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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI JASON P BOAZ & SHRI PAVAN KUMAR GADALE
O R D E R Per Jason P. Boaz, Accountant Member
This appeal by the assessee is directed against the final order of assessment for Assessment Year 2013-14 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short ‘the Act’) dated 26.10.2017,
IT(TP)A No. 2847/B/2017 Page 2 of 11 pursuant to the directions issued by the Dispute Resolution Panel – 1, Bangalore (DRP) u/s 144C(5) of the Act on 08.09.2017.
Briefly stated, the facts of the case are as under:
2.1 For Assessment Year 2013-14, the assessment carried out was in respect of M/s. Wyse Technology Software Development India Pvt. Ltd.,. This company was merged with Dell International Services India Pvt. Ltd., w.e.f. 01.04.2013. This company is engaged in rendering of software development services to its Associated Enterprises (AE). For Assessment Year 2013-14, the assessee filed its return of income on 21.11.2013 declaring total income of Rs.5,75,59,810/-. The case was taken up for scrutiny. In view of the international transactions reportedly entered into by the assessee in the year under consideration, the Assessing Officer (‘AO’) made a reference to the Transfer Pricing Officer (TPO) for determination of the arms length price (ALP) thereof with its AEs. The TPO passed an order u/s 92CA of the Act dated 23.09.2016 wherein he proposed a TP adjustment of Rs.1,12,71,436/- to the assessee’s transactions in the provision of software development services. Thereupon, the AO passed the draft order of assessment for Assessment Year 2013-14 u/s 143(3) r.w.s. 144C of the Act dated 09.12.2016, wherein the assessee’s income was determined at Rs.6,88,31,248/-; after incorporating the TP adjustment of Rs.1,12,71,436/-. The assessee filed its objections thereto before the DRP and after hearing the assessee in the matter, the DRP issued its directions on 08.09.2017 u/s IT(TP)A No. 2847/B/2017 Page 3 of 11 144C(5) of the Act dated 26.10.2017 wherein the assessee’s income was determined at Rs.6,98,09,165/- in view of incorporating the TP adjustment of Rs.1,22,49,353/-.
The assessee, being aggrieved by the final order of assessment dated 26.10.2017 for Assessment Year 2013-14, has filed this appeal before the Tribunal wherein it has raised the following grounds:
The Appellant submits as under: I. Transfer Pricing I. Order/ Directions bad in law and on facts The order issued by the Additional Commissioner of Income-tax, a) Large Tax Payers Unit, Bangalore [(`Assessing Officer') or (`A0')], under section 143(3) read with section 144C (13), pursuant to the directions issued by the Hon'ble Dispute Resolution Panel [`IDRP' / Ld. Panel], is bad in law and on facts and is in violation of the principles of natural justice. Without prejudice to the generality of the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Dell International Services India Private Limited (for the merged entity Wyse Technology Software Development India Private Limited), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. The directions issued by the Ld. Dispute Resolution Panel (`DRP/ Ld. b) Panel') did not take cognizance of the objections raised by the Appellant in relation to the transfer pricing matters while issuing the directions under Section 144C(5). On the facts and in the circumstances of the case and in law, the Ld. c) Panel and AO/ TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act.
