M/s Software Paradigms Infotech Private Limited, Mysore V. Asst.C.I.T., Mysore

ITA 994/BANG/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 4151 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 9 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 13-05-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PRASHANTH G S
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R BASKARAN, ACCOUNTANT MEMBER IT(TP)A NO.994/BANG/2016 ASSESSMENT YEAR : 2011-12 M/S SOFTWARE PARADIGMS INFOTECH PVT. LTD., NO.316-318, SPL CITY, HEBBAL INDUSTRIAL AREA, HEBBAL, MYSURU-570 016. PAN AALCS 7583C. VS. THE ASST. COMMISSIONER OF INCOME- TAX, CIRCLE-1(1), MYSURU. APPELANT RESPONDENT APPELLANT BY : SHRI PRASHANTH G.S, C.A RESPONDENT BY : SHRI PRADEEP KUMAR, CIT DATE OF HEARING : 28.01.2019 DATE OF PRONOUNCEMENT : 15.02.2019 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE O RDER DATED 21/1/2016 OF ACIT, CIRCLE-1(1), MYSORE PASSED U/S 1 44C(13) R.W.S 143(3) OF THE INCOME-TAX ACT 1961 (ACT) IN RELATION TO T HE ASST. YEAR 2011-12. 2. IN THIS APPEAL, THE ISSUE TO BE DECIDED IS WITH REGARD TO CORRECTNESS OF DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES AND INFO RMATION TECHNOLOGY ENABLED SERVICES (ITES) BY THE ASSESSEE TO ITS ASSO CIATED ENTERPRISE. THE ADDITION MADE ON DETERMINATION OF ALP IN THE SOFTWA RE DEVELOPMENT SEGMENT (SWD) WAS SUM OF RS.2,68,45,350/- AND IN IT ES SEGMENT SUM OF RS.51,36,018/-. THE MOST APPROPRIATE METHOD (MAM) CHOSEN BY THE IT(TP)A NO.994/BANG/2016 PAGE 2 OF 11 ASSESSEE AND ACCEPTED BY THE TPO WAS TRANSACTIONAL NET MARGIN METHOD (TNMM). THE PROFIT LEVEL INDICATOR CHOSEN FOR THE PURPOSE OF COMPARISON WAS OPERATING PROFIT TO OPERATING COST (OP/OC). SOFTWARE DEVELOPMENT SERVICES SEGMENT : 3. AS FAR AS DETERMINATION OF ALP IN SOFTWARE DEVEL OPMENT SEGMENT IS CONCERNED, THE LD COUNSEL FOR THE ASSESSEE SUBMITTE D BEFORE US THAT HE SEEKS TO EXCLUDE SOME OF THE COMPARABLE COMPANIES C HOSEN BY THE TPO AND CONFIRMED BY THE DRP. IN SO FAR AS DETERMINATIO N OF ALP IN SWD SEGMENT IS CONCERNED, THE TPO HAD CHOSEN 13 COMPARA BLES COMPANIES IN THE FOLLOWING MARGINS. IT(TP)A NO.994/BANG/2016 PAGE 3 OF 11 4. THE TPO DETERMINED THE ADDITION TO THE TOTAL INC OME ON DETERMINATION OF ALP AS FOLLOWS:- 13.4. COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. PLEASE SEE ANNEXURE B FOR DETAILS OF COMPUTATION OF PU OF THE COMPARABLES. BASED ON THIS, THE ARMS LENGTH PRICE OF THE SERVICES RENDERED BY THE TAXPAYER TO ITS AE( S) IS COMPUTED AS UNDER: THE ABOVE SHORTFALL OF RS.2,69,92450/ IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA IN RESPECT OF SOFTWARE DEVELOPMENT SEGMENT OF THE TAXPAYER'S INTERNATIONAL TRANSACTIONS. 