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Income Tax Appellate Tribunal, DELHI BENCH “I”, NEW DELHI
Before: SHRI S.V. MEHROTRA & MS. SUCHITRA KAMBLE
O R D E R PER S.V. MEHROTRA, A.M :
Both the captioned appeals preferred by the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.
This appeal filed by the assessee is directed against the order dated 27.10.2010 passed by the Assessing Officer u/s 144C/143(3) of the Income Tax Act, 1961 (in short “the Act”) relating to assessment year 2006-07 pursuant to the direction of the Dispute Resolution Panel-II, New Delhi.
Brief facts of the case are that assessee company, in the relevant assessment year, was primarily engaged in providing software programming services and IT enables services to CMIL. The assessee had filed its return of income declaring total taxable income of Rs.10,77,60,011/-. The assessee had entered into international transactions for providing software development services to its associated enterprises of Rs.60,29,46,396/-.
Accordingly, a reference u/s 92CA was made by the Assessing Officer for determining the arm’s length price u/s 92CA(3) of the Act. The assessee had used the Transactional Net Margin Method (TNMM) as the most appropriate method with OP/OC as the Profit Level Indicator (PLI) in Transfer Pricing (TP) Study. The assessee has used itself as tested party. It had earned an Operating Margin of 14.53% on cost as against the weighted average margin of 50 comparables, considered in TP Study, at 12.50%. On the basis of updated margin (current year data), the average margin of comparables was arrived at 11.83% for March, 2006. Ld. TPO rejected the assessee’s contention for use of data in respect of comparables for the year 2004-05 and 2005-06 and considered the data for the year 2006-07 only.
On this basis 25 comparables were rejected on the basis of related parties transactions and on the ground of persistent loss making. Ld. TPO has also assigned certain other reasons for rejecting the 2-3 comparables. He also show-caused for including the following comparables :-
(a) Cambridge Technology Enterprises Ltd. (b) Powersoft Global Solutions Ltd. (c) SIP Technologies & Export Ltd. Systemlogic Solutions Ltd. (d)
The final set of comparables is given in para 10 at pages 17 and 18 of his order in which he considered 30 comparables including the four noted above and computed the arithmetic mean at 20.94% as compared to 14.53 of the assessee and, thus, directed for making an upward addition of Rs.3,45,08,163/- as under :-
Total Cost of Provision of Services by the Assessee (a) Rs. 52,70,83,314 OP/OC 20.94 Margin @ 20.94% as discussed above (b) Rs. 11,07,71,245 Arm’s Length Price A (a+b) Rs. 63,74,54,559 Price at which international transaction has been Rs. 60,29,46,396 undertaken B Difference A-B Rs. 3,45,08,163 % of difference with B above 5.72%
Ld. DRP, after considering the assessee’s objections only directed for exclusion of Satyam Computer Services Ltd. from the list of comparables adopted by ld. TPO and, thus, the average margin was computed at 20.26%.
Accordingly, the Assessing Officer made an addition of Rs.3,09,23,997/- as under :-
Total cost of provision of services by the assessee (a) 52,70,83,314/- OP/OC 20.26% Margin @ 20.26% (b) 10,67,87,079/- Arm’s Length Price (A) (a+b) 63,38,70,393/- Price at which international transaction has been 60,29,46,396/- undertaken B Difference A-B 3,09,23,997/-
Being aggrieved with the assessment order passed u/s 144C/143(3), the assessee is in appeal before the Tribunal. The assessee has taken various grounds of appeal. However, at the time of hearing, ld. counsel for the assessee has only pressed ground nos.1.4 and 1.8, which are reproduced hereunder :-
“1.4 By making modification to the set of comparable companies by including four additional companies to the set of comparable companies identified by the Appellant without making an attempt to appreciate the fact that these companies are operationally/ functionally dissimilar to the Appellant. 1.8 By erroneously computing the “% difference with ALP" by not taking into consideration the amount of “other income” reported in the profit and loss account of the Appellant.”
Apart from the above two effective grounds, the assessee has also taken following additional grounds of appeal :-
“1.10 That on the facts and circumstances of the case, M/s Infosys Technologies Limited, Wipro Limited, KALS Info Systems Limited, Helios & Matheson Information Technology Limited and Tata Consultancy Services Limited may be rejected for the purposes of comparability analysis as these companies are not comparable to the Appellant in terms of functions performed, assets employed and risk assumed. 1.11 That on the facts and circumstances of the case, working capital adjustment as specified under Rule 10B(1)(e)(iii) and Rule 10B(3) of the Income Tax Rules, 1962 may be allowed for the purpose of determination of arm's length price to account for the difference in working capital employed by the Appellant vis-a-vis the comparable companies.”