IT(TP)A No. 2847/B/2017 Page 4 of 11
2. Comparability Analysis adopted by the TPO for determination of arm's length price for the Software Development Services segment (`IT Services Segment') The Ld. Panel and the Ld. AO/TPO erred in rejecting the value of a) international transactions pertaining to rendering of IT Services, as recorded in the books of accounts, as the arm's length price. The Ld. Panel and the Ld. AO/ TPO erred in law in holding that the b) fresh comparability analysis using non contemporaneous data conducted by the Ld. TPO and further substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the Ld. TPO with regards to the IT services, is liable to be quashed. c) The Ld. AO/ TPO grossly erred on facts in benchmarking the transactions of the IT Services Segment of the Appellant with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-à-vis comparable companies. The Ld. Panel erred in upholding the actions of the Ld. AO/ TPO. The Ld. AO/ TPO erred on facts in rejecting the comparable companies d) arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant and the Ld. Panel also erred in confirming the same. The Ld. Panel and the Ld. AO/ TPO erred in law in applying arbitrary e) filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability, such as, (i) companies whose data for financial year (`FY') 2012-13 was not available, (ii) companies with software development service revenue less than 75% of total operating revenue, (iii) companies with related party transactions greater than 25% of sales (iv) companies with'export service income less than 75% of total operating revenues, (v) companies with employee cost less than 25% of turnover, and (vi) companies with different financial year ending (i.e. other than 31 March 2013). f) The Ld. AO/ TPO also erred on facts in erroneously computing the margins of certain companies identified as comparable by the Ld. TPO. The Ld. AO/ TPO erred in arbitrarily rejecting the comparable g) companies selected by the Appellant in the transfer pricing document,
IT(TP)A No. 2847/B/2017 Page 5 of 11 despite these companies being functionally comparable. The Ld. Panel also erred in confirming the same. The Ld. AO/ TPO erred in including CG-VAK Software Exports Limited, h) ICRA Techno Analytics Ltd, Larsen & Toubro InfoTech Limited, Persistent Systems Ltd and Mindtree Limited as comparable, despite these companies being functionally dissimilar to the Appellant. The Ld. Panel also erred in confirming the same. i) The Ld. AO/ Ld. TPO erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. The Ld. Panel also erred in confirming the same. The Ld. AO /Ld. TPO erred in not applying the turnover filter at the j) upper limit so as to reject high turnover companies. The Ld. AO/ Ld. TPO, while applying the said turnover filter at the lower k) limit so as to reject companies having turnovers less than INR 1 crore in FY 2012-13, erred in not applying the said filter at the upper end so as to reject high turnover companies as well. The Ld. Panel also erred in confirming the same. l) The Ld. AO/ TPO also erred in treating provisions for doubtful debts as non-operating in nature while calculating the net margins of the comparable companies. The Ld. Panel also erred in confirming the same. m) The Ld. AO/TPO erred in considering data obtained u/s 133(6). The Ld. Panel erred in confirming the same.
Non-allowance of appropriate adjustment to the comparable 3. companies by the Ld. Panel and Ld. AO/ Ld. TPO The Ld. AO/ Ld. TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (i) accounting practices, (ii) marketing expenditure adjustment, (iii) research and development expenditure adjustment, (iv) working capital, and (iv) risk profile between the Appellant and the comparable companies. Variation of 3% from the arithmetic mean 4. The Ld. AO/ Ld. TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant.
IT(TP)A No. 2847/B/2017 Page 6 of 11 II. Corporate tax Set-off of lower Minimum Alternate Tax (`MAT') credit — Rs. 5. 1,268,714 The Ld. AO has erred in setting-off MAT credit amounting to Rs. 6,839,215 without appreciating the fact that the Appellant is eligible for MAT credit amounting to Rs. 8,107,929. Levy of interest under section 234B of the Act — Rs. 2,314,345 6. The Ld. AO has erred in levying interest under section 234B of the Act amounting to Rs. 2,314,345, which is consequential in nature. Levy of interest under section 234C of the Act — Rs. 36,108 7. The Ld. AO has erred in levying interest under section 234C of the Act amounting to Rs. 36,108 instead of Rs. 28,652 as per the return of income filed. The Ld. AO has failed to appreciate the fact that as per the provisions of section 234C of the Act, has to be computed on returned income and not on assessed income. TRANSFER PRICING ISSUES
Ground Nos. 1,2 a) to i) & k) to m), 3 and 4 – not pressed.
4.1 The assessee has raised grounds on transfer pricing issues in grounds 1 to 4 (supra). At the outset, the learned AR for the assessee submitted that in respect of TP issues raised in this appeal, the assessee is only pressing ground No. 2 j) and all other grounds are not being pressed. In view of the above submission of the assessee, the grounds raised on transfer pricing issues at S. Nos. 1, 2 a) to i) and k) to m), 3 and 4 being not pressed in this appeal by the assessee, they are rendered infructuous and accordingly dismissed as not pressed.
IT(TP)A No. 2847/B/2017 Page 7 of 11
Ground No. 2 j)
5.1 In this ground, the assessee contends that the AO/TPO erred in not applying the turnover filter at the upper limit so as to reject high turnover companies. It is submitted that the assessee’s turnover in the year under consideration is only approx. Rs.37.02 crores whereas there are atleast 3 companies in the TPO’s final list of comparables with turnovers in excess of 10 times the assessee’s turnover. In this regard, the learned AR for the assessee drew the attention of the Bench to page 10 of the TPO’s order u/s 92CA of the Act to show that from the table in para 6.4, it is clear that the following three companies that find place in the TPO’s final set of companies have turnover in excess of 10 times the assessee’s turnover:
(i) Larsen and Toubro Infotech Ltd., : Rs.3,613.42 Crores (ii) Mindtree Ltd., : Rs.2,361.80 Crores (iii) Persistent Systems Ltd., : Rs.996.75 Crores 5.1.2 The learned AR contends that since the turnover of the aforesaid 3 comparable companies chosen by the TPO have turnovers more than 10 times in excess of the assessee’s turnover of Rs.37.02 Crores, these companies should be excluded from the final set of comparables. In support of this proposition, the learned AR placed reliance on the decision of the Hon’ble Karnataka High Court in the case of Acusis Software India Pvt. Ltd., Vs. ITO in dated 14.08.2018.
