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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”, HYDERABAD
Before: SHRI K.NARASIMHA CHARY & SHRI MADHUSUDAN SAWDIA
PER MADHUSUDAN SAWDIA, A.M.: These cross-appeals are filed by Azingo Soft Systems India Private Limited (“the Assessee”) and Revenue for the A.Y. 2010-11 against the order of the learned Assessing Officer (“ vLd. AO” ) dated 30-01-2015, passed u/s.143(3) r.w.s. 144C
I.T.A. Nos. 460 & 331/Hyd/2015 of the Income Tax Act, 1961 (“the Act”), consequent to the directions of the Dispute Resolution Panel , Hyderabad [“Ld. DRP”]. For the sake of convenience, both these appeals are decided by this common order.
At the outset, it is seen that, there is a delay of 1 day in filing of this appeal for which the Revenue has filed a condonation petition along with affidavit explaining the reasons for such delay. After considering the contents of the condonation petition and after hearing the Ld. AR the delay of 1 day in filing of this appeal by the Revenue is condoned and the appeal is admitted for adjudication.
The assessee has raised the following grounds before the Tribunal:
“1. That on the facts and circumstances of the case, the final assessment order dated 30 January 2015 passed by the Deputy Commissioner of Income-tax, Circle 1 (1), Hyderabad ('AO') u/s 143(3) r.w.s 144C of the Income- tax Act, 1961 ('Act') read with order dated 24 September 2013 issued by Transfer Pricing Officer ('TPO') u/s 92CA(3) of the Act, pursuant to the directions dated 28 November 2014 by Dispute Resolution Panel, Hyderabad ('DRP') u/s 144C(8) of the Act is bad in law and void ab-initio.
I.T.A. Nos. 460 & 331/Hyd/2015
General 2. That on the facts and circumstances of the case and in law, the AO /DRP erred in confirming transfer pricing adjustment of Rs 15,82,39,054 with respect to provision of Software Development Services ('SOS') by the Appellant to its Associated Enterprise.
3. That on the facts and circumstances of the case and in law, the AO / DRP erred in rejecting transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('Rules') and undertaking a fresh economic analysis during the course of assessment proceedings and thereby making an adjustment of Rs. 15,82,39,054 to the international transactions. Error in computation of net margin of the Appellant 4. That the AO/DRP erred by considering the cost incurred post termination of agreement as operating cost which does not relate to the services provided to AE, while computing Profit Level Indicator of the Appellant in respect of international transaction with the AE. 5. That the AO / DRP erred by considering cost at entity level instead of operating cost for AE segment while making transfer pricing adjustment in respect of international transaction with AE. Selection of uncomparable companies 6. That on the facts and circumstances of the case and in law, the AO /DRP erred in accepting following companies as comparable companies as selected by the TPO: a) E-Infochips Bangalore Ltd; b) Kals Information Systems Ltd; c) E-Zest Solutions Ltd; d) Tata Elxsi Ltd; and e) Kuliza Technologies Private Ltd
I.T.A. Nos. 460 & 331/Hyd/2015 f) Comp-U-Learn Tech India Ltd, g) Mindtree Ltd (Seg); h) Persistent Systems Ltd; i) Sasken Communications Technologies Ltd; 7. That on the facts and circumstances of the case and in law, the AO/DRP erred in not following the specific directions of the DRP to verify and exclude companies listed in Sl. no (f) to (i) above. Error in computation of margin of the comparable companies 8. That the AO / DRP erred in confirming the TPO's stand of not treating the annual listing fees as part of operating cost for the purpose of margin computation of CAT Technologies Ltd.
9. That the AO / DRP erred in confirming the TPO's stand of not treating discount and rebate received as part of non-operating income and bad debts written off as part of operating expense for the purpose of margin computation of E-Zest Solutions Ltd.
That the AO / DRP erred in confirming the TPO's stand of treating the provision for doubtful debts and bad debts as non-operating expenses for the purpose of margin computation of comparable companies as selected by TPO. Rejection of comparable companies 11. That on the facts and circumstances of the case and in law, the AO / DRP erred in confirming the rejection of the following comparable companies, as rejected by the TPO: a) Akshay Software Technologies Ltd; b) LGS Global Ltd; c) R Systems International Ltd; d) Quintegra Solutions Ltd; e) Allgo Embedded Systems Private Ltd; and I.T.A. Nos. 460 & 331/Hyd/2015 f) Lucid Software Ltd. Use of filters 12. That on the facts and circumstances of the case and in law, the AO / DRP erred in upholding the use of the following additional filters in undertaking the comparative analysis: a) Employee cost filter; b) Related party transactions filter; c) Diminishing revenue filter; d) Persistent loss filter; e) Different financial year-end filter; and f) Companies having extreme profit margin Rejection of use of multiple year data 13. That on the facts and circumstances of the case and in law, the AO /DRP erred in rejecting the use of multiple year data and using data for the FY 2009-10 only. Interest on outstanding receivables from associated enterprise ('AE') 14. That on the facts and circumstances of the case and in law, the AO/DRP erred in considering 'outstanding receivables' as an international transaction for the Assessment Year under consideration and thereby making adjustment on account of notional interest on outstanding receivables.