5. ON OBJECTION BY THE ASSESSEE TO THE PROPOSAL OF THE TPO, THE DRP EXCLUDED 6 COMPARABLE COMPANIES NAMELY 1) INFOSYS LTD., 2) LARSEN & TOUBRO INFOTECH LTD. 3) MINDTREE LTD., 4) PERSISTENT SYSTEMS LTD., 5) SASKEN COMMUNICATION TECHNOLOGIES LTD., 6) TATA ELXSI LTD., IT(TP)A NO.994/BANG/2016 PAGE 4 OF 11 6. AS A RESULT OF DRPS ORDER, ONLY 7 COMPARABLE CO MPANIES OUT OF THE TOTAL 13 COMPARABLE COMPANIES CHOSEN BY THE TPO REM AINED FOR THE PURPOSE OF COMPARISON OF PROFIT MARGIN. IN THIS APP EAL, ASSESSEE SEEKS TO EXCLUDE THE 3 COMPANIES OUT OF 7 COMPANIES THAT REM AIN AFTER THE ORDER OF THE DRP. THE 3 COMPARABLE COMPANIES WHICH THE ASSE SSEE SEEKS TO EXCLUDE ARE: 1) ACROPETAL TECHNOLOGIES 2) E-INFOCHIPS LTD., 3) ICRA TECHNO ANALYTICS LTD., 7. THE LD COUNSEL FOR THE ASSESSEE BROUGHT TO OUR N OTICE THAT IN RESPECT OF COMPANIES ENGAGED IN SOFTWARE DEVELOPMENT SUCH A S THE ASSESSEE, COMPARABILITY OF THESE 3 COMPANIES HAS ALREADY BEEN CONSIDERED BY THIS TRIBUNAL IN RELATION TO ASSESSMENT YEAR 2011-12. O UR ATTENTION WAS DRAWN TO THE DECISION OF ITAT BANGALORE BENCH IN THE CASE OF M/S APPLIED MATERIALS INDIA PVT. LTD., VS. ACIT, IT(TP)A NO.17 & 39/BANG/2016 ORDER DATED 21/9/2016, WHEREIN THIS TRIBUNAL HELD ON COMP ARABILITY OF ACROPETAL TECHNOLOGIES THAT THE INCOME OF THIS COMPANY FROM S OFTWARE DEVELOPMENT WAS LESS THAN 75% OF ITS TOTAL REVENUE AND THEREFOR E THE BASIC CRITERIA FOR COMPARABILITY OF COMPANY VIZ., EXISTENCE OF MORE T HAN 75% REVENUE OR SOFTWARE DEVELOPMENT SERVICES WAS ABSENT. 8. AS FAR AS E-INFOCHIPS LTD., IS CONCERNED OUR ATT ENTION WAS DRAWN TO DECISION OF THE DELHI ITAT IN THE CASE OF SAXO INDI A PVT. LTD., VS. ACIT 67 TAXMANN.COM 155 WHEREIN THE DELHI TRIBUNAL TOOK NO TE OF THE FACT THAT THE OPERATING REVENUE OF THIS COMPANY WAS FROM SOFTWARE DEVELOPMENT, HARDWARE MAINTENANCE, INFORMATION TECHNOLOGY, CONSU LTANCY ETC. THE TRIBUNAL FOUND THAT 15% OF THE TOTAL REVENUE WAS FR OM HARDWARE MAINTENANCE. THE OTHER SEGMENTAL INFORMATION WAS N OT AVAILABLE. SINCE IT(TP)A NO.994/BANG/2016 PAGE 5 OF 11 NO SEGMENTAL DATA WAS AVAILABLE INDICATING OPERATIN G PROFIT FROM SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY WAS EXCLUDED FRO M THE LIST OF COMPARABLE COMPANIES. 9. AS FAR AS ICRA TECHNO ANALYTICS LTD., IS CONCERN ED, THIS TRIBUNAL IN THE CASE OF APPLIED MATERIALS INDIA PVT. LTD., (SUP RA) TOOK THE VIEW THAT THIS COMPANY WAS ENGAGED IN DIVERSIFIED ACTIVITIES LIKE SOFTWARE DEVELOPMENT, CONSULTANCY ENGINEERING SERVICES, WEB DEVELOPMENT A ND HOSTING AND SUBSTANTIALLY DIVERSIFIED ITSELF INTO DOMAIN OF BUS INESS ANALYSIS AND BUSINESS PROCESS OUT SOURCING. THEREFORE, IT WAS H ELD THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH A SOFTWARE DEVELOP MENT SERVICES PROVIDER. 