Income Tax Appellate Tribunal - Hyderabad
M/S. Infotech Enterprises Ltd ( ... vs Department Of Income Tax on 29 September, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD " B " BENCH, HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI
SAKTIJIT DEY, JUDICIAL MEMBER
ITA No.1604/Hyd/2010
Assessment Year 2003-04.
ACIT, Cir-2(1), -v- M/s Infotech Enterprises Ltd.,
Hyderabad. (Formerly Tele Atlas India Pvt Ltd.)
Madhapur, Hyderabad.
PAN:AAACT4446Q
(Appellant) (Respondent)
Appellant by Shri D. Sudhakar Rao
Respondent by Shri V. Raghavendra Rao
Date of Hearing 05-11-2013
Date of pronouncement 13-11-2013
ORDER
PER SAKTIJIT DEY, J.M:
This appeal by the department is directed against the order dated 29-9-2010 of CIT (A)-XX, New Delhi pertaining to the assessment year 2003-04.
2ITA no.1604 of 2010 Infotech Enterprises Ltd., Hyd.
2. The department has raised altogether six grounds. Ground Nos. 1 and 6 being general in nature are not required to be adjudicated upon.
3. Ground Nos. 2 and 3 relates to the issue of CIT (A) excluding Hinduja TMT Limited as a comparable.
4. Briefly the facts are, the assessee, a company was earlier known as M/s Tele Atlas Hertogenbosech BV which subsequently merged with the present assessee by virtue of an order passed by the Hon'ble High Court of Andhra Pradesh in Company Petition No.105/05 vide order dated 27-1-2006. Be that as it may, during the relevant assessment year, the assessee was an wholly owned subsidiary of Herotogenbosch BV engaged in the business of development of digitised geographic databases and other software through its unit in Noida. For the assessment year under dispute, the assessee was engaged in the business of rendering software development and IT enabled back office services. The assessee undertook a TP study to justify the price charged to its Associated Enterprise ( AE in short) to be within the arm's length. For that purpose, the assessee adopted the Transactional Net Margin Method (TNMM) as the most appropriate method and operating profit/total cost (OP/TC) as the profit level indicator.
5. The assessee selected six companies as comparables with average OP/TC margin based on multiple year data worked out 3 ITA no.1604 of 2010 Infotech Enterprises Ltd., Hyd.
at 10%. Since the assessee's OP/TC margin of 11.03% was higher than the average margin of 10% of the comparables, the price charged by the assessee to its AE was found to be within the arm's length.
6. During the proceedings before the TPO for determining the arms's length price of the international transaction entered into the by the assessee with its AE, the TPO rejected one of the comparable companies selected by the assessee namely; Vans Information Limited on the ground of functional dissimilarity, persistently loss making entity and further is not a representative sample of the industry chosen for the purpose of comparability. Though the assessee, in the course of proceedings had objected to such rejection of the said company but the TPO rejected the same and selected balance 5 companies as comparables. The TPO thereafter relying upon the data for financial year 2000-01 and 2001-02 of the said 5 companies arrived at the average OP/TC at 19%. Since the assessee's OP/TC margin was declared at 11.03%, the TPO determined the arms's length price at Rs.25,18,17,489/- as against Rs.23,45,68,090/- declared by the assessee thereby computing the transfer pricing adjustment of Rs.1,72,49,399/-. On the basis of the adjustment, the Assessing Officer completed the assessment by making the addition of Rs.1,72,49,399/- to the income of the assessee. Being aggrieved of the addition so made, the assessee preferred an appeal before the CIT (A).
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7. In course of hearing of appeal before the CIT (A) , the assessee contended that one of the comparables i.e., Hinduja TMT Ltd., was having significant related party transaction of about 28%, hence it cannot be treated as comparable to the assessee. In this respect, the assessee submitted the details of transaction of Hinduja TMT Ltd.,. It was further contended that the TPO has used multiple year data of the comparables to arrive at the OP/TC margin which is in complete violation of rule 10B(4) of the IT Rules which mandate that only current year data of the comparable companies are to be considered. The assessee also furnished a workout showing OP/TC margin of the comparable companies on the basis of the current year data i.e., the data for the financial year 2002-03 which is as under:-
S.No. Company Name OP/TC margin based on
Current yr (i.e. FY 2002-03)
Data
Including Excluding
Hinduja TMT Ltd. Hinduja TMT Ltd.
