Appeal details
Counselvise Citation
[2012] 140 COUNSELVISE.COM (IT) 66133 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 year(s) 9 month(s) 11 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
06-08-2012
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
B
Next Hearing Date
26-05-2011
Assessment Year
2002-2003
Appeal Filed On
26-10-2006
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.962/HYD/2003 ASSESSMENT YEAR : 2002-03 M/S.INFOBAHN TECHNOLOGIES LTD., HYDERABAD. .... APPELLANT PAN:AAACI 6015Q VS. DY.CIT, SPL. RANGE-3, HYDERABAD. RESPONDENT APPELLANT BY : SHRI C.P. RAMASWANY RESPONDENT BY : SHRI G. GYNA PRAKASH DATE OF HEARING : 07-06-2012 DATE OF PRONOUNCEMENT : 06-08-2012 ORDER PER SAKTIJIT DEY, J.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST ORDER DATED 8-9-2006 OF CIT (A)-III, HYDERABAD PASS ED IN ITA NO.15/DC2(1)/CIT(A)-III/05-06 AND IT PERTAINS TO TH E ASSESSMENT YEAR 2002-03. 2. THOUGH THE ASSESSEE HAS RAISED 9 GROUNDS, LEARNE D AR FOR THE ASSESSEE AT THE OUTSET SUBMITTED HE WANTS TO AR GUE ON GROUND NOS. 6(A) AND 6(B) ONLY. CONSIDERING THE SU BMISSIONS OF THE LD. AR THE OTHER GROUNDS RAISED ARE DISMISSED A S NOT PRESSED. FOR THE SAKE OF CONVENIENCE, GROUNDS NOS. 6(A) AND 6(B) ARE QUOTED BELOW:- 2 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD.. 6(A) THE LD. CIT (A) ERRED IN ALLOCATING 80% OF UNB ILLED HOURS TO THE ASSOCIATED ENTERPRISE AND CONSEQUENTLY ERRED IN ARRIVING AT THE ALP OF RS.12,57,28,362 BY IGNORI NG THE FACT THAT THE APPELLANT SUFFERED LOSSES IN THE AFTE RMATH OF BOMB ATTACK ON WORLD TRADE CENTRE ON 9/11 IN US. 6(B) THE LD. CIT (A) ERRED IN OVERLOOKING THE BASI C FACTS THAT THE APPELLANT WAS OBLIGED TO TAKE 25 PERSONS O N A MONTHLY BASIS AS PER THE CONTRACT BETWEEN THE APPEL LANT AND ITS AE AND DUE TO 9/11 INCIDENT, THERE WERE PER SONNEL SITTING ON THE BENCH, WHO COULD NOT BE DEPUTED TO ANY CLIENT/CUSTOMER OF THE APPELLANT. CONSEQUENTLY, TH E LD. CIT (A) FAILED TO APPRECIATE THE LOSS INCURRED, AND ERR ED IN ATTRIBUTING SUCH BUSINESS LOSS AS UNBILLED HOURS OF THE AE 3. BRIEF FACTS OF THE ISSUE ARE, THE ASSESSEE IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT BY RESOURCING QUALIFIED PER SONNEL FOR THE PURPOSE. THE ASSESSEE DURING THE RELEVANT FINANCIA L YEAR HAD INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISE (AE) M/S CYPRESS ASSOCIATES INC. OF USA WHICH IS ITS 100% SU BSIDIARY. ON A REFERENCE MADE BY THE AO U/S 92CA(1) OF THE ACT T HE TPO ISSUED NOTICE U/S 92CA(2) TO THE ASSESSEE FOR FIXAT