAW, INTERNAL TNMM SH OULD GET PRECEDENCE OVER THE EXTERNAL TNMM COMPARABLES. THIS VIEW IS ALSO SUPPORTED BY ITA NO. 822/M/13 8 VARIOUS DECISIONS OF THE TRIBUNAL ONE OF WHICH IS M /S. TECHNIMONT ICB INDIA (P) LTD.138 ITD 23 WHEREIN THE TRIBUNAL THU S HELD AS UNDER: THERE IS CUE IN THE RULE ITSELF AS TO PREFERENCE T O BE GIVEN TO INTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS. IT IS BECAUSE THE DELEGATED LEGISLATURE HAS FIRSTLY REFERRED TO THE N ET PROFIT MARGIN REALIZED BY THE ENTERPRISE (INTERNAL) FROM A COMPAR ABLE UNCONTROLLED TRANSACTION AND, THEREAFTER, IT POINTS TOWARDS NET PROFIT MARGIN REALIZED BY AN UNRELATED ENTERPRISE ( EXTERNAL) FROM A COMPARABLE UNCONTROLLED TRANSACTION. THUS WHERE P OTENTIAL COMPARABLE IS AVAILABLE IN THE SHAPE OF AN UNCONTRO LLED TRANSACTION OF THE SAME ASSESSEE, IT IS LIKELY TO H AVE HIGHER DEGREE OF COMPARABILITY VIS--VIS COMPARABLES IDENTIFIED A MONGST THE UNCONTROLLED TRANSACTIONS OF THIRD PARTIES. THE UN DERLYING OBJECT BEHIND COMPUTING ALP OF AN INTERNATIONAL TRANSACTIO N IS TO BE FIND OUT THE PROFITS WHICH SUCH ENTERPRISE WOULD HAVE EA RNED IF THE TRANSACTION HAD BEEN WITH SOME THIRD PARTY INSTEAD OF RELATED PARTY. WHEN THE DATA IS AVAILABLE SHOWING PROFIT M ARGIN OF THAT ENTERPRISE ITSELF FROM A THIRD PARTY, IT IS ALWAYS SAFE AND ADVISABLE TO HAVE RECOURSE TO SUCH INTERNAL COMPARABLE CASE. THE REASON IS PATENT THAT THE VARIOUS FACTORS HAVING BEARING ON THE QUALITY OF OUTPUT, ASSETS EMPLOYED, INPUT COST ETC. CONTINUE T O REMAIN BY AND LARGE SAME IN CASE OF AN INTERNAL COMPARABLE. THE EFFECT OF DIFFERENCE DUE TO SUCH INHERENT FACTORS ON COMPARIS ON MADE WITH THE THIRD PARTIES, GETS NEUTRALIZED WHEN COMPARISON IS MADE WITH INTERNAL COMPARABLE. EX CONSEQUENTI, IT FOLLOWS TH AT AN INTERNAL COMPARABLE UNCONTROLLED TRANSACTION IS MORE NOTEWO RTHY VIS--VIS ITS COUNTERPART I.E. EXTERNAL COMPARABLE. RESPECTFULLY FOLLOWING THE AFORESTATED FINDINGS OF THE TRIBUNAL, IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE RESTORE T HIS ISSUE BACK TO THE FILES OF THE TPO. THE TPO IS DIRECTED TO CONSIDER THE IN TERNAL COMPARABLE TNMM. THE ASSESSEE IS DIRECTED TO PROVIDE NECESSAR Y DETAILS TO THE TPO. BEING FAIR TO BOTH PARTIES, WE ALLOW THE ASSESSEE T O BRING FORTH ADDITIONAL COMPARABLES AND DIRECT THE TPO TO ACCEPT/REJECT THE SAME AFTER NECESSARY EXAMINATION/VERIFICATION AS PER THE PROVISIONS OF L AW. NEEDLESS TO MENTION THAT THE TPO SHALL GIVE REASONABLE OPPORTUN ITY OF BEING HEARD TO THE ASSESSEE. ITA NO. 822/M/13 9 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 05.02.2014 . 3 . 2& $ 4 56 05.02.2014 2 . 7 SD/- SD/- (I.P. BANSAL ) (N.K. BILLAIYA) /JUDICIAL MEMBER $ / ACCOUNTANT MEMBER MUMBAI; 5 DATED 5.2.2014 . . ./ RJ , SR. PS 3 3 3 3 . .. . +/ +/ +/ +/ 8 &/ 8 &/ 8 &/ 8 &/ / COPY OF THE ORDER FORWARDED TO : 1. '* / THE APPELLANT 2. +,'* / THE RESPONDENT. 3. 9 ( ) / THE CIT(A)- 4. 9 / CIT 5. :7 +/ , , / DR, ITAT, MUMBAI 6. 7; < / GUARD FILE. 3 3 3 3 / BY ORDER, , / +/ //TRUE COPY// = == = / > > > > ( ( ( ( (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI