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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN, VICE- & SHRI ARUN KUMAR GARODIA
O R D E R Per Shri A.K. Garodia, Accountant Member These are cross appeals filed by the assessee and revenue and these are directed against the order of ld. CIT(A)-XX, New Delhi dated 25.02.2013 for Assessment Year 2007-08. 2. The grounds raised by the revenue in IT(TP)A No. 609/Bang/2013 are as under. “1. The order of the Learned CIT (Appeals), in so far as it is prejudicial IT(TP)A No. 609/Bang/2013 & IT(TP)A No. 2486/Del/2013 Page 2 of 7 to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. The learned CIT(A) erred in holding that M/s Mold Tek, cannot be taken as comparable, being functionally different without appreciating that it satisfies all the qualitative and quantitative filters applied by the TPO.
3. The learned CIT(A) erred in holding that M/s Maple Esolutions Ltd. and Triton Corp. Ltd., cannot be taken as comparables, without appreciating that the company qualifies all the qualitative and quantitative filters applied by the TPO in selection of this company as a comparable
4. The learned CIT(A) erred in holding that M/s Maple Esolutions Ltd. and Triton Corp. Ltd., cannot be taken as comparables, without appreciating the fact that there are no extraordinary events which would influence price or margins of the company.
5. The learned CIT(A) erred in holding that M/s Vishal Information, cannot be taken as comparable, without appreciating the fact that the company qualifies all the qualitative and quantitative filters applied by the TPO in selection of this company as a comparable.
6. The learned CIT(A), on the facts and in the circumstances of the case, erred in excluding M/s Vishal Information from the list of comparables holding that the company had not outsourced its work.
7. The learned CIT(A) erred in holding that Genesys International Corporation Ltd., cannot be taken as comparable, without appreciating the fact the company qualifies all the qualitative and quantitative filters applied by the TPO in selection of this company as a comparable.
8. The CIT(A) erred in not appreciating the fact that the TPO and the taxpayer had not gone into the horizontal and vertical sub segments of the ITES services.
9. The CIT(A) erred in rejecting the company as a comparable without identifying any extraordinary variables which would distinguish this company from the taxpayers in terms of functions performed, assets used and risk undertaken i.e., qualitative and quantitative analysis.
10. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.”
3. The grounds raised by the assessee in IT(TP)A No. 2486/Del/2013 are as under. “The grounds stated therein are without prejudice to each other:
IT(TP)A No. 609/Bang/2013 & IT(TP)A No. 2486/Del/2013 Page 3 of 7 Rejection of appellant's economic analysis 1. On the facts and in the circumstances of the case and in law, the Learned TPO and AO have erred in. and the Learned CIT(A) has further erred in upholding / confirming the rejection of transfer pricing analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules and making an upward adjustment of Rs. 9,05,33.042/- to the value of international transactions of the appellant.
On the facts and in the circumstances of the case and in law, the Learned TPO and AO have erred in, and the Learned CIT(A) has further erred in disregarding the segmentation analysis undertaken by the appellant without providing any cogent reasons for rejecting the same. Selection of comparable companies 3. On the facts and in the circumstances of the case and in law, the Learned TPO and AO have erred in, and the Learned CIT(A) has further erred in upholding / confirming the action of TPO in conducting a fresh economic analysis by selecting companies based on unreasonable comparability criterion and / or selecting companies which are not functionally comparable 4. On the facts and in the circumstances of the case and in law, the Learned TPO and AO have erred in, and the Learned CIT(A) has further erred in upholding / confirming the action of TPO in exercising his powers under Section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes Computation of operating margins 5. On the facts and in the circumstances of the case and in law, the Learned TPO and AO have erred in, and the Learned CIT(A) has further erred in upholding / confirming the determination of arm's length margin / price using only FY 2006-07 data which was not available to the Appellant at, the time of complying with the transfer pricing documentation requirements 6. On the facts and in the circumstances of the case and in law, the Learned TPO and AO have erred in. and the Learned CIT(A) has further erred in upholding / confirming the action of TPO in considering certain items of income / expenditure as non-operating while computing the operating margin of the comparable companies.
7. On the facts and in the circumstances of the case and in law, the Learned TPO and AO have erred in, and the Learned CIT(A) has further erred in not allowing suitable adjustments to account for the functional differences and / or capacity utilization and / or the risk profile of the Appellant vis-a-vis the comparable companies.
8. On the facts and in the circumstances of the case and in law, the IT(TP)A No. 609/Bang/2013 & IT(TP)A No. 2486/Del/2013 Page 4 of 7 Learned TPO and AO have erred in, and the Learned CIT(A) has further erred in not considering that the adjustment based on arm's length price, if any. should be limited to the lower end of the 5 percent range. Other Issues 9. On the facts and in the circumstances of the case and in law, the Learned TPO and AO have erred in, and the Learned CIT(A) has further erred in not restricting the quantum of transfer pricing adjustment to the value of international transaction.
On the facts and in the circumstances of the case and in law, the Learned TPO and AO have erred in, and the Learned CIT(A) has further erred in failing to consider the profits made by overseas AEs while calculating the quantum of adjustments.
The Learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, before commencement of / during proceedings before the Hon'ble Tribunal.”
4. It was submitted by ld. AR of assessee before us that this was the main argument of assessee before ld. CIT(A) that idle capacity adjustment should be allowed and on this aspect, various submissions were made before ld. CIT(A) but this issue has been decided by ld. CIT(A) in a very cryptic manner as per para no. 17 of his order available on page no. 43 of his order. When the bench wanted to see the submission made before ld. CIT(A), it was submitted that the relevant portion is available on page no. 51 of the paper book. It is also submitted by ld. AR of assessee before us that on pages 1 to 9 of the paper book is an affidavit under Rule 10 of ITAT Rules, 1963 and submitted that this affidavit is very relevant regarding assessee’s claim for idle capacity adjustment and hence, the entire matter should be restored back to the file of ld. CIT(A) for fresh decision after considering all aspects of the matter. The ld. DR of revenue supported the order of AO/TPO.
We have considered the rival submissions. First of all, we reproduce the relevant portion of affidavit dated 11.01.2017 from pages 1 to 2 of the paper book. The same is as under. “I, Amit Kothiyal, Managing Director of M/s. ISG Novasoft Technologies Private Limited having its registered office at 2nd Floor,
IT(TP)A No. 609/Bang/2013 & IT(TP)A No. 2486/Del/2013 Page 5 of 7 Maruthi Sapphire 128/9, Madiwala Machideva Road (Old Airport Road) Murugeshpalya Bengaluru - 560 017, India, aged about 41 years do hereby solemnly affirm and state on oath on this 11th day of January 2017 as under:
1. 1. That M/s. ISG Novasoft Technologies Private Limited is the appellant in for the AY 2007-08, which is pending adjudication before the Hon'ble Income-tax Appellate Tribunal, Bangalore.
2. That during the year under appeal, M/s. ISG Novasoft Technologies Private Limited (hereinafter referred to as "the Appellant") was engaged in providing ITeS or Business Process Outsourcing (`BP0') services in the residential mortgage industry and offers mortgage technology solutions for its group companies. The Appellant also provided IT related back-office services and SAP related support services to its Associated Enterprises (`AEs').
3. That during the year under appeal, due to severe competition, the Appellant was in the process of redefining it business goals.
4. That during the year under appeal, the Appellant in anticipation of additional projects through successful marketing of IPRs in ISGN Ireland and recruited large number of employees to ensure that it was equipped for meeting the projected project requirements. As a result, some of the employees of the Appellant could not be fruitfully deployed.
5. That during the year under appeal, the Appellant had an average bench strength of 120 employees, with the actual figures fluctuating in the range of 158 in April 2006 to 80 in March 2007 (refer to column (B) of Table A).
6. Table A No. of employees No. of employees actually worked Month on month head count actually worked on on employed by the Appellant International Domestic projects projects (A) (B) (C) (D) April 158 41 9 May 157 37 9 June 137 38 9 July 143 31 9 August 127 40 8 September 124 45 9 October 110 45 9 IT(TP)A No. 609/Bang/2013 & IT(TP)A No. 2486/Del/2013 Page 6 of 7 November 115 34 9 December 100 32 9 January 94 30 9 February 89 27 9 March 89 27 9
That during the year under appeal, at any point of time not more than 45 employees were engaged on the projects agreed with the AEs (refer to Column (C) of Table A) and the said employees had worked on the projects allotted by Novasoft Information Technology Corporation, USA; Asia Novasoft Technology Pte. Ltd, Singapore; and Novasoft Information Technology Europe Ltd, United Kingdom (collectively referred as AEs).
8. That during the year under appeal, the Appellant billed its AEs based on the model of 20% mark-up on salary cost of the employees who were directly involved/ deputed in the project(s) of the AEs. The detailed calculation of the monthly billing and employee cost along with the details of employees involved is enclosed as Annexure 1 of this Affidavit. 9. That during the year under appeal, the total turnover of the Appellant comprises of 39% of domestic turnover and 61% of export turnover. The detailed working of the domestic turnover is enclosed as Annexure 2 of this Affidavit.” 6. From the above affidavit, it is seen that this is the claim of the assessee that there was substantial idle capacity and hence, idle capacity adjustment should have been allowed. On this aspect, para no. 17 of the order of ld. CIT(A) is relevant which is reproduced hereinbelow from page no. 43 of the order of ld. CIT(A). This para reads as under. “17. I have considered the submission of the appellant. Bench cost and idle capacity adjustment depends on the availability of similar data for the comparables also. Since, they are absent, I hold that TPO was correct in not venturing into such adjustments. Therefore, I hold that TPO was correct in taking the data for the appellant from its audited accounts for both the years.”
7. From the above para reproduced from the order of ld. CIT(A), it is seen that the finding of ld. CIT(A) on this aspect is very cryptic without dealing with any other arguments which were raised before him and moreover, before the Tribunal, the assessee brought on record one affidavit in which factual aspects are narrated regarding idle capacity. Data of idle capacity of each of the comparable can be obtained by the AO/TPO u/s 133 (6) from the comparable
IT(TP)A No. 609/Bang/2013 & IT(TP)A No. 2486/Del/2013 Page 7 of 7 company. Industry data about idle capacity of the industry can be made available by the assessee, if possible and if the idle capacity of the assessee is substantially higher than industry average, such adjustment should be granted. After considering the entire facts of the present case, we feel it proper to restore back the entire matter back to the file of ld. CIT(A) for fresh decision. In view of this decision, no adjudication is called for regarding any other grounds raised by assessee or various grounds raised by the revenue and we leave all the issues open before ld. CIT(A) for a fresh decision.
In the result, both the appeals filed by the assessee and revenue are allowed for statistical purposes. Order pronounced in the open court on the date mentioned on the caption page.