DCIT, V. M/s Electronics for Imaging India Pvt. Ltd.,

ITA 876/BANG/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95270 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 03-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction

Judgement Text

IT(TP)A.876/BANG/2013 & CO.167/BANG/2015 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'B', BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER I.T(TP).A NO.876/BANG/2013 (ASSESSMENT YEAR : 2004-05) DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 11(3), BANGALORE ..APPELLANT V. M/S. ELECTRONICS FOR IMAGING INDIA P. LTD, KALYANI PLATINA, 4 TH FLOOR, BLOCK I, 24, EPIP ZONE, PHASE II, WHITEFIELD, BANGALORE 560 066 ..RESPONDENT PAN : AAACG6053E CROSS OBJECTION NO.167/BANG/2015 I.T(TP).A NO.876/BANG/2013 (ASSESSMENT YEAR : 2004-05) (BY THE ASSESSEE) ASSESSEE BY : SHRI. PADAM CHAND KHINDHA, CA REVENUE BY : DR. P. K. SRIHARI, ADDL. CIT HEARD ON : 08.09.2015 PRONOUNCED ON : 30.09.2015 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEAL AND CROSS OBJECTION FILED BY REVE NUE AND ASSESSEE RESPECTIVELY DIRECTED AGAINST AN ORDER DT.19.03.201 3, OF CIT (A) IV, BENGALURU, FOR THE ASST. YEAR 2004-05. IT(TP)A.876/BANG/2013 & CO.167/BANG/2015 PAGE - 2 02. APPEAL OF THE REVENUE IS TAKEN UP FIRST FOR DIS POSAL. REVENUE HAS ALTOGETHER TAKEN SEVEN GROUNDS OF WHICH GROUNDS 1, 6 AND 7 ARE GENERAL NEEDING NO SPECIFIC ADJUDICATION. 03. VIDE ITS GROUNDS 2 AND 3, REVENUE IS AGGRIEVED WITH THE DIRECTION OF CIT (A) FOR EXCLUSION OF M/S. SYNERGY LOG-IN SYSTEMS LT D AND M/S. TRANSWORLD INFOTECH LTD FROM THE LIST OF COMPARABLES SELECTED BY TPO FOR BENCH MARKING THE VALUE OF INTERNATIONAL TRANSACTIONS OF ASSESSEE WITH ITS AE. 04. FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN SOFT WARE DEVELOPMENT, MESSAGING AND MARKETING SUPPORT ACTIVITIES, WAS RE NDERING SUCH SERVICES TO ITS PRINCIPAL ELECTRONICS FOR IMAGING INC., USA. FOR J USTIFYING THE REVENUE OF RS.10,02,75,735/- IT RECEIVED ON ACCOUNT OF INTERNA TIONAL TRANSACTIONS, IT ADOPTED COST PLUS METHOD IN ITS TP STUDY. TPO WAS OF THE O PINION THAT ASSESSEES METHODOLOGY OF WORKING OF COST PLUS 10% FOR SOFTWAR E SERVICES TO AE AND COST PLUS 8% FOR MARKETING SERVICES COULD NOT BE ACCEPTE D SINCE RELIABLE DATA ESTABLISHING FUNCTIONAL COMPARABILITY OF THE COMPAN IES SELECTED BY THE ASSESSEE AS COMPARABLES, WITH THE ASSESSEE, COULD NOT BE EST ABLISHED. THERE AFTER THE TPO ADOPTED TNMM AS THE MOST APPROPRIATE METHOD FOR BENCH MARKING THE VALUE OF INTERNATIONAL TRANSACTIONS. FOR SUCH TNMM HE TOOK FIVE COMPANIES AS COMPARABLES WHICH INCIDENTALLY APPEARED IN THE LIST PROVIDED BY THE ASSESSEE IN ITS COST PLUS METHOD ANALYSIS. COMPARABLES SELECTE D WERE THE FOLLOWING : 1. M/S. MOTHERSON SUMI INFOTECH AND DESIGNS LTD, 2. M/S. SYNERGY LOG-IN SYSTEMS LTD, 3. TRANSWORLD INFOTECH LTD, IT(TP)A.876/BANG/2013 & CO.167/BANG/2015 PAGE - 3 4. M/S. VISU INTERNATIONAL LTD, 5. M/S. ZIGMA SOFTWARE LTD AVERAGE PLI OF THE COMPARABLES ARRIVED AT BY THE TP O WAS 19.43%. 