M/s. Sap Labs India Private Limited, Bangalore V. Additional Commissioner Of Income Tax, Range- 12, Bangalore

ITTPA 285/BANG/2014

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 5096 (ITAT-BANGALORE)
• Duration Of Justice: 7 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 27-02-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 03-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; TDS
• Section: 92C; 143(3); 92; 234B; 40(a)(ia); 194J; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No.285/Bang/2014 Assessment year: 2009-10 M/s. SAP Labs India Pvt. Ltd., No.138, Export Promotion Industrial Park, Whitefield, Bangalore – 560066. PAN: AAFCS 3649P Vs. The Additional Commissioner of Income Tax, Range 12, Bangalore – 560 001. APPELLANT RESPONDENT IT(TP)A No.236/Bang/2014 Assessment year: 2009-10 The Deputy Commissioner of Income Tax, Range 12, Bangalore – 560 001. Vs. M/s. SAP Labs India Pvt. Ltd., Bangalore – 560066. PAN: AAFCS 3649P APPELLANT RESPONDENT Assessee by : Shri Pratik Shah, AR Respondent by : Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. Date of hearing : 28.02.2022 Date of Pronouncement : 28.02.2022 IT(TP)A No.285 & 236/Bang/2014 Page 2 of 12 O R D E R Per Chandra Poojari, Accountant Member These are cross appeals against the final assessment order dated 31.01.2014 passed by the AO u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] for the assessment year 2009-10. 2. The assessee has raised the following revised grounds:- “The grounds mentioned herein by the Appellant are without prejudice to one another. 1. That the order passed by the learned Additional Commissioner of Income Tax, Range 12, and Bangalore or 'Assessing Officer' or 'AO' to the extent prejudicial to the Appellant is arbitrary, vague contrary to the facts and circumstances of the case and is against the law and is liable to be quashed. (corresponding to original ground 1) Transfer Pricing matters 2. That the learned AO and the learned Dispute Resolution Panel (Panel') erred in upholding the learned Transfer Pricing Officer's ("TPO") approach of rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant; (corresponding to original ground 2) 3. That the learned AO and the learned Panel erred both in facts and law in confirming the action of the learned TPO of making an adjustment to the transfer price of the Appellant in respect of contract software development and related services provided to its associated enterprises by Rs. 1,037,137,731/- holding that the international transactions do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 and in doing so grossly erred in: 3.1 Upholding the rejection of comparability analysis of the Appellant in the TP documentation and confirming the comparability analysis as adopted by the learned TPO in the TP Order. (corresponding to original ground 3.1) IT(TP)A No.285 & 236/Bang/2014 Page 3 of 12 3.2 Disregarding application of multiple year/ prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2008-09) data for comparable companies should be used. (corresponding to original ground 3.2) 3.3 Upholding the learned TPO's approach of using data as at the time of transfer pricing assessment proceedings which was not available to the Appellant on the date of preparing the TP documentation. (corresponding to original ground 3.3) 3.4 Erred in upholding the learned TPO's approach of not providing Risk Adjustment and thus ignored the limited risk nature of the services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential, even when full-fledged entrepreneurial companies are selected as comparable companies. (corresponding to original ground 3.4) 3.5 Arbitrarily arriving at a set of companies as comparable for the contract software development and related services rendered by the Appellant by rejecting companies that are otherwise functionally comparable to the Appellant. (corresponding to original ground 3.5) 3.6 Arbitrarily arriving at a set of companies as comparable for the contract software development and related services rendered by the Appellant by including `Kals information” Systems Ltd.' in its comparability analysis which is functionally dissimilar to the Appellant. (corresponding to original ground 3.5) 3.7 Arbitrarily arriving at a set of companies as comparable for the contract software development and related services rendered by the Appellant by including 'Tata Elxsi Ltd.' in its comparability analysis which is functionally dissimilar to the Appellant. (corresponding to original ground 3.5) 3.8 Arbitrarily arriving at a set of companies as comparable for the contract software development and related IT(TP)A No.285 & 236/Bang/2014 Page 4 of 12 services rendered by the Appellant by including `Sasken Communication Technologies Ltd.' in its comparability analysis which is functionally dissimilar to the Appellant. (corresponding to original ground 3.5) 3.9 Arbitrarily arriving at a set of companies as comparable for the contract software development and related services rendered by the Appellant by including Infosys Ltd.' in its comparability analysis which is functionally dissimilar to the Appellant. (corresponding to original ground 3.5) 3.10 Arbitrarily arriving at a set of companies as comparable for the contract software development and related services rendered by the Appellant by retaining `Bodhtree Consulting Ltd.' which fails the test of comparability. (corresponding to original ground 3.5) 3.11 Arbitrarily arriving at a set of companies as comparable for the contract software development and related services rendered by the Appellant by retaining 'Persistent System Ltd.' which fails the test of comparability. (corresponding to original ground 3.5) 3.12 Arbitrarily arriving at a set of companies as comparable for the contract software development and related services rendered by the Appellant by not excluding companies which had related party transactions exceeding the tolerance limit of 15% during the year under consideration. (corresponding to original ground 3.5) 4. That the learned AO and the learned Panel erred in upholding the learned TPO's approach of not considering the foreign exchange gain earned by the Appellant as part of operations for the purpose of computing the Appellant's operating mark-up on total cost as well as to arrive at the arm's length price. (corresponding to original ground 4) 5. That the learned AO and the learned Panel erred in upholding the TPO's approach and disregarding the fact that the revenue from contract software development and related IT(TP)A No.285 & 236/Bang/2014 Page 5 of 12 services amounting to Rs. 104,413,682/- do not qualify as international transactions u/s 92CA of the Act as these transactions were entered into by the Appellant with a Domestic company (SAP India Systems, Applications and Products in Data Processing Private Limited). (corresponding to original ground 5) Other than Transfer Pricing Related 6.1 That the learned AO and the learned Panel erred in disallowing deduction under section 8oJJAA of the Act amounting to Rs. 221,132,112/- (the Company is eligible to claim deduction amounting to Rs. 223,399,301/-, however was restricted to the total income of the Company amounting to Rs. 221,132,112/-). The learned AO and the learned Panel failed to appreciate the fact that deduction under section 8oJJAA of the Act is assessee specific and not undertaking / unit specific. (corresponding to original ground 6.1) 6.2 That the learned AO and the learned Panel is not justified in invoking the provisions of section 8oA(4) in context of deduction claimed under section 8oJJAA for IDA units. (corresponding to original ground 6.2) 6.3 Without prejudice to the above, the learned AO and the learned Panel have erred in not allowing deduction under section 8oJJAA in respect of non-10A units. (corresponding to original ground 6.3) 7. The learned AO and the learned Panel erred in classifying the routers and switches in the block of `Plant and Machinery', being eligible for depreciation at 15% as against the block of 'Computers' eligible for depreciation at 60% claimed by the Company, as prescribed in the Income Tax Rules, 1962 (`the Rules'). (corresponding to original ground 7) 8. The learned AO and the learned Panel has failed to appreciate that servers, routers, switches, work stations and printers are to be treated as Computers and are eligible for IT(TP)A No.285 & 236/Bang/2014 Page 6 of 12 depreciation at the rate of 6o%, as prescribed in the Rules. (corresponding to original ground 8) 9. That the learned AO erred in not allowing deduction under section IDA of the Act for the various disallowances considered [i.e Restriction on depreciation on routers and switches amounting to Rs. 1,454,887/-], in computing the total income of the Company and consequent increase in profit eligible for deduction under section 10A of the Act. (corresponding to original ground 9) 10. That the learned AO and the learned Panel erred in levying interest under section 234B amounting to Rs. 199,857,450/-, interest under section 234C of the Act amounting to Rs. 150,852/- and 234D of the Act amounting to Rs. 7,462,654/- (corresponding to original ground 10) That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal.” 3. The assessee has filed petition for admission of various set of additional grounds. In the first petition dated 4.8.2017 it is stated that ITAT, Ahmedabad has formed a Special bench in the case of Doshi Accounting Services Pvt. Ltd. (ITA No. 1285/12 & 1352/A/2011), to adjudicate following ground of appeal:- "Whether or not the provisions of section 92 can be invoked in a situation in which the income of the assessee is eligible for tax exemption or tax holiday and thus not actually chargeable to tax in India, or in a situation in which there cannot be any tax avoidance motive in manipulating the prices at which international transactions have been entered into? 4. At the outset, the assessee therefore contests that the provisions of section 92C cannot be invoked in the assessee’s case since it is enjoying tax holiday u/s. 10A of the Act and therefore, the assessee would not have tax avoidance motive in manipulating the prices at which international transactions have been entered. Hence the following additional ground is IT(TP)A No.285 & 236/Bang/2014 Page 7 of 12 raised with regard to non-applicability of transfer pricing provisions in its case:- “11. On the facts and in the circumstances of the case and in law, the learned Assessing Officer (`Ld. AO')/ learned Transfer Pricing Officer (`Ld. TPO')/Hon'ble Dispute Resolution Panel (`Hon'ble DRP') erred in invoking provisions of section 92C of the Income-tax Act, 1961 (`the Act') despite the fact that the income of the Appellant was eligible for tax holiday u/s. 10A of the Act.” 5. By another petition dated 16.8.2017, the assessee has raised additional rounds with regard to exclusion of 3 comparable companies from the final list. It is stated that these grounds were inadvertently not raised originally. The additional grounds now raised read as follows:- “12. On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (`Ld. TPO') erred in retaining `Bodhtree Consulting Ltd.' in its comparability analysis which is functionally dissimilar to the Appellant. It is prayed, that `Bodhtree Consulting Ltd.' be excluded from the set of comparables considered by the Ld. TPO for comparability analysis. 13. On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (`Ld. TPO') erred in retaining 'Persistent System Limited' in its comparability analysis which is functionally dissimilar to the Appellant. It is prayed that 'Persistent System Limited' be excluded from the set of comparables considered by the Ld. TPO for comparability analysis. 14. On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (`Ld. TPO') erred in retaining 'Larsen & Toubro Infotech Ltd.' in its comparability analysis which is functionally dissimilar to the Appellant. IT(TP)A No.285 & 236/Bang/2014 Page 8 of 12 It is prayed that 'Larsen & Toubro Infotech Ltd.' be excluded from the set of comparables considered by the Ld. TPO for comparability analysis.” 6. Further, vide petition dated 17 th April, 2019, the assessee has stated that the draft and final assessment order passed by the Addl. CIT is bad in law as it is without establishing that he possessed the powers of performing function of the AO u/s. 120(4)(b) of the Act. In view of the above additional ground is filed in this regard. Further the assessee has also filed a letter dated 16.4.2019 with the AO for confirmation of the fact whether the order u/s. 127 of the Act for transfer of jurisdiction and order u/s. 120(4)(b) of the Act for assigning powers to the Addl. CIT has been duly passed by the concerned authorities. The additional grounds are as follows:- “15. On the facts and circumstances of the case and in law, the final assessment order dated 31 January 2014 and the draft assessment order dated 28 March 2013 passed by the Additional Commissioner of Income-tax, Range-12, Bangalore (Addl. CIT') under section 143(3) read with section 144C(13) of the Income- tax Act, 1961 (`Act') is illegal, bad in law and without jurisdiction as he failed to establish that he possessed the legal and valid powers of performing functions of an Assessing Officer conferred on him under section 120(4)(b) of the Act. 16. On the facts and circumstances of the case and in law, the final assessment order dated 31 January 2014 and draft assessment order dated 28 March 2013 passed by Addl. CIT, Range-12, is bad in law, without establishing that the Addl. CIT possessed a valid order for transfer of jurisdiction from Assistant Commissioner of Income-tax, Circle 12(3), Bangalore ('ACIT') under section 127 of the Act.” 7. The ld. AR submitted that the aforesaid grounds are purely legal in nature and does not require any verification of facts and therefore the same may be admitted for adjudication in the interest of justice. He relied on the Supreme Court judgment in the case of NTPC Ltd. v. CIT (1998) 229 ITR IT(TP)A No.285 & 236/Bang/2014 Page 9 of 12 383 (SC) wherein it was held that a question of law can be raised before the Tribunal for the first time which has a bearing on the tax liability of an assessee, notwithstanding the fact that the same was not raised before the lower authorities. He also relied on other decisions of Supreme Court and various courts. 