Appeal details
Counselvise Citation
[2017] 127 COUNSELVISE.COM (IT) 2215 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
6 year(s) 7 month(s) 10 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
29-12-2017
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
B
Next Hearing Date
18-12-2017
Assessment Year
2005-2006
Appeal Filed On
19-05-2011
Judgement Text
ITA NOS 633 AND 972 OF 2011 ICAPGEMINI TECH SERVICES INDIA LTD HYDERABAD. PAGE 1 OF 10 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.633/HYD/2011 (ASSESSMENT YEAR: 2005-06) M/S.CAPGEMINI TECHNOLOGY SERVICES INDIA LTD (FORMERLY KNOWN AS IGATE GLOBAL SOLUTIONS LTD, HYDERABAD PAN: AACCA 4255 G VS INCOME TAX OFFICER WARD 16 ( 2 ) HYDERABAD (APPELLANT) (RESPONDENT) ITA NO.972/HYD/2011 (ASSESSMENT YEAR: 2005-06) INCOME TAX OFFICER WARD 16 ( 2 ) HYDERABAD VS M/S.CAPGEMINI TECHNOLOGY SERVICES INDIA LTD (FORMERLY KNOWN AS IGATE GLOBAL SOLUTIONS LTD, HYDERABAD PAN: AACCA 4255 G (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI A.V. RAGHURAM FOR REVENUE : SHRI J.SIRI KUMAR, DR O R D E R PER SMT. P. MADHAVI DEVI, J.M. BOTH ARE CROSS APPEALS BY THE ASSESSEE AS WELL AS T HE REVENUE FOR THE A.Y 2005-06. THESE APPEALS ARE AGAI NST THE ORDER OF THE CIT (A)-III HYDERABAD, DATED 14.03.2011. IN THE ASSESSEES APPEAL, THE ASSESSEE HAS RAISED THE FOLLOWING GROUN DS OF APPEAL: DATE OF HEARING: 18.12.2017 DATE OF PRONOUNCEMENT: 29 . 1 2 .2017 ITA NOS 633 AND 972 OF 2011 ICAPGEMINI TECH SERVICES INDIA LTD HYDERABAD. PAGE 2 OF 10 IN THE FACTS AND THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-III, HYDERABAD, ERRED: 1. IN RESPECT OF DISALLOWANCE OF RS.5,99,163 ON ACCOUNT OF EMPLOYEES' CONTRIBUTIONS TO PROVIDENT FUND PAID AFTER THE DUE DATE: A) THE CIT(A) OUGHT TO HAVE ALLOWED THE SAID AMOUNT AS DEDUCTION SINCE THE SAME WAS PAID BEFORE THE END OF THE YEAR. B) WITHOUT PREJUDICE TO ABOVE: (I) IN HOLDING THAT THE SAID AMOUNT IS NOT A BUSINESS RECEIPT BUT INCOME FROM OTHER SOURCES. (II) IN CONFIRMING THAT THE SAID AMOUNT IS NOT ELIGIBLE FOR DEDUCTION U/S.L0A (III) IN NOT APPRECIATING THAT THE ONCE THE AMOUNT IS DISALLOWED U/S.36(I)(VA) AND FORMS PART OF THE BUSINESS INCOME, THE SAME HAS TO BE CONSIDERED FOR THE PURPOSE OF COMPUTING DEDUCTION U/S.L0A. 2. IN RESPECT OF ADJUSTMENT AND ADDITION OF RS.3,09,56,957 UNDER TRANSFER PRICING: A) IN CONFIRMING THE AMOUNT OF ADJUSTMENT AND ADDITION TO THE EXTENT OF RS.3,06,35,594 B) IN DIRECTING THE ASSESSING OFFICER TO ADOPT ARITHMETIC MEAN OF 26.41 % AS PROFIT LEVEL INDICATOR. C) IN NOT ACCEPTING THE CONTENTION OF THE APPELLANT THAT DUE WEIGHTAGE OUGHT TO BE GIVEN FOR THE INCREASED COST AND EXPENSES INCURRED IN ANTICIPATION OF FUTURE GROWTH, THE BENEFITS OF WHIC H WERE REAPED IN FUTURE, AND BY HOLDING THAT SUCH PLEA AT THE APPELLATE STAGE BEFORE CIT(A) IS NOT PERMISSIBLE WHEN THE FACTS WERE AVAILABLE AND IT ITA NOS 633 AND 972 OF 2011 ICAPGEMINI TECH SERVICES INDIA LTD HYDERABAD. PAGE 3 OF 10 WAS NECESSARY TO CONSIDER THEM FOR DETERMINING CORRECT ARM'S LENGTH PRICE. D) IN NOT EXCLUDING FROM THE LIST OF COMPARABLES TWO COMPANIES HAVING VERY HIGH MARGIN VIZ., EXENSYS SOFTWARE SOLUTIONS LTD. AND THIRDWARE SOLUTIONS LTD. E) IN NOT EXCLUDING FROM THE LIST OF COMPARABLES A COMPANY HAVING VERY LARGE TURNOVER VIZ., INFOSYS. F) IN CONFIRMING THAT THE AMOUNT OF ADJUSTMENT UNDER TRANSFER PRICING IS TO BE CALCULATED ON THE TOTAL OPERATING COST OFRS.17,83,68,232 AND TOTAL PRICE RECEIVED OF RS.18,87,93,005 WITHOUT EXCLUDING THE AMOUNTS IN RESPECT OF NON- ASSOCIATED ENTERPRISES. G) IN NOT APPRECIATING THAT THE PROFITABILITY OF TH E ASSOCIATED ENTERPRISES DO NOT JUSTIFY ANY ADJUSTMENT UNDER TRANSFER PRICING IN THE CASE OF THE APPELLANT. H) WITHOUT PREJUDICE TO ABOVE AND WITHOUT ACCEPTING THE DISALLOWANCE, IN CONFIRMING THAT THE TRANSFER PRICING OFFICER WAS JUSTIFIED IN NOT GRANTING THE BENEFIT OF 5% AS PER THE PROVISO TO SUB-SECTION (2) OF SECTION 92. I) IN NOT APPRECIATING THAT THE APPELLANT HAS NOT REALIZED ANY CONSIDERATION BEYOND THE AMOUNT STATED IN THE BOOKS AND ACCOUNT AND THERE IS NO AVOIDANCE OF TAX ESTABLISHED ON FACTS. 3. THE APPELLANT CRAVES LEAVE TO ADD, MODIFY OR WITHDRAW ANY OF THE GROUNDS OF APPEAL AT THE TIME OF HEARING. 2. AS REGARDS GROUND OF APPEAL NO.1, WE FIND THAT T HIS ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY T HE DECISION OF ITA NOS 633 AND 972 OF 2011 ICAPGEMINI TECH SERVICES INDIA LTD HYDERABAD. PAGE 4 OF 10 THE COORDINATE BENCH OF THIS BENCH (TO WHICH BOTH O F US SIGNATORIES) IN THE CASE OF M/S. NAGARJUNA ENGINEER ING CONSTRUCTIONS VS. ACIT IN ITA NO.766/HYD/2017, DATE D 30.11.2017 WHEREIN WE HAVE HELD THAT THE EMPLOYEES CONTRIBUTION TO PF & ESI IS ALSO ALLOWABLE BOTH U/S 43B AND 36(1)(VA) OF THE ACT IF IT IS REMITTED TO THE GOVT. A/C BEFORE FILING OF THE RETURN OF INCOME. THE RELEVANT PARAGRAPH IS AS UNDER: 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT AS REGARDS THE ALLOWABILITY OF DEDUCTION U/S 43B OF THE ACT OF EMPLOYERS CONTRIBUTION TO PF AND ESIC, THE HON'BLE SUPREME COURT HAS HELD THAT IF IT IS PAID ON OR BEFORE THE DUE DATE OF THE FILING OF THE RETURN U/S 139(1) OF THE ACT, IT IS ALLOWABLE. AS REGARDS THE APPLICABILITY OF SUCH PROVISO TO THE DISALLOWANCE MADE U/S 36(1)(VA) OF THE ACT, WE FIND THAT DECISIONS ARE BOTH AGAINST AND IN FAVOUR OF THE ASSESSEE. WE FIND THAT THE COORDINATE BENCH OF THIS TRIBUNAL AT VISAKHAPATNAM IN THE CASE OF DCIT VS. EASTERN POWER DISTRIBUTION COMPANY OF A.P. LTD (CITED SUPRA) HAS CONSIDERED ALL THE ABOVE DECISIONS REFERRED TO BY THE ASSESSEE AS WELL AS THE DR AND HAS HELD THAT THERE IS NO DISTINCTION BETWEEN THE EMPLOYEES AND EMPLOYERS CONTRIBUTION OF PF AND IF THE TOTAL CONTRIBUTION IS DEPOSITED ON OR BEFORE THE DUE DATE OF FURNISHING THE RETURN U/S 139(1) OF THE ACT, THEN NO DISALLOWANCE CAN BE MADE OF EMPLOYEES CONTRIBUTION TO PF. RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH ON SIMILAR SET OF FACTS, THIS