M/s Affiliated Computer Services of India Private Limited, Bangalore V. DCIT, Bangalore

ITA 931/BANG/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9449 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 25-07-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 24-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: KEERTHI NARAYAN
• Keywords: Transfer pricing
• Section: 92C; 143(3); 244A; 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER IT(TP)A NO.931/BANG/2011 ASSESSMENT YEAR : 2007-08 M/S. AFFILIATED COMPUTER SERVICES OF INDIA PVT. LTD., LEVEL 6, ITPL INNOVATOR BLOCK, WHITEFIELD ROAD, BANGALORE 560 066. PAN: AADCA 8386M VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI KEERTHI NARAYAN, CA RESPONDENT BY : MS. NEERA MALHOTRA, CIT(DR) DATE OF HEARING : 25.07.2016 DATE OF PRONOUNCEMENT : 26.08.2016 O R D E R PER SUNIL KUMAR YADAV, JUDICIAL MEMBER THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST THE ORDER OF DRP INTER ALIA ON THE FOLLOWING GROUNDS, WHICH ARE AS UNDER:- BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AFFILIATED COMPUTER SERVICES OF INDIA PRIVATE LIMITED (HEREINA FTER REFERRED TO AS 'THE APPELLANT'), RESPECTFULLY SUBMITS IN RES PECT OF THE ORDER PASSED BY THE LEARNED DEPUTY COMMISSIONER OF INCOME - TAX 'AO') CIRCLE 11 (1), BANGALORE UNDER SECTION 143(3) /144C OF THE IT(TP)A NO.931/BANG/2011 PAGE 2 OF 8 INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS TH E 'ACT') ON THE FOLLOWING GROUNDS: TRANSFER PRICING 1. THE LEARNED ASSESSING OFFICER ('AO') BASED ON THE D IRECTIONS RECEIVED FROM LEARNED DISPUTE RESOLUTION PANEL ('DR P') HAS ERRED IN LAW AND ON FACTS, IN UPHOLDING THE ADJUSTM ENT TO THE TRANSFER PRICE MADE BY THE LEARNED TRANSFER PRICING OFFICER ('TPO'). 2. THE LEARNED AO/DRP/TPO HAS ERRED, IN LAW AND ON FAC TS BY NOT APPRECIATING THAT THE APPELLANT IS A CAPTIVE SE RVICE PROVIDER, CARRYING OUT LIMITED FUNCTIONS AND ASSUMI NG LIMITED RISKS. 3. THE LEARNED AO/DRP/TPO HAS ERRED, IN LAW AND ON FAC TS BY MAKING AN ADDITION OF RS 53,341,104 TO THE TAXABLE INCOME OF THE APPELLANT AND IN HOLDING THAT THE TRANSACTIONS BETWEEN THE APPELLANT AND ITS ASSOCIATED ENTERPRISE ('AE') WITH RESPECT TO ITS SOFTWARE DEVELOPMENT SERVICES WERE NOT AT ARM'S LENGTH. 4. THE LEARNED AO/DRP/TPO HAS ERRED, IN LAW AND ON FAC TS BY MAKING AN ADDITION OF RS 265,190,759 TO THE TAXABLE INCOME OF THE APPELLANT AND IN HOLDING THAT THE TRANSACTIO NS BETWEEN THE APPELLANT AND ITS AE WITH RESPECT TO ITS IT ENA BLED SERVICES WERE NOT AT ARM'S LENGTH. 