ION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS AE IN USA. IN COURSE OF THE PROCEEDING THE TPO FOUND THAT THE ASSESSEE HAD PAID AN AMOUNT OF RS.13,39,79,178 TO ITS AE M/S CYPRESS ASSOCIATES INC. USA @ RS.61.39 USD FOR A TOTAL OF 45,662 MAN HORS WHEREAS IT HAS RECEIVED CHARGES FOR THE TECHNICAL SERVICES PROVIDE D TO ITS CLIENTS FOR 41,921 MAN HOURS. BEFORE THE TPO THE ASSESSEE EXPLAINED THAT IT HAS ENTERED INTO AN AGREEMENT WITH ITS AE F OR HIRING TECHNICAL PERSONNEL TO BE ENGAGED IN ITS OVERSEAS P ROJECT. AS PER THE TERMS OF THE AGREEMENT THE ASSESSEE WILL HIRE M INIMUM OF 25 EMPLOYEES PER MONTH AND WILL PAY 9700 USD PER MONTH PER 3 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD.. EMPLOYEE. WHEN THE TPO ASKED THE ASSESSEE ABOUT TH E HUGE GAP BETWEEN MAN HOUR UTILISATION, THE ASSESSEE EXPLAINE D THAT THE TOTAL MAN HOURS UTILISED AFTER DEDUCTING HOLIDAYS A ND OTHERS, IT COMES TO 158 HOURS PER MONTH. THE ASSESSEE SUBMITT ED THAT THE AVERAGE RATE CHARGED AS PER INVOICE RAISED ON AE BY THE ASSESSEE IS RS.66.40 PER HOUR WHEREAS IT HAS PAID @ 61.39 US D PER HOUR TO ITS AE. THE ASSESSEE ALSO EXPLAINED THE DIFFERENCE BETWEEN MAN HOURS BY SUBMITTING THAT IN THE MONTH OF NOVEMBER, EVEN THOUGH IT EMPLOYED ONLY 10 IT HAD TO PAY THE AMOUNT FOR 25 PEOPLE TO THE AE AS PER THE AGREEMENT. DUE TO RECESSION IN THE A FTERMATH OF9/11 TERRORIST ATTACK IN USA MAN POWER COULD NOT BE UTILISED PROPERLY AND THE ASSESSEE INCURRED LOSSES, HENCE CL OSED DOWN ITS OPERATIONS. THE TPO FOUND THAT WHILE THE AE HAS SUP PLIED ITS MAN POWER TO INDEPENDENT PARTIES ON ACTUAL MAN HOUR UTI LISATION BASIS, IT HAS PROVIDED MANPOWER UTILISATION TO THE ASSESSE E ON MONTHLY PAYMENT BASIS. THE TPO FOUND THE TERMS AND CONDITI ONS MENTIONED IN THE AGREEMENT BETWEEN THE ASSESSEE WIT H ITS AE HAS PUT THE ASSESSEE IN A DISADVANTAGEOUS POSITION CONC EDING UNDUE BENEFITS TO THE AE. THE TPO ALSO FOUND THAT WHILE RAISING BILLS ON THIRD PARTIES IN RESPECT OF ONSITE OPERATIONS, THE ASSESSEE HAS QUOTED RATES AS PER THE TECHNICAL ABILITIES AND THE NATURE OF SUCH SERVICES RENDERED BY SUCH EMPLOYEES RANGING BETWEEN 50 USD TO 90 USD. WHEREAS THE ASSESSEE PAID 61.39 USD PER MA N HOUR TO THE AE WITHOUT CONSIDERING THE TECHNICAL EXPERTISE AND QUALITY OF SERVICE PROVIDED. THIS, ACCORDING TO THE TPO WAS A BENEFIT GIVEN TO THE AE WHICH ULTIMATELY REFLECTED ON THE POOR FI NANCIAL RESULT OF THE ASSESSEE COMPARED TO OTHER SIMILAR INDUSTRIES. THE TPO FOUND THE DIFFERENCE BETWEEN THE MAN HOURS PAID TO AE AND MAN HOURS CHARGED