APPEAL OF THE ASSESSEE IS ALLOWED . RESPECTFULLY FOLLOWING THE SAME, GROUND OF APPEAL N O.1 IS ALLOWED. ITA NOS 633 AND 972 OF 2011 ICAPGEMINI TECH SERVICES INDIA LTD HYDERABAD. PAGE 5 OF 10 3. AS REGARDS GROUND OF APPEAL NO.2 AGAINST THE ADJUSTMENT MADE TOWARDS THE ALP OF THE INTERNATIONA L TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AES, THE ASSESSEE IS SEEKING EXCLUSION OF THREE COMPANIES FR OM THE FINAL LIST OF COMPARABLES. THEY ARE (I) EXENSYS SOFTWARE SOLUTIONS LTD; (II) THIRDWARE SOLUTIONS LTD; AND (III) INFOSYS TEC HNOLOGIES LTD. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. DURING THE RELEVANT A.Y, THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSAC TIONS OF PROVIDING SOFTWARE SERVICES TO ITS AES. FOR DETERMI NATION OF THE ALP OF THE TRANSACTION, THE AO REFERRED THE MATTER TO THE TPO. THE TPO REJECTED THE ASSESSEES T.P STUDY AND MADE HIS OWN SEARCH FOR THE COMPARABLES. HE FINALLY ADOPTED 17 COMPARAB LES, THE AVERAGE ARITHMETIC MEAN OF WHICH, IS 34.98% AS AGAI NST THE ASSESSEES MARGIN OF 12.3%. THEREFORE, THE TPO PROP OSED ADJUSTMENT OF RS.3,09,56,957. ACCORDINGLY, THE AO M ADE THE ADJUSTMENT TO THE RETURNED INCOME OF THE ASSESSEE. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A) WHO CONFIRMED THE ORDER OF THE AO AS FAR AS THE TP ADJUSTMENT IS CONC ERNED. AGAINST THIS ADJUSTMENT CONFIRMED BY THE CIT (A), THE ASSES SEE IS IN APPEAL BEFORE US. 5. THE ASSESSEE HAS OBJECTED TO (I) EXENSYS SOFTWAR E SOLUTIONS LTD, AND (II) THIRDWARE SOLUTIONS LTD BEI NG TAKEN AS COMPARABLES ON THE GROUND THAT BOTH OF THEM ARE HAV ING VERY HIGH PROFIT MARGINS. THEREFORE, ACCORDING TO THE AS SESSEE, THEY SHOULD BE EXCLUDED FROM THE COMPARABLES FOR THE PUR POSE OF ITA NOS 633 AND 972 OF 2011 ICAPGEMINI TECH SERVICES INDIA LTD HYDERABAD. PAGE 6 OF 10 DETERMINATION OF THE ALP. AS FAR AS INFOSYS TECHNOL OGIES LTD IS CONCERNED, HE OBJECTED TO IT ON THE GROUND OF ITS H UGE TURNOVER. ON THE VERY SAME GROUND, THE ASSESSEE IS OBJECTING TO THE OTHER COMPANIES ABOVE AS WELL. 6. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW, WHIL E THE LEARNED DR PLACED RELIANCE UPON THE ORDER OF THE CIT (A). W E FIND THAT AS FAR AS INFOSYS LTD IS CONCERNED, THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES LTD; REPORTED IN (2013) 219 TAXMANN 0026 (DEL.); HAS HELD INFOSYS TE CHNOLOGIES LTD TO BE NOT COMPARABLE WITH ANY OTHER COMPANY BEC AUSE OF ITS HUGE TURNOVER. WE FIND THAT THE SAID DECISION HAS B EEN FOLLOWED BY THE COORDINATE BENCHES OF THIS TRIBUNAL INCLUDIN G THIS VERY BENCH AND HAS DIRECTED THE EXCLUSION OF THE SAID CO MPANY FROM THE FINAL LIST OF COMPARABLES. RESPECTFULLY FOLLOWI NG THE DECISION OF THE COORDINATE BENCHES, WE DIRECT THE AO TO EXCLUDE INFOSYS TECHNOLOGIES LTD FROM THE FINAL LIST OF COMPARABLES . 