AMD Research & Development Center India Private Limited, Hyderabad V. DCIT, Circle-1(1), Hyderabad

ITA 86/HYD/2014

• Counselvise Citation: 8622514 RSA 2014
• Duration Of Justice: 1 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2015
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 19-02-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 22-01-2014
• Court: TRIBUNAL
• Department Lawyers: G APARNA RAO
• Assessee Lawyers: RAGHUNATHAN S
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 143(3); 201(1); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 86/HYD/2014 ASSESSMENT YEAR: 2009-10 AMD RESEARCH & DEVELOPMENT CENTER INDIA PRIVATE LTD., MADHAPUR, HYDERABAD [PAN: AAACZ1270E] VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI RAGHUNATHAN S. AR FOR REVENUE : SMT G.APARNA RAO, DR DATE OF HEARING : 19 - 0 2 - 201 5 DATE OF PRONOUNCEMENT : 0 4 - 0 3 - 2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE PREFERRED AGAINST TH E ORDER OF THE ASSESSING OFFICER PASSED U/S.143(3) R.W.S.144C OF T HE INCOME TAX ACT (ACT) CONSEQUENT TO THE DIRECTIONS OF DISPUTE RESOL UTION PANEL [DRP]. 2. ASSESSEE-COMPANY IN ITS APPEAL HAS RAISED THE FO LLOWING GROUNDS PERTAINING TO TRANSFER PRICING ADJUSTMENTS: I.T.A. NO.86 /HYD/2014 AMD RESEARCH & DEVELOPMENT CENTER INDIA PRIVATE LIMITED :- 2 -: '1. THE FINAL ORDER ISSUED BY THE LEARNED DEPUTY CO MMISSIONER OF INCOME-TAX, CIRCLE 1 (1) ['LD. AO'] DATED 03 DECEMB ER 2013 UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME -TAX ACT, 1961 ('THE ACT') IS BAD IN LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP') ERRED IN UPHOLDING THE ACTION OF THE LEARNED TRANSFER PRICING OFFICER ('L D.TPO')/LD.AO IN MAKING A TRANSFER PRICING ADJUSTMENT/ADDITION OF R S. 17,88,20,166/- UNDER SECTION 92CA(3) OF THE ACT. 2.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP/LD. TPO/LD. AO ERRED IN NOT UNDERTAKING AN INDEPENDENT VERIFICATION BUT SIMPLY RELYING ON THE ORDER DATED 28 JANUARY 2013 PASSED UNDER SECTION 201(1)/201(1A) BY THE LD. ASSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAX ) - I (LD. ADIT') WHILE COMING TO THE CONCLUSION THAT THE REIMBURSEME NTS OF EXPENSES BY THE APPELLANT TO ITS HOLDING COMPANY/ASSOCIATED ENTERPRISE ('AE') AMOUNTING TO RS.17,88,20,166/- WAS AGAINST A SERVIC E WHICH WAS NEVER RECEIVED (I.E. IN OTHER WORDS A SHAM TRANSACT ION/COLORABLE DEVISE TO SHIFT CASH/PROFITS OUTSIDE INDIA). 2.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E, THE HON'BLE DRP/LD.TPO/LD.AO ERRED IN NOT GIVING CREDENCE TO T HE FINDINGS IN THE ORDER OF THE COMMISSIONER OF CUSTOMS, CENTRAL EXCI SE AND SERVICE TAX DATED 23 JULY 2012 IN THIS REGARD. 2.