FROM CLIENTS BY THE ASSESSEE TO BE 3741 MAN HOURS. AFTER GIVING BENEFIT TO THE ASSESSEE OF 240 MAN HOU RS FOR DEMO PURPOSE THE TPO CAME TO THE CONCLUSION THAT THE ASS ESSEE HAS 4 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD.. PAID THE AE FOR 3500 MAN HOURS IN EXCESS. HE ACCOR DINGLY CALCULATED THE ALP. THE PAYMENT MADE TO THE AE BY T HE ASSESSEE WAS FOUND TO BE NOT WITHIN THE +/- 5% RANGE AND THE REFORE WAS NOT ACCEPTED. THE CALCULATION OF ALP BY THE TPO IS REPRODUCED BELOW FOR THE SAKE OF CONVENIENCE. MAN HOURS PAID TO A.E :45,662 MAN HOURS CHARGED FROM CLIENTS 41,921 ---------- DIFFERENCE 3,741 LESS: UNBILLED FOR DEMO PURPOSE ETC. 241 ------------ BALANCE 3,500 ------------- PAYMENTS BY THE ASSESSEE TO AE RS.13,39, 79,178 LESS: 3500 MAN OURS @ 61.39$ X 48 BEING EXCESS PAID TO AE WHEN COMPARED TO ACTUAL SERVICES RENDERED RS. 1 ,03,13,520 ------------------- ARMS LENGTH PRICE RS.1 2,36,65,658 ALP RANGE + 5% : 14,06,78,136 - 5% : 12,72,80,219 4. THE AO COMPLETED HE ASSESSMENT BY ADOPTING THE A LP DETERMINED BY THE TPO AND MADE AN ADDITION OF RS.1, 03,13,520/-. THE ASSESSEE CHALLENGED THE DETERMINATION OF ALP AN D ADDITION MADE AS A RESULT OF SUCH DETERMINATION BY FILING AN APPEAL BEFORE 5 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD.. THE CIT (A). IN COURSE OF HEARING OF APPEAL BEFORE THE CIT (A), THE ASSESSEE SUBMITTED THAT EXCLUDING AMERICAN HOLI DAYS IN THE YEAR 2001 THE AVERAGE WORKING HOUR IN A MONTH WILL COME TO 158 HOURS, WHICH WORK OUT TO TOTAL OF 45662 MAN HOURS B ILLED BY THE AE. FURTHER EXPLAINING THE DIFFERENCE OF 3741 MAN HOURS BETWEEN THE MAN HOURS BILLED BY THE AE ON ASSESSEE AND MAN HOURS BILLED BY THE ASSESSEE ON ITS CLIENTS THE ASSESSEE SUBMITT ED THAT IN THE AFTERMATH OF 9/11 INCIDENT IN USA, THERE WAS STEEP LOSS INCURRED BY THE ASSESSEE WHICH IS EVIDENT FROM THE INVOICES FOR THE MONTH OF NOVEMBER, 2001 WHEN PAYMENT WAS MADE FOR 25 PERS ONNEL BUT THE ASSESSEE COULD DEPLOY ONLY 10 PERSONNEL WHICH R ESULTED INTO A DIFFERENCE OF 2370 MAN HOURS LOST IN 2001. AND THE BALANCE DIFFERENCE OF 1370 MAN HOURS WAS ON ACCOUNT OF VARI OUS FACTORS LIKE PRIVILEGE LEAVE, SICK LEAVE, UNBILLED PILOT PR OJECTS AND FREE DEMO PURPOSE. 