DCIT 2(3)(1), MUMBAI vs. CANVASM TECHNOLOGIES LTD, MUMBAI

Aforesaid appeal by Revenue for Assessment Year [in short referred to as ‘AY’] 2010-11 contest the order of Ld. Commissioner of Income-Tax

The Ld. Authorized Representative for the assessee [AR], at the outset, submitted that Ld. first appellate authority, relied upon the order of its predecessor for AY 2008-09, while granting relief to the assessee. The assessee as well as revenue preferred further appeal before Tribunal vide cross-appeal & 5852/Mum/2012 order dated 23/04/2019 wherein the assessee’s appeal was allowed whereas the revenue’s appeal was dismissed. A copy of the order has been placed on record. The said fact could not be controverted by Ld. CIT-DR.

The material on record would reveal that certain international transactions being carried out by the assessee during the year, with its sole Associated Enterprise [AE] i.e. CanvasM, USA, were referred to Ld. Transfer pricing Officer [TPO] for determination of Arm’s Length Price [ALP]. The assessee was stated to be engaged in providing end-to-end solutions which bring together content, technology and device expertise to ensure an enhanced digital experience to customers of telcos, media houses and enterprises. It was in receipt of amount of Rs.29.24 Crores from its AE on account of provision for software development services and paid an amount of Rs.12.74 Crores to its AE on account of onsite computer M/s. CanvasM Technologies Ltd. Assessment Year-2010-11 consultancy and programing support services. Under the contractual terms, CanvasM, USA sub-contracts the work it secures from third parties customers in USA to assessee and performs limited offshore support and on-site software development functions. CanvasM retains 5% of the revenue out of total fees received by it from its clients and remit the balance 95% to the assessee. Additionally, CanvasM charges all cost it incurs for the performance of on-site portion of the software development work to the assessee. For the purpose of economic analysis, the transactions were aggregated and benchmarked using Transactional Net Margin Method [TNMM]. The Ld. TPO, upon examination, reached a conclusion that the assessee did not produce any documentary evidences in support of claim of availing any services from its AE except the copies of invoices raised by the AE and therefore, the payment made to AE fails benefit test. Consequently, the ALP of Rs.12.74 Crores paid by assessee on account of availing the services, was determined at Nil and corresponding adjustment was proposed by Ld. TPO, in its order dated 28/01/2014. Incorporating the same, assessment was framed by Ld. Assessing Officer u/s 143(3) r.w.s. 144C(3)(a) on 31/03/2014, which was subjected to further appeal before Ld. first appellate authority.

The Ld. CIT(A) while rejecting the segregation approach adopted by Ld. TPO and also the assessee’s benchmarking, chose to apply the methodology adopted by its predecessor in earlier years. It was noted that since the assessee had export transactions (revenue streams) for both AEs as well as non-AEs, the transactions with non-AE would provide an internal M/s. CanvasM Technologies Ltd. Assessment Year-2010-11 comparable which would be more reliable from the point of view of comparability. In other words, the Ld. first appellate authority proposed to apply internal TNMM as most appropriate method and the assessee was directed to the furnish the relevant data of transactions carried out with its AE as well as non-AE. The data has been extracted at para 4.12 of the impugned order. Upon perusal, it was observed that the assessee had made a profit of 28% from transactions with its AE as against 6% margin on transactions with its international third parties and therefore, no adjustment was required on this account. Aggrieved, the revenue is in further appeal before us.

Upon due consideration, it transpires that Ld. first appellate authority has adopted the methodology followed by its predecessors in earlier years. The Tribunal has confirmed similar methodology followed by Ld. CIT(A) in AY 2008-09 by way of dismissal of revenue’s appeal in order dated 23/04/2019 which is evident from paras 6 to 8 of the order. However, to dispel the concerns raised by Ld. CIT-DR that the segmental results were not subjected to scrutiny of the auditor and also in view of the fact that revenue has raised a specific ground in this respect, we direct Ld. TPO / Ld. AO to verify the segmental results furnished by the assessee before Ld. CIT(A). For the said limited purpose, the matter would stand remitted back to Ld. TPO / Ld. AO with a direction to the assessee to provide requisite information. If the margins are found to be correct, the decision of Ld. first appellate authority would stand confirmed.

In result, the appeal stands allowed for statistical purposes.