5. THE LEARNED AO/DRP/TPO HAVE ERRED IN LAW AND ON FAC TS BY REJECTING THE TRANSFER PRICING DOCUMENTATION PREPAR ED BY THE APPELLANT IN THE MANNER AS REQUIRED UNDER THE PROVI SIONS OF THE ACT AND INCOME-TAX RULES, 1962 ('THE RULES'). 6. THE LEARNED AO/DRP/TPO HAVE ERRED IN LAW BY CONDUCT ING A FRESH SEARCH FOR COMPARABLE COMPANIES AND BY REJECT ING THE SEARCH PROCESS CARRIED OUT BY THE APPELLANT, WITHOU T GIVING ADEQUATE REASONS FOR THE REJECTION. 7. THE LEARNED AO/DRP/TPO ERRED IN LAW AND ON FACTS BY REPLACING THE FILTERS ADOPTED BY THE APPELLANT WITH THE NEW FILTERS BASED ON HIS OWN JUDGMENT AND PERCEPTION AN D THAT THE FILTERS APPLIED BY THE TPO WERE NOT CORRECTLY APPLI ED. IT(TP)A NO.931/BANG/2011 PAGE 3 OF 8 8. THE LEARNED AO/DRP/TPO ERRED IN LAW AND ON FACTS BY IDENTIFYING INCORRECT SET OF COMPARABLE COMPANIES. 9. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO/DRP/TPO HAS ERRED IN NOT ACCEPTING CONSOLIDATED FINANCIAL STATEMENTS FOR POTENTIALLY C OMPARABLE COMPANIES. 10. THE LEARNED AO/DRP/TPO HAVE ERRED IN LAW AND ON FAC TS BY REJECTING THE CERTAIN COMPARABLES CONSIDERED BY THE APPELLANT, ON THE GROUNDS OF FUNCTIONAL DISSIMILARI TY AND BY APPLYING THE FILTERS OF ONSITE REVENUE, EXPORT E ARNINGS, EMPLOYEE COST, DIFFERENT YEAR ENDING, DECLINING REV ENUE, REVENUE FROM RELEVANT SEGMENT LESS THAN 75 PERCENT OF TOTAL REVENUE AND PERSISTENT LOSS. 11. THE LEARNED AO/DRP/TPO HAVE ERRED IN LAW AND ON FAC TS BY NOT APPLYING THE SALES TURNOVER FILTER. 12. THE LEARNED AO/DRP/TPO HAVE ERRED IN LAW AND ON FAC TS BY NOT FOLLOWING THE CONSISTENT APPROACH WHILE APPLYIN G FILTERS IN SOFTWARE DEVELOPMENT AND ITES SEGMENT. 13. THE LEARNED AO/DRP/TPO HAVE ERRED IN LAW AND ON FAC TS BY INCLUDING GIANT COMPANIES IN VIEW OF THEIR TURNOVER , BRAND AND HIGH PROFITABILITY AS COMPARABLE TO APPELLANT. 14. THE LEARNED AO/DRP/TPO HAVE ERRED IN LAW AND ON FAC TS BY NOT FOLLOWING CONSISTENCY AND ADDING CERTAIN COMPAN IES AS COMPARABLES, WHICH FAILS THE QUALITATIVE AND QUANTI TATIVE FILTERS ADOPTED TPO. 15. THAT AO/DRP/TPO ERRED ON THE FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW BY USING ONLY THE CURRENT YEAR (I.E. FINANCIAL YEAR 2006-07) DATA FOR COMPUTATION OF ARM 'S LENGTH PRICE. 16. THE LEARNED AO/DRP/TPO HAS FAILED TO APPRECIATE THE APPELLANT'S COMMERCIAL JUDGMENT ABOUT THE APPLICATI ON OF ARM'S LENGTH PRINCIPLE WHICH IS TIED TO THE BUSINES S REALITIES. 