Expertus Infotech Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 969/CHNY/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8725 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 19-07-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 17-04-2014
• Court: TRIBUNAL
• Department Lawyers: M N MAURYA
• Keywords: Transfer pricing; Principle of natural justice; International transaction
• Section: 92C

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , ! ' , # $% & [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ] ./ I.T.A.NO.969/MDS./2014 / ASSESSMENT YEAR : 2009-10 M/S.EXPERTUS INFOTECH PVT. LTD., 7 TH FLOOR,DOWLATH TOWERS, 63,TAYLORS ROAD, KILPAUK, CHENNAI 600 010. VS. DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(1), CHENNAI. [PAN AAACE 9281 G ] ( '( / APPELLANT) ( )*'( /RESPONDENT) / APPELLANT BY : MR.RAGHUNATHAN SAMPATH, /RESPONDENT BY : MR.M.N.MAURYA, CIT DR / DATE OF HEARING : 19 - 07 - 201 6 / DATE OF PRONOUNCEMENT : 22 - 07 - 2016 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE ASSESSING OFFICER DATED 05.02.2014 PASSED U/S.143( 3) R.W.S.144C(5) OF THE ACT, WHICH IS EMANATED FROM DIRECTION OF THE DISPUTE RESOLUTION PANEL (DRP), CHENNAI DATED 20.12.2013 U/S.144C(5) O F THE ACT PERTAINING TO ASSESSMENT YEA 20009-10.. ITA NO. :- 2 -: 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS F OR OUR ADJUDICATION. 1. THE LEARNED AO/TPO FAILED TO UNDERSTAND THAT EXP ENSES AMOUNTING TO INR 1,48,44,034 WAS INCURRED FOR DEVELOPMENT OF INDIA RELATED / NON AE TESTING PLATFORM AND CONSTRUED THE SAME AS A PART COST TOWARDS IT SEGMENT WHICH IS A CAPTIVE TO EXPERTUS, USA. A. THE APPELLANT HAS INCURRED TOTAL COST OF INR 1,4 8,44,034 FOR NON-AE SEGMENT FOR DEVELOPING A TESTING BASED PLATF ORM IN INDIA AS THEIR INDEPENDENT PROJECT IN 2007. THE APPELLANT HAD A SEPARATE TEAM OF PROFESSIONALS WHO WERE DEVELOPING THIS PLATFORM WHOSE COSTS WERE CAPTURED SEPARATELY. THE SEGMENTAT ION PROVIDED BY THE APPELLANT CLEARLY SHOWS THIS UNDER THE NON AE SEGMENT. B. FURTHER, THE LEARNED AO AND THE LEARNED TPO HAVE ERRED IN NOT ACCEPTING THE SEGMENTATION PROVIDED BY THE APPE LLANT BETWEEN IT, ITES AND NON-AE SEGMENT. C. FURTHER, THE LEARNED AO AND THE LEARNED TPO ERRE D IN CORRELATING SALES MADE TO DOMESTIC CUSTOMERS AND TH E COST OF DEVELOPING THE TESTING PLATFORM. BASIS THIS FLAWED UNDERSTANDING, A PROPORTIONATE OPERATING EXPENDITURE OF INR 95,20, 519 WAS ALLOCATED TO THE IT SEGMENT BASED ON PROFIT AND TUR NOVER PROPORTIONS, WHICH IS INAPPROPRIATE ESPECIALLY WHEN THE APPELLANT HAS PROVIDED CORRECT SEGMENTATION. D. THE APPELLANT WOULD LIKE TO STATE THAT THE ACT O F THE LEARNED TPO OF QUESTIONING THE BUSINESS DECISION IS BEYOND THE JURISDICTION CONFERRED BY THE ACT I RULES. SOME OF THE KEY PRINCIPLES WHICH EMERGE FROM THE JUDICIAL PRECEDENT S THAT HAVE UPHELD THIS VIEW AND THE RELEVANT CASE LAWS ARE REP RODUCED BELOW: . EKL APPLIANCES LIMITED (L.T.A. NOS.1068/2011 & I. T.A. NOS.1070/2011) DRESSER-RAND INDIA PRIVATE LIMITED VS.ADDITIONAL CIT, MUMBAI ABHISHEK AUTO INDUSTRIES LIMITED VS. DCIT (2010-T LL-54-ITAT- DEL-TP) ITA NO. :- 3 -: AWB INDIA PRIVATE LIMITED VS.ADDITIONAL CIT,(ITA NO. 4454/DEI/2011) MCCANN ERICKSON INDIA PVT. LTD- (ITA NO.5871/DEI. /2011) ERICSSON INDIA PVT. LTD - (ITA NO.5141/DEL./2011) 2. THE LEARNED AO AND THE LEARNED TPO HAVE ERRED IN PASSING THE SUBJECT ASSESSMENT ORDER BY NOT PROVIDING DETAILED ACCEPT REJECT MATRIX OF SEARCH CONDUCTED BY THE LEARNED TOP, WHIC H IS A GROSS VIOLATION OF PRINCIPLES OF NATURAL JUSTICE. 3. THE LEARNED AO AND THE LEARNED TPO HAVE ERRED, I N LAW AND IN FACTS BY THE BY REJECTION THE TRANSFER PRICING DOCUMENTAT ION SUBMITTED BY THE APPELLANT WHICH WAS PREPARED ON A SCIENTIFIC BA SIS AND WITH ADEQUATE SEGMENTATION BETWEEN IT AND ITES SEGMENTS. 4. THE LEARNED AO AND THE LEARNED TPO HAVE ERRED, I N LAW AND IN FACTS, BY SELECTING CERTAIN COMPANIES AS COMPARABLES WHICH DO NOT SATISFY VARIOUS COMPARABILITY CRITERIONS. 5. THE LEARNED AO AND THE LEARNED TPO HAVE ERRED, I N LAW AND IN FACTS, BY DETERMINING THE ARMS LENGTH MARGIN /PRICE USING ONLY THE F.Y 2008-09 DATA WHICH WAS NOT AVAILABLE TO THE APPELL ANT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION R EQUIREMENTS. 6. THE LEARNED AO AND THE LEARNED TPO HAVE ERRED, I N LAW AND IN FACTS BY NOT MAKING ADJUSTMENTS TO ACCOUNT FOR DIFFERENCE S IN THE RISK PROFILE OF THE APPELLANT VIS--VIS THE COMPARABLES. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A RESIDENT COMPANY OF M/S.EXPERTUS INC., WHICH IS BASED AT SAN TA CLARA,CALIFORNIA ITA NO. :- 4 -: AND IS ENGAGED IN PROVISION OF LEARNING MANAGEMENT SOLUTIONS, STRATEGIC CONSULTING AND CLOUD SOLUTIONS BY WAY OF CONSULTING AND IMPLEMENTATION USING SAAS (SOFTWARE AS A SERVICE MO DEL). THE ASSESSEE IS A CHENNAI BASED SUBSIDIARY COMPANY OF M /S.EXPERTUS INC., AND IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT MA INTENANCE SERVICES AND PROVIDES SUPPORT SERVICES TO E.USA. D URING THE F.Y 2008- 09 RELEVANT TO ASSESSMENT YEAR 2009-10, THE ASSESSE E HAS ENTERED INTO INTERNATIONAL TRANSACTION FOR PROVIDING SOFTWARE SE RVICES AMOUNTING TO RS.18,13,89,502.- WITH ITS ASSOCIATED ENTERPRISE (A E), M/S.EXPERTUS INC.,. 3.1. ACCORDING TO THE TPO, THE ASSESSEE HAS NOT FI LED THE TRANSFER PRICING DOCUMENTS AS STIPULATED U/S.92C OF THE ACT, WHICH WAS INFORMED TO THE ASSESSEE VIDE VARIOUS LETTERS INCLU DING SHOW-CAUSE NOTICE DATED 31.12.2012. IN RESPONSE THIS SHOW-CAU SE NOTICE, THE ASSESSEE REPLIED ALONG WITH TP REPORT VIDE ITS LETT ER DATED 07.01.2013. THE EXTRACT OF THE LETTER IS REPRODUCED AS UNDER:- EXPERTUS INDIA DETERMINED THAT THE INTERNATIONAL TRANSACTION WITH ITS AE OF EXPERTUS INC. USA, THE TRANSACTIONAL NET MARGIN METHOD (TNMM) IS THE MOST APPROPRIATE METHOD TO EVALUATE THE ARMS LENGTH STA NDARD. FURTHER, FULLY LOADED COST PLUS (FLCP) IS USED AS T HE PROFIT