First, we consider ground no.1.4 and 1.8. Apropos ground no.1.4, ld. counsel for the assessee submitted that in regard to (i) Cambridge Technology Enterprises Ltd., (ii) Powersoft Global Solutions Ltd., (iii) SIP Technologies & Export Ltd., have to be computed corresponding to assessee’s financial year because the accounts are in respect of 15 month in the case of Cambridge Technology Enterprises Ltd.; upto September, 2006 in respect of Powersoft Global Solutions Ltd. and for 18 months in respect of SIP Technologies & Export Ltd.. He submitted that if this computation can be made then only these comparables should be included otherwise they could not be included. As regards the Systemlogic Solutions Ltd., ld. counsel pointed out that this is a subsidiary of Helios & Matheson Information Technology Ltd., the results for which have already been included by ld. TPO in the final list of comparable selected by him and, therefore, inclusion of Systemlogic Solutions Ltd. results to duplication. In this regard, he referred to page 68 of Annual Report of Helios & Matheson Information Technology Ltd.. Ld. DR submitted that the results corresponding to assessee’s financial year may be drawn from the financial statements of three comparables for which results for different financial year are available and, therefore, they have to be included. As regards the Systemlogic Solutions Ltd., ld. DR submitted that the matter needs to be re- examined by ld. TPO.
We have considered the rival submissions of both the parties and perused the record of the case. In our opinion, the matter needs to be restored to the file of ld. Assessing Officer/TPO for fresh adjudication in regard to aforementioned comparables. In this regard, in the light of submissions advanced by both the parties, if result in respect of three comparables viz. (i) Cambridge Technology Enterprises Ltd., (ii) Powersoft Global Solutions Ltd., (iii) SIP Technologies & Export Ltd. can be drawn corresponding to the financial year ending on March, 2006 then only these three comparables should be included otherwise they have to be excluded from the list of comparables. Similarly, in regard to Systemlogic Solutions Ltd., ld. TPO should examine the assessee’s contentions, as noted above. If the same is found to be correct then to exclude this comparable from the list of comparables. In the result, this ground is allowed for statistical purposes in terms of aforementioned observations.
Now, coming to ground no.1.8, the grievance of the assessee is that while computing the margin of tested party i.e. assessee, the TPO did not take into consideration other income, which was in the nature of operating income. In this regard, ld. counsel further pointed out that while arriving at advance pricing agreement dated 24.08.2016, the Department itself has considered the other income as operating income as is evident from clause (f) of APA, which is reproduced hereunder :-
“(f) “operating revenue” means the revenue earned by the Applicant in the previous year in relation to the covered transaction during the course of its normal operations including the net foreign exchange difference (if gain) and gain on forward contracts but does not include the following, namely :- (i) income on transfer of assets or investments; (ii) refunds relating to income-tax; (iii) extraordinary incomes; and (iv) other incomes not relating to normal operations of the Applicant. The operating income includes interest received on deposits for Previous Years 2013-2014 and 2014-2015 and roll back years.”
After hearing both the parties, this issue is restored back to the file of ld. Assessing Officer/TPO for verification of assessee’s claim as per page 165 of Paper Book read with the chart filed at the time of hearing, which is reproduced hereunder :-
RBS India Development Centre Private Limited Assessment Year 2006-07 Particulars Amount Nature Amount
Other Income - Provisions 733,420 Excess expenses provided towards 366,000 written back reimbursement of secondees, subsequently reversed Reimbursement expenses incorrectly charged 5,866 to expenses Excess provision of cost made for employees 282,690 who have resigned Write off of excess provision created for 78,864 expenses TOTAL 733,420 - Miscellaneous 9,484 Excess sums paid to employees in the form of 9,484 income travel advances received back and accounted for as other income In the result, ground no.1.8 is allowed for statistical purposes.
