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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAO
O R D E R
Per Sunil Kumar Yadav, Judicial Member
This appeal is preferred by the assessee against the assessment order passed consequent to the order of the DRP inter alia on the following grounds:-
“1. That the order of the learned of Income-tax Officer, Ward - 2(1)(1), Bangalore ("Assessing Officer" or "AO") pursuant to the direction of the learned Dispute Resolution Panel ("DRP") to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.
IT(TP)A No.762/Bang/2017 Page 2 of 9
The learned AO and the learned DRP erred both in facts and law in upholding the approach of the learned Deputy Commissioner of Income-tax, Transfer Pricing - 1(1)(2), Bangalore ("Transfer Pricing Officer" or "TPO") of making an adjustment to the transfer price of the Appellant to the tune of INR 28,626,764 in relation to relating to revenue from project/service Income, holding that the international transactions does not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP grossly erred in: 2.1. Re-characterising the functions of CAE India being a project management services relating to installation, up-gradation and assembling and execution of projects to a software development service provider; 2.2. Disregarding the comparables considered by the Appellant as per the Transfer Pricing Study being the functionally comparable companies, and erroneously proceeding to consider software development companies as comparables. 2.3. Upholding the approach of learned TPO of not allowing the use of financial projections for arriving at the arm's length price as submitted by the Appellant.
3. The learned AO and the learned DRP erred both in facts and law in upholding the approach of the learned Deputy Commissioner of Income-tax, Transfer Pricing – 1(1)(2), Bangalore ("Transfer Pricing Officer" or "TPO") of making an adjustment to the transfer price of the Appellant to the tune of INR 74,475,956 in relation to transaction of corporate management services and reimbursement of expenses, holding that the international transactions does not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP grossly erred in: 3.1. Holding that corporate management services and reimbursement of expenses is in the nature of stewardship activities;
IT(TP)A No.762/Bang/2017 Page 3 of 9 3.2. Disregarding the corporate management services arrangement of the Appellant with CAE Inc., Canada despite furnishing a legal and contractually binding agreement with respect to transactions; 3.3. Erroneously concluding that no commercial or economic benefits have been received by the Appellant and disregarding the collective evidences provided by the Appellant to establish he benefit received from such services provided; 3.4. Not considering the information/ documents/ clarification provided to satisfy benefit test for the transactions in appeal and erred in computing the arm's length value of the said transaction to be NIL.
4. Granting credit for tax deducted at source amounting to INR 23,35,143 while passing the final assessment order as against INR 37,82,335 claimed by the Applicant in its return of income for AY 2012-13.
5. Consequent to the above, the Learned AO erred in charging interest- of INR 149,910 under section 234A of the Act.
Consequent to the above, the Learned AO erred in charging interest of INR 4,347,390 under section 234B of the Act. The above grounds are independent of, and without prejudice to, each other and that the appellant craves leave to add, alter, amend, modify or withdraw the grounds of appeal
or produce further documents before or at the time of hearing of this Appeal.”
2. During the course of hearing, the ld. Counsel for the assessee has invited our attention that the assessee company is engaged in the business of integration of hardware and software in the simulation and services. Therefore, the assessee has considered itself to be in the field of project management, but the TPO has considered the assessee to be in the field of software development services.
IT(TP)A No.762/Bang/2017 Page 4 of 9 Accordingly, the TP study made by the assessee was rejected by the TPO and he selected different comparables engaged in the software development services. The assessee has filed objections before the DRP and tried to demonstrate that assessee is engaged in the provision of aircraft simulation and tanks and gunnery simulation services to various players in the civil and military training sectors. The customers of assessee are independent players in the aerospace and the defence industries. The services provided by the assessee and its group are primarily used for in pilot training and also the defence personnel’s virtual wartime trainings, etc. The contentions of the assessee were not appreciated by the ld. DRP and they have confirmed the order of the TPO.
Now the assessee is before us and invited our attention to the functions performed by the assessee as described in its TP study, according to which, the assessee was divided into marketing department, technical department, quality department, pricing department and finance, human resource and administration. It was further contended that assessee is engaged in the project management and not the software development services. Therefore, the comparables adopted by the TPO/DRP were different and cannot be considered.
The ld. DR, on the other hand, has invited our attention to the TP study whereby it was described that assessee undertakes independent verification and validation of flight-critical software including design, coding and testing in various programming languages. Since the assessee was engaged in software development services, the TPO/AO has rightly considered the assessee to be in IT(TP)A No.762/Bang/2017 Page 5 of 9 software development services and also rightly picked up certain comparables.