05. TPO RECOMMENDED AN UPWARD ADJUSTMENT OF RS.1,30 ,68,729/-, AS WORKED OUT HEREUNDER : TOTAL OPERATIVE COST INCURRED RS.9,64,39,382/- ARMS LENGTH PRICE @ 119.43% RS.11,51,77,553/- PRICE RECEIVED RS.10,02,75,736/- ADJUSTMENT U/S.92CA RS.1,30,68,729/- ASSESSMENT WAS COMPLETED ACCORDINGLY. 06. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE THE CIT (A). CIT (A) DIRECTED EXCLUSION OF M/S. SYNERGY LOG-IN SYSTEMS L TD AND M/S. TRANSWORLD INFOTECH LTD FROM THE LIST OF COMPARABLES CONSIDERE D BY TPO. REASON STATED BY CIT (A) WAS THAT THE FINANCIAL YEAR OF THE SAID COM PANY DID NOT COINCIDE WITH THAT OF THE ASSESSEE. AS PER CIT (A), THE PUBLISHE D ACCOUNTS OF THESE TWO COMPANIES WERE FOR YEAR ENDING 30.06.2004 AND HENCE COULD NOT BE CONSIDERED AS PROPER COMPARABLES SINCE ASSESSEES FINANCIAL YE AR WAS ENDING ON 31.03.2004. 07. NOW BEFORE US, LD. DR SUBMITTED THAT THE TWO CO MPANIES, NAMELY, M/S. SYNERGY LOG-IN SYSTEMS LTD AND M/S. TRANSWORLD INFO TECH LTD, HAD APPEARED IN ASSESSEES OWN LIST IN ITS TP STUDY. HENCE ACCORDI NG TO HIM, CIT (A) FELL IN ERROR IN DIRECTING EXCLUSION OF THESE COMPANIES. 08. PER CONTRA, LD. AR SUPPORTED THE ORDER OF CIT ( A). IT(TP)A.876/BANG/2013 & CO.167/BANG/2015 PAGE - 4 09. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT ACCOUNTING PERIOD OF M/S. SYNERGY LOG- IN SYSTEMS LTD AND M/S. TRANSWORLD INFOTECH LTD, WAS ONE ENDING ON 30.06.20 04 AND THE DATA CONSIDERED FOR WORKING OUT THEIR PLI WAS RESULTS OF SUCH ACCOU NTING PERIOD. FOR BENCH MARKING AN INTERNATIONAL TRANSACTION, COMPARISON SH OULD BE WITH AN UNCONTROLLED TRANSACTION AND AN UNCONTROLLED TRANSA CTION WOULD BE COMPARABLE WITH INTERNATIONAL TRANSACTION ONLY IF THERE ARE NO DIFFERENCES BETWEEN THE TRANSACTIONS BEING COMPARED THAT ARE LIKELY TO MATE RIALLY AFFECT THE PRICES OF COST INCURRED OR PAID IN OR THE PROFIT ARISING FROM SUCH TRANSACTION IN THE OPEN MARKET. RELEVANT RULE 10B(4) IS REPRODUCED HEREUN DER : 10B(4) THE DATA TO BE USED IN ANALYSING THE COMPARA BILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE IN TERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO Y EARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRA NSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. 10. UNLESS AND UNTIL THERE ARE RELIABLE PUBLISHED A CCOUNTING RECORDS, WHICH WOULD HELP TO CULL OUT THE RESULT OF A COMPARABLE C OMPANY FOR A FINANCIAL YEAR COMPARABLE TO THAT OF THE TESTED PARTY ANY ATTEMPTE D COMPARISON WOULD NOT YIELD CORRECT RESULTS. IN OUR OPINION THE CIT (A) WAS JUSTIFIED IN DIRECTING EXCLUSION OF M/S. SYNERGY LOG-IN SYSTEMS LTD AND M/ S. TRANSWORLD INFOTECH LTD, SINCE THEIR ACCOUNTING YEAR ENDED ON A DIFFERE NT DATE, WHEN COMPARED TO THAT OF THE ASSESSEE. WE DO NOT FIND ANY REASON TO INTERFERE. GROUNDS 2 AND 3 OF THE REVENUE STAND DISMISSED. IT(TP)A.876/BANG/2013 & CO.167/BANG/2015 PAGE - 5 11. VIDE ITS GROUND 4, GRIEVANCE RAISED BY THE REVE NUE IS THAT CIT (A) HELD FOREIGN EXCHANGE LOSS / GAIN AS OPERATING IN NATURE . 