IT(TP)A No. 2847/B/2017 Page 8 of 11 6.2 Per contra, the learned DR for Revenue placed reliance on the orders of the authorities below:
6.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the Hon’ble High Court of Karnataka in its decision in the case of Acusis Software India Pvt. Ltd., Vs. ITO in dated 14.08.2018 has upheld the Bangalore Tribunal’s application of the tolerance range of turnover of 10 times on either side of an assessee’s turnover, holding as under at paras 14 and 15 thereof:
“14. The findings of the learned Tribunal as regards the comparable namely, Mercury Outsourcing Management Ltd., which too have been excluded by the Tribunal are quoted below for ready reference:- “ii) Mercury Outsourcing Management Ltd.
The learned Authorised Representative has submitted that the TPO has rejected this company on the similar reasoning of diminishing revenue and abnormal cost. 13.2 On the other hand, the learned DR has submitted that this company is incurring persistent losses and further the turnover of this company is less than Rs.1 Crore and therefore it does not satisfy the filter of turnover applied by the TPO. 13.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that turnover of this company in the ITES segment is only Rs.45.33. lakhs which is any case does not satisfy any filter of turnover in comparison to the assessee’s turnover more than Rs.27 Crores. Even if we apply the tolerance range of turnover of 10 times on both sides of the assessee’s turnover then the company which is having less than Rs.2.7 Crores of turnover will be outside the said range of 10 times. Accordingly, we are of the view that this company which is having only Rs.45.33 lakhs turnover cannot be considered as a good comparable to the assessee”.
IT(TP)A No. 2847/B/2017 Page 9 of 11
From the aforesaid findings of the learned Tribunal, we are satisfied that the reasons assigned by the learned Tribunal in excluding the aforesaid company as comparable is also reasonable and the same deserves to be accepted by us. It is analysed by the learned Tribunal in extenso which arrived at a decision that the company which is having only Rs.45.33 lakhs turnover cannot be considered as comparable to the Assessee-company whose turnover is more than Rs.27 Crores.”
6.3.2 Respectfully following the above decision in the case of Acusis Software India Pvt. Ltd., (supra), wherein the Hon’ble High Court has upheld the Bangalore Tribunal’s application of the tolerance range of turnover of 10 times on either side of the assessee’s turnover, we hold and direct that the following three companies are to be excluded from the TPO’s final set of comparable companies as their turnover of each of these companies is in excess of 10 times the assessee’s turnover of Rs.37.02 Crores:
Sl. No. Name of the Comparable Company Turnover (Rs. In Crores) 1. Larsen & Toubro Infotech Ltd., 3,613.42 2. Mindtree Ltd., 2,361.80 3. Persistent Systems Ltd., 996.75 Consequently, ground No. 2 j) of the assessee’s appeal is allowed.
II CORPORATE TAX ISSUES
Ground No.5 – Set off of MAT credit 7.1 In this ground (supra), the assessee contends that the AO erred in setting off MAT credit amounting to Rs.68,39,215/- without appreciating the fact that the assessee is eligible for MAT credit of Rs.81,07,929/-. After
IT(TP)A No. 2847/B/2017 Page 10 of 11 hearing both sides in the matter, we set aside this matter to the file of the AO for examining/verification of the assessee’s above claim of being given short credit of MAT credit. Consequently, ground No. 5 of assessee’s appeal is allowed for statistical purposes.
Ground Nos. 6 and 7 – Charging of interest u/s 234B and 234C of the Act 8.1 In these grounds (supra), the assessee denies itself liable to be charged interest u/s 234B of the Act. The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon’ble Apex Court in the case of Anjum H. Ghaswala (252 ITR 1) (SC) and I, therefore, uphold the action of the AO in charging the assessee the aforesaid interest u/s 234B and 234C of the Act. The AO is, however, directed to re-compute the interest chargeable u/s 234B and 234C of the Act, if any, while giving effect of this order.
In the result, the assessee’s appeal for Assessment Year 2013-14 is partly allowed.
Pronounced in the open court on 02.01.2019.