LEVEL DOMESTIC SALE = 0.29, MARGIN ON DOMESTIC SALE =0.03(0.29*10.82/100) COST ON DOMESTIC SALE =0.26 TOTAL COST CLAIMED AS DOMESTIC COST =1.48 ITA NO. :- 5 -: COST CONSIDERED AS RELATED TO AE SALE =(1.48-0.26)= 1.22 PROPORTIONATE TO IT SEGMENT (1.22*13.28/17.10)=0.95(RS.0.95 CR.) 3.2 SUBSEQUENT TO THIS, TPO CONDUCTED INDEPENDENT TRANSFER PRICING STUDY AND FURTHER THE TPO CONDUCTED AN INDEPENDENT SEARCH TO FIND OUT THE MOST APPROPRIATE COMPARABLE COMPANIES AS FO LLOWS:- A) NET SALES GREATER THAN RS.1 CRORE AND LESS THAN RS.100 CRORE B) OPERATING INCOME/NET SALES IS GREATER THAN 25% C) R&D EXPENSES /NET SALES IS LESS THAN 3% D) COMPANIES HAVING POSITIVE NET WORTH E) A FOREIGN EXCHANGE EARNING/NET SALE IS MORE THAN 75% F) RPT IS LESS THAN 25% OF SALES AND G) QUALITATIVE COMPARABLES SUCH AS FUNCTION. 3.3 FURTHER, THE TPO TOOK THE FOLLOWING 9 COMPARAB LE COMPANIES ON THE BASIS OF THE CURRENT STATUS OF THE ASSESSEE AND WORKED OUT THE MARGIN (OP/TC). THE RESULTANT ARITHMETIC MEAN OF T HE COMPARABLE COMPANIES WAS 25.65% A) AKSHAY SOFTWARE TECHNOLOGIES LTD. 12.38% B) BODHTREE CONSULTING LTD. 68.56% C) TAKSHEEL SOLUTION LTD. 8.80% D) THINKSOFT GLOBAL SOLUTION LTD. 20.77% E) COM U-LEARN TECH INDIA LTD 28.06% F) CAPITAL GAINS-VAK SOFTWARE & EXPERTUS LTD.(SEG )8.26% G) CAT TECHNOLOLGIES LTD. 45.71% H) FCS TECHNOLOLGIES SOLUTIONS LTD. 18.29% I) VIRINCHI TECHNOLOGIES LTD., 20.30% ARITHMETIC MEAN 25.65% ITA NO. :- 6 -: 3.4 THE TPO PASSED THE ORDER DATED 16.01.2013 WI TH THE FOLLOWING OBSERVATIONS:- A) THE ASSESSEE HAD PROVIDED SEGMENTAL DETAILS, WH EREIN RS.1,48,44,034/- WAS CLAIMED AS EXPENDITURE TOWARDS DOMESTIC SERVICE INCOME OF 29,00,740/- WHICH IS DISPROPORTIO NATE TO THE INCOME OFFERED. B) THE MARGIN OF THE ASSESSEE COMPANY HAS BEEN AR TIFICIALLY INCREASED BY CLAIMING HIGHER EXPENDITURE TOWARDS DO MESTIC SERVICES. HENCE, A PART OF THE EXPENDITURE OF RS.1, 48,44,034/- HAS BEEN CONSIDERED AS AN OPERATING COST IN THE IT SEGM ENT AND THE SAME HAS BEEN CALCULATED AS FOLLOWS:- 1.TOTAL SALES: 18.13 CR. 2.TOTAL COST:16.30 CR. 3.PROFIT 1.77 MARGIN (OP/TC)=10.82% 3.5 APPLYING THE SAME ANALOGY, THE MARGIN OF THE A SSESSEE WAS FOUND TO BE AT 10.5% WHEREAS THE MARGIN OF THE COMP ARABLE COMPANIES WAS AT 25.65%. ALP OF THE TRANSACTION WAS FIXED AS RS.15.09 CRORES. APPLYING 5 RANGE THEREON, IT COME S TO RANGE OF RS.15.84 CRORES TO RS.14.33 CRORES. ACCORDINGLY, T PO CALCULATED THE ADJUSTMENT REQUIRED AT RS.1.81 CRORES. THE APO OBSE RVED THAT ALP FOR SALE PRICE CALCULATED ON INTERNATIONAL TRANSACTIONS HAD NOT BEEN DETERMINED BY THE ASSESSEE COMPANY IN ACCORDANCE WI TH SEC.92C(3) AND CALCULATED THE ALP AS PER THE PROVISIONS OF SUB -SECTIONS (1) & (2) OF 92C AND MADE AN ADJUSTMENT IN THE INCOME OF ASSE SSEE AMOUNTING ITA NO. :- 7 -: TO RS.1.81 CRORES. BESIDES IT, THE TPO RECOMMENDED PENALTY U/S.271G @ 2% ON THE INTERNATIONAL TRANSACTION. 