12. LD. DR IN SUPPORT OF THE ABOVE GROUND SUBMITTED THAT CIT (A) HAD NOT ESTABLISHED THE NEXUS BETWEEN THE FOREIGN EXCHANGE LOSS / GAIN WITH THE EXPORT ACTIVITY OF THE ASSESSEE. 13. PER CONTRA, LD. AR SUPPORTED THE ORDER OF CIT ( A). 14. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. ASSESSEES SUBMISSION WITH REGARD TO FOREIGN EXCHANGE GAIN OF RS.29,96,409/- WHICH IT CONSIDERED TO BE OPERATING IN NATURE WAS AS UNDER : 82. IT WAS SUBMITTED THAT WHILE COMPUTING THE OPER ATING MARGINS OF THE APPELLANT THE TPO HAD NOT CONSIDERED THE FOR EIGN EXCHANGE GAIN OF RS.29,96,409. EXCHANGE GAIN OR LOSS AROSE ON ACCOUNT OF FACTORS LIKE REALISATION OF SALES, PAYMENT TO SUPPL IERS, AND RESTATEMENT OF THE VALUES OF ASSETS AND LIABILITIES . THESE CAUSES AND FACTORS WERE OPERATING IN NATURE, AS PER PARAGRAPH 134 ON PAGE 46 OF OECD DRAFT GUIDELINES ON TRANSACTIONAL PROFIT ME THODS. RELIANCE WAS PLACED ON THE DECISION OF THE BENGALUR U BENCH OF THE HONBLE ITAT IN THE CASE OF SAP LABS 6 ITR (TRIB) 8 1 , WHERE IT WAS HELD THAT FOREIGN EXCHANGE GAIN NEEDED TO BE CONSID ERED AS OPERATING IN NATURE WHILE DETERMINING THE ALP. CONSIDERING THE NATURE OF ACTIVITIES OF ASSESSEE AN D THE NATURE OF REVENUES EARNED BY IT FROM SOFTWARE DEVELOPMENT ACTIVITIES RENDERED ABROAD, WE ARE OF THE OPINION THAT THE FOREIGN EXCHANGE GAIN COULD HA VE BEEN CONSTRUED ONLY AS INCIDENTAL TO THE SALES, PAYMENT TO SUPPLIERS ETC., WE CANNOT THEREFORE FIND ANY FAULT WITH THE DIRECTION OF THE CIT (A) TO CONSIDER SUCH FOREIGN EXCHANGE GAIN AS OPERATING IN NATURE. GROUND 4 OF THE REVENUE STAND S DISMISSED. IT(TP)A.876/BANG/2013 & CO.167/BANG/2015 PAGE - 6 15. VIDE ITS GROUND 5, GRIEVANCE RAISED BY REVENUE IS THAT CIT (A) DIRECTED REWORKING OF THE OPERATING MARGIN BY ALLOCATING COS T ON THE BASIS OF MAN-HOURS. 16. FACTS APROPOS ARE THAT ASSESSEE WAS HAVING BOTH AE AND NON-AE SEGMENTS AND THE INDIRECT COST WAS ALLOCATED BY ASS ESSEE BETWEEN THESE TWO SEGMENTS ON THE BASIS OF MAN-HOURS, IN ITS TP STUDY . TPO HAD REJECTED THIS BASIS OF ALLOCATION AND ON THE OTHER HAND ADOPTED T HE TURNOVER RATIO AS BASIS FOR ALLOCATION. CONTENTION OF THE ASSESSEE WAS THAT IT S MAIN ASSETS WERE ITS EMPLOYEES AND ACCOUNTS WERE MAINTAINED ON ERP, ENAB LING IT TRACK ALL COSTS BASED ON COST CENTRES LINKED TO EACH SEGMENT. ASSES SEE SUBMITTED THAT MAN POWER WAS ITS MOST CRITICAL RESOURCE AND THEREFORE ALLOCATION ON THE BASIS OF MAN-MONTH WAS SCIENTIFIC AND APPROPRIATE. THOUGH T HE TPO WAS NOT APPRECIATIVE OF THE ABOVE CONTENTIONS, CIT (A) ACCE PTED IT, CONSIDERING THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. EHPT INDIA P. LTD [(2011) 16 TAXMANN.COM 305]. 