7. AS REGARDS EXENSYS SOFTWARE SOLUTIONS LTD IS CONCERNED, THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF UNITED ONLINE SOFTWARE DEVELOPMENT (INDIA) PVT. LTD VS. ITO IN ITA NO.1480/HYD/2010 DATED 24.01.2014 HAS TAKEN NOTE OF THE FACT THAT THERE WAS A MERGER OF THE EXENSYS SOFTWARE SOL UTIONS LTD AND HOLOOL INDIA LTD W.E.F. 1.4.2004 AND THAT IT HA D A MATERIAL IMPACT ON THE FINANCIAL RESULTS OF THE COMPANY FOR THE YEAR. WE HAVE GONE THROUGH THE FINANCIAL RESULTS OF EXENSYS SOFTWARE SOLUTIONS LTD AND IN THE ANNUAL REPORT, THE DIRECTO RS HAVE ITA NOS 633 AND 972 OF 2011 ICAPGEMINI TECH SERVICES INDIA LTD HYDERABAD. PAGE 7 OF 10 MENTIONED THAT THERE HAS BEEN A MERGER OF THE ASSES SEE COMPANY WITH HOLOOL INDIA LTD. WHEN THIS FACT HAS BEEN BROU GHT TO THE NOTICE OF THE TPO, THE TPO HAS NOT BROUGHT OUT AS T O HOW THE MERGER HAS NOT AFFECTED THE FINANCIAL RESULTS OF TH E COMPANY FOR THE RELEVANT A.Y. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCHES, PARTICULARLY IN THE CASE OF UNITED ONLINE SOFTWARE DEVELOPMENT (INDIA) PVT. LTD (SUPRA), WE D IRECT THE AO TO EXCLUDE THIS COMPANY FROM THE FINAL LIST OF COMPARA BLE. 8. AS REGARDS THIRDWARE SOLUTIONS LTD IS CONCERNED, THE LEARNED COUNSEL FOR THE ASSESSEE HAD RELIED UPON TH E DECISION OF THE COORDINATE BENCH I.E. B BENCH IN THE CASE OF INTOTO SOFTWARE INDIA PVT LTD IN ITA NO.1196/HYD/2010, DATED 24.05. 2013 FOR THE A.Y 2005-06 WHEREIN THE TRIBUNAL HAS TAKEN NOTE OF THE FACT THAT THIRDWARE SOLUTIONS LTD IS INTO BOTH SOFTWARE SERVI CES AS WELL AS PRODUCT DEVELOPMENT. THE TRIBUNAL AT PARA 25 & 26 O F ITS ORDER HAS OBSERVED THAT THERE WAS NO SALE OF THE SOFTWARE PRODUCTS DURING THE YEAR AND HAS HELD THAT THE SEGMENTAL DET AILS AS REGARDS THE SOFTWARE PRODUCTS ARE NOT AVAILABLE AND PARTICULARLY THAT THE DETAILS OF THE EXPENDITURE INCURRED TOWARD S THE DEVELOPMENT OF SOFTWARE PRODUCTS ARE NOT AVAILABLE AND IN VIEW OF THESE FACTS, THE TRIBUNAL HAS DIRECTED THE EXCLUSIO N OF THE SAID COMPANY. WE HAVE GONE THROUGH THE DETAILS FILED BEF ORE US WITH REGARD TO THE THIRDWARE SOLUTIONS LTD IN THE PAPER BOOK AT PAGE 183 TO 185 AND WE FIND THAT THE FACTS ARE THE SAME. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH ON SIMILAR SET OF FACTS, WE DIRECT THIS COMPANY TO BE EXCLUDED. ITA NOS 633 AND 972 OF 2011 ICAPGEMINI TECH SERVICES INDIA LTD HYDERABAD. PAGE 8 OF 10 9. THE ASSESSEE HAS ALSO SUBMITTED THAT THERE WAS UNDERUTILIZATION OF THE ASSETS OF THE COMPANY DURIN G THE RELEVANT A.Y AND THAT THE TPO OUGHT TO HAVE MADE ADJUSTMENTS TOWARDS SUCH UNDERUTILIZATION OF THE ASSETS. HE PRAYED THAT THE TPO BE DIRECTED TO GIVE ADJUSTMENT FOR UNDERUTILIZATION OF ITS CAPACITY. WE FIND THAT THE ASSESSEE HAD NOT SOUGHT ADJUSTMENT TO WARDS UNDERUTILIZATION OF THE ASSETS DURING THE TP PROCEE DINGS BUT BEFORE THE CIT (A) THE ASSESSEE HAS RAISED AN ARGUM ENT THAT DURING THE RELEVANT FINANCIAL YEAR, ADDITIONAL SPAC E WAS TAKEN ON RENT AND ADDITIONAL PERSONNEL WERE APPOINTED DURING THE RELEVANT PREVIOUS YEAR AND THAT THE BENEFIT OF INCREASED COS T OF SALARY AND RENTAL PREMISES COULD NOT BE RECOVERED IN THE CURRE NT YEAR WHICH REDUCED THE PROFIT PERCENTAGE. THE CIT (A) HAS REJE CTED THIS GROUND ON THE GROUND THAT IT WAS TAKEN FOR THE FIRS T TIME BEFORE HIM. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE APPEAL BEFORE THE CIT (A) IS CONTINUATION OF THE AS SESSMENT PROCEEDINGS AND THEREFORE, THE CIT (A) OUGHT TO HAV E CONSIDERED THE CONTENTION OF THE ASSESSEE ON MERITS. 10. THE LEARNED DR HOWEVER, OBJECTED TO THIS CONTEN TION. 11. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT IN A NUMBER OF CASES, THIS TRIBUNAL HAS HELD THAT THE ADJUSTMENT TOWARDS UNDERUTILIZATION H AS TO BE ALLOWED FOR DETERMINATION OF THE ALP. IN THE CASE O F ACIT VS. MOSCHIP SEMI CONDUCTOR TECHNOLOGIES LTD IN ITA NO.7 0/HYD/ 2015, DATED 22.09.2017, WE HAVE DIRECTED THE AO TO ALLOW THE ADJUSTMENT FOR UNDERUTILIZATION OF THE INFRASTRUCTU RE. IN VIEW OF ITA NOS 633 AND 972 OF 2011 ICAPGEMINI TECH SERVICES INDIA LTD HYDERABAD. PAGE 9 OF 10 THE SAME, WE DIRECT THE AO TO GIVE ADJUSTMENT FOR U NDERUTILIZATION OF CAPACITY. 12. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSEE HAD TRANSACTIONS WITH B OTH AE AND NON AES AND THE ONLY AE TURNOVER OUGHT TO HAVE TAKE N INTO CONSIDERATION FOR TP ADJUSTMENT. HE SUBMITTED THAT THE TPO HAS TAKEN TURNOVER OF BOTH THE AE AND NON-AE TRANSACTIO NS. WE FIND THAT THE TRANSFER PRICING PROVISIONS ARE APPLICABLE ONLY TO THE INTERNATIONAL TRANSACTIONS BETWEEN THE ASSESSEE AND ITS AES. THEREFORE, THE AO IS DIRECTED TO CONSIDER THE SEGME NTAL RESULTS OF THE AE TRANSACTIONS ONLY FOR THE PURPOSE OF ALP ADJ USTMENTS. THEREFORE, THE GROUND OF APPEAL NO.2 IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.972/HYD/2011 (REVENUES APPEAL) 13. AS REGARDS REVENUES APPEAL, WE FIND THAT THE O NLY GROUND IS AGAINST THE DIRECTION OF THE CIT (A) TO E XCLUDE THE TELECOMMUNICATION CHARGES BOTH FROM THE EXPORT TURN OVER AS WELL AS FROM THE TOTAL TURNOVER FOR THE PURPOSES OF COMP UTATION OF DEDUCTION U/S 10A OF THE ACT. WE FIND THAT THIS ISS UE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON'B LE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. ( 2012) 349 ITR 98 (KAR) AND ALSO THE DECISION OF THE HON'BLE JURIS DICTIONAL HIGH COURT IN THE CASE OF BA CONTINUUM (ITTA NO.214 OF 2 017). RESPECTFULLY FOLLOWING THE SAME, WE SEE NO REASON T O INTERFERE WITH THE ORDER OF THE CIT (A). ITA NOS 633 AND 972 OF 2011 ICAPGEMINI TECH SERVICES INDIA LTD HYDERABAD. PAGE 10 OF 10 14. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSES AND THE REVENUES APPEAL IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH DECEMBER, 2017. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 29 TH DECEMBER, 2017. VINODAN/SPS COPY TO: 1 K.VASANTKUMAR, AV RAGHU RAM & P VINOD, ADVOCATES, 610 BABUKHAN ESTATE, BASHEERBAGH, HYDERABAD 50001 2 ITO WARD 16(2) AAYAKAR BHAVAN, BASHEERBAGH, HYDERAB AD - 01 3 CIT (A) - III HYDERABAD 4 CIT IV HYDERABAD 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER
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