3.6 NOW, THE MAIN GRIEVANCE OF THE ASSESSEES COUNS EL IS THAT DRP FAILED TO UNDERSTAND THAT THE EXPENSES AMOUNTING TO RS.1,4 8,44,034/- WAS INCURRED FOR DEVELOPMENT OF INDIA RELATED/NON-AE TE STING PLATFORM AND CONSTRUED THE SAME AS A PART OF COST OF IT SEGMENT, WHICH IS M/S.CAPTIVE EXPERTISE, USA. ACCORDING TO LD.A.R, THE LOWER AUT HORITIES ARE NOT PROPERLY CORRELATING THE SALES MADE TO DOMESTIC CUSTOMERS AN D THE COST OF DEVELOPING TESTING PLATFORM AND ARRIVED AT THE WRONG PROPORTIO NATE OPERATING EXPENDITURE WHICH WAS FURTHER IN PROPORTIONAL IN AL LOCATED TO THE IT SEGMENT. BASED ON PROFIT AND TURNOVER PROPORTION DOES NOT HO LD GOOD IN THE LIGHT OF TRANSFER PRICES WORKING IN PARA 9.2 OF TPOS ORDER . HE SUBMITTED THAT THE ASSESSEE HAS SUBMITTED TRANSFER PRICING DOCUMENT SE GMENT WISE WHEREIN THE REVENUE RELATED COST INCURRED IN RESPECT OF EACH SE GMENT, I.E. IT SEGMENT, ITES SEGMENT AND THE SOFTWARE TESTING SERVICE SEGM ENT (DOMESTIC SERVICES) WHERE CAPTURED SEPARATELY. HE DREW OUR ATTENTION TO THE PAGE NO.107 OF THE PAPER BOOK TO DEMONSTRATE THE SEGMENT OF PROFIT AND LOSS OF EACH OF THESE UNITS. ACCORDING TO LD.A.R, AN AMOUNT OF RS. 1,48,44,034/- AS EXPENSES IN THE NON-AE SEGMENT (SET OFF FOR THE UK MARKET) WHIC H WAS TOTALLY UNRELATED TO AE BUSINESS SEGMENT I.E. (IT & IYES SEGMENT) AND HENCE THIS COST DID NOT FORM PART OF THE TOTAL COST CHARGED BACK WITH MARK UP OF M/S.CAPTIVE EXPERTISE, USA. ACCORDING TO HIM, THIS COST OF DEV ELOPING AN INDEPENDENT TESTING PLATFORM SHOULD NOT FORM PART OF THE IT SE RVICES SEGMENT, REQUIRING MARK UP FROM M/S.CAPTIVE EXPERTISE, USA. ACCORDING TO LD.A.R, THE ITA NO. :- 8 -: OBSERVATION OF THE TPO THAT AN AMOUNT OF RS. 1,48,44,034/- HAS BEEN CLAIMED AS AN EXPENDITURE TOWARDS THE SERVICES PROV IDED IN DOMESTIC AGAINST THE DOMESTIC INCOME OF RS.29,00,740/-, WHICH IS DI SPROPORTIONATE TO THE EXPENDITURE CLAIMED IS INCORRECT AND IT CANNOT BE C ONSTRUED AFTER THOUGHT IN VIEW OF RECRUITMENT OF VARIOUS ENGINEERS DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. FURTHER, HE FILED DETAILS OF CANDID ATE EVOLUTION FORM IN RESPECT OF VARIOUS TESTING ENGINEERS RECRUITED BY THE ASSES SEE. FURTHER, HE SUBMITTED THAT THERE IS A CATEGORICAL OBSERVATION IN THE NOTE S FORMING PART OF THE BALANCE SHEET AND P&L A/C FOR THE FINANCIAL YEAR 20 07-08 IN PARA-14 WHICH READS AS FOLLOWS:- THE COMPANY HAS INCURRED UN-REALIZABLE EXPENDITURE TOWARDS DEVELOPMENT IN NEW TECHNOLOGY AND THE VALUE IS NOT ASCERTAINABLE. THE NEW TECHNOLOGY MAY RESULT IN RAI SING ADDITIONAL /NEW INCOME IN FUTURE. HE ALSO SUBMITTED THAT IN SUBSEQUENT ASSESSMENT YEA R 2009-10, THERE IS NO TRANSFER PRICING ADJUSTMENT AND TPO HAS ACCEPTED AT THE ASSESSEES SEPARATE TESTING DEPARTMENT WHICH WAS AIMED AT TAPPING THE P OTENTIAL IN THE UK MARKET AND EARNING PROFIT FOR WHICH THE COMPANY HAD A SEPARATE TEAM WHO WERE RECRUITED FOR PROVIDING TESTING SERVICES AND W HOSE COSTS WERE CAPTURED SEPARATELY. FINALLY, HE RELIED ON THE VARIOUS JUDG MENTS IN SUPPORT OF HIS CLAIM. 