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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
O R D E R Per N.V. Vasudevan, Judicial Member
This appeal by the Revenue is against the order dated 11.9.2014 of the CIT(Appeals)-IV, Bangalore relating to assessment year 2009-10.
Ground Nos.1, 5 & 6 are general in nature and calls for no adjudication.
Ground No.2 raised by the Revenue reads as follows:-
IT(T)A No.1326/Bang/2014 Page 2 of 7
“2. The CIT (A) erred in law as well as on facts in holding that, as the working capital adjustment provided by the TPO has negative impact on adjusted margin, the assessee is entitled to risk adjustment as per prevailing norms, which shall be worked out by the TPO and granted to the assessee without appreciating that risk adjustment could not be allowed in the absence of specific difference in risk and its impact on profit margin and the TP regulations in India are against making any assumptions in respect of any adjustments and such risk adjustment cannot be provided without making necessary assumptions.”
The assessee is an Indian company and wholly owned subsidiary of Pi Corporation Inc., USA. The assessee provides software development services to its AE. The transaction of providing software development services is an international transaction and the price received by the assessee has to satisfy the arm’s length price test laid down u/s. 92 of the Income-tax Act, 1961 [“the Act” in short”]. On a reference for determination of ALP of the international transaction in question, the TPO selected 11 comparables and computed the ALP as follows:-
Sl. Company Name Sales OP to No. (Rs.Cr.) Total Cost % 1. Kals Information Systems Ltd. 2,14,04,686 13.89 2. Akshay Software Technologies Ltd. 12,23,21,483 8.11 3. Bodhtree Consulting Ltd. 16,05,75,212 62.27 4. R S Software (India) Ltd. 1,49,57,12,634 9.97 5. Tata Elxsi Ltd. (segmental) 3,78,43,03,000 20.28 6. Sasken Communication Technologies 4,05,31,20,000 27.91 Ltd. (seg) 7. Persistent Systems Ltd. 5,19,69,10,000 41.40 8. Zylog Systems Ltd. 7,34,93,51,475 7.81 9. Mindtree Ltd. (seg) 7 93,22,79,326 5.52 10. Larsen and Toubro Infotech 19,50,83,81,374 24.72 11. Infosys Ltd. 2,02,64,00,00,000 45.61 Avg. 24.32%
IT(T)A No.1326/Bang/2014 Page 3 of 7 ALP
Arm's Length Mean Margin on cost 24.32% Less: Working Capital Adjustment (Annex.C) (1.43)% Adjusted margin 25.75% Operating Cost 14,24,76,782 Arms Length Price (ALP) 125.75% of Operating Cost 17,91,64,553 Price Received 16,39,46,917 Shortfall being adjustment u/c. 92CA 1,52,17,636
The shortfall of Rs.1,52,17,636 being adjustment u/s.92CA of the Act was added to the total income of the Assessee. The financial results of assessee insofar as it relates to provision of software development services was as follows:-
Details Amount in Rs. Operating Revenue * 16,39,46,917 Operating Expenses ** 14,24,76,782 Operating Profit (Profit/Loss) 2,14,70,135 Op Profit on Cost % 15.07%
The assessee filed appeal before the CIT(Appeals) against adjustment proposed by the TPO, which was added to the total income by the AO. The CIT(Appeals) after hearing the submissions of the assessee, excluded 7 comparables and retained only 4 comparables as follows:-
Sl. Company Function No. Name 1. Kals Software development & consultancy. During the year, Information software development services have been rendered. The Systems Ltd. TPO found that during the year the company was into rendering software development services and training which constituted only 4% of revenues. The products
IT(T)A No.1326/Bang/2014 Page 4 of 7 mentioned in the website were not created during the year. 2. Akshay It offers software services and products. The sale of Software products of only 4% of total turnover. Technologies Ltd. 3. Bodhtree IT Consultancy and software development services. Consulting Ltd. 4. R S Software Software development services. (India) Ltd.
