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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI G. MANJUNATHA
Per N.V. Vasudevan, Judicial Member These are cross appeals by the assessee and revenue directed against the order dated 20.09.2017 of CIT(Appeals)-3, Bengaluru for assessment year 2011-12.
The assessee is a company engaged in preparation of engineering drawings for export to overseas Associate Enterprises. For the AY 2011- 12, the assessee filed return of income declaring total income of Rs.92,35,55,952. The assessee rendered Engineering Design Services to its AE for which it received a consideration of RS.32,40,51,700. Since the above transaction was an international transaction, income arising from such international transaction had to be determined having regard to the ALP as mandated u/s. 92 of the Act. The assessee in support of its claim that the price received in the international transaction was at arm’s length filed a TP analysis. The AO referred to the TPO the question of determination of ALP u/s. 92CA of the Act. The TPO firstly took the stand that the TP analysis done by the assessee on the premise that it was rendering Engineering Design Services was incorrect and that the tax payer was involved in high end KPO services. On that basis, the TPO chose the following comparable companies:-
Sl. Name of the case Operating Operating OP/OC No. Income Cost 1. Accentia Technologies Ltd. 1,069,026,524 82,93,91,898 28.89% 2. Acropetal Technologies 494,399,332 389,706,574 26.86% 3. I C R A Online Ltd. (seg) 156,691,000 116,749,267 34.21% 4. Jeevan Scientific 1,721,400,000 1,008,652,592 70.66% Technology Ltd. 5. iGate Global Solutions Ltd. 11,845,540,000 9,471,165,000 25.07% Average Margin 37.14%
IT(TP)A Nos.2590 & 2491/Bang/2017 Page 3 of 8
The AO determined the ALP and addition to be made to the total income as follows:-
IT ENABLED SERVICES Arm’s Length Mean Margin on cost 37.14% Less: Working Capital Adjustment 2.12% (As per Annex. C) Adjusted margin 35.02% Operating Cost 292,697,888 Arms Length Price (ALP) 395,200,688 135.02% of Operating Cost Price received 324,051,700 Shortfall being adjustment u/s. 92CA 71,148,988 The above shortfall of Rs.71,148,988/- is treated as transfer pricing adjustment u/s. 92CA in respect of software development segment of the tax payer’s international transactions.
On appeal by the assessee, the CIT(Appeals) allowed certain relief to the assessee, but nevertheless upheld the conclusion of the TPO that assessee was not into Engineering Design Services, but into high end KPO services and on that basis, the TPO was justified in proceeding to determine the ALP.
Aggrieved by the relief allowed in the matter of determination of ALP, the revenue is in appeal before the Tribunal. The assessee is in appeal before the Tribunal aggrieved by the relief denied by the CIT(A) and classifying the assessee as high end KPO service provider.
At the time of hearing, the ld. counsel for the assessee brought to our notice that the various AEs to which Engineering Design Services rendered by the assessee were located in various countries including USA. The assessee filed common TP analysis in respect of Engineering Design Services rendered to various AEs located in various countries including
IT(TP)A Nos.2590 & 2491/Bang/2017 Page 4 of 8 USA and that the nature of services rendered by the assessee were the same to USA as well as other countries.
The services rendered to AEs in USA constituted about 73% of the entire consideration received for rendering Engineering Design Services and remaining 27% related to AEs located in countries other than in USA. As far as the international transaction of rendering Engineering Design Services with AEs in USA is concerned, the assessee approached the Competent Authority of US and India to resolve the tax dispute in relation to international transaction of provision of Engineering Design Services undertaken by the assessee with its US AEs under the Mutual Assessment Procedure (MAP) provided under DTAA between India & USA. The dispute has been resolved and the department accepted the nature of services as provision of Engineering Design Services and a margin of 15% mark-up of operating cost was agreed as arm’s length price in such proceedings and accordingly the assessee paid taxes.
The submission of the ld. counsel for the assessee was that on similar basis, the ALP of the remaining 27% of the value of international transaction of rendering Engineering Design Services should also be determined. In this regard, the submission was that the nature of services rendered to AEs in countries other than US was similar and this aspect was never disputed at any point of time by the revenue authorities. The resolution of dispute under the MAP accepting the nature of services by the assessee should be equally applicable to transaction with AEs, who are tax residents of countries other than USA. Similar submissions were made by the assessee before the CIT(Appeals) which were rejected by the CIT(A) for the following reasons:-
IT(TP)A Nos.2590 & 2491/Bang/2017 Page 5 of 8
“In relation to grounds of appeal 12 to 20 relating to the other international transactions i.e. relating to providing Engineering Design Services (EDS) to non US AEs, the appellant submitted that the international transactions with non US AEs were identical to that entered with US related AEs. The appellant further submitted that in order to complete the litigation it wants that the operating profit markup decided in MAP for the international transactions with US related AEs he accepted as the operating profit markup in relation to international transactions with non US AEs for EDS segment. Accordingly the appellant submitted that it wished to offer the additional income to tax arising from the acceptance of MAP's mark-up as an arm's length price (ALP) for the EDS transactions entered with non US AEs . 4.1 The submissions of the appellant have duly been considered. The submissions of the appellant that MAP's mark-up for EDS related international transactions with US related AEs be accepted as the operating profit markup in relation to international transactions with non US AEs cannot be accepted for the reason that the scope of such agreement arrived at between the Government and the appellant is on basis of some negotiations and in negotiations each party agrees to tone down from its normal stand on the issue to arrive at a mutually agreeable profit markup. Since there is no MAP in relation to international transactions with non US AEs, so the same needs to be determined independently. The appellant has relied upon the decision of ITAT Bangalore in the case of CGI Information Systems Management Consultants Pvt Ltd vs DCIT IT(TP)A No 1117 (Bang) 2011 dt 15.02.2017, which relied on decision of ITAT in P Morgan Services P Ltd dt 03.11.2015, to support its argument of acceptance of MAP's mark-up as an arm's length price (ALP) for the EDS transactions entered with non US AEs. However, a perusal of the said decision shows that the ITAT accepted such argument as in that case 96% of the transactions were covered by MAP and only a meager 4% were being disputed. So this decision cannot be applied to the case under consideration as 27% of the total EDS transactions are disputed, which is fairly substantial. Considering above the issue of ALP determination of the EDS transactions entered with non US AEs is decided on merits.”
IT(TP)A Nos.2590 & 2491/Bang/2017 Page 6 of 8
We have considered the rival submissions and the order of CIT(Appeals). It was also brought to our notice that in assessee’s own case for the AY 2007-08 in IT(TP)A No.1277/Bang/2011 for AY 2007-08, order dated 02.05.2018, this Tribunal came to the conclusion that Engineering Design Services rendered by the assessee cannot be equated with ITeS (high end KPO). Keeping in mind the fact that the issue of nature of services rendered by the assessee to its AE has already been decided, we are of the view that the request for applying 15% mark-up of operating cost should be the basis to determine the ALP in the case of international transactions with AEs who are tax residents of countries other than USA. In our view, the above conclusion is justified in the facts and circumstances of the present case, where the Tribunal has already pronounced on characterization of service provided by the assessee to its AE. In the circumstances, the entire basis of the TPO’s conclusion that the assessee is rendering high end KPO services, will have no legs to stand. With a view to give end to the litigation, we are adopting the aforesaid approach. The ld. counsel for the assessee has also filed two orders of Tribunal wherein similar approach was accepted by the revenue and in one such case, the plea for such an approach was made on behalf of the revenue. These decisions are Fidelity Business Services India (P) Ltd. v. DCIT, order dated 13.02.2018 and IT(TP)A No.5/Bang/2014, order dated 25.01.2019. We direct the AO to determine the ALP accordingly, after affording the assessee opportunity of being heard. In view of the above, the question of comparability of companies chosen by TPO/DRP and other adjustments to the margins, all become academic. We make it clear that the approach adopted in this case is under the peculiar facts and circumstances of the case and shall be no value as precedent. We may also add that the approach of the CIT(A) not accepting the plea of the Assessee on the ground that the percentage of AE transactions with IT(TP)A Nos.2590 & 2491/Bang/2017 Page 7 of 8 enterprises located in places other than the country covered by MAP was negligible or insignificant cannot be accepted. In terms of comparability of companies chosen by the TPO and other aspects of determination of ALP, the very same set of comparable companies have been chosen for all international transactions and therefore there cannot be any difference just because the AEs are operating in different countries. Unless such a distinction is established on the basis of geographical location of AEs, the stand taken by the CIT(A) in our view is unsustainable.
One other issue that arises for consideration in the revenue’s appeal is with regard to the direction of the CIT(Appeals) to exclude from the export turnover, whatever is reduced from the total turnover, while allowing deduction u/s. 10A of the Act. The CIT(Appeals) has followed the judgment of the Hon’ble Karnataka High Court in the case of Tata Elxsi Ltd., 349 ITR 98 (Karn).
The ld. DR in support of the ground raised has submitted that since the SLP has been filed in the Hon’ble Supreme Court, the judgment of the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd., 349 ITR 98 should not be followed. The ld. counsel for the assessee, on the other hand, has contended that the operation of the judgment of the Hon'ble jurisdictional High Court has not been stayed by the Hon’ble Supreme Court, therefore, the Tribunal is supposed to follow the judgment of Hon'ble jurisdictional High Court.
Having carefully examined the orders of the lower authorities, we find that so long as the judgment of Hon'ble jurisdictional High Court holds the field, all subordinate authorities are supposed to follow the same. Therefore, we find no infirmity in the order of the DRP, which has adjudicated the issue following the judgment of the Hon'ble jurisdictional
IT(TP)A Nos.2590 & 2491/Bang/2017 Page 8 of 8 High Court in the case of Tata Elxsi Ltd. (supra). We accordingly confirm the order of CIT(Appeals).
In the result, the appeal by the revenue is dismissed while the appeal by the Assessee is partly allowed.
Pronounced in the open court on this 15th day of March, 2019.