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE DRP/LD.TPO/LD.AO ERRED IN NOT DEMONSTRATIN G THE TAX BENEFIT THE APPELLANT DERIVED BY SUCH ALLEGED SHA M ARRANGEMENT WHILE HOLDING THE REIMBURSEMENT OF RS.17,88,20,16 6/- AS SHAM ARRANGEMENT TO REPATRIATE CASH/PROFITS TO ITS AE. 2.4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E, THE HONBLE DRP/LD.TPO/LD.AO ERRED IN NOT APPRECIATING THE FAC T THAT AS A RESULT OF REIMBURSEMENT OF EXPENSES, THERE WAS AN ADDITIO NAL CASH INFLOW/PROFITS IN THE APPELLANT COMPANY AS AGAINST ALLEGED SHIFTING OF CASH/PROFITS TO ITS AE. 2.5 THE LD. AO/LD. TPO ERRED AND THE HON'BLE DRP T HEREON FURTHER ERRED IN UPHOLDING/CONFIRMING THE ACTION OF THE LD . TPO IN ARRIVING AT 'NIL' ALP FOR REIMBURSEMENT OF EXPENSES. 2.6 THE HON'BLE DRP, WHILE REJECTING THE SUBMISSIO NS MADE BY THE APPELLANT, HAVE ERRED IN NOT FOLLOWING THE DECISIO NS OF THE HON'BLE I.T.A. NO.86 /HYD/2014 AMD RESEARCH & DEVELOPMENT CENTER INDIA PRIVATE LIMITED :- 3 -: JURISDICTIONAL INCOME TAX APPELLATE TRIBUNAL LAYIN G DOWN THE JURISDICTIONAL POWER OF A TPO UNDER SECTION 92CA O F THE ACT. 3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.TPO ERRED IN ARRIVING AT RS.12,12,82,509/- AS A N ALTERNATE TP ADJUSTMENT TO THE INTERNATIONAL TRANSACTION OF PR OVIDING INFORMATION TECHNOLOGY/SOFTWARE DEVELOPMENT ('IT') SERVICE! TO ITS AE SHOULD THE PRIMARY TP ADJUSTMENT IS DELETED/RULED IN FAVOUR O F THE APPELLANT BY THE HIGHER APPELLATE AUTHORITIES. 3.1 THE LD. TPO ERRED ON FACTS AND IN LAW IN SELEC TING CERTAIN COMPANIES AS COMPARABLES THOUGH FUNCTIONALLY NOT C OMPARABLE TO THE APPELLANT. 3.2 THE LD. TPO ERRED ON FACTS AND IN LAW BY ACCEP TING COMPARABLES WHICH MAKE ABNORMAL PROFITS AND WHOSE PROFITS OVER THE PERIOD FLUCTUATE SIGNIFICANTLY, WHILE REJECTING COMPARABL ES WHICH WERE MAKING LOSSES. 3.3 THE LD. TPO ERRED ON FACTS AND IN LAW BY ARBIT RARILY ACCEPTING COMPANIES WITHOUT CONSIDERING THE TURNOVER AND SIZ E OF THE APPELLANT AND COMPARABLES. 3.4 THE LD. TPO ERRED IN LAW AND ON FACTS IN NOT A LLOWING APPROPRIATE ADJUSTMENTS UNDER RULE 1 OB TO ACCOUNT FOR, INTER ALIA, DIFFERENCES, WITH REGARD TO (A) RISK ADJUSTMENT; AND (B) DEPREC IATION ADJUSTMENT [I.E. NOT CONSIDERING '(PROFITS BEFORE DEPRECIATIO N, INTEREST AND TAX) / (TOTAL OPERATING COST EXCLUDING DEPRECIATION)' AS PROFIT LEVEL INDICATOR ('PLI') UNDER TRANSACTION NET MARGIN MET HOD ('TNMM')] BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES . 3.5 THE LD. TPO HAS ERRED IN NOT FOLLOWING T HE BINDING DECISIONS OF THE HONBLE JURISDICTIONAL INCOME TAX AP PELLATE TRIBUNAL WHILE PASSING THE TRANSFER PRICING ORDER UNDER SEC TION 92CA OF THE ACT'. 3. BRIEFLY STATED, ASSESSEE IS ENGAGED IN THE BUSIN ESS OF SOFTWARE RESEARCH & DEVELOPMENT AND DESIGN SERVICES AND IS A CAPTIVE SERVICE PROVIDER TO ITS PARENT COMPANY ATI TECHNOLOGIES INC ('ATI CANADA') AND WORKS ON COST PLUS MARK UP ARRANGEMENT. FOR THE YE AR UNDER CONSIDERATION, THE COMPANY FILED ITS RETURN OF INCO ME ON 30-09-2009 DISCLOSING TOTAL TAXABLE INCOME OF RS.96,35,115/. SINCE ASSESSEE HAS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES [AE], THE I.T.A. NO.86 /HYD/2014 AMD RESEARCH & DEVELOPMENT CENTER INDIA PRIVATE