Having carefully examined the orders of authorities below in the light of rival submissions, we find that the assessee’s functions were described in the TP study at page 311 of the compilation, according to which the assessee was divided into different departments. For the sake of reference, we extract the functions described under the head ‘Functions performed’ by assessee:-
“4.2.2. Functions performed by CAE India The organisation structure of CAE India is divided into the following departments: Marketing department; Technical department; Quality department; Pricing department and Finance, Human Resource & Administration. Marketing Department: CAI; India is engaged in the provision of aircraft simulation and tanks < d' gunnery simulation services to various players in the civil and military training sectors. The customers of CAE India’s products are independent players in the aerospace and the defence industries. The service provided by CAE India and its group are primarily used in pilot training and also the defence personnel’s virtual wartime training etc. The CAE Group entities worldwide have been geographically divided on the basis of specialization in the market. In view of the same, CAE India assists in preparing bids for its group companies. For this purpose a special proposal department has been set up, which prepares the bids. The team comprises a proposal manager and an engineer for the technical aspects. Technical Department: The technical department is engaged in the actual execution of contracts bid, which are executed by CAE India. The following functions are performed by CAE India;
IT(TP)A No.762/Bang/2017 Page 6 of 9
· Contract execution: Depending on the quantum of the project CAE India executes the projects with the assistance of CAE Group entities. CAE India provides basic fact finding and Cost Benefit Analysis (CBA) for the bid and the final decision on the actual bidding and execution of the contract is done by CAE Group. Also in the event of winning the contract for the services, CAE India would perform the task with the technical and management assistance from CAE Group. The marketing team bids and signs the contract and subsequently hands over the execution to the programme management teams in CAE India, which mainly constitute of engineers. · Development of simulators: The simulators arc built in kits. The various components are subsequently assembled later on at the place of installation. · Installation/ Commissioning: CAE India is a provider of simulation and modelling technologies and integrated training services for civil aviation and defence customers in the Indian market. It also supplies civil flight simulators to airlines, aircraft manufacturers, training centres and military full-mission simulators. In this regard CAE India gives a comprehensive package ranging from the visual software to the final installation and commissioning of the simulators. · Tank Programme: As mentioned earlier, the CAF. Group's operations are divided based on market specialization and also geographically. As a group company, CAE UK specializes in the Tank simulation markets. CAE India receives services and pays technical assistance fees to CAE UK for the assistance received with respect to the Tank Programme. CAE India procures all the metal castings locally for this activity. · Liaison between the marketing department and the technical department: A communication channel is opened between the marketing and technical &Imminent for a) future
IT(TP)A No.762/Bang/2017 Page 7 of 9 bids, b) improving customer relationships c) evaluation of newer technologies and apprising the customers on the same.” 6. Similarly, the ld. DR has also invited our attention to the description with regard to functions of assessee given in the TP study appearing at page 304 of the compilation of the assessee. For the sake of reference, we extract the relevant relevant portion to which our attention was invited by the ld. DR:-
“CAE India is a subsidiary of Flight Training Device (Mauritius) Limited, which holds 76% stake in the company. The remaining 24% stake is held by Macmet India Private Limited and Macmet Interactive Technology (P) Limited. The company formerly known as Macmet Technologies Private Limited was acquired by CAE Group in July 2007. Subsequently with effect from June 22, 2009), the company changed its name from Macmet Technologies Private Limited to CAE India Private Limited. CAE India undertakes independent verification and validation of flight-critical software including design, coding, testing in various programming language like C, C++, Ada. CAE India also has the expertise in 2D & 3D modelling, interface checks, sheet metal design, assembly creation and CATIA V5 & AutoCAD. CAE India deals with Real Time Embedded Systems using operating systems viz; VxWorks with expertise in RTCA DO 178B and DOD 2167A and also has wide experience in providing CBTs, CAI and VATS. CAE India has provided computer based training packages for the Indian Army and DRDO. CAE India primarily caters to the Indian defence sector and it has developed India's first Battle Tank Gunnery Trainer and also supplied a Naval Tactical Trainer. CAE India, post acquisition by the CAE Group, has ventured into flight simulator. CAE India has also provided assistance in implementation and commissioning of India's first Full Mission Flight Simulator (Sea Harrier) refurbishment and in implementing India’s First 6DOF, an electric motion simulator.”
IT(TP)A No.762/Bang/2017 Page 8 of 9
During the course of hearing, both the parties have agreed that all these aspects were not examined by the TPO/DRP while adjudicating the main issue with regard to functional profile of the assessee. Under these circumstances, we are of the opinion that the matter should go back to the TPO to first re-examine the issue with regard to functional profile of the assessee and thereafter adopt the comparables of same profile.
With regard to the remaining grounds, the ld. Counsel for the assessee has invited our attention that these grounds were not examined by the DRP and it simply confirmed the view taken by the TPO/AO. Since the issues were not examined by the lower authorities, it may also be re-examined by the TPO. Finding force in the contention of the ld. Counsel for the assessee, we set aside the findings of the DRP in this regard and we restore the matter to the AO/TPO to adjudicate the same as per law. Needless to mention here that while adjudicating the aforesaid issues, opportunity of being heard should be afforded to the assessee.
In the result, the appeal of the assessee is allowed for statistical purposes.
Pronounced in the open court on this 22nd day of December, 2017.