17. NOW BEFORE US, LD. DR SUBMITTED THAT ALLOCATIO N MADE BY ASSESSEE HAD NO SCIENTIFIC BASIS. ACCORDING TO HIM, COST COULD BE BETTER ALLOCATED ON THE BASIS OF REVENUES IN DIFFERENT SEGMENTS. ASSESSEE COULD NOT SHOW HOW THE METHOD OF MAN-HOUR BASIS WAS BETTER THAN TURNOVER BASIS FOR A LLOCATION OF INDIRECT COST. 18. PER CONTRA, LD. AR SUBMITTED THAT ASSESSEE WAS BILLING ON COST PLUS BASIS. BILLINGS WERE THUS BASED ON THE TOTAL COST INCURRED BY THE ASSESSEE. SUCH COSTS WERE WORKED OUT BY THE ASSESSEE BY ALLOCATING THE I NDIRECT COSTS ON THE BASIS OF HEAD COUNT. THUS THE REVENUE EARNED BY ASSESSEE IT SELF WAS BASED ON MAN-HOURS IT(TP)A.876/BANG/2013 & CO.167/BANG/2015 PAGE - 7 SPENT BY THE EMPLOYEES. ACCORDING TO HIM, ALLOCATI ON BASED ON REVENUE EARNED WOULD BE INAPPROPRIATE IN ASSESSEES CASE WHEN THE REVENUE STREAM ITSELF WAS DEPENDENT ON THE COST ALLOCATED ON HEAD-COUNT BASIS . RELIANCE WAS ONCE AGAIN PLACED ON HONBLE DELHI HIGH COURT JUDGMENT IN THE CASE OF EHPT INDIA P. LTD (SUPRA). 19. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT ASSESSEE WAS BILLING ITS AE ON COST PL US BASIS. SUCH COST WAS ARRIVED AT BY THE ASSESSEE BY ALLOCATING THE INDIRE CT COST ON THE BASIS OF MAN- HOURS AND DIRECT COST DIRECTLY. WHEN THE REVENUE O F THE ASSESSEE ITSELF WAS BASED ON AN ALLOCATION DONE ON MAN-HOUR BASIS, IN O UR OPINION, IT WAS NOT APPROPRIATE TO ADOPT A DIFFERENT YARDSTICK FOR WORK ING OUT ITS PLI. THAT FOR A SOFTWARE DEVELOPMENT COMPANY, THE MOST APPROPRIATE METHOD FOR ALLOCATING INDIRECT COST IS HEAD-COUNT METHOD HAS BEEN CLEARLY BROUGHT OUT BY HONBLE DELHI HIGH COURT JUDGMENT IN THE CASE OF EHPT INDIA P. LTD (SUPRA). RELEVANT PARA 8 OF THE JUDGMENT READ AS UNDER : 8. WE HAVE EXAMINED THE MATTER IN THE LIGHT OF THE SUBMISSIONS MADE BEFORE US. THE FATE OF THE APPEALS MUST DEPEND UPON THE ANSWER TO THE QUESTION WHETHER THE METHOD ADOPTED B Y THE ASSESSEE, NAMELY, THAT OF APPORTIONING THE INDIRECT EXPENSES BETWEEN THE STP UNIT AND THE NON-STP DOMESTIC UNIT ON THE BASIS OF THE 'HEAD-COUNT' IS AN UNREASONABLE METHOD AND IF IT HAS BEEN FOLLOWED CONSISTENTLY BY THE ASSESSEE IN T HE PAST AND HAS ALSO BEEN ACCEPTED BY THE DEPARTMENT, SHOULD TH E REVENUE AUTHORITIES BE PERMITTED TO DISTURB THE SAME IN THE YEARS UNDER APPEAL. IT SEEMS TO US THAT THE SETTLED POSITION IN SUCH MATTERS IS TO EXAMINE WHETHER THE METHOD WHICH IS CANVASSED FO R ACCEPTANCE IS THE ONE (A) WHICH HAS BEEN CONSISTENT LY IT(TP)A.876/BANG/2013 & CO.167/BANG/2015 PAGE - 8 ACCEPTED BY BOTH THE PARTIES, NAMELY, THE ASSESSEE AND THE REVENUE IN THE PAST; (B) WHICH IS A REASONABLE METH OD HAVING REGARD TO THE NATURE OF THE BUSINESS AND OTHER RELE VANT FACTORS AND (C) WHICH DOES NOT DISTORT THE PROFITS. THERE IS NO DISPUTE THAT THE HEAD-COUNT METHOD HAS BEEN CONSIST ENTLY FOLLOWED AND ACCEPTED WITHOUT DEMUR IN THE PAST. A DEPARTURE THEREFROM IS SOUGHT TO BE MADE ONLY IN THE YEARS UNDER CONSID ERATION BY THE DEPARTMENTAL AUTHORITIES. THAT IT IS A REASONAB LE METHOD AND FAIR TO BOTH SIDES IS INDICATED BY THE CONDUCT OF T HE REVENUE