LIMITED :- 4 -: MATTER WAS REFERRED TO THE TRANSFER PRICING OFFICER [TPO], WHO PASSED AN ORDER U/S.92CA(3) OF THE ACT ON 29-01-2013, RECOMME NDING ADJUSTMENT OF RS.17,88,20,166/-. THE SAME WAS INCORPORATED BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER. ASSESSEE PR EFERRED A PETITION BEFORE THE DRP RAISING VARIOUS OBJECTIONS. THE DRP WHILE UPHOLDING THE ADJUSTMENT OF RS.17,88,20,166/-, HOWEVER, GAVE SOME RELIEF WITH REFERENCE WITH OBJECTIONS RELATING TO CLAIM OF SECT ION 10A. ASSESSEE IS AGGRIEVED AND RAISED THREE GROUNDS WITH VARIOUS SUB -GROUNDS. 4. WE HAVE HEARD THE LD.COUNSEL AND LD.DR IN DETAIL AND CONSIDERED NOT ONLY THE PAPER BOOKS PLACED ON RECORD BUT ALSO WRITTEN SUBMISSIONS FILED BY BOTH THE PARTIES IN THIS REGARD. 5. DURING THE ASSESSMENT YEAR RELEVANT TO FINANCIAL YEAR, ASSESSEE- COMPANY MADE CERTAIN REMITTANCES TO ATI CANADA WHIC H INTER ALIA INCLUDES REIMBURSEMENT OF EXPENSES TOWARDS ENGINEER ING SERVICES PAID BY ATI CANADA ON BEHALF OF ASSESSEE TO ONE M/S. SO CTRONICS INDIA PVT. LTD., AND TOWARDS SOFTWARE LICENSE PAYMENTS ON COST TO COST BASIS. CONCURRENTLY, THERE WERE SEPARATE PROCEEDINGS U/S.1 95 R.W.S. 201(1) OF THE INCOME TAX ACT FOR AYS.2007-08 TO 2010-11 INITI ATED BY ADIT, (IT)-I, INTERNATIONAL TAXATION. ADIT( INTERNATIONAL TAXATI ON) HAD PASSED AN ORDER U/S.201(1) AND 201(1A) OF THE ACT ON 28-01-20 13, WHEREIN THE REIMBURSEMENT OF ENGINEERING SERVICES AND TOWARDS S OFTWARE APPLICATIONS WAS HELD AS INCOME DISTRIBUTED TO PARE NT COMPANY WITHOUT RECEIVING ANY SERVICES/SOFTWARE. ON 29-01-2013, TH E TPO ALSO ADOPTED THE SAME STAND AND HELD THAT ASSESSEE DID NOT RECEI VE ANY SERVICES AND THEREFORE CLAIM OF REIMBURSEMENT OF EXPENSES CANNOT BE ALLOWED. ACCORDINGLY, HE DETERMINED THE ARM'S LENGTH PRICE [ ALP] OF THE SAID EXPENSES REIMBURSED AT NIL AND PROPOSED AN ADJUSTME NT OF RS.17,88,20,166/-. I.T.A. NO.86 /HYD/2014 AMD RESEARCH & DEVELOPMENT CENTER INDIA PRIVATE LIMITED :- 5 -: 6. THE TPO ALSO ANALYSED THE ASSESSEE'S INTERNATION AL TRANSACTIONS WITH AE TO AN EXTENT OF RS.98,25,47,908/-. ASSESSE E MAINTAINED DOCUMENTATION IN TERMS OF SECTION 92 AND FOR THE PU RPOSE OF BENCH MARKING, THE INTERNATIONAL TRANSACTIONS IN THE NATU RE OF PROVISION OF IT SERVICES, ASSESSEE HAS USED TRANSACTION NET MARGIN METHOD [TNMM] AS THE MOST APPROPRIATE METHOD WITH A PROFIT LEVEL IND ICATOR OF OPERATING PROFIT BY OPERATING COST. AS PER THE TP STUDY, ASS ESSEE EARNED MARGIN OF 11.78% UNDER TNMM AND ASSESSEES SELECTED COMPARABL ES ARITHMETICAL MEAN WAS DETERMINED AT 12.66%. SINCE THE MARGIN EAR NED BY ASSESSEE IS WITHIN THE REASONABLE RANGE, NO ADDITION WAS CONSID ERED U/S.92CA OF THE ACT. TPO CONDUCTED A FRESH SEARCH, REJECTED 11 OUT OF 17 COMPARABLE COMPANIES IDENTIFIED BY ASSESSEE AND SELECTED 17 NE W COMPANIES THEREBY TAKING 23 COMPANIES IN ALL FOR COMPARISON A ND ARRIVED AT ARM'S LENGTH MARGIN AT 23.79% AND PROPOSED TO MAKE A TRAN SFER PRICING ADJUSTMENT