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Income Tax Appellate Tribunal, DELHI BENCH “I-1” NEW DELHI
Before: SHRI S.V. MEHROTRA : & SHRI KULDIP SINGH :Shri Anuj Arora CIT(DR) Shri Ajay Vohra Sr. Advocate Shri Neeraj Jain Adv. Shri Abhishek Agarwal CA Shri Manish Kumar CIT(DR)
Date of hearing : 08/08/2016. Date of order : 23/08/2016. O R D E R PER S.V. MEHROTRA, A.M:
This is revenue’s appeal against CIT(A)-XX, New Delhi’s order dated 15.02.2013 in appeal no. 89/2011-12/CIT(A)-XX, relating to AY 2009-10.
Brief facts of the case are that the assessee company, in the relevant assessment year, was engaged in the business of development of computer software. The assessee filed return of income declaring income of Rs. 3,25,396/-. The AO noticed that during the year under consideration the assessee had entered into international transaction of Rs. 11,34,95,073/- with M/s Interra Information Technologies Inc., USA. The AO vide his letter dated 9.12.2011 required the assessee to work out the value of international transaction in view of order passed by the Addl. DIT, TPO-1(5) for AY 2009-10, observing as under:
“As you may be aware, a reference u/s 92CA(1) of the IT Act, 1961 was sent in your case to Joint DIT, Transfer Pricing Officer-1(5), New Delhi. The order u/s 92CA(3) of the Act dated 31/10/2011 has been received from the Addl. DIT, TPO, New Delhi in which it has been found that the value of International Transactions reported by you requires upward adjustment by Rs. 3,52,02,752/- for the detailed reason given in the order. In view of this, you are required to work out the value of your international transactions in view of order passed the Addl. DIT, TPO-1(5) accordingly for AY 2009-10.” 2.1. The assessee in its reply dated 19.12.2011, reproduced at pages 2-3 of the assessment order, pointed out that assessee was required to compute the ALP of the international transaction, undertaken by the assessee during FY 2008-09 in accordance with the order passed by the TPO for AY 2008-09.
The assessee, inter alia, pointed out that comparables used for determination of ALP in a particular year may not be appropriate comparables for determination of ALP in the succeeding year. Accordingly, it was submitted that ALP of the international transactions undertaken by the assessee during FY 2008-09 cannot be computed on the basis of comparables selected for the purpose of computing the ALP of the international transactions undertaken during FY 2007-08. Assessee further pointed out that it had undertaken detailed bench marking analysis in accordance with the provisions of Chapter X of the act. Assessee compared the operating profit margin/OC earned by it from transactions undertaken with its AE with the operating profit margin earned by it from transactions with unrelated entities. The result of this analysis was as under:
OP/TC% from transitions with unrelated entities 9.78% OP/TC % of inferra infotech 8.03% 2.2. Further, it was pointed out that assessee had also undertaken external bench marking wherein operating profit margin earned by the assessee from transactions with AEs was compared with the operating profit margin earned by comparable uncontrolled entities and the results were as under:
Average of OP/TC% comparable companies (-) 1.07% OP/TC% of Interra Infotech 5.40% 2.3. Accordingly, it was submitted that international transactions of provision of software development services entered into by Interra Infotech with Interra IT Inc. were, therefore, at ALP applying TNMM.