5. THE ASSESSEE SUBMITTED THAT DUE TO PREVAILING CO NDITIONS IN USA AFTER 9/11 INCIDENT, THERE WAS SHARP DECLINE IN THE BUSINESS OF HIRING TECHNICAL PERSONNEL FOR WHICH ASSESSEE WA S FORCED TO CLOSE DOWN ITS OPERATION. THE ASSESSEE WAS COMPETI NG WITH BIGGER PLAYERS IN THE FIELD, HENCE IT HAD TO QUOTE ON LOW MARGIN OF PROFIT AND AT THE SAME TIME RECRUIT SOFTWARE PERSON NEL BY OFFERING GOOD PACKAGES. IT WAS FURTHER CONTENDED BY THE ASS ESSEE THAT TPO HAS NOT ADOPTED PROPER NUMBER OF MAN HOURS VIS A VIS THE ACTUAL NUMBER OF WORKING DAYS. IF PROPER NUMBER O F MAN HOURS WERE REWORKED THE DIFFERENCE WOULD BE 1370 MAN OURS WHICH COME TO THE VALUE OF RS.40,37,006/-. IF THIS AMOUN T IS REDUCED FROM THE PAYMENTS MADE TO AE THEN THE ALP WOULD BE RS.12,99,42,172/- AND AFTER TAKING THE+/-5% RANGE, THE PRICE PAID BY THE ASSESSEE WILL BE WITHIN 5% OF SUCH ALP. THE ASSESSEE CONTENDED THAT THE AVERAGE RATE OF USD 61.39 PER MA N HOUR AT 6 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD.. WHICH PAYMENT WAS MADE BY THE ASSESSEE TO ITS AE IS CLOSER TO THE MINIMUM OF THE RATES QUOTED BY THE ASSESSEE TO OTHERS FOR THE SERVICES, THEREFORE THE ALLEGATION OF THE TPO T HAT EXCESSIVE PAYMENT HAS BEEN MADE TO THE AE WAS UNFOUNDED. 6. THE CIT (A) AFTER GOING THROUGH THE TERMS OF TH E MOU AND THE AGREEMENT BETWEEN ASSESSEE WITH ITS AE FOUND A STIPULATION THAT THE PAYMENT HAS TO BE MADE FOR A MINIMUM OF 25 EMPLOYEES PER MONTH IRRESPECTIVE OF THE UTILISATION THE CIT (A) FOUND THIS CLAUSE TO BE UNDULY ADVANTAGEOUS TO THE AE SINCE TH E ENTIRE LOSS ARISING OUT OF NON AVAILABILITY AND NON UTILISATION OF THE EMPLOYEES HAS TO BE BORNE BY THE ASSESSEE WHICH IS CONTRARY T O THE ACCEPTED CONTRACTUAL NORMS INVOLVING TRANSACTION BETWEEN UNR ELATED PARTIES. THE CIT (A) CAME TO A CONCLUSION THAT SHA RING OF LOSS/EXPENDITURE ARISING OUT OF UNFORESEEN SITUATIO NS SHOULD BE IN THE RATIOS OF COMPARATIVE SITUATIONS AND RISKS OF T HE PARTIES INVOLVED IN THE TRANSACTIONS WHICH WERE NOT FOUND T O BE THE CASE IN THE AGREEMENT BETWEEN ASSESSEE WITH ITS AE. AS HAS BEEN OBSERVED BY THE CIT (A) IN HIS ORDER AFTER ANALYSIN G THE TRANSFER PRICING STUDY REPORT FILED BY THE ASSESSEE THE CIT (A) FOUND THAT IN THE TRANSACTIONS BETWEEN THE ASSESSEE AND ITS AE , MOST OF THE RISK FACTORS WERE ASSOCIATED WITH THE AE. HOWEVER THE AGREEMENT WITH AE REGARDING PAYMENT FOR MINIMUM 25 NOS. OF P ERSONNEL PUT THE ASSESSEE AT A DISADVANTAGEOUS POSITION CONT RARY TO THE FINDINGS IN THE TRANSFER PRICING STUDY REPORT. THE CIT (A) ULTIMATELY CAME TO A CONCLUSION THAT THE AGREEMENT WITH AE WAS DELIBERATELY CONSTRUCTED IN A MANNER SO AS TO PUT A LL POSSIBLE LOSSES ARISING ON ACCOUNT OF UNUTILISED MANPOWER ON THE ASSESSEE. ON THE AFORESAID CONCLUSION THE CIT (A) HELD THAT T HE AGREEMENT BETWEEN THE ASSESSEE AND ITS AE WAS NOT AT ARMS LE NGTH AND THE PAYMENT