AMOUNTING TO RS.11,43,67,597/-. SINCE A SSESSEE MADE OBJECTIONS WITH REFERENCE TO VARIOUS COMPANIES, IN THE FINAL ORDER THE TPO PROPOSED 17 COMPANIES WHOSE MARGIN WAS ARRIVED AT 22.03% AND PROPOSED ALTERNATE ADJUSTMENT OF RS.12,12,82,059/-. SINCE, REIMBURSEMENT OF EXPENDING OF RS.17,88,20,166/- WA S DISALLOWED AND BY THAT REASON ASSESSEE'S ALP HAS INCREASED, TPO DID NOT MAKE ANY SEPARATE ADJUSTMENT. HOWEVER, HE LEFT A NOTE THAT IN CASE THE EXPENDITURE DISALLOWED OF REIMBURSABLE NATURE WAS A LLOWED TO ASSESSEE BY ANY HIGHER AUTHORITY, THEN THE TRANSFER PRICING ADJUSTING PROPOSED HAS TO BE MADE, SINCE THIS AMOUNT WAS SUBSUMED IN T HE HIGHER DISALLOWANCE WHEREIN THE PLI WAS INCREASED FROM 11. 38% TO 38.18%. HE DID NOT MAKE ANY SEPARATE ADDITION BUT NOTED THAT P LI HAS TO BE RE- ADJUSTED TO 11.38% AS INITIALLY CALCULATED AND IN S UCH A SCENARIO, THE SHORTFALL OF RS.12,12,82,059/- ADJUSTED ON ACCOUNT OF PROVISION OF SOFTWARE SERVICES WILL STAND. I.T.A. NO.86 /HYD/2014 AMD RESEARCH & DEVELOPMENT CENTER INDIA PRIVATE LIMITED :- 6 -: 7. DRP HAS CONFIRMED THE DISALLOWANCE ON REIMBURSEM ENT EXPENDITURE, THEREFORE, IT DID NOT ADJUDICATE THE W ORKING OF ALP AND THE OBJECTIONS ON COMPARABLES. 8. IN THE COURSE OF PRESENT PROCEEDINGS, IT WAS FAI RLY ADMITTED BY THE PARTIES BEFORE US THAT THE ISSUE OF SERVICES BEING RENDERED BY M/S. SOCTRONICS INDIA PVT. LTD., FOR WHICH EXPENDITURE W AS REIMBURSED WAS CONSIDERED BY THE ITAT VIDE ITS ORDER DT.22-10-2014 IN ITA NOS.692/HYD/2014 TO 695/HYD/2014, WHEREIN INTER ALIA IT WAS HELD THAT REIMBURSEMENT OF ENGINEERING EXPENSES AND SOFTWARE LICENSE EXPENSES MADE BY ASSESSEE-COMPANY TO ATI CANADA WAS FOR THE BENEFIT DERIVED BY THE COMPANY AND IS NOT A CASE OF PAYMENT OF EXTRA P ROFIT/CASH TO THE AE. VIDE THAT ORDER, THE ITAT HAS INDEED ALLOWED THE SO FTWARE EXPENSES AND REIMBURSEMENT OF EXPENSES, THEREFORE, THE DISALLOWA NCE PER SE OF RS.17,88,20,166/- AS SERVICES NOT PROVIDED AND ALP AT NIL DOES NOT STAND. THEREFORE, GROUND NO.2 RAISED BEFORE US ON THE ISSUE OF DISALLOWANCE OF ENTIRE REIMBURSEMENT OF EXPENDITURE IS TO BE HELD IN FAVOUR OF ASSESSEE. 9. HOWEVER, WE NOTICE FROM THE ORDERS OF THE AUTHO RITIES AND FROM THE ORDER OF ITAT THAT FOR THE FINANCIAL YEAR 2008- 09 I.E., RELEVANT FOR AY.2009-10 BEFORE US, THE ORDER OF THE ITAT INDICAT E THE SOFTWARE EXPENSES AT NIL AND ENGINEERING EXPENSES AT RS.10,7 6,77,131/-. HOWEVER, THE ORDERS OF TPO AS CONSIDERED IN THIS IM PUGNED ORDER INDICATE THAT AMOUNT WAS AT RS.17,88,20,166/-. EVE N THOUGH IN PRINCIPLE, WE AGREE WITH THE FINDINGS OF THE ITAT W ITH REFERENCE TO THE NATURE OF SERVICES BEING RENDERED BY THE SAID COMPA NY, WE, HOWEVER, DIRECT THE ASSESSING OFFICER TO EXAMINE THE AMOUNTS INVOLVED AND RECONCILE THE PAYMENTS CONSIDERED IN THE ORDER OF A DIT, INTERNATIONAL I.T.A. NO.86 /HYD/2014 AMD RESEARCH & DEVELOPMENT CENTER INDIA PRIVATE LIMITED :- 7 -: TAXATION U/S.201(1A) AND THE AMOUNTS CONSIDERED FOR DISALLOWANCE IN THIS ORDER BY THE ASSESSING OFFICER. 10. SUBJECT TO THE ABOVE OBSERVATIONS AND RECONCILI ATION OF THE AMOUNTS INVOLVED, THE DISALLOWANCE OF ENTIRE AMOUNT DOES NOT ARISE. GROUND NO.2 IS CONSIDERED ALLOWED ACCORDINGLY. 11. NOW, COMING TO THE ISSUE OF ALP ADJUSTMENT OF R S.12,12,82,059/-, EVEN THOUGH ASSESSEE HAS OBJECTED TO THE INCLUSION OF VARIOUS COMPARABLES, NOT GIVING ADJUSTMENT ON ACCOUNT OF DI FFERENCE IN DEPRECIATION POLICY AND OTHER OBJECTIONS WITH REFER ENCE TO DETERMINATION OF ALP, WE ARE OF THE OPINION THAT THIS ISSUE HAS T O BE RESTORED TO THE FILE OF DRP FOR FRESH ADJUDICATION. AS BRIEFLY STATED, THE DRP DID NOT ADJUDICATE ANY OF THESE ISSUES, AS IT HAS CONFIRMED THE DISALLOWANCE MADE BY THE TPO OF REIMBURSEMENT OF EXPENDITURE WHI CH RESULTED IN HIGHER ALP OF ASSESSEE'S TRANSACTIONS. SINCE THAT ISSUE IS HELD IN FAVOUR OF ASSESSEE IN GROUND NO.2, THE ISSUE OF ADJUSTMENT UNDER THE TP PROVISIONS HAS TO BE CONSIDERED AFRESH. SINCE THE DRP DID NOT EXAMINE ANY OF THESE ISSUES, WE ARE OF THE OPINION THAT THE MATTER HAS TO BE RESTORED TO THE FILE OF DRP, WHO SHOULD CONSIDER TH E OBJECTIONS OF ASSESSEE ON VARIOUS COMPARABLES. WE WERE ALSO INFO RMED THAT WITH REFERENCE TO THE ADJUSTMENT FOR DEPRECATION, THE DR P HAS ISSUED FAVOURABLE DIRECTIONS TO CONSIDER PROFIT BEFORE TAX AND DEPRECATION FOR ARRIVING THE PLI IN AY.2010-11. SINCE, WE ARE NOT ADJUDICATING THE ISSUES ON MERIT, THESE MATTERS CAN BE EXAMINED BY T HE DRP, CONSISTENT WITH THE ORDERS PASSED IN ASSESSEE'S OWN CASE IN OT HER YEARS. THE DRP ALSO SHOULD CONSIDER ASSESSEE'S OBJECTIONS ON VARIO US COMPARABLES AND PASS DETAILED ORDER ON THE PROPOSED TP ADDITION OF RS.12,12,82,059/-. ACCORDINGLY, THE ISSUES IN GROUND NO.3 RAISED BY AS SESSEE ARE RESTORED TO THE FILE OF DRP FOR WHICH PURPOSE, WE SET ASIDE FIN AL ORDER OF THE I.T.A. NO.86 /HYD/2014 AMD RESEARCH & DEVELOPMENT CENTER INDIA PRIVATE LIMITED :- 8 -: ASSESSING OFFICER AND THE ORDER OF THE DRP, SO THAT FRESH ORDER(S) CAN BE PASSED ACCORDING TO LAW AFTER GIVING DUE OPPORTUNIT Y TO ASSESSEE. WITH THESE OBSERVATIONS/DIRECTIONS, GROUND NO.3 IS CONSI DERED ALLOWED FOR STATISTICAL PURPOSES. 12. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 04 TH MARCH, 2015. SD/- SD/- (ASHA VIJAYARAGHAVAN) (B. RAMA KOTAIAH) JUDICIAL MEMBER ACC OUNTANT MEMBER HYDERABAD, DATED 04 TH MARCH, 2015 TNMM COPY TO : 1. AMD RESEARCH & DEVELOPMENT CENTER INDIA PRIVATE LIMITED, 8 TH FLOOR, BUILDING NO.11, RAHEJA IT PARK MINDSPACE, SURVEY NO.64, APIIC SOFTWARE LAYOUT, MADHAPUR, HYDERABAD 500 081. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1( 1), AAYAKAR BHAVAN, HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. THE DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATI ON, INCOME TAX TOWERS, 10-2-3, A.C. GUARDS, HYDERABAD-500 004. 5. ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICI NG), HYDERABAD-500 004. 6. D.R. ITAT, HYDERABAD.