At the time of hearing, ld. counsel has filed an application for admission of additional under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963. The application is reproduced hereunder :-
“01 June 2016 The Registrar Income Tax Appellant Tribunal Lok Nayak Bhawan, Khan Market New Delhi Dear Sir, Re: RBS India Development Centre Private Limited ('the Appellant') [merged into RBS Services India Private Limited (formerly known as RBS Business Services Private Limited) with effect from 1 April 2015) Assessment Year ('AY') 2006-07, PAN: AAACC2526J Sub: Application under Rule 11 of the Income Tax (Appellant Tribunal) Rules, 1963 ('the ITAT Rules') for filing of additional grounds with regard to Appeal No. ITA 5538/De1/2010
The Appellant has filed the captioned appeal against the order passed by the Assistant Commissioner of Income Tax, CIT-I, Gurgaon ['Ld. Assessing Officer' or 'the AO'], dated 27 October 2010. The subject appeal is listed for hearing before your Honours on 06 June 2016. In reference to the captioned appeal, the Appellant may please be allowed to raise additional grounds of appeal with your Honours. Your Honours will appreciate that the additional grounds would be essential for due dispensation of substantial justice. Given the evolving nature of the Transfer Pricing subject in India, recent developments and principles laid down by judicial pronouncements, the Appellant hereby requests your Honour to provide due opportunity of presenting additional grounds. In the light thereof, we humbly request your Honours to exercise the powers provided in Rule 11 of the ITAT Rules and admit the above additional grounds of appeals. In this regard, we enclose Form No. 36B, along with the additional grounds, in duplicate. In this context, reliance is also placed on the decision in the case of Jute Corporation of India Ltd. [187 ITR 688 (Hon'ble Supreme Court)]. In this case, the Hon'ble Apex Court, observed as under: "5 .... Even otherwise, an appellate authority while hearing the appeal against the order of a subordinate authority, has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers, which the subordinate authority may have in the matter. " Further, in case of Quark Systems India (P.) Ltd [ITA No. 594/2020], the High Court Of Punjab & Haryana observed as under: "4. The issue involved in this case is whether the Tribunal was justified in entertaining the additional ground for exclusion of M/s. Datamatics Technologies as comparable and remanding the case to the Assessing Officer whereby it had directed that the assessee shall be entitled to produce all relevant material for determination of proper Arm's Length Price and shall co-operate for expeditious disposal of the matter. xxxx xxxx xxxx xxxx
6. In view of the observations of the Tribunal whereby an opportunity was provided to the assessee to produce material before the Assessing Officer and the fact that after the remand and consideration of the material produced by the assessee in terms of the order of the Tribunal, an order in favour of the assessee has been passed, no question of law much less a substantial question of law arises in this appeal for consideration of this Court. Accordingly, the present appeal is dismissed. " Also, in this regard, reliance is also placed on the following decisions: • National Thermal Power Co. Ltd Vs CIT [1998] 229 ITR 383 (SC) • CIT Vs. Nelliappan (S.) [1967] 66 ITR 722 (SC) • Ahemdabad Electricity Co. Ltd Vs CIT [1993] 199 ITR 351 (Bom) • Ashok Vardhan Birla Vs. CWT [1994] 208 ITR 958 (Bom) • Inaroo Ltd. Vs. CIT [1993] 204 ITR 312 (Bom) • CIT vs. Govindram Bros. Pvt. Ltd. [1983] 141 ITR 626 (Bom)
In the light of the above, the Appellant moves the additional grounds appended herewith in Annexure A for due adjudication by your Honours. It is humbly submitted that the Appellant may please be allowed to raise the aforementioned additional grounds as the same are essential for proper dispensation of substantial justice. For this act of kindness the Appellant shall be ever grateful. Hope your Honours will accede to our request. The Appellant is separately providing a copy of the additional grounds to the Department Representative. Thanking You Yours faithfully For RBS Services India Private Limited Sd/- (Joint Managing Director)”
Ld. DR opposed the admission of these additional grounds pointing out that no substantial reasons have been assigned by the assessee which prevented it from producing necessary evidence/plea before ld. TPO.
After hearing both the parties, we consider it in the interests of justice in view of the decision of Hon’ble Punjab & Haryana High Court in the case of Quark Systems India (P.) Ltd. (supra), the relevant para from which has been reproduced by assessee in its application under Rule 11 of the Income Tax Rules, 1963 noted above, to admit these additional grounds as the same are essential for imparting substantial justice to assessee. The assessee has filed detailed analysis in this regard which Assessing Officer will consider.
The matter is restored back to the file of ld. Assessing Officer/TPO to examine the assessee’s contentions in this regard. In the result, the additional ground no.1 is allowed for statistical purposes.
As regards the additional ground no.2, ld. counsel pointed out that working capital adjustment has been allowed by ld. DRP in assessment year 2007-08 and in the additional ground the assessee has given all details and, therefore, this matter may be restored back to the file of ld. Assessing Officer/TPO for examining the assessee’s plea and to allow the working capital adjustments. After hearing both the parties, this additional ground is admitted for examining the assessee’s contentions. This ground is also allowed for statistical purposes.
In the result, the appeal of the assessee in is partly allowed for statistical purposes.