3.7 ON THE OTHER HAND, LD.D.R SUBMITTED THAT THE A SSESSEE HAS NOT PROVIDED ANY DETAILS OF SUCH EXPENSES EITHER BEFORE THE TPO OR BEFORE THE DRP IN SPITE OF GIVING AMBLE OPPORTUNITY OF HEARING TO THE ASSESSEE. IN ITA NO. :- 9 -: ABSENCE OF COMPLETE DATA BEFORE THE LOWER AUTHORITI ES, THE TESTING SERVICE DEPARTMENT WAS NOT CONSIDERED AS SEPARATE PROFIT CE NTRE SO AS TO ARRIVE SEGMENTAL PROFIT FROM THAT SECTION. HE RELIED ON TH E ORDER OF LOWER AUTHORITIES. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE ASSESSEE FILED VARIOUS DETAILS OF APPOINTMENT OF TESTING ENGINEERS WHICH ARE NOT PRODUCED BEFORE THE LOWER A UTHORITIES AND REVENUE HAVE NO OCCASION TO EXAMINE THE SAME. AS THIS INFO RMATION FILED FIRST TIME BEFORE THIS TRIBUNAL, THE DRP HAS TO GET IT DONE VE RIFIED FROM THE TPO SO AS TO REACH A CONCLUSION WHETHER THERE IS A SEPARATE T ESTING PLATFORM AND TO BE TREATED AS INDEPENDENT PROFIT CENTRE AS THIRD SEGME NT. THEN ONLY ONE HAS TO DECIDE THE TRANSFER PRICING ADJUSTMENTS ON THIS ISS UE. FURTHER, IT IS NOT POSSIBLE TO HOLD THAT THE CLAIM OF ASSESSEE THAT TH ERE IS SEPARATE SOFTWARE TESTING SERVICES SEGMENT IS AFTER THOUGHT AS THE NO TES TO FINANCIAL STATEMENT FOR THE F.Y 2007-08 IN PARA-14 SHOWS THAT NOTED IN THE ACCOUNT) THAT THE ASSESSEE HAS INCURRED UN-RELATABLE EXPENDITURE TOW ARDS DEVELOPMENT IN NEW TECHNOLOGY AND THE VALUE IS NOT ASCERTAINABLE. THE NEW TECHNOLOGY MAY RESULT IN RAISING ADDITIONAL /NEW INCOME IN FUTURE. FURTHER, THE ASSESSEE ALSO FILED AN AFFIDAVIT DATED 18.01.2016 TO THE EFFECT T HAT THE ASSESSEE SET UP A SEPARATE BUSINESS SEGMENT CALLED INDEPENDENT VERIF ICATION AND VALIDATION SEGMENT PROPOSING TO PROVIDE AN INDEPENDENT SOFTWA RE TESTING SERVICES WITH AN OBJECT OF EXPLORING UK MARKET AND NOT TO IT S AE BASED AT USA. FURTHER, THE COST RELATING TO THIS SEGMENT WERE NOT OPERATING COST FOR THE SERVICES PROVIDED TO THE AE UNDER THE SOFTWARE SER VICES SEGMENT. THE ITA NO. :- 10 - : FACTS NARRATED IN THIS AFFIDAVIT REQUIRED TO BE EXA MINED BY THE TPO/DRP AND THEREAFTER ANY ADJUSTMENTS TOWARDS TP TO BE TESTED. ACCORDINGLY, IN THE INTEREST OF JUSTICE, WE REMIT THE ENTIRE ISSUE TO T HE FILE OF DRP FOR FRESH CONSIDERATION, IF REQUIRE THE DRP CALLED FOR REMAND REPORT FROM THE CONCERNED AUTHORITIES. 5. THE OTHER GROUNDS REGARDING THE SELECTION OF CO MPARABLE IS NOT ADJUDICATED AT THIS STAGE AS IT IS DEPEND UPON ONLY AFTER DISPOSING OF FIRST GROUND HEREIN ABOVE BY THE DRP. IN THE RESULT, THE APPEAL OF THE ASSESSEE ITA NO.943/MDS./15 IN IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 22 ND JULY, 2016, AT CHENNAI. SD/ - SD/ - ( . . . ! ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( ! ' ) (CHANDRA POOJARI) # / ACCOUNTANT MEMBER '# / CHENNAI $% / DATED: 22 ND JULY, 2016 K S SUNDARAM %&'' ()'*) / COPY TO: ' 1 . / APPELLANT 3. ' +',! / CIT(A) 5. )-.' / / DR 2. / RESPONDENT 4. ' + / CIT 6. .0'1 / GF