17. THAT AO/DRP/TPO ERRED ON THE FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW BY IGNORING THE PROVISIONS OF R ULE 10B(3) OF THE RULES, INTERNATIONAL COMMENTARIES AND JUDICI AL IT(TP)A NO.931/BANG/2011 PAGE 4 OF 8 PRONOUNCEMENTS, WHICH ADVOCATE USAGE OF MULTIPLE YE AR DATA OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMIN ATION OF THE ARM'S LENGTH PRICE. 18. THAT AO/DRP/TPO ERRED ON THE FACTS AND CIRCUMSTANCE S OF THE CASE AND IN LAW BY NOT PROVIDING A RELIEF ON AC COUNT OF DIFFERENCES IN RISK PROFILE LEVELS BETWEEN THE APPE LLANT AND THE POTENTIAL COMPARABLES FOR BOTH SOFTWARE AND ITES SEGMENTS. 19. THE LEARNED AO/DRP/TPO HAVE ERRED IN LAW AND ON FAC TS BY INCLUDING CERTAIN COMPANIES AS COMPARABLE AND IN RE JECTING CERTAIN COM PARABLES CONSIDERED BY APPELLANT, BASED ON THE INFORMATION GATHERED UNDER SECTION 133(6) OF TH E ACT, THOUGH THE SAME INFORMATION WAS NOT AVAILABLE IN PU BLIC DOMAIN, TO THE APPELLANT AT THE TIME OF CONDUCTING ITS OWN TP STUDY. 20. THE LEARNED AO/DRP/TPO HAS ERRED IN BY FAILING TO APPRECIATE THE FACT THAT TRANSFER PRICING IS AN ANT I-AVOIDANCE MECHANISM. IN THE INSTANT CASE THE APPELLANT IS REG ISTERED AS AN ENTITY REGISTERED UNDER THE STPI AND HAS CLAIMED TAX BENEFITS UNDER SECTION 10A OF THE ACT AND HAS NO RE ASON TO SUPPRESS ITS PROFIT FROM ITS OPERATIONS TO MANIPULA TE THE TRANSFER PRICES. 21. THE LEARNED AO/DRP/TPO HAVE ERRED IN LAW AND ON FAC TS, IN MAKING SEVERAL OBSERVATIONS AND FINDINGS WHICH ARE BASED ON INCORRECT INTERPRETATION OF LAW AND CONTRARY TO FAC TS OF THE CASE. 22. THE LEARNED AO/DRP/TPO HAS ERRED, IN LAW AND ON FAC TS, BY NOT PROVIDING THE APPELLANT THE BENEFIT OF 5 PERCEN T RANGE AS PROVIDED BY THE PROVISO OF SECTION 92C(2) OF THE AC T. 23. THE LEARNED AO/DRP/TPO HAS ERRED BY NOT CARRYING OU T THE DETERMINATION OF ARM'S LENGTH PRICE AS REQUIRED UND ER SECTION 92C OF THE ACT READ WITH RULE 100 OF INCOME TAX RUL ES, 1962. 24. THE LEARNED COLLEGIUM OF COMMISSIONERS COMPRISING T HE DRP ERRED IN LAW AND ON FACTS, BY NOT ADHERING TO T HE PROCEDURE LAID DOWN IN SECTION 144C(5), 144C(6) AND 144C(7) WAS NOT FOLLOWED. IT(TP)A NO.931/BANG/2011 PAGE 5 OF 8 25. THE LEARNED AO HAS ERRED IN INITIATING PENALTY PROC EEDINGS UNDER SECTION 271 (1)(C) OF THE ACT. 26. THE LEARNED AO HAS ERRED, IN LAW AND ON FACTS, IN C HARGING INTEREST UNDER SECTION 234B AND 244A OF THE ACT. CORPORATE TAX 1. RE COMPUTATION OF DEDUCTION ALLOWABLE UNDER SECTION 10A A) THE LEARNED AO HAS ERRED IN RE-COMPUTING THE DED UCTION UNDER SECTION 10A OF THE ACT AFTER REDUCING THE TELECOMMUNICATION EXPENSES OF RS. 37,073,942 FROM E XPORT TURNOVER ALONE. B) THE LEARNED AO HAS ALSO ERRED IN NOT