MADE BY THE ASSESSEE TO ITS AE FOR UNAVAILA BLE MAN 7 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD.. POWER ARE EXCESSIVE. THE CIT (A) THOUGH AGREED WIT H THE ASSESSEES CONTENTION THAT THERE WAS RECESSION AND ADVERSE MARKET CONDITIONS IN SOFTWARE INDUSTRY HE WAS OF T HE VIEW THAT THE SAME IS APPLICABLE TO ALL ASSESSEES ENGAGED IN THIS LINE OF BUSINESS AND MOST OF THEM HAVE SHOWN SUBSTANTIAL PR OFIT COMPARED TO THE ASSESSEE. THE CIT (A) CAME TO HOLD THAT OUT OF THE LOSS ARISING FROM PAYMENT MADE FOR EXTRA 3500 M AN HOURS WHICH WERE NEITHER UTILISED OR BILLED BY THE ASSESS EE 20% SHARE IN LOSS IS ALLOCABLE TO THE ASSESSEE CONSIDERING THE F ACT THAT AS PER THE TRANSFER PRICING STUDY REPORT THE AE HAD FOUR TIMES GREATER RISK THAN THE ASSESSEE. THE CIT (A) TREATED THE BA LANCE 80% MAN HOUR I.E. 2800 TO HAVE BEEN EXCESSIVELY PAID BY THE ASSESSEE TO ITS AE. HE THEREFORE REDUCED THE COST FOR 2800 MAN HOURS FROM THE PAYMENT MADE BY THE ASSESSEE TO ITS AE AND DETE RMINED THE ALP AT RS.12,57,28,362 AS BELOW. STATED PRICE OF THE SERVICES RS.1 3,39,79,178 LESS: 2800 MAN HOURS @ 61.39 USD COVERED INTO RS. @RS.48 PER DOLLAR I.E. 2800 X61.39 X 48 RS. 82,50,816 ------------------ ARMS LENGTH PRICE RS.12,57,28,362 ------------------ SINCE THE PAYMENT MADE BY THE ASSESSEE TO ITS AE W AS NOT WITHIN THE +/- 5% OF THE ALP DETERMINED BY THE CIT (A) HE DIRECTED THE AO TO ADOPT THE ALP DETERMINED BY HIM AT RS.12,57,2 8,362/- AND ADDED THE DIFFERENTIAL AMOUNT OF RS.82.50,816 TO TH E TOTAL INCOME OF THE ASSESSEE. HE FURTHER DIRECTED THAT AS PER T HE PROVISIONS OF 8 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD.. SEC. 92C(4) ON DEDUCTION U/S 10A TO BE ALLOWED FRO M THE ADDITION MADE TO THE INCOME ON ACCOUNT OF DETERMINATION OF A LP. 7. THE LEANED AR SUBMITTED BEFORE US THAT THE TPO P ROCEEDED ON A WRONG FOOTING THAT PAYMENT TO AE WAS ON THE BA SIS OF MAN HOUR WHEREAS IN REALTY PAYMENT WAS ON THE BASIS OF NUMBER OF PERSONNEL CONTRACTED PER MONTH. THE LEARNED AR SUBM ITTED THAT DUE TO RECESSION IN SOFTWARE INDUSTRY AFTER 9/11 IN CIDENT IN USA THE ASSESSEE SUFFERED HUGE LOSS AS THE TECHNICAL PE RSONNEL HIRED BY IT FROM ITS AE COULD NOT BE DEPLOYED AND WERE S ITTING ON THE BENCH. IN THE MONTH OF NOVEMBER 2001 IT COULD DEPL OY ONLY 10 PERSONS EVEN THOUGH IT HAS TO PAY TO ITS AE FOR A M INIMUM OF 25 PERSONS EVERY MONTH. DUE TO DEPLOYMENT OF ONLY 10 PERSONS IN NOVEMBER 2001 THE NUMBER OF UNBILLED HOURS LOST WAS 2370 HOURS WHICH LEAVES A SHORTFALL OF 1370 HOURS ONLY WHICH W AS ALSO EXPLAINED BY THE LD. AR TO BE DUE TO PERSONNEL DEPL OYED FOR DEMO PURPOSE., SICK LEAVE, PRIVILEGE LEAVE ETC. THE LD. AR FURTHER SUBMITTED EVEN ASSUMING THERE IS EXCESS PAYMENT FOR 1370 MAN HOURS THE PAYMENT MADE BY THE ASSESSEE TO ITS AE WI LL BE WITHIN +/- 5% RANGE OF ALP. THE LD. AE DEMONSTRATED IT W ITH THE FOLLOWING CALCULATION. NUMBER OF HOURS PAID FOR TO M/S CYPRESS ASSOCIATES INC. RS.45,662 LESS: NUMBER OF HOURS BILLED TO CLIENTS RS.41,922 _____________ BALANCE 3740 LESS: NO. OF UNBILLED HOURS LOST IN NOVEMBER, 2001 2370 ____________ 9 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD.. BALANCE 1370 PAYMENTS BY THE ASSESSEE TO AE RS.1 3,39,79,178 LESS: 1370 MAN HOURS @ 61.39$ X 48 BEING EXCESS PAID TO AE WHEN COMPARED TO ACTUAL SERVICES RENDERED RS. 40,37,006 ______________ ARMS LENGTH PRICE RS.12,99,42,172 ALP RANGE + 5% : 14,06,78,136 -5% : 12,72,80,219 THE LEARNED AR FURTHER SUBMITTED THAT WHEN THE ASSE SSEES INCOME IS EXEMPT AND THE AES PROFITS ARE TAXABLE T HERE WAS NO REASON ON THE PART OF THE ASSESSEE TO MAKE EXCESS P AYMENT TO ITS AE. 8. THE LEARNED DR STRONGLY DEFENDING THE ORDER PASS ED BY THE CIT (A) SUBMITTED THAT THE ASSESSEE HAS DELIBERATEL Y MADE EXCESS PAYMENT TO ITS AE WITH AN INTENTION TO REDUCE ITS P ROFIT. THE LEARNED DR SUBMITTED THAT THE CIT (A) AFTER CONSIDE RING ALL ASPECTS HAS CORRECTLY DETERMINED THE ALP. 9. WE HAVE HEARD RIVAL SUBMISSIONS, PERUSED THE ORD ERS PASSED BY THE REVENUE AUTHORITIES AND ALSO THE DOCUMENTS S UBMITTED IN THE PAPER BOOK BY THE ASSESSEE. AFTER ANALYSING TH E ALP DETERMINED BY THE TPO, CIT (A) AND ALP COMPUTED BY THE ASSESSEE WE FIND THERE IS NO DISPUTE WITH REGARD TO MAN HOURS PAID TO AE BY THE ASSESSEE AND MAN HOURS CHARGED BY THE ASSESSEE FROM ITS CLIENTS. THE DIFFERENCE BETWEEN THE TWO BEING 3741. THE TPO HAS DETERMINED THE ALP BY DEDUCTING EXCESS PAYMENT FOR 3500 MAN HOURS AFTER GIVING BENEFIT OF 241 MAN 10 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD.. HOURS TO THE ASSESSEE BEING UNBILLED FOR DEMO PURP OSE. THE CIT (A) HAS ALLOWED THE ASSESSEE FURTHER BENEFIT OF 75 0 MAN HOURS AND DETERMINED THE ALP AFTER CONSIDERING 2800 MAN H OURS BEING EXCESS PAYMENT MADE TO AE. 10. THE LD. AR HAS DEMONSTRATED BEFORE US THAT IF A T ALL IT IS TO BE ASSUMED THAT THE ASSESSEE HAS MADE EXCESS PAYMEN T TO THE AE THEN IT SHOULD BE CONFINED TO 1370 MAN HOURS SIN CE 2370 MAN HOURS COULD NOT BE BILLED TO CLIENTS AS ASSESSEE CO ULD DEPLOY ONLY 10 PERSONS IN NOVEMBER 2001 WHEREAS IT HAD TO PAY T O ITS AE FOR MINIMUM 25 