10. THE LD DR RELIED ON THE ORDER OF DRP. WE ARE O F THE VIEW THAT IN THE LIGHT OF JUDICIAL PRECEDENCE CITED BY THE LD COUNS EL FOR THE ASSESSEE, THE ABOVE 3 COMPANIES NAMELY ACROPETAL TECHNOLOGIES LTD . (SEG.), E-INFOCHIPS AND ICRA TECHNO ANALYTICS LTD. ARE DIRECTED TO BE E XCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THE AO IS DIRECTED TO COMPUT E THE ALP AFTER EXCLUDING THE AFORESAID IN THE SOFTWARE DEVELOPMENT SEGMENT. ITES SEGMENT 11. AS FAR AS ITES SEGMENT IS CONCERNED, THE TPO HA D CHOSEN THE FOLLOWING SET OF 10 COMPARABLE COMPANIES WHOSE ARIT HMETIC MEAN OF PROFIT MARGIN WAS AS FOLLOWS:- IT(TP)A NO.994/BANG/2016 PAGE 6 OF 11 12. THE TPO COMPUTED ALP AND CONSEQUENT ADDITION TO THE TOTAL INCOME AS FOLLOWS:- 13. THE ABOVE SHORTFALL OF RS. 41,73,731/- IS TREAT ED AS TRANSFER PRICING ADJUSTMENT U/S 92CA IN RESPECT OF IT ENABLED SERVIC ES SEGMENT OF THE TAXPAYER'S INTERNATIONAL TRANSACTIONS. IT(TP)A NO.994/BANG/2016 PAGE 7 OF 11 14. ON OBJECTIONS BY THE ASSESSEE, THE DRP EXCLUDE D 3 OUT OF 13 COMPARABLES CHOSEN BY THE TPO. IN THIS APPEAL, THE ASSESSEE SEEKS TO EXCLUDE 4 OUT OF THE REMAINING 10 COMPANIES. THE 4 COMPANIES WHICH THE ASSESSEE SEEKS TO EXCLUDE ARE - 1)ACCENTIA TECHNOLOGIES LTD., 2) ACROPETAL TECHNOLOGIES LTD., 3) ICRA ONLINE LTD. 4) JEEVAN SCIENTIFIC TECHNOLOGY LTD., 15. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED BEFOR E US THAT IN THE CASE OF COMPANY PROVIDING ITES SERVICES SUCH AS THE ASSE SSEE, THIS TRIBUNAL FOR AY 2011-12 CONSIDERED AND DECIDED THE COMPARABILITY OF ALL THE 4 AFORESAID COMPANIES. THE LD COUNSEL FOR THE ASSESSE BROUGHT TO OUR NOTICE THAT ACCETIA TECHNOLOGIES LTD., WAS REGARDED AS NOT COMP ARABLE FOR THE REASON THAT THERE WERE MAJOR ACQUISITIONS AND MERGERS DURI NG THE RELEVANT PREVIOUS YEAR WHICH IMPACTED ITS PROFIT MARGIN. OU R ATTENTION WAS DRAWN TO THE DECISION OF THE ITAT BANGALORE BENCH IN THE CAS E OF SWISS RE SHARED SERVICES INDIA PVT. LTD., VS. ACIT (2016) 76 TAXMAN N.COM 22 LAYING THE DOWN AS ABOVE. 16. AS FAR ACROPETAL TECHNOLOGIES IS CONCERNED THIS TRIBUNAL IN THE CASE OF SWISS RE SHARED SERVICES INDIA PVT. LTD., (SUPRA ) TOOK THE VIEW THAT THIS COMPANY WAS GIVING SOPHISTICATED SET OF SERVICES IN VOLVING HIGHER LEVEL OF SKILLS. IT WAS ALSO HELD THAT THIS COMPANY WAS REN DERING ENGINEERING DESIGN AND ENTERPRISE SOLUTION INFRASTRUCTURAL AND HEALTH CARE ETC. SINCE THIS COMPANY WAS MORE INTO ENGINEERING DESIGN SERVICES, IT WAS HELD TO BE NOT FUNCTIONALLY COMPARABLE. IT(TP)A NO.994/BANG/2016 PAGE 8 OF 11 17. AS FAR AS ICRA ONLINE LTD., IS CONCERNED, IN TH E CASE OF SWISS RE SHARED SERVICES INDIA PVT. LTD., (SUPRA) THE TRIBUN AL HELD THAT THIS COMPANY WAS INTO KNOWLEDGE PROCESS OUT SOURCING AND ONLINE SOFTWARE. THE TRIBUNAL TOOK A VIEW THAT THIS COMPANY WAS FUNC TIONALLY COMPARABLE. HOWEVER IN THE CASE OF ZYME SOLUTION PVT. LTD., VS. ACIT, IT(TP)A NO.85/BANG/2016 DATED 28/4/2017, THIS TRIBUNAL REMA NDED THE ISSUE WITH REGARD TO EXISTENCE OF RELATED PARTY TRANSACTIONS A ND THEREAFTER DIRECTED COMPARABILITY OF THIS COMPANY AND EXCLUDE THIS COMP ANY IF THE RPT IS MORE THAN 15% OF THE TOTAL REVENUE. AS FAR AS JEEVAN SC IENTIFIC TECHNOLOGY LTD., IS CONCERNED THIS TRIBUNAL IN THE CASE OF SWISS RE SHARED SERVICES INDIA PVT. LTD., (SUPRA) SET ASIDE AND REMANDED FOR FRESH CONSIDERATION BY THE TPO OF THE COMPARABILITY OF THIS COMPANY WITH THE F OLLOWING OBSERVATIONS. 