8. We have heard both the parties and perused the material on record regarding admission of all the additional grounds. In our opinion, these grounds go to the very root of the matter, including the grounds specifically relating to the jurisdiction of the AO. In view of the Hon’ble Supreme Court judgment in the case of NTPC Ltd. (supra), we admit all the additional grounds raised by the assessee for adjudication. 9. These additional grounds are raised for the first time before the Tribunal and the lower authorities had no occasion to examine these issues, hence in the interest of justice, we remit these additional grounds to file of the DRP to adjudicate these grounds after considering the material on record and decision in accordance with law, after providing opportunity of being heard to the assessee. 10. Since we have set aside the additional grounds of the assessee to the file of DRP for fresh decision in accordance with law, at this stage, we refrain from going into the other grounds of appeal raised by the assessee on merits. 11. In the result, the assessee’s appeal is allowed for statistical purposes. Revenue’s appeal 12. The revenue has raised the following grounds:- IT(TP)A No.285 & 236/Bang/2014 Page 10 of 12 “1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in law in directing the AO to exclude reimbursement of specific expenditure both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 10A, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub- clause (4) of Explanation 2 below Sub-section (8) of Section 10A and the total turnover has not been defined in this Section. 3. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the AO to compute deduction u/s 10A in the above manner by placing reliance on the decision of Hon'ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in law in not appreciating the finding of the AO that the servers and workstations cannot be classified under the head of assets – "Computers" since there is no definition for "computer" in the Act but for the "Computer System" as explained in Explanation (a) to Clause (xi) of Se ion 36(1) of the Act. 5. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in law in holding that no TDS is required to be effected in respect of provisions for legal and professional charges payable made by the assessee without considering the explanation (c) to Section 194J of the Act, as per which TDS is to be effected even when the amount is credited to the suspense account. IT(TP)A No.285 & 236/Bang/2014 Page 11 of 12 6. On the facts and in the circumstances of the case, the DRP erred in directing the AO to allow depreciation on the software items without appreciating that the same is contrary to the provisions of Section 40(a)(ia) and Section 194J as the claim of depreciation is in the nature of business expenditure. 7. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the TPO to include M/s FCS Solutions and M/s Thinksoft Global Services Limited which the TPO rightly excluded under Rule I 8B(3) of IT Rules, being not comparable companies. 8. On the facts and in the circumstances of the case, as per the directions of the Dispute Resolution Panel, whether working capital adjustment can be made on the basis of advance received from AEs in absence of debtors and inventory in the case of assessee for calculating the cost of working capital built in the profit margin. 9. On the facts and in the circumstances of the case the Dispute Resolution Panel is not justified in directing the TPO to adjust the profit margin of the assessee for the entire amount of advances received from AE on the ground that there is time value for money. 10. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.” 13. Since the assessee’s appeal is remitted to the file of DRP for adjudication of the legal issues raised by the assessee by way of additional grounds raised for the first time before the Tribunal, the revenue’s appeal becomes infructuous at this stage and as such, it is dismissed as infructuous. IT(TP)A No.285 & 236/Bang/2014 Page 12 of 12 14. Thus, the appeal by assessee is allowed for statistical purposes and the revenue’s appeal is dismissed as infructuous. Pronounced in the open court on this 28 TH day of February, 2022. Sd/- Sd/- ( BEENA PILLAI ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 28 th February, 2022. / Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.