PERSONS AS PER THE TERMS OF THE AGREEMEN T. AS IT APPEARS, THE CIT (A) EVEN THOUGH ACCEPTS THE FACT T HAT THE DIFFERENCE IN MAN HOURS PAID TO THE AE AND BILLED T O THE CLIENTS IS DUE TO RECESSION AND SLUMP IN SOFTWARE INDUSTRY AFT ER THE 9/11 INCIDENT, HE NEVERTHELESS MAKING HIS OWN INTERPRETA TION OF THE AGREEMENT CAME TO A CONCLUSION THAT ASSESSEE CAN B E ALLOWED BENEFIT AT 20% OUT OF THE LOSS ARISING FROM PAYMENT MADE FOR EXTRA 3500 MAN HOURS AS THE AE HAD FOUR TIMES RISK IN THE TRANSACTIONS. WE FIND THE AFORESAID CONCLUSION OF THE CIT (A) IS WITHOUT A REASONABLE BASIS. WHEN THE ASSESSEE HAS PAID TO THE AE FOR A MINIMUM OF 25 PERSONS AS PER THE TERMS OF THE AGREEMENT WHEREAS IT COULD BILL ITS CLIENT FOR 10 P ERSONS THE CIT (A) WAS NOT JUSTIFIED IN COMING TO THE CONCLUSION T HAT THE ASSESSEE COULD BE GIVEN BENEFIT OF 20% OUT OF THE L OSS ARISING ON ACCOUNT OF EXCESS PAYMENT MADE FOR 3500 MAN HOURS. IT IS A FACT THAT ASSESSEES BUSINESS SUFFERED DUE TO RECESSION AS RESULT OF 9/11 INCIDENT AND ASSESSEE ULTIMATELY HAD TO CLOSE DOWN ITS OPERATIONS. THE CIT (A) ALSO DOES NOT DISPUTE THIS FACT. WE ALSO FIND FORCE IN LD. ARS CONTENTION THAT ASSESSEES I NCOME BEING EXEMPT THERE WAS NO NEED ON ITS PART TO TRANSFER IT S INCOME TO ITS AE WHOSE PROFIT WAS TAXABLE. THE LD. AR HAS DEMON STRATED 11 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD.. BEFORE US THE ALP AT RS.12,99,42,172/- AFTER DEDUCT ING COST OF 1370 MAN HOURS @61.39USD AND THE PAYMENT MADE BY IT TO THE AE TO BE WITHIN +/-5% OF THE ALP RANGE WHICH WE ARE INCLINED TO ACCEPT. IN THE AFORESAID FACTUAL SITUATION, WE SET ASIDE THE ORDER OF CIT (A) AND DIRECT THE AO TO VERIFY THE INVOICES RAISED BY THE ASSESSEE ON ITS CLIENTS AND INVOICES RAISED BY THE AE ON THE ASSESSEE TO FIND OUT THE ACTUAL UNBILLED HOURS LOST IN NOVEMBER, 2001. IF THE ASSESSEES CLAIM WILL BE FOUND TO BE CORRECT, THEN NO ADDITION CAN BE MADE UNDER THE TRANSFER PRICING REGULATIONS. THE AO SHALL AFFORD REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE COMPLETING THE PROCEEDINGS. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 06 - 8-2012. SD/- SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 6 TH AUGUST, 2012. COPY TO:- 1) C/O SHRI C.P. RAMASWAMY, ADVOCATE, FLAT NO.108, GITANJALI APARTMENTS, P;LOT NO.108, SRINAGAR COLONY , HYDERABAD. 2) DCIT, CIR-2(1), HYDERABAD. 3) THE CIT (A)-III, HYDERABAD 4) THE CIT CONCERNED, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABA D. JMR* 12 ITA NO. 962 OF 2006 M/S INFOBAHN TECHNOLOGIES LTD..
