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Income Tax Appellate Tribunal, ‘B’ BENCH, BENGALURU
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAO
O R D E R
Per INTURI RAMA RAO, AM :
This is an appeal filed by the assessee directed against the assessment order dated 12/10/2011 passed u/s 143(3) r.w.s. 144C of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] by the Income-tax Officer, Ward 12(1), Bengaluru for the assessment year 2007-08.
The assessee-company raised the following grounds of appeal and the additional grounds of appeal:
IT(TP)A No.1223/Bang/2011 Page 2 of 15 IT(TP)A No.1223/Bang/2011 Page 3 of 15 IT(TP)A No.1223/Bang/2011 Page 4 of 15 Additional grounds of appeal:
IT(TP)A No.1223/Bang/2011 Page 5 of 15 3. Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is 100% subsidiary of M/s.NVIDIA Graphics Holding Co. Mauritius. It is engaged in the business of providing software research and development services and marketing support services to its group companies. The assessee carried on business from two units located at Bengaluru and Pune registered as 100% EOU.
The return of income for the assessment year 2007-08 was filed on 31/10/2007 declaring a total income of Rs.Nil. The assessee-company also reported the following international transactions with its Associated Enterprises (AE):
The assessee-company sought to justify the consideration received for the above international transaction entered with its AE to be at arm’s length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting TNMM as most appropriate method and operating profit/operating cost as profit level indicator for the transferring pricing study. The assessee-company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assessee-company’s profit margin was computed at 12.58% in respect of software segment and 9.10% in respect of marketing support services.1.45%/ The assessee-company claimed that the same was comparable with other companies rendering software development services. For the purpose of transfer pricing study, the assessee- company had chosen 28 comparable entities in respect of software segment whose profit margin was computed at 14.53%, according to the assessee-company, its PLI was within +/_ 5% range of arithmetical mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm’s length price (ALP).
IT(TP)A No.1223/Bang/2011 Page 6 of 15 5. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO). The TPO, by an order dated 30/08/2010 passed u/s 92CA(3)of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’] computed the transfer pricing adjustment at Rs.9,65,24,352/- in respect of software development services and Rs.77,52,050/- in respect of marketing support services. In respect of software development segment, the TPO proceeded to identify different set of comparables for the purpose of determining ALP. While doing so, the TPO applied the following filters:
Finally the TPO selected the following comparables in respect of software development services:
IT(TP)A No.1223/Bang/2011 Page 7 of 15 The TPO computed transfer pricing adjustment in respect of software development services as follows:
IT(TP)A No.1223/Bang/2011 Page 8 of 15 In respect of marketing support services, the TPO applied the following filters:
Finally, the TPO selected the following comparables in respect of marketing support services:
IT(TP)A No.1223/Bang/2011 Page 9 of 15 The TPO computed the transfer pricing adjustment in respect of marketing support services as follows:
The Assessing Officer passed draft assessment order dated 27/12/2010 u/s 143(3) read 144C of the Act incorporating the above adjustment and also restricting deduction u/s 10A by reducing expenditure incurred in foreign currency on freight and telecommunication expenditure only from export turnover for the purpose of calculating deduction u/s 10A. After receipt of the above assessment order, objections were filed before the Hon’ble Dispute Resolution Panel (DRP). The Hon’ble DRP, after considering the submissions, upheld the action of the AO as well as the TPO in making transfer pricing adjustment. The AO passed final assessment order dated 12/10/2011 u/s 143(3) r.w.s. 144C of the Act incorporating the directions given by the Hon’ble DRP.
Being aggrieved, the assessee-company is before us in the present appeal. Now, we shall deal with issues in appeal in software segment.
Ground Nos.2 to 5 challenges restricting the deduction u/s 10A by reducing telecommunication expenses only from export turnover. This issue is covered in favour of the assessee by the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Tata Elxsi (349 ITR 98),
IT(TP)A No.1223/Bang/2011 Page 10 of 15 wherein the Hon’ble High Court held that that the same is required to be reduced from export turnover as well as total turnover. Respectfully following the ratio of the decision of the Hon'ble jurisdictional High Court, we direct that expenses incurred in foreign exchange telecommunication are to be reduced both from export turnover as well as total turnover. Therefore, the grounds of appeal filed by the assessee in this regard are allowed.
The learned AR of the assessee sought exclusion of the following comparables by way of filing additional grounds of appeal along with an application under rule 11 for admission of additional grounds. viii. Accel Transmatics Ltd. ix. E-Zest Solutions Ltd. x. Quintegra Solutions Ltd. xi. Helios and Matheson Information Technology Ltd. It is submitted that the additional grounds could not be raised earlier and are required to be admitted in the interests of justice and the issues arising out of additional grounds are purely legal issues and the facts are already on record. The learned AR of the assessee alo placed reliance on the following decisions for admission of additional grounds of appeal: i. Jute Corporation of India vs. CIT (187 ITR 688)(SC) ii. National Thermal Power Corporation vs. CIT (229 ITR 383)(SC) iii. Ahmedabad Electricity Co. Ltd. (199 ITR 351)(Bom) iv. DCIT vs. Quark Systems (P) Ltd. (ITA No.100(CHD)/2009) (ITAT,Chandigarh).