AUTHORITIES IN ACCEPTING IT IN THE PAST. THE REASON ABLENESS OR FAIRNESS OF THE METHOD OF HEAD-COUNT ADOPTED BY THE ASSESSEE CAN BE SAID TO BE INDICATED BY THE FACT THAT IN THE ASSESSMENT YEAR 2002-03 THE ASSESSEE APPORTIONED MORE COMMON EXPENSES TO THE STP UNIT, THEREBY REDUCING ITS PROF ITS AND CONSEQUENTLY REDUCING THE CLAIM FOR DEDUCTION UNDER SECTION 10A AND AT THE SAME TIME OFFERING A HIGHER INCOME I N THE DOMESTIC UNIT THAN WHAT WOULD HAVE BEEN OFFERED HAD THE TURNOVER METHOD OF APPORTIONMENT ADOPTED BY THE ASS ESSING OFFICER BEEN FOLLOWED. THIS ASPECT HAS BEEN NOTICED BY THE CIT(A) IN HIS ORDER FOR THE ASSESSMENT YEAR 2002-03 AS FOLLOWS: 'IN VIEW OF THE ABOVE FACTS, THOUGH THE RIGHT COURS E OF ALLOCATING THE COMMON EXPENSES IS ON THE BASIS OF TURNOVER BASIS. THE APPELLANT HAD FILED A CALCULATI ON ON TURNOVER BASIS, THE DEDUCTION AVAILABLE TO THE APPELLANT COMPANY COMES TO RS. 6,53,49,442 INSTEAD OF RS. 6,51,50,217 CLAIMED BY THE APPELLANT. THE WORKI NG GIVEN BY THE APPELLANT COUNSEL HAS BEEN FOUND TO BE CORRECT. IN VIEW OF THE ABOVE FACTS, AS THE ASSESSE E HAD SHOWN MORE INCOME THOUGH THE RIGHT COURSE OF ALLOCA TION FOR INDIRECT EXPENSES IS TURNOVER BASIS BUT AS THE APPELLANT COMPANY HAD SHOWN MORE INCOME, THE SAME I S TO BE ACCEPTED AND CANNOT BE DISTURBED. IN VIEW OF THE ABOVE, NO DISTURBANCE IS REQUIRED TO BE MADE IN RES PECT OF INDIRECT EXPENSES ALLOCATED BY THE APPELLANT COM PANY. IN VIEW OF THE ABOVE FACTS, THE ADDITION MADE BY TH E ASSESSING OFFICER IS DELETED. IT WAS ONLY AS A MATTER OF PRINCIPLE THAT THE CIT(A ) UPHELD THE METHOD ADOPTED BY THE ASSESSING OFFICER EVEN TH OUGH THE IT(TP)A.876/BANG/2013 & CO.167/BANG/2015 PAGE - 9 RESULT WAS IN FAVOUR OF THE ASSESSEE. NEITHER THE A SSESSING OFFICER NOR THE CIT(A) HAS RAISED ANY SERIOUS QUEST IONS ABOUT THE VALIDITY OF THE HEAD-COUNT METHOD ADOPTED BY TH E ASSESSEE NOR HAVE THEY POINTED OUT ANY COMMERCIAL ACCOUNTING PRINCIPLE OR ACCOUNTING STANDARD THAT REPUDIATES THE METHOD. THUS ACCORDING TO US, DIRECTION OF CIT (A) THAT APP ORTIONMENT OF COST HAS TO BE DONE ON MAN-HOUR BASIS AND NOT ON TURNOVER BASIS CO ULD NOT BE FAULTED WITH. WE DO NOT FIND ANY REASON TO INTERFERE WITH THE DIR ECTION OF CIT (A) IN THIS REGARD. GROUND.5 OF THE REVENUE IS DISMISSED. 20. COMING TO THE CROSS OBJECTION OF THE ASSESSEE, LD. AR SUBMITTED THAT IF DIRECTION OF THE CIT (A) WITH REGARD TO EXCLUSION O F TWO COMPANIES, NAMELY, M/S. SYNERGY LOG-IN SYSTEMS LTD AND M/S. TRANSWORLD INFOTECH LTD WAS ACCEPTED, HE HAD NO OTHER GRIEVANCE. ACCORDINGLY W E DISMISS THE CROSS OBJECTION OF THE ASSESSEE. 21. IN THE RESULT, APPEAL OF THE REVENUE AND CROSS OBJECTION OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30TH DAY OF S EPTEMBER, 2015. SD/- SD/- (SMT.ASHA VIJAYARAGHAVAN) (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN IT(TP)A.876/BANG/2013 & CO.167/BANG/2015 PAGE - 10 COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR