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Income Tax Appellate Tribunal, DELHI BENCH ‘I’, NEW DELHI
This is an appeal by the assessee against the order dated 26/10/2015 of the AO passed u/s 143(3) / 144C of the Income Tax Act, 1961 (hereinafter referred to as the “Act” ). Following grounds have been raised in this appeal :-
“ 1. That on facts and in law, the impugned order/directions passed by the Income Tax Officer, Ward - 23(1), New Delhi ("Learned AO")I Deputy Commissioner of Income Tax - Transfer Pricing Officer - 111(1 )(1), New Delhi ("Learned TPO")I Hon'ble Dispute Resolution Panel "Hon'ble DRP"), making an addition of INR 1,39,12,291/- to the total income of the Appellant on account of adjustment in the arm's length price is bad in law.
That on facts and in law, the Ld. DRP/TPO/AO have erred in computing the total income of the Appellant at INR 1,39,12,291/- as against the returned income of INR NIL by making an upward adjustment of INR 1,39,12,291/- with respect to Arm's Length Price of the international transaction. 3 That on facts of the case and in law, the Ld. TPO/AO have erred in not complying with the directions of the Hon'ble DRP while passing the impugned order. 4 That on facts of the case and in law, the DRP/TPO/AO have erred in arbitrarily rejecting the segmental accounts prepared by the Appellant for benchmarking the international transaction pertaining to provision of software consulting and support services. 5 That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant wherein the Appellant had applied Cost Plus Method ('CPM') to compare the gross margins earned by the Appellant from provision of software consulting and support services to associated enterprises and non-associated enterprises. 6 That on facts of the case and in law, the Ld. TPO has erred in applying Transactional Net Margin Method (TNMM') as the Most Appropriate Method ('MAM') for benchmarking the international transaction instead of CPM adopted by the Appellant.
Without prejudice, that on facts of the case and in law, the Ld. DRP/TPO/AO have erred in selecting comparable companies on an ad-hoc basis without conducting a detailed FAR analysis, for benchmarking the international transaction. 8 Without prejudice, that on facts of the case and in law, the Ld. DRP/TPO/AO have erred in selecting companies in the final set of alleged comparables which have different business / operating models as compared to the Appellant. 9 Without prejudice, that on facts of the case and in law, the Ld. DRP/TPO/AO have erred in conducting a fresh economic analysis by using arbitrary filters for identifying comparable companies to the Appellant. 10 Without prejudice, that on facts of the case and in law, the Ld. DRP/ TPO/AO have erred in using single year data for financial year ("FY") 2010- 11 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. 11 Without prejudice, that on facts of the case and in law, the Ld. DRP/TPO/AO have failed to make suitable adjustments to account for differences in the capacity utilization ignoring the fact that the Appellant is in the initial years of operation and an adjustment for capacity utilization should have been allowed. 12 Without prejudice, that on facts of the case and in law, the Ld. DRP/TPO/AO have failed to make appropriate adjustments to account for differences in working capital employed by the Appellant vis-a-vis the comparable companies.
13. Without prejudice, that on facts of the case and in law, the Ld. DRP/TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the appellant vis-a-vis the alleged comparables for the international transaction and in the process inter-alia neglected the Indian transfer pricing regulations, international guidelines on transfer pricing and judicial precedence in this regard.
14. That on the facts and in the circumstances of the case, the Ld. AO has erred in initiating penalty under section 271 (1 )(c) of the Act, as a onsequences of the addition made in the impugned order passed under section 143(3) read with section 144C of the Act.
15. That on the facts and in the circumstances of the case, the Ld. AO has erred in charging interest under section 234 of the Act, as a consequence of the addition made in the impugned order passed under section 143(3) read with section 144C of the Act.”
2. In the present case, ground nos. 1 and 2 are general in nature. Ground nos. 3 and 9 to 15 were not pressed so these grounds do not require any comments on our part.
3. Vide ground no. 4 to 7, the grievance of the assessee relates to the arm’s length price adjustment (ALP) by applying Transactional Net Margins Method (TNMM) as most appropriate method for bench marking the International Transaction instead of Cost Plus Method (CPM) adopted by the assessee and selecting the companies in final set off alleged comparables which have different benefit / operative models than the assessee and rejecting the segmental accounts prepared by the assessee for benchmarking the international transaction pertaining to provosion of Software Consulting and Support Services.
Facts of the case in brief are that the assessee derived income from Software Consulting and Support Services, it is a 100% subsidiary of Seven N A/S, Denmark. The assessee filed the return of income on 30.9.2011 declaring nil income which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred as “Act”). Subsequently, the case was selected for scrutiny, the AO made a reference u/s 92CA(3) of the Act to the TPO to determine the arm’s length price (ALP) in respect of International Transactions entered into by the assessee. The TPO vide his order dated 12.01.2015 and order u/s 154/92CA (3) dated 09.02.2015 worked out the adjustments of Rs. 1,39,12,291/- after taking into account the comparables as provided by the assessee and his own comparables, as well asby applying TNMM method instead of assessee’s Cost Plus Method. The contention of the assessee before the TPO was that the TNMM should not be considered as the most appropriate method as the international transaction undertaken by the assessee, during the relevant assessement year with its Associated Enterprises (AE’s) had been justified to be at arm’s length price (ALP) under the CPM method. The assessee gave the justification in this regard by comparing the gross margin earned therein with the gross margin earned by the assessee on transactiosn undertaken with the Non-AE’s. The assessee had earned a gross margin of 38.65% under AE segment service in comparison to the margin of 36.63% earned under the Non-AE segment. The TPO rejected the contention of the assessee by observing as under :-
“ The objection of the assessee is considered but not acceptable. As a matter of fact, the assessee has acknowledged that no segmental profit and loss account was prepared w.r.t services provided to the AE’s and no AE’s. In such a scenario, the application of cost plus method is extremely difficult as the gross profit margin is required to be charged on the direct and indirect costs identified. For application of CPM, gross profit margin of comparable entitites cannot be identified in India from the data available in public domain as there is no requirement for disclosure of gross profit margin. Instead of applying cost plus method with numerous assumptions it is more appropriate to apply TNMM and therefore assessee’s contention to apply CPM is rejected.”
The TPO finally selected the following comparables for benchmarking the international transactions relating to Software Development Services :-
S. No. COMPANY NAME OP/OC(5) (Corrected)
I Akshay Software Technologies Ltd. 0.86% ii E-Infochips 56.44% iii Evoke Technologies Pvt. Ltd. 8.11% iv E-Zest Solutions 39.98% v Infosys Ltd. 43.39% vi Larsen & Toubro Infotech Ltd. 18.40% vii LGS Global Limited 14.11% viii Persistent Systems & Solutions 21.51% Ltd.(Merged) ix Persistent Systems Ltd. 23.08% x R S Software (India) Ltd. 16.20% xi Sasken Communications Technologies 24.33% Ltd. xii Wipro Technology Services Ltd. 54.42% (Merged) xiii Celstream Technologies Ltd. Ltd. 13.20% xiv Acropetal technologies Ltd. (Seg.) 22.06% xv Mindtree Ltd. (Seg) 10.29% xvi Sankhya Infotech Limited (Seg.) 26.20% xvii Tata Elxsi Ltd. (Seg.) 26.20% xviii Thirdware Sol (Seg) 18.30% xix Zylog Systems Limited 28.74% Average 23.81%
6. The TPO worked out the adjustment on account of arm’s length price as under :- Particulars Amount (INR) Operating Cost 7,11,10,000 Arm’s Length Margin (%) 23.81% Arm’s Length Margin Rs. 1,69,31,291 Arm’s Length Price 8,80,41,291 Price charged by the assessee 7,41,29,000 5% of Price charged in international 37,06,450 transaction Difference between ALP and Price 1,39,12,291 charged by assessee Difference for which adjustment is 1,39,12,291 required to be made
7. The AO accordingly passed the draft assessment order by proposing an adjustment of Rs. 1,39,12,291/-. Being aggrieved the assessee filed the objection to the proposed adjustment before the DRP who did not find any merit in the objections of the assessee by observing that the TPO had dealt with the assessee’s contentions in respect of all the points raised by the assessee by giving elaborate reasons and that a clear cut finding has been given by the TPO that reliable GP Margin could not be identified in India from the Data available in public domain hence TMNN was appropriate over CPM, the DRP also observed that full opportunity was given to the assessee to present its case. The AO thereafter, by keeping in view this fact that the objections raised by the assessee where rejected by the DRP vide order dated 31.8.2015 retained the adjustments as has been made by the TPO and made the addition of Rs. 1,39,12,291/- on account of arm’s length price adjustment.
Being aggrieved the assessee is in appeal. The Assessee has furnished an application dated 3rd March, 2016 under Rule 29, of the Income-tax (Appellate Tribunal), Rules 1963 for admission of additional evidences stating therein as under : “ 4. Seven N A/S (‘7N’) is a Copenhagen Denmark based IT consulting and training company with 20 years’ of experience. 7N provides IT consulting services in-house remote development and related services. 7N is also functional in IT Education & Training. It is respectfully submitted that 7N holds 99.99% equity shares of Appellant Company. 5. During the relevant assessment year, Appellant had entered into the following international transaction with its associated enterprises (‘AE’) – Description of Value of Tested Party Method used Associated the transaction Enterprise transaction (Rs.) Provision of 7,41,29,154 7N India Cost Plus 7N software Method consulting and support services Reimbursement 95,002 Not Cost-to-cost 7N of expenses Applicable
The learned Assessing Officer (“AO”) referred the matter to Transfer Pricing Officer (“TPO”) to determine arms’ length price of international transaction entered into by the Appellant, Vide order dated 12 January, 2015, the TPO added Rs. 1,39,12,291/- to the total income of the Appellant as adjustment on account of the arm’s length price (“ALP”) of the international transaction pertaining to provision of software consulting and support services by the Appellant to its AE which was upheld by the Dispute Resolution Panel (“DRP”) vide directions dated 31 August, 2015. AO passed the final assessment order dated 26 October, 2015 in line with the directions of DRP.
7. That the Appellant had benchmarked its ‘international transaction’ pertaining to rendering of software consulting and support services by using Cost Plus Method. The TPO however rejected the most appropriate method applied by the Appellant for benchmarking the subject transaction, by erroneously concluding that segmental data was not available with respect to the services provided by the Appellant to the AE & non-AEs. In this regard, we respectfully submit that segmental data was duly available & produced before the TPO (segmental details are produced at para 5 on page 3 of TPO’s order). 8. We respectfully submit that during the proceedings before the TPO, the Appellant was asked to furnish segmental data. Accordingly, the Appellant filed segmental data before the TPO, and vide its submissions dated 8 January, 2015 (Page 24 of the paper book) and 10 December, 2014 ( Page 53 and 54 of the paperbook) had requested the TPO to consider the net operating margins of internal comparable (internal TNMM) to benchmark the subject transaction. 9. This contention was placed by the Appellant without prejudice to its primary contention that gross margins of internal comparable (internal CPM) should be considered by the TPO for benchmarking the subject transaction. The TPO failed to discuss the internal TNMM in his order and rejected the benchmarking analysis based on internal comparable data without giving the Appellant a proper opportunity of being heard, thereby depriving of its right to natural justice.
10. It is respectfully submitted that unaudited data was duly available with TPO while analysing the transaction; however, he had not given much wieghtage to the same. For the sake of completeness of arguments and to demonstrate results more emphatically, vide the present application the appellant wishes to place on record the audited result. The segmental data required detailed analysis of direct and indirect costs associated with arrangements entered into by 7N India with non-associated enterprises located within India and outside India. The segmental data of 7N India (containing geographic segmentation with regard to comparable data) for AY 2011-12 has been audited by an independent Chartered Accountant.
The present application is being filed to seek liberty of the Tribunal to consider the aforementioned segmental data of 7N India for FY 2010-11 which has been duly audited by an independent Chartered Accountant. The audited segmental results of 7N India for AY 2011-12 is enclosed as Annexure – 2.
12. We respectfully submit that even though the TPO has rejected the internal comparability analysis of the Appellant in the TP Order, the TPO has considered the net operating margin earned by 7N India from its arrangement with associated enterprise for the purpose of benchmarking the subject transaction and accordingly, determined the quantum of transfer pricing adjustment to the income of the Appellant for AY 2011-12.
13. While adjudicating the issue of rejection of Cost Plus Method as the most appropriate method for determining the ALP of the international transaction entered into by the Appellant, the DRP rejected Appellant’s objections without passing a speaking order and upheld the approach of TPO in applying TNM Method. The DRP merely observed that TNMM gives a very pointed and straight comparison as ultimately it is the margins from a transaction that help in determination of it being at arm’s length or not, therefore, the Appellant’s objections were dismissed by the DRP as untenable.
14. Being aggrieved by the final assessment order dated 26 October, 2015, the Appellant preferred the present appeal before this Hon’ble Tribunal which has been registered as .
15. We wish to submit that once Profit Margin of AE & Non-AE segments are available for the purpose of benchmarking the subject international transaction, internal comparables ought to have been preferred as it is now a settled position in law that internal comparables are preferred over external comparables.”
The reliances is placed on the following case : “ a) Tecnimont ICB (P) Ltd. V. ACIT, & 5085/Mum/2010, ITAT Mumbai (Third Member) b) Birlasoft India Ltd. V. DCIT, 44 SOT 664, ITAT Delhi c) Sony Ericsson Mobile Coomunications India Pvt. Ltd. Vs. CIT-III [(2015) 374 ITR 118] (Del HC) d) Diageo India Private Limited vs. DCIT Mumbai (ITA Nos. 7932/Mum/2011) e) Cable & Wireless (India) Ltd. Vs. ADIT Mumbai (ITA No. 822/Mum/2013) f) Genisys Integrating System (India) Private Limited vs. DCIT Bangalore (ITA No 908/Bang/2011) g) Birla Soft (India) Limited (formerly Birlasoft Limited) vs. DCIT, New Delhi (ITA No. 284/Del/2013) h) Eaton Fluid Power Limited (ITA No. 1623/PN/2011) i) Valtech India Systems Private Limited [IT(TP)A 22/Bang/2014] j) Agila Specialities Pvt. Ltd. [IT(TP)A No. 214/Bang/2015] k) e4e Business Solutions India Pvt. Ltd. [IT(TP)A No. 324(Bang)/2015]”
It has also been stated in the aforesaid application as under :- “ 18, Thus, it is clear from the above precedents that Internal TNMM is to be preferred over External TNMM. In the instant case, the necessary and reliable data which is required for benchmarking the subject international transaction of 7N India with its AE & Non-AE is available, thus, internal comparable is to be preferred over External comparables. 19. It is further submitted that to do complete justice and for adjudication of Ground No. 4 to 8 of the present appeal, it is necessary to take the present additional evidence on record.”
11. A prayer had been made to admit the additional evidences under rule 29 the Income Tax Appellate Tribunal Rules, 1963. Reliance has been placed on the decision of the ITAT, Delhi in the case of UOP LLC reported at 108 ITD186. The assessee furnished the copies of segmental profit and loss accounts in relation to transactions with the AE and non-AE’s for the revenue and associated cost for arriving at segmental profit and loss which has been audited by M/s. S.S.Kothari Mehta & Co., The Director of the assessee has also furnished an affidavit dated 9th March, 2016 stating therein as under :-
“ 1. That I am Director of M/s. Seven N Consulting Private Limited, and am fully conversant with the facts of the case relating to the Assessment Year (“AY”) 2011-12 and I am thus fully competent to swear and file this affidavit.
2. That Seven N Consulting Private Limited have received on 3 March, 2016, a certificate of audit carried out by an independent Chartered Accountant of its segmental financial results for the financial year ended on 31st March, 2011.
That Seven N Consulting Private Limited has duly furnished the same to the Hon’ble ‘ I-1’ Bench of the Income Tax Appellate Tribunal vide application dated 3 March, 2016 under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 (Rules) for admission of audited segmental results as additional evidence. 4. That as per the general practice followed by Seven N Consulting Private Limited and in terms of AS-17, the company was not required to maintain separate segmental accounts in-as-much as the nature of services in respect of transactions undertaken with Seven N A/S, Denmark (related party) and the unrelated parties. However during the course of Transfer Pricing Assessment the Transfer Pricing Officer had rejected the Most Appropriate Method selected by Seven N Consulting Private Limited on the ground that the segmental data was not audited. Hence, on advice in the appeal before the Hon’ble Tribunal the audited segmental results have now been obtained from an independent Chartered Accountant.”
During the course of hearing the ld. Counsel for the assessee reiterated the contents of the aforesaid application move for admission of the additional evidences and further submitted that at the time of proceedings before the TPO audited segmental accounts were not available, therefore, the assessee was prevented by reasonable cause for producing the same before the TPO. It was further stated that the assessee furnished segmented data vide submission dated 08.01.2015 before the TPO for considering the internal comparables but the TPO rejected those comparables as the same were not audited. However, the assessee now got the financial statements audited for arriving at the segmented data by M/s S.S.Kothari Mehta & Co. therefore, these are to be considered. In his rival submissions, the Ld. DR objected the admission of the additional evidence and stated that the accounts were audited in respect of segmental results after a gap of 5 years so these are not to be admitted, particularly when the assessee did not furnish the same before the DRP/AO./T.P.O.
We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case it is noticed that the assessee requested the TPO to consider the segmental P & L Account in relation to transaction with associated enterprises (AE) and Non-AE’s for the revenue of associated cost for arriving at segmental P & L vide letter dated 08.01.2015. However, the TPO did not accept the request of the assessee since the segmental data relating to internal comparables were not audited. Now the assessee got the segmental profit and loss account audited by M/s. S.S. Kothari Mehta & Co. in pursuance of the provisions of Income-tax Act, 1961 and the provisions of Companies Act, 1956 for the year ended on 31st March, 2011 and furnished the copies of the same as an additional evidence.
In our opinion, to resolve the present controversy, the additional evidences furnished by the assessee are relevant and go to the root of the matter, so these deserves to be admitted. Accordingly, the additional evidences is furnished by the assessee are admitted under Rule 29 the Incom-tax (Appellate Tribunal) Rules, 1963. However, these evidences furnished by the assessee first time before this bench of the Tribunal were not available to the authorities below. We, therefore, deem it appropriate to set aside the issue under consideration to the file of the TPO to be adjudicated afresh inaccordance with law, after providing due and reasonable opportunity of being heard to the assessee. We also direct the TPO to consider the additional evidences, furnished by the assessee while adjudicating the issues under consideration.
15. As regards to ground no. 8, the ld. Counsel for the assessee submitted that it is consequential in nature and directly relates to the issues involved in ground no. 4 to 7. Accordingly, the issue raised by the assessee in ground no. 8 is also remanded back to the file of the TPO to be adjudicated along with the issues raised in ground no. 4 to 7.
In the result, appeal of the assessee is allowed for statistical purposes. (Order Pronounced in the Court on 08/06/2016).