ACCEPTING THE CONTENTION OF THE APPELLANT COMPANY THAT THE DEFINI TION OF 'TOTAL TURNOVER' UNDER SECTION 80HHC/80HHE SHOULD BE USED TO COMPUTE THE DEDUCTION UNDER SECTION 10A OF THE ACT. C) THE LEARNED ACIT HAS NOT ACCEPTED THE ASSESSEE' S CONTENTION THAT SHOULD THE TELECOMMUNICATION EXPENS ES BE REDUCED FROM THE EXPORT TURNOVER, THE EXPENSES SHOU LD ALSO BE REDUCED FROM THE TOTAL TURNOVER IN ARRIVING AT THE DEDUCTION UNDER SECTION 10A OF THE ACT. D) FURTHER, THE LEARNED ACIT HAS ALSO ERRED IN NOT RELYING ON THE DECISION OF THE SPECIAL BENCH OF THE CHENNAI TR IBUNAL IN THE CASE OF SAK SOFT LIMITED V. ITO (ITA NO. 91 & 1953/ MDS/2007) WHEREIN IT HAS BEEN HELD THAT IF THE TELECOMMUNICAT ION, FREIGHT AND INSURANCE EXPENSES ARE REDUCED FROM THE EXPORT TURNOVER THEN THE SAME WOULD ALSO HAVE TO BE REDUCED FROM THE TOT AL TURNOVER IN ORDER TO COMPUTE THE DEDUCTION UNDER SECTION 10A. E) FURTHER, THE LEARNED ACIT HAS ALSO ERRED IN NOT RELYING ON THE FOLLOWING DECISIONS OF THE HONOURABLE ITAT: CIT V. GEM PLUS JEWELLERY INDIA LIMITED [2010] 194 TAXMAN 192 (BOM.) ITO V. D.E. BLOCK INDIA SOFTWARE (P) LID, ITA 983 & 984 - HYDERABAD TRIBUNAL IT(TP)A NO.931/BANG/2011 PAGE 6 OF 8 DELL INTERNATIONAL SERVICES INDIA PVT LTD., ITA NO. 'S 362 & 363/B/07 - BANGALORE TRIBUNAL TATA ELXSI V. CIT-ITA NO 315 - BANGALORE TRIBUNAL M/S. I-GATE GLOBAL SOLUTIONS LTD V. THE ACIT - ITA NO.248 & 249/BANG/2007 - BANGALORE TRIBUNAL PATNI TELECOM (P) LIMITED V. ITO (22 SOT 26) - HYDERABAD TRIBUNAL NOUS INFOSYSTEMS (P) LTD V. ITO ITA NO. 1042/BANG/07(AY 2003-04). BANGALORE TRIBUNAL ANZ OPERATIONS & TECHNOLOGY PRIVATE LIMITED V. CIT- ITA NO. 30/BANG/200B- BANGALORE TRIBUNAL KPIT CUMMINS INFOSYSTEMS (BANGALORE)(P) LTD. V. ACI T - 26 SOT 529 - BANGALORE TRIBUNAL ACIT V. HONEYWELL TECHNOLOGY SOLUTIONS LAB. PVT. LT D (ITA NO. 344 & 345 BANG./2009) - BANGALORE TRIBUNAL 12 TECHNOLOGIES INDIA PRIVATE LIMITED V. ACIT - ITA NO. 277/BANG/2009 BANGALORE TRIBUNAL 2. CONSEQUENTIAL INTEREST LEVIED UNDER SECTION 234B THE LEARNED AO HAS ALSO ERRED IN LEVYING INTEREST U NDER SECTION 234B OF RS. 57,469,967 WHICH IS CONSEQUENTIAL IN NA TURE. 3. CONSEQUENTIAL INTEREST LEVIED UNDER SECTION 234D THE LEARNED AO HAS ALSO ERRED IN LEVYING INTEREST U NDER SECTION 234D OF RS. 235,314 WHICH IS CONSEQUENTIAL IN NATUR E. FURTHER, IN THE ASSESSMENT ORDER THE ABOVE MENTIONED AMOUNT OF INTEREST HAS BEEN INADVERTENTLY MENTIONED AS INTEREST UNDER SECT ION 244A INSTEAD OF SECTION 243D. THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJU DICE TO EACH OTHER. FOR THE ABOVE AND ANY OTHER GROUNDS, WHICH MAY BE A DVANCED AT THE TIME OF HEARING, YOUR APPELLANT PRAYS THAT THE ORDER OF THE LEARNED AO MAY BE PLEASE SET ASIDE. IT(TP)A NO.931/BANG/2011 PAGE 7 OF 8 THE APPELLANT PRAYS FOR LEAVE TO ADD, ALTER, AMEND AND/ OR MODIFY ANY OF THE GROUNDS OF APPEAL AT OR BEFORE THE HEARI NG OF THE APPEAL. 2. THE LD. COUNSEL FOR THE ASSESSEE HAS MOVED AN AP PLICATION STATING THEREIN THAT THE ASSESSEE HAS ACCEPTED THE MAP RESO LUTION AND CRAVES LEAVE TO WITHDRAW THE GROUNDS OF APPEAL RELATING TO TP ADJUSTMENTS, WHICH WAS ONE OF THE MATTERS PENDING BEFORE THE TRIBUNAL FOR ADJUDICATION. 3. THE OTHER MATTER FOR ADJUDICATION PERTAINS TO CO RPORATE TAX ADJUSTMENTS I.E., COMPUTATION OF CLAIM OF DEDUCTION U/S. 10A OF THE INCOME- TAX ACT, 1961 [THE ACT]. IN THIS REGARD, IT WAS CONTENDED THAT THE ISSUE IS SQUARELY COVERED BY THE JUDGMENT OF HON'BLE JURISDI CTIONAL HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD. & ORS., 349 ITR 98 IN FAVOUR OF THE ASSESSEE. 4. THE LD. DR DID NOT DISPUTE THESE FACTS. SHE, HO WEVER, CONTENDED THAT AGAINST THE ORDER OF THE HON'BLE JURISDICTIONA L HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD. (SUPRA) , THE REVENUE HAS FILED SLP BEFORE THE HONBLE SUPREME COURT AND THE SAME HAS BEEN ADMITTED. THER EFORE, THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT SHOULD NOT BE FOLLOWED. 5. HAVING CAREFULLY EXAMINED THE DISPUTE IN THESE A PPEALS AND THE ASSESSEES LETTER, WE FIND THAT SINCE THE ASSESSEE HAS ACCEPTED THE MAP RESOLUTION WITH RESPECT TO TP ADJUSTMENTS, THE GROU NDS OF APPEAL BECOMES INFRUCTUOUS. WE ACCORDINGLY DISMISS THE SAME. IT(TP)A NO.931/BANG/2011 PAGE 8 OF 8 6. SO FAR AS THE OBJECTION TO DEDUCTION U/S. 10A IS CONCERNED, WE ARE OF THE VIEW THAT SINCE FILING OF SLP IN THE HONBLE SU PREME COURT AGAINST THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT V. TATA ELXSI LTD. (SUPRA) DOES NOT AMOUNT TO STAY OF OPERATION OF THE JUDGMEN T OF THE HONBLE HIGH COURT, WE BEING IN THE JURISDICTIO N OF THE HON'BLE JURISDICTIONAL HIGH COURT, ARE BOUND TO FOLLOW THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT. THEREFORE, FOLLOWING TH E SAME, WE DEICE THE ISSUE OF COMPUTATION OF DEDUCTION U/S. 10A OF THE ACT IN FAVOUR OF THE ASSESSEE. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 26 TH DAY OF AUGUST, 2016. SD/- SD/- ( A.K. GARODIA ) (SUNIL KUMAR YA DAV ) ACCOUNTANT MEMBER JUDIC IAL MEMBER BANGALORE, DATED, THE 26 TH AUGUST, 2016. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.