After hearing the rival submissions, we are of considered opinion that additional grounds of appeal be admitted in the light of the ratio laid down by the Hon’ble Supreme Court in the case of National Thermal
IT(TP)A No.1223/Bang/2011 Page 11 of 15 Power Corporation vs. CIT (supra). We find from the additional grounds of appeal that exclusion of the above comparables was sought on the grounds of functional dissimilarities. We find from perusal of the orders of the TPO as well as the Hon’ble DRP that functional aspects of these comparables was not discussed by the lower authorities. However, keeping in view that the Annual reports of the comparables are already on record of the TPO and the fact that the TPO has selected set of comparables only on the premise that same set of entities were considered as comparables in the immediately preceding year, needless to say that the issue of comparability requires to be adjudicated in the backdrop of the facts of selected comparables as well as the tested party. It cannot be presumed that FAR analysis of comparables as well as tested party can be same as that of the immediately preceding assessment year. There is possibility of variation in FAR analysis from the preceding assessment year. Therefore, we remit this issue back to the file of the TPO to adjudicate the comparability of above entities after undertaking FAR analysis of the comparables vis-à-vis tested party.
Marketing support services segment: 11. In marketing support services segment, the assessee-company is seeking exclusion of only one comparable i.e. ICC International Agencies Ltd.(segmental). It is contended that this comparable entity earned abnormal super profits of 78.67% and is engaged in trading and acts as a commission agent for machineries used in textile industry. Reliance was also placed on the decision of the co-ordinate bench of this Tribunal in the case of Logica Pvt. Ltd. vs. Asst.CIT (36 taxmann.com 374)(Bang.Trib).
We heard rival submissions and perused the material on record. The functions performed by the assessee-company are described by the TPO as under:
IT(TP)A No.1223/Bang/2011 Page 12 of 15
IT(TP)A No.1223/Bang/2011 Page 13 of 15 From the above, it is clear that the functions of this company cannot be characterizes as a commission and service activity. From mere perusal of the order of the TPO vide para.22.6, the TPO had characterized the activities of the assessee-company as commission and service agent. In our considered opinion, activities of the assessee-company cannot be characterized as commission and service agent. Therefore, this company cannot be considered as comparable with that of the ICC International Agencies Ltd., which is engaged in the activities of commission and service agent. The co-ordinate bench of the Tribunal in the case of Logica Pvt. Ltd. (supra) had considered the comparability of ICC International Agencies Ltd., and held as follows:
“5. The ld. counsel for the assessee focused his attention on comparability chosen by the TPO viz., ICC International Agencies Ltd. The functional profile of this company has been dealt with by the TPO at page No.260 of his order. In his objection before the TPO, the assessee submitted as follows:-
"International Agencies Ltd is primarily engaged in trading of embroidery accessories, embroidery spares and embroidery machines. The company also provides indenting services to the textile industry. Your goodself in the Notice considered the indenting services segment of ICC International Agencies Ltd as a comparable to the support services segment of the Assessee. The type of services provided by the company under indenting agency services is not available both in the Annual Report and websites. As such there is a lack of information available in the public domain for appropriate analysis of comparability." The TPO on the above objection of the Assessee, in his order, observed as under:- "The taxpayer's argument is that the company renders indenting services to the textile industry. As explained earlier, the TPO did not go into verticals i.e. the segment to which a company caters to IT(TP)A No.1223/Bang/2011 Page 14 of 15 for rendering commission agency services except that the commission agency services must relate to products and not for services as the taxpayer is rendering similar services relating to telecom products. Thus this argument is not accepted by the TPO. The company's commission & servicing activity segment is considered as a comparable with the segment PLI of 78.67% on cost as arrived at above."
The ld. counsel for the assessee pointed out that the comparable company's commission and servicing activity segment has been taken by the TPO for the purpose of comparison. It was his submission that the assessee was not a commission agent and ICC International Agencies Ltd. Which was rendering indenting services as admitted by TPO in his order (Indenting services is nothing but commission agency) cannot therefore be taken as a comparable company.”
The ld. DR, on the other hand, relied on the order of the TPO. It was his submission that as far as marketing support services are concerned, the assessee was not doing it only for software services, but also for supply of hardwares and therefore ICC International Agencies Ltd. which was also supplying accessories for embroidery should be taken as a comparable.
We have given a careful consideration to the rival submissions and are of the view that the plea put forth by the assessee deserves to be accepted. As can be seen from the functional profile of ICC International Agencies Ltd. given by the assessee, which is not disputed by the TPO, that it does trading and also acts as commission agent for machineries used textiles industry. As against this, the functional profile of the assessee, as we have already seen, is only giving support services. Keeping in mind the functions and risk analysis, it is not possible to compare the assessee with ICC International Agencies Ltd. If ICC International Agencies Ltd. is not taken as a comparable, then the margin of the assessee would be well within the OP/Cost PLI of the other comparable companies chosen by the TPO. We accordingly hold that in respect of the international transactions of rendering marketing support services, the price received by the assessee is at arm's length and no adjustment is called for. Ground No.5 raised by the assessee is accordingly allowed.
Respectfully following the decision of the co-ordinate bench in the case of Logica Pvt. Ltd. (supra), we hold that ICC International Agencies Ltd.(segmental) cannot be compared with that of the assessee-company and therefore, we direct the AO/TPO to delete this company from the list of comparables.
IT(TP)A No.1223/Bang/2011 Page 15 of 15 13. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.