That on the facts and circumstances of the case and in law, the AO/DRP erred in making adjustment in relation to the outstanding receivables from AEs disregarding the fact that such receivables had arisen out of the services transaction which is already benchmarked as per TP regulations.
That on the facts and circumstances of the case and in law, the AO/DRP erred in making the adjustment towards outstanding receivables as working capital adjustment factors for such implications.
I.T.A. Nos. 460 & 331/Hyd/2015
Without prejudice to the above grounds, that on the facts and circumstances of the case and in law, the AO/ DRP erred in not conducting an objective comparative analysis and adopting a rate of L1BOR plus 2% for imputing notional interest on outstanding receivables.
Without prejudice to the above grounds, the AO/DRP erred in imputing interest on the outstanding receivables, wherein the principal amount itself was irrecoverable and a provision has been created against the same. Arm's length range of 5% 19. That the AO / TPO be directed to re-work the profit margins of the Appellant vis-a-vis the resultant comparable companies and to allow the benefit of + 1- 5% range as provided in proviso to Section 92C(2) of the Act. Others 20. That on the facts and circumstances of the case, the AO erred in granting credit in respect of Advance Tax only to the extent of Rs. 86,50,000 as against Rs. 89,00,000 claimed in the return of income filed by the Appellant 21. That the consequential effect should be given to the liability of interest under Section 234B and Section 234D of the Act. 22. The Appellant craves, to consider each of the above grounds of appeal
without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”
4. The Revenue has raised the following grounds before the Tribunal: “(i) In the facts of the circumstances of the case, the Hon'ble DRP was not justified in directing the A.O to delete Larsen & Tourbo Infotech Ltd on the ground of having high turnover which is contrary to Rule 1OB(2) which prescribes comparability of international transactions with uncontrolled transactions with I.T.A. Nos. 460 & 331/Hyd/2015 reference to functions performed, assets employed and risks assumed? (ii) In the facts and the circumstances of the case, the Hon'ble DRP was not justified in directing the TPO to exclude companies in the event of any merger / acquisition without proving that it has really impacted the profit margin and now the company became functionally different. (iii) In the facts and the circumstances of the case, the Hon'ble DRP was not justified in rejecting Mindtree Ltd stating that acquisition/merger is an extraordinary event ignoring the fact that the company was considered at segmental level and even if the same is considered to be true, still the merger / acquisition does not influence segmental results? (iv) In the facts and the circumstances of the case, the Hon'ble DRP erred in adopting LIBOR rates as the appropriate rate to charge interest on receivables without appreciating the fact that the rate of interest should be charged as per the prevailing PLR in the source country· (v) Any other ground that may be urged at the time of hearing.”
5. The assessee has also raised the following additional ground(s): “Ground No. 18A Negative working capital adjustment The appellant submits that the Ld.TPO/DRP has erred in making a negative working capital adjustment of -0.92% while computing the adjustment u/s. 92CA of the Income-of the Income tax Act, 1961 (“the Act”), 1961.”
6. Learned AR submitted that additional grounds so filed are admissible in view of judgment rendered by the Hon’ble Supreme Court in the case of National Thermal Power Co.
I.T.A. Nos. 460 & 331/Hyd/2015 Ltd. v. CIT (1998) 229 ITR 383 (SC). The prayer for admission of additional grounds noted above, which are not in memorandum of appeal, are being admitted for adjudication in terms of Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 owing to the fact that objection raised in additional ground is legal in nature for which relevant facts are stated to be emanating from the existing records.
Brief facts of the case as culled out from the records are that, the assessee is a company, engaged in the business of software development services (“SDS”), filed its return of income for the AY. 2010-11 on 14-09-2010 declaring total income of Rs. 37,407/- as per normal provision of the Act and book loss of Rs. 6,80,48,481/- u/s 115JB of the Act. The case of the assessee was selected for scrutiny and notice u/s. 143(2) of the Act was issued to the assessee on 26/08/2011. During the course of assessment proceedings, it was observed that, during the year the assessee had entered into international transactions with its Associated Enterprise (AE). Hence, in accordance with the provisions of section 92CA of the Act, the case of assessee was referred to I.T.A. Nos. 460 & 331/Hyd/2015 the learned Transfer Pricing Officer (“Ld. TPO”) for determination of Arms Length Price (“ALP”) and the Ld. TPO by order dated 24-09-2013, recommended an adjustment of Rs. 17,73,39,787/- u/s. 92CA of the Act. After receipt of order from Ld. TPO, considering the recommendations of the Ld. TPO, the Ld. AO passed draft assessment order u/s 143(3) r.w.s.92CA & 144C of the Act on 07/03/2014 assessing the total income at Rs. 17,05,06,361/- under the normal provision of the Act.
Feeling aggrieved, the assessee raised objections before the Ld. DRP against the draft assessment order dated 07/03/2014. The Ld. DRP vide its order dated 28/11/2014, directed the Ld. TPO to (i) exclude two comparables i.e. Infosys Technologies and L&T Infotech from the list of comparab1es and to rework the ALP, [ii] verify the effect of extraordinary events like acquisition, merger and restructuring of companies in four companies named in its order and (iii) charge interest at LIBOR+2% of the inter- company receivables, as against 12% adopted by the Ld. TPO. Accordingly, the Ld. TPO in order to give effect to the I.T.A. Nos. 460 & 331/Hyd/2015 directions of Ld. DRP, suggested an adjustment of Rs. 15,82,39,054/-. Finally, considering the recommendations of the Ld. TPO, the Ld. AO passed the final assessment order u/s 143(3) r.w.s. 144C of the Act on 30/01/2015 making the TP adjustment of Rs. 15,82,39,054/- and assessing the total income at Rs.15,14,05,628/-.
Feeling aggrieved by the final order of the Ld. AO, the assessee and the Revenue are in appeal before the Tribunal.
Appeal of the assessee 10. At the time of arguments before the Bench, learned AR submitted that Ground no. 4 raised by the assessee will have bearing on the other grounds raised by the assessee, and if the Ground no. 4 of the assessee is allowed by the Bench, other grounds will become academic, and do not require any adjudication.
11. With regards to Ground no.4 the Ld. AR submitted that the assessee provided SDS only to Azingo US. During the year Azingo US discontinued his business and cancelled the service agreement with the assessee w.e.f. 06/12/2009. Therefore the assessee did not provided any services to I.T.A. Nos. 460 & 331/Hyd/2015 Azingo US w.e.f. 06/12/2009. Since the assessee didn't have any business except providing SDS to Azingo US, the assessee did not performed any business activity w.e.f. 06/12/2009 and finally closed its business on 15/03/2010. However for the period from 06/12/2009 till 15/03/ 2010 the assessee had to incurred certain expenses including severance pay of employees. The Ld. AR further submitted that the expenses incurred by the assessee for the period from 06/12/2009 till 15/03/2010 are extraordinary in nature, since no business activities had been conducted by the assessee during this period. The Ld. AR also submitted that the expenditure, which are of extraordinary nature should not be considered a part of operating cost for the purpose of working of Profit Level Indicator (“PLI”). Hence the Ld. AR prayed before the bench to exclude the same from the working of operation cost and PLI.
Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the Revenue authorities.
I.T.A. Nos. 460 & 331/Hyd/2015
We have heard the rival contentions and gone through the record in the light of submissions made by either of side. As submitted by the Ld. AR, the assessee did not performed any business activity w.e.f.06/12/2009 and finally closed its business on 15/03/2010. However for the period from 06/12/2009 till 15/03/ 2010 the assessee had to incurred certain expenses including severance pay of employees. Since the assessee had stopped it business activities w.e.f.06/12/2009, the expenditure incurred after that date can not be treated as part of operating cost. Hence we are in agreement with the submission of Ld. AR. Therefore we set aside the matter to the file of Ld.AO with a direction to exclude the amount of expenditure incurred by the assessee for the period from 06/12/2009 till 15/03/2010 from the calculation of operating cost for the purpose of calculation of PLI, if no business activities had been done by the assessee during the period from 06/12/2009 till 15/03/2010. Accordingly the grounds no. 4 of the assessee is allowed for statistical purposes.
With respect to the other grounds raised by the assessee, since we have allowed the core issue raised by the I.T.A. Nos. 460 & 331/Hyd/2015 assessee vide Ground No. 4, the adjudication of the other grounds raised
by the assessee becomes as a mere academic exercise. Accordingly, the other grounds are disposed of.
15. In the result, the grounds of the assessee are allowed for statistical purposes.
Appeal of the Revenue 16. As we have allowed the appeal of the assessee for statistical purposes, the appeal of the Revenue is dismissed. 17. In the result, the grounds of the Revenue are dismissed. 18. To sum up, the assessee’s appeal is allowed for statistical purposes and the Revenue’s appeal is dismissed.
Order pronounced in the open court on 16th July, 2024.