ITA No.5443/Del/2011 (A.Y. 2007-08):
This appeal filed by the assessee is directed against the order dated 27.09.2011 passed by the Assessing Officer u/s 144C/143(3) of the Act relating to assessment year 2007-08 pursuant to the direction of the Dispute Resolution Panel-II, New Delhi.
The assessee has filed application under Rule 11 of the Income Tax Rules for admission of additional grounds of appeal, which is reproduced hereunder :-
“2.11 That on the facts and circumstances of the case, M/s Infosys Technologies Limited, Wipro Limited, KALS Info Systems Limited and Helios & Matheson Information Technology Limited may be rejected for the purposes of comparability analysis as these companies are not comparable to the Appellant in terms of functions performed, assets employed and risk assumed.”
The assessee has also filed an application for admission of additional evidence in support of additional grounds.
At the time of hearing, ld. counsel pointed out that the additional ground is identical to ground raised in appeal for assessment year 2006-07 except that TCS is not there in the additional ground. After hearing both the parties, the additional ground raised by the assessee is admitted as the reasons are identical for raising the same as in assessment year 2006-07.
Following the observations made in the assessment year 2006-07, this additional ground is restored to the file of the ld. Assessing Officer/TPO for considering the assessee’s contentions. In the result, the additional ground is allowed for statistical purposes.
The main grievance of assessee in this appeal is in regard to directions issued by ld. DRP while disposing of 154 petition. The assessee was primarily aggrieved by inclusion of Helios & Matheson Information Technology Ltd. and exclusion of VMF Soft Tech Ltd.. Ld. counsel pointed out that VMF Soft Tech Ltd. has been rejected by ld. DRP on the ground that it was following different business model observing that the company had outsourced its activity. Ld. counsel pointed out that this is factually incorrect because in assessment year 2008-09, ld. DRP has accepted this company’s business as comparable to assessee’s business. The same is also evident from the response of VMF Soft Tech Ltd. sent u/s 133(6) of the Act which was annexed along with the order passed under Rule 13 of Income Tax (DRP) Rules, 2009. After hearing both the parties, we restore this matter back to the file of the ld. Assessing Officer/TPO to examine the assessee’s contention and if it is found that VMF Soft Tech Ltd. has not outsourced its activity then to include in the list of comparable companies.
The next ground no.2.1 pressed at the time of hearing is reproduced hereunder :-
“2.1 By making modification to the set of comparable companies identified by the Appellant by rejecting comparables on grounds of functional dissimilarity. In this regard, the Ld. TPO/ DRP have rejected comparable on erroneous basis without following a cogent economic basis.”
Ld. counsel pointed out that the main contention of assessee is that the following two comparables have wrongly been rejected by TPO : (a)
Goldstone Technologies Limited and (b) Computech Information Ltd.. He pointed out that both these comparables have been accepted by ld. TPO and DRP in assessment year 2006-07 as is evident from page 30-31 of the Paper Book. Ld. DRP rejected these comparables observing that functional similarity has to be examined in particular year.
We have considered submissions of both the parties. From the TPO’s order for the assessment year 2006-07, it is evident that Goldstone Technologies Limited and Computech Information Ltd. were included in the final list of comparables. However, no reason has been assigned for excluding these comparables from the final list of comparables for assessment year 2007-08. Unless any functional dissimilarity had arisen in assessment year 2007-08 in respect of these two comparables, which warranted exclusion of these two comparables, they should not have been excluded particularity in view of the principle of consistency. We, therefore, restore this matter to the file of the ld. Assessing Officer/ TPO to examine the assessee’s contentions in the light of functional dissimilarity of these comparables and, if, the same are found to be in line with the assessee then these two comparables have to be included to the list of comparability.
In the result, this ground is allowed for statistical purposes.
The next issue pressed at the time of hearing is in regard to ground no.2.8, which is reproduced hereunder :-
“2.8 By using an incorrect computation of Net Cost Plus (“NCP”) margin of selected comparable companies and accordingly erred in computing the amount of adjustment on account of transfer price.”
Ld. counsel pointed out that foreign exchange gain has been taken as non-operating income while computing the operating profit though foreign exchange loss, in assessment year 2006-07, has been considered as operating loss. Further, in assessment year 2008-09, this has been considered as operating income and in advance pricing agreement it has been considered as operating income.
After hearing both the parties, we direct the ld. Assessing Officer/TOP to compute the operating income of assessee by including foreign exchange gain as operating income of assessee. Thus, this ground is allowed.
In the result, the appeal of the assessee in is partly allowed for statistical purposes.
Resultantly, both the captioned appeals of the assessee are partly allowed for statistical purposes. Order pronounced in the open court on this 10th day of January, 2017.