ASST CIT 15(2)(2), MUMBAI vs. MOBILEUM (INDIA) P. LTD, MUMBAI

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ITA 945/MUM/2016Status: DisposedITAT Mumbai26 June 2019AY 2011-1236 pages

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Cases cited in this judgment

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Pr.CIT v. B.C. Management Services (P.) Ltd.
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223 Taxmann 8 · 2014 · HC
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93 Taxmann.com 227 · 2018 · HC
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Alcatel Lucent India Ltd. v. DCIT
74 Taxmann.com 105 · 2016 · HC
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DCIT v. Flakt (India) Ltd.
76 Taxmann.com 209 · 2016 · ITAT
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Orange Business Services India Solutions Private Limited v. DCIT
95 Taxmann.com 284 · 2018 · HC
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Agilis Information Technologies International (P.) Ltd. v. ITO
88 Taxmann.com 6 · 2017
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Symantec Software & Services India (P.) Ltd. v. Dy. CIT
79 Taxmann.com 208 · 2017
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Income Tax Appellate Tribunal, MUMBAI BENCHES “J”, MUMBAI

Before: Shri C. N. PRASAD, & Shri G. MANJUNATHA

For Appellant: Shri ArijitChakravarty, Shri Manish Kumar Singh-DR

Hearing: 09/05/2019

आदेश / O R D E R Per G. Manjunatha (Accountant Member)

These cross appeals filed by the assessee as well as the Revenue are directed against directions of the Dispute Resolution Panel-3, Mumbai, dated 27/11/2015, u/s 144C(5) of the Act, for AY 2011-12, which, in turn, arised out of order of the TPO/AO u/s 143(3) r.w.s 144C(1) of the Act ,dated 11/02/2015. Since, the facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this consolidated order.

The assessee, in its memorandum of appeal has taken following grounds of appeal.

Adjustment I Addition to Total Income INR 3,64,56,910/- 1. on the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO) and the learned Assessing Officer (AO) erred in proposing and the Hon'ble Dispute Resolution Panel ('DRP') further erred in confirming the proposed addition to the Appellant's total income of INR 3,64,56,910/- based oil provisions of Chapter X of the Income-tax Act, ('the Act'). Requisite Conditions under Section 92C(3) - Not Satisfied 2. On facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned AO and learned TPO in not stating any reasons to show that either of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied before making all to the income of the Appellant. Software Development Services (INR 3,55,82,325) Cherry picking of comparable companies 3. On facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRIP further erred in upholding / confirming the action of the learned AO and learned

TPO in arbitrarily selecting certain companies to benchmark the international transaction of payment for software services merely on the premise that the companies were forming part of the accept-reject matrix of the Appellant thereby resorting to cherry picking of comparable companies. In light of the aforesaid, the Appellant prays that the action of the learned TPO and the Hon'ble DRP is liable to be quashed or alternatively ignored. Incorrect selection of comparable companies 4. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO in selecting certain companies thereby ignoring Appellant's submission with respect to rejection of those companies. The Appellant prays that since the action of the learned TPO and the Hon'ble DRP is against the established principles of benchmarking exercise, is liable to be rejected Incorrect rejection of the comparable companies selected by the Appellant in the transfer pricing report 5. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned AO and learned TPO in rejecting one of Appellant's comparable viz. CG-V AK Software & Exports Limited by erroneously stating that the company is a persistently loss making company and further erred in ignoring Appellant's submission that the company has earned profits during FY 2010-11 and it is not a persistently loss making company. The Appellant prays that since the action of the learned TPO and the I Hon'ble DRP is against the established principles of benchmarking exercise, is liable to be rejected Inconsistency in approach while selecting/rejecting comparable companies 6. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO of rejecting one of the Appellant's comparable viz. Varna Industries Limited on the grounds that the company is engaged in providing Engineering Services however erroneously erred in accepting E-Infochips Limited providing hi- tech engineering services, which clearly brings out the inconsistency in the approach adopted by the learned TPO as well as the Hon'ble DRP. In view of the above, the Appellant prays that the aforesaid inconsistency in the approach of the learned TPO as well as the Hon'ble DRP lacks

4 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. consistency and contains inherent contradictions being against the established principles of benchmarking exercise and is liable to be rejected/appropriately corrected. Incorrect application of an arbitrary filter to select functionally different companies 7. On the facts and in the circumstances of the case and in law, the Hon'ble DRP further erred in arbitrarily applying a filter of software development services more than 50 per cent to select two companies viz. e-lnfochips Limited and Wipro Technologies Limited to the final set thereby ignoring all the submissions of the Appellant with respect to deletion of the said companies and demonstrating a prejudicial mind-set to make an adjustment to the total income of the Appellant. In view of the above, the Appellant prays that action of the learned TPO and the Hon'ble DIZP of adopting an arbitrary filter without any basis is unwarranted and the companies should be excluded from the final set. Incorrect Margin Calculations: 8. On the facts and in the circumstances of the case and in law and without prejudice to Appellant's contentions, the learned TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO of incorrectly calculating margins of few comparable companies. In view of the above, the Appellant prays that learned AO as well as the learned 'ITO be directed to consider the correct margin of comparable companies. Disregarding no intention of shifting profits 9. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in not appreciating the fact that the Appellant was claiming tax exemption under Section 10A of the Act and accordingly had no intention to shift profits outside India by manipulating the prices charged in its international transactions which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. Use of Multiple Year data 10. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in rejecting the plea for use of multiple year data as specified in Proviso to rule 10B(4) of the Income Tax Rules, 1962; Adjustment as per Rule 10B(1)(e)(iii) of the Rules

11. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned AO and learned TPO in not making appropriate adjustments to the comparable companies as is required by Rule 10B(1)(e)(iii) of the Rules, which has rendered the benchmarking exercise carried out by the learned TPO inconsistent with the requirement of law and hence is liable to be rejected. Interest on outstanding debtors (1NR 8,74,585) 12. On the facts and in circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in making an adjustment of INR 8,74,585 by using the LIBOR plus 2% for the purpose of benchmarking the notional interest cost to the Appellant by erroneously ignoring the fact that the Appellant is a zero debt company and it does not have any borrowings / loans from external sources, therefore no actual interest cost borne by the Appellant, thereby disregarding the factual explanations submitted by the Appellant during the course of assessment proceedings. In view of the above, the Appellant prays that the addition of notional interest on account of the delay in receipts from the AEs made by the learned AO, learned TI'0 and confirmed by the Hon'ble DRP is erroneous, unwarranted and should be deleted. Initiation of Penalty Proceedings under section 271(1)(c) of the Act 13. On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the learned AO be directed to drop the penalty proceedings initiated under section 271(1)(c) of the Act. Computation of Interest under Sections 234B, 234C and 2341) of the Act 14. On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under Section 234B, Section 234C and Section 234D of the Act. The Appellant prays that the learned AO be directed to re-compute the interest under aforesaid sections of the Act.

27 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. development services is clearly identifiable. The TPO as well as DRP has excluded this company only on the ground that it is persistent loss making company which is evident from financial statement for relevant year. Further, although this company is into profit if FOREX foreign exchange gain is considered as part of operational revenue, but such FOREX gain or loss cannot be considered as part of operating revenue to determine the operating margins. We find that the issue of foreign exchange gain is whether part of operating revenue has been considered by the Hon’ble Delhi High Court in the case of Pr. CIT vs B.C. Management Services Pvt. Ltd. (2018) 403 ITR 45 (Del.). and by following its earlier order in the case of Pr. CIT vs Cashedge India Pvt. Ltd. in of 2016 held that as far as the question of foreign exchange fluctuation element is concerned, the records clearly indicate that the safe Harbour rules came into force later, whereas the facts of the case pertains to AY 2010-11 as a consequence, the impugned order of the Tribunal cannot be interfere with, where the Tribunal held that FOREX gain is part of operating revenue for the purpose of determination operating margin. In this case, there is no doubt with regard to the fact that if FOREX gain is included as part of operating revenue, then this company is not a persistent loss making company. Further, various Courts and the Tribunals has consistently held that when functions carried out by two comparables are similar, then merely for the reason of loss in one or two years cannot be a good reason for rejection of comparables. Therefore, we are of the 28 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. considered view that the TPO as well as the DRP were erred in excluding CG VAK Software and Exports Ltd. from the list of final set of comparables even though there is no adverse remark about functional similarity between two companies, hence we direct the TPO to include CG-VAK Software and Exports Ltd. in the final set of comparables for determination of arithmetic mean margin to benchmark international transactions with its AE.

“7.2 We have considered the TPO's order and the submissions of the assessee. The main contention of the assessee is that TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. It was contended that since the assessee is a zero debt company and has no interest expenditure, there is no need to recover any interest from the AE in respect of delay in realization of sundry debtors. The assessee relied on the decision of the Hon'ble ITAT, Mumbai in the case of Evonik Degussa Indian (P) Ltd. In support of its contention. 7.3 We find that the assessee's contention is not in accordance with the Transfer Pricing provisions in the IT.Act. Explanation (c) to Section 92B(1) inserted by the Finance Act 2012 with retrospective effect from 01.04.2002 has clarified that the expression "International Transaction" shall include Capital Financing including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. This explanation which is clarificatory in nature is squarely applicable to the transaction of realization of sundry debtors by the assessee from its AE and therefore this transaction falls within the ambit of an "International Transaction". 7.4 Once the transaction takes the character of an international transaction, the income arising from such transaction has to be completed having regard to Arm's Length Price as per the provisions of Section 92 of the I.T.Act. For this purpose, it is not material whether there is an agreement between the assessee and the AE for charging of interest on delayed recovery of sundry debtors or whether there is under charging of interest or whether assessee has incurred any cost of borrowing. The application of the provisions of Section 92 for 33 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. determining the Arm's Length Price of the international transaction is mandatory regardless of these factors. 7.5 As regards the reliance placed by the assessee on the decision of the Hon'ble ITAT, Mumbai Bench, it is seen that though the said decision was rendered on 21.11.2012, the insertion of Explanation to Section 92B by the Finance Act 2012 with retrospective effect from 01.04.2002 has not been brought to the notice of the Hon'ble Tribunal. 7.6 In view of the discussion above, we hold that the transfer pricing adjustment made by the TPO by way of computing interest income with regard to the delayed recovery of sundry debtors from the AEs is in accordance with the transfer pricing provisions of the I.T.Act and is in order. 7.7 However, we do not agree with the benchmarking carried out by the TPO with regard to this international transaction by considering the PLR of SBI along with a mark up of 3% as the Arm's Length Price, it has been held in various decisions of the Hon'ble Tribunals and the Hon'ble Delhi High Court (in the case of M/s. Cotton Natural (India) Pvt. Ltd.) that benchmarking of international transactions of interest on loans advanced in foreign currency to AEs shall be made on LIBOR plus basis. The issue regarding the quantum of spread over the LIBOR rate is to be decided on the basis of peculiar facts of each case after evaluating the terms of the loan i.e. period of loan, quantum of loan, creditworthiness of the borrower and the nature of collateral (secured/unsecured loans). 7.8 The delay in realisation of debtors from the AE is akin to a transaction of advancing of a interest free loan to the AE. Hence, the principle of benchmarking applicable to a transaction of interest free loan to an AE is equally applicable to the international transaction of delay in recovery of debtors from the AE. In view of this, the benchmarking of the rate of interest on such delay in recovery is required to be made on the basis of LIBOR along with an appropriate mark up considering the risks involved.