The assessee also prayed for risk adjustment/working capital adjustment. The same was considered by the CIT(A) and allowed in his order. The relevant observations of the CIT(A) in this regard were as follows:-
“8.4 (iv) Risk adjustment/working capital: 8.4.1. I have examined the TPO’s working and find that she has provided a working capital adjustment on the basis of the detailed working as per Annexure-C of her order. Recently, the Mumbai Bench of the Hon’ble Tribunal in Exxon Mobil Company India P. Ltd. v. Deputy Commissioner of Income-tax (15 ITR (Trib) 353) has observed :- “The other issue is grant of adjustments, i.e., working capital adjustment and risk adjustment while arriving at the arm’s length price. In this case, assessee in his transfer pricing study, has not made any working capital adjustment or risk adjustment. The Assessing Officer has, in fact, granted working capital adjustment. When the assessee is confronted with the possible transfer pricing adjustment due to change of some comparables and addition of certain other comparables by the Transfer Pricing Officer, this claim of risk adjustment is made by the assessee. Though, in principle, these adjustments have to be made while arriving at IT(T)A No.1326/Bang/2014 Page 5 of 7 the arm s length price, on the facts and circumstances of the case, as the assessee has not worked out the risk adjustment and as the Assessing Officer has already allowed 0.47 per cent. as working capital adjustment, we are of the opinion that no further adjustment is necessary.” 8.4.2. On the basis of the aforesaid line of reasoning, I am of the view that once the AO/TPO has granted working capital adjustment, there is no necessity of providing any further adjustments. But however, in the instant case, it cannot be said that the TPO has provided working capital adjustment. As a matter of fact, he has provided it at (-)1.43% which has increased the arm’s length mean margin on cost from 24.32% to 25.75%. Before me, it was argued that the appellant is a captive service provider and assumes the less normal risks relating to business and operations and entrepreneurial risks borne by its AEs outside India and is therefore insulated from most of the business and operational risks which the comparable companies are exposed to. Therefore, controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in the risks assumed are made. I have considered the facts and circumstances of the case and find that the working capital adjustment provided by the TPO has a negative impact on adjusted margin and therefore, it cannot be said that a working capital adjustment has been provided in the positive sense. Hence, the Hon’ble Tribunal’s ruling will not apply in the instant case. Therefore, in my view, the appellant is entitled to risk adjustment as per prevailing norms which shall be worked out by the TPO and granted to the appellant. It is ordered accordingly.”
The grievance projected by the Revenue in ground No.2 is that the risk adjustment ought not to have been allowed by the CIT(Appeals).
At the time of hearing, the ld. counsel for the assessee submitted that by reason of exclusion of certain comparable companies by the CIT(Appeals), the assessee’s margin would be within +/- 5% range of IT(T)A No.1326/Bang/2014 Page 6 of 7 comparable companies ultimately retained after the CIT(A)’s order. According to him, therefore, there is no need to allow any further risk adjustment and therefore ground of appeal Revenue may be allowed and the action of the TPO/AO in not allowing risk adjustment be upheld.
The ld. counsel for the assessee submitted that the assessee is in the process of voluntary winding-up and would not like the litigation to protract and therefore the above concession is being given.
We accept the plea of the ld. counsel for the assessee and accordingly allow ground No.2 raised by the Revenue.
Grounds No.3 & 4 are with regard to action of the CIT(Appeals) in directing the AO to exclude from the total turnover also the internet charges/communication expenses of Rs.24,61,838 and travel expenses incurred in foreign currency of Rs.22,58,586 while computing deduction u/s. 10A of the Act. The AO reduced the aforesaid expenses from the export turnover and did not exclude the same from the total turnover. As a result, the deduction allowed u/s. 10A to the assessee was at a much lower sum than what was claimed by the assessee.
The CIT(Appeals), following the decision of the Hon’ble High Court of Karnataka in Tata Elxsi Ltd., 349 ITR 98 (Karn), directed the AO to exclude the aforesaid sums both from the export turnover and total turnover while computing deduction u/s. 10A of the Act. According to the Revenue,
IT(T)A No.1326/Bang/2014 Page 7 of 7 the decision of Hon’ble High Court of Karnataka has not been accepted by the Revenue and therefore the issue being agitated. In our view, the fact that the department has filed an appeal against the judgment of the Hon’ble High Court cannot be a bar not to follow the said decision. The decision being that of a jurisdictional High Court is binding on the Tribunal. We therefore uphold the order of the CIT(Appeals) and dismiss the grounds No.3 & 4 raised by the Revenue.
In the result, the appeal by the Revenue is partly allowed. 14.
Pronounced in the open court on this 10th day of April, 2015.