31. WE HAVE HEARD THE RIVAL CONTENTIONS. AUDITED BALANCE SHEET AND FINANCIAL STATEMENT OF JEEVAN SCIENTIFIC TECHNOLOGIES LTD, (SEG), TAKEN FROM CAPI TALINE DATA BASE HAS BEEN FILED BEFORE US BY THE ASSESSEE AT PAPER BOOK PAGE.677 TO 740. NET REVENUE OF THE SAID COMPANY FOR THE RELEVANT PREVIOUS YEAR FROM ITS OPERATION WAS RS.2,45,39,23 1/-, AS PER ITS INCOME STATEMENT AT PAPER BOOK PAGE 725. TPO HAD CONSIDERED THE REVENUE AS RS.2,46,75,000/-. HOWEVER SEGMENTAL REVENUE OF THE SAID COMPANY, AS IT APPEAR AT PAPER BOOK PAGE 719 SHOW ITS EARNINGS FROM BPO OPERATIONS IS RS.71.219 LAKHS. THUS TPO HAD CONSIDERED THE TOTAL REVENUE INSTEAD OF THE SEGMENT AL REVENUE. THE TURNOVER OF THE SEGMENT WHICH WAS BEIN G COMPARED WAS LESS THAN RS.1 CRORE AND BY THE YARDSTICK APPLIED BY THE TPO HIMSELF, THE COMPANY OUGHT HAVE BEEN EXCLUDED FROM THE LIST OF COMPARABL ES. WHETHER THE SEGMENTAL INFORMATION OF THE SAID COMPANY GIVEN BY THE ASSESSEE AT PAPER BOOK PAGE 719, NEVERTHELESS REQUIRES A VERIFICATION. WE THERE FORE SET ASIDE THE COMPARABILITY OF JEEVAN SCIENTIFIC TECHNOLOGIES LTD, (SEG), BACK TO THE FILE OF THE AO /TPO FOR CONSIDERATION AFRESH. IN CASE THE EARNING OF TH E SAID COMPANY FOR ITS BPO OPERATIONS IS LESS THAN RS.1 CR ORE IT(TP)A NO.994/BANG/2016 PAGE 9 OF 11 IT HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. 18. THE LD DR RELIED ON THE ORDER OF THE DRP. 19. AFTER CONSIDERING RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT BASED WITH JUDICIAL PRECEDENT CITED BY THE LD COUNSEL FOR THE ASSESEE, ACCENTIA TECHNOLOGIES LTD., AND ACROPETAL TECHNOLOGIES LTD. , SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. AS FAR AS I CRA ONLINE LTD. IS CONCERNED, THE RPT IN THE CASE ICRA ONLINE LTD., NE EDS TO BE VERIFIED BY THE TPO AND IF THE RPT IS MORE THAN 15% OF THE TOTA L REVENUE OF THIS COMPANY THEN THE SAME SHOULD BE EXCLUDED. AS FAR A S JEEVAN SCIENTIFIC TECHNOLOGY IS CONCERNED, THE TPO IS DIRECTED TO EXA MINE THE COMPARABILITY OF THIS COMPANY AS WAS DIRECTED BY THE TRIBUNAL IN THE CASE OF SWISS RE SHARED SERVICES INDIA PVT. LTD., (SUPRA). 20. THE TPO IS DIRECTED TO COMPUTE THE ALP AS PER T HE DIRECTIONS GIVEN ABOVE AFTER AFFORDING OPPORTUNITY OF BEING HEARD T O THE ASSESSEE. 21. THE OTHER GROUNDS OF APPEAL ARE NOT PRESSED FOR ADJUDICATION. 22. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 15 TH FEBRUARY, 2019 . SD/- SD/- ( B.R BASKARAN ) ( N.V. VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, 15 TH FEBRUARY, 2019. / VMS / IT(TP)A NO.994/BANG/2016 PAGE 10 OF 11 COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE. IT(TP)A NO.994/BANG/2016 PAGE 11 OF 11 ** 1. DATE OF DICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR.P.S .. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER . 12. THE DATE ON WHICH THE FILE GOES TO DISPATCH SEC TION FOR DISPATCH OF THE TRIBUNAL ORDER . 13. DATE OF DESPATCH OF ORDER. ..