2.4. The AO noted that assessee had selected following 11 comparables on the basis of operating profit/ cost (OP/Cost):
S. Company name Year Sales Operating Operating OP/OC% No. Profit Cost 1 Melster Information Technologies Ltd. 2009-10 18.75 -0.53 19.93 -2.66% 2 Saven Technologies Ltd. 2009-10 3.66 0.1 3.57 2.80% 3 Intense Technologies Ltd. 2009-10 17.41 -0.65 17.82 -3.65% 4 Goldstone Technologies Ltd. 2009-10 23.08 -6.26 30 20.87% 5 Compulink Systems Ltd. 2009-10 14.56 -1.46 15.37 -0.50% 6 Religare Technova Global Solutions 2009-10 19.28 -7.81 28.36 -27.54% Ltd. 7 Zylog Systems (India) Ltd. 2009-10 1.25 0.01 1.31 0.76% 8 Cethar Consultancy Services Pvt. Ltd. 2009-10 2.12 0.04 2.31 1.73% 9 Akshay Software Technologies Ltd. 2009-10 12.23 0.93 11.5 8.09% 10. Element K India Pvt. Ltd. 2009-10 16.04 2.1 14.2 17.79% 11 Synetairos Technologies Ltd. 2009-10 6.04 1.28 5.28 24.24% Average PLI (OP/OC%) -1.07% PLI (OP/OC%) of Interra Infotech (refer 5.40% Annexure II)
2.5. The AO did not accept the assessee’s contention and adopted the comparables selected by the TPO for AY 2008-09, which were as under:
S. Name of the Sales OP to % of % of Onsite % of % of EMP No company (Rs. In total RPT exports Revenue R&D marketing cost Cr.) cost over over (%) over over sales (%) sales sales sales 1 Avani Cincon 3 21.65 8.08 100 0 0 1.20 63.52 Technologies 2 Bodhtree 10.42 19.14 0 96.15 0 0 1.06 58 Consulting Ltd. 3 Celestial 20.21 87.94 0 91 0 0 5.34 38.61 Biolabs 4 e-Zest 7.66 28.95 0 94.74 0 0 0.89 65.37 solutions Ltd. 5 Flextronics 958 8.07 5.67 95.8 17.45 0 1.15 63.2 (Aricent) 6 iGate Global 781.51 13.9 1782 100 50.14 0 0.54 58.41 Solution Ltd.
Infosys 15648 40.41 7.78 98.6 50.9 0 0.18 74.25 8 Kals 2.05 41.94 0 100 0 0 0.10 42.28
Information Systems Ltd. (seg) 9 LGS Global 136.52 26.64 0 100 46.8 0 0.00 89.8 Ltd. 10 Mindtree Ltd. 572.96 17.51 0.03 93 26.97 0 0.91 66.79 (seg) 11 Persistent 409.88 27.23 3.7 93.93 5.555 0 0.08 73.43 Systems Ltd.
2.6. He pointed out that since the assessee was engaged in the same business and there were no abnormal changes, in the circumstances and facts of the case, the comparables adopted by the TPO for AY 2008-09 were to be applied for computing ALP. He computed the required adjustment to the ALP as under:
Arithmetic mean PLI : 26.16% Less: Working capital adjustment : -0.96% Adj.: Arithmetic mean APLI : 25.20% Operating cost Rs. 12,40,05,000/- Arm’s Length Margin 25.20% Arm’s Length Price (ALP) @ % of operating cost 15,52,54,260/- Price charged in the international transactions Rs. 11,34,95,073/- Adjustment u/s 92CA Rs. 4,17,59,187/- 2.7. Being aggrieved, the assessee preferred appeal before ld. CIT(A), who, after elaborate consideration of all aspects including the profile of comparables furnished by assessee in its TP study as well as the functional analysis of comparables selected by TPO and also after examining the internal bench marking analysis of assessee, concluded that the PLI earned by the assessee from the transactions with uncontrolled entities was within ± 5% range of the operating margins of 8.03% earned from transactions with AEs.
2.8. As regards external comparables, ld. CIT(A) observed that applying TNMM the PLI of assessee was 5.40% as against average PLI of -1.07% noted earlier. He further observed that only two companies, namely, Saven Technologies Ltd. and Zylog Systems (India) Ltd. were having declining sales considering March 2007 as the base year. He pointed out that even if these two companies were excluded the PLI of the remaining 9 companies comes to -1.71% with the single year data. He, accordingly, upheld the TP analysis of assessee.
2.9. Aggrieved, the department is in appeal before us and has taken following ground of appeal:
“Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting an addition of Rs. 4,17,59,187/- made by the AO for the year under consideration on account of arm’s length price determined by TPO for the A.Y. 2008-09 as there was no abnormal changes in the circumstances of the case.”
At the outset ld. CIT(DR) filed before us a copy of tribunal’s order for AY 2008-09 in assessee’s own case and submitted that the matter has been restored back to the file of TPO and since AO did not refer to TPO in this year as transaction was less than Rs. 5 crores, but he adopted the reasoning for AY 2008-09, therefore, in view of Tribunal’s decision, matter should be restored.
Ld. counsel for the assessee vehemently opposed the submissions advanced by ld. CIT(DR) and submitted that ld. CIT(A) has undertaken detailed analysis in regard to all the comparables adopted in AY 2008-09 by TPO and has, inter alia, pointed out that companies having large turnover should not be taken as comparable to this case. Further, he pointed out that ld. CIT(A) has examined the companies selected by assessee and after detailed examination of profile of each comparable, concluded that none of the companies selected by the assessee had negative worth.
4.1. He further observed that prowess data base was accessed to verify the claim of the assessee regarding profile of the company and their functions.
He elaborately examined the three years sales and net worth position of the 11 companies selected by the assessee and concluded that apart from two companies namely Saven Technologies Ltd. and Zylog Systems (India) Ltd., which were having declining sales considering March 2007 as the base year, other companies had positive net worth. He further pointed out that even if these two companies were excluded, the PLI of the remaining 9 companies comes to -1.71% with the single year data.
4.2. Ld. counsel pointed out that ld. CIT(A) has examined the issue thread-bare from all facet including determining the ALP with reference to external comparables as well as internal bench marking. He further pointed out that as far as decision for AY 2008-09 is concerned, the matter was restored to the file of AO because Tribunal noticed that AE had charged revenue of Rs. 26.63 crores from the customers whereas value of ALP was determined by the TPO considering the adjustment in the case of the assessee and M/s Interra information Technologies India Pvt. Ltd. was 31.21 crores. Thus, the total value of ALP exceeded the revenue charged by AE from customer. Tribunal, after considering various decisions held that adjustment in no case could exceed the amount received by AE from third party. However, since details of AE available on record were only up to 31st March 2007 and not up to 31st March 2008, the matter was restored to the file of AO directing the assessee to provide all documents to find out the revenue earned by the AE up to 31st March 2008. In these circumstances, the remaining grounds were not adjudicated. He, therefore, submitted that there is no reason to restore the matter to the file of AO in the present assessment year.
We have considered the submissions of the parties and perused the material available on record. We are in agreement with the observations of ld. CIT(A) that the AO was not justified in adopting the comparables selected for AY 2008-09 without undertaking proper analysis. We have gone through the detailed order passed by ld. CIT(A) and find that he has elaborately considered external bench marking analysis as well as internal bench marking analysis of assessee and also considered the comparables selected by TPO. He has also considered in detail the profile of comparables selected by assessee and in that regard we find considerable force in the submissions of ld. counsel for the assessee as noted earlier. Ld. CIT(DR) has not controverted any fact mentioned by ld. CIT(A) in his order for arriving at his conclusion and, therefore, since the PLI on the basis of external benchmarking was 5.40% of assessee as compared to -1.71% of comparables and on the basis of internal bench marking the PLI earned by the assessee from internal transaction entered into with AEs was 8.03% while the PLI from transactions with for unrelated parties was 9.78%, therefore, international transaction undertaken by the assessee was at ALP.
We, accordingly, confirm the order of ld. CIT(A).
5.1. As far as ld. CIT(DR)’s plea that matter has been restored back to the file of AO in AY 2008-09 is concerned, we are in agreement with the submissions advanced by ld. counsel for the assessee that in AY 2008-09 the matter was restored under entirely different scenario and in this year the said exercise has no relevance to the facts obtaining in this year. Accordingly, we see no reason to interfere with the order of ld. CIT(A) and the same is upheld.
In the result revenue’s appeal is dismissed. Order pronouncement in open court on 23/08/2016.