1. AMI Computers (I) Ltd -63% -63%
2. Ace Software Exports Ltd. 8% 8%
3. Hinduja TMT Ltd. 106% X
4. MCS Ltd. 15% 15%
5. Nucheus Netsoft & Gis India
Ltd. -26% -26%
Average 8% -17%
Appellant's OP/TC Margin 11.3% 11.3%
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Infotech Enterprises Ltd., Hyd.
8. Referring to the said work out, it was contended by the assessee that even after retaining Hinduja TMT Ltd., if the current year data will be considered, which is also in accordance with statutory provisions, then the average OP/TC margin of comparables would be 8% and while excluding Hinduja TMT Ltd., the average OP/TC would be (-)17%. Therefore, it was contended that since the assessee had shown OP/TC margin of 11.03% there cannot be any transfer pricing adjustment because it is much above the average OP/TC of the comparables. The assessee further objected to the rejection of one of the comparables namely Vans Information Ltd., by the TPO. However since we are not concerned with that issue in the present appeal, it is not necessary to deal with the same.
9. The CIT (A) after considering the submissions of the assessee vis a vis the statutory provisions agreed with the contention of the assessee that only current year data can be considered for arriving at OP/TC margin of the comparable companies. The CIT (A) after considering the current year data of the comparable companies noticed that the OP/TC margin as per the work out given at page-13 of his order while including the rejected company, viz., Vans Information Technology, the average OP/TC would be (-)4.32%. Whereas on excluding the said company the average OP/TC would be 8%. Similarly, if both the companies i.e. i.e. Hinduja TMT Ltd., and Vans Information are excluded from the list of comparables, the 6 ITA no.1604 of 2010 Infotech Enterprises Ltd., Hyd.
average OP/TC margin of the remaining comparables on the basis of current year data comes to (-17%). The CIT (A) therefore held that since the assessee's OP/TC margin is 11.03% which is much higher than the OP/TC margin of the comparable companies by using the current year data, no adjustment can be made to the arm's length price declared and accordingly he deleted the addition made by the Assessing Officer.
10. We have heard the contentions of the parties and perused the materials on record as well as the orders of the authorities below. Undisputedly, the TPO while determining the arms' length price has arrived at the average OP/TC margin of comparable companies by relying upon multiple year data which is contrary to Rule 10 B(4) of IT Rules. The said rule makes it clear that only the data relating to the relevant financial year has to be relied upon for computing the OP/TC margin of the comparable company. Therefore, when the current year data of the comparable companies were available on public domain, the TPO was not justified for using multiple data in violation of Rule 10B(4) of I T Rules. As has been demonstrated by the assessee before the CIT ( A), the average OP/TC margin of comparable companies, even after including Hinduja TMT Ltd., as a comparable, comes to 8% which is much below the margin of 11.03% shown by the assessee. In aforesaid view of the matter, no adjustment can be made to the arm's length price declared by the assessee. Therefore, in the aforesaid facts and circumstances, we do not find any infirmity in the order of the CIT (A) which is accordingly upheld. The grounds raised are dismissed.
11. Ground No.4 reads as under:-
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" The learned CIT (A) erred both on facts, in law and circumstances by not considering mark up on the recharges received by the taxpayer."
The learned AR, at the outset, objecting to the aforesaid ground submitted that the said ground does not arise either from the order of the TPO or CIT (A). Hence, the department cannot be permitted to raise such ground before us. In fact the learned Departmental Representative wanted to withdraw the said ground.
12. After perusing the order of the TPO as well as the CIT (A), we find the aforesaid contention of the learned AR to be correct, as the said ground does not arise out of the order passed by the TPO or CIT (A). In aforesaid view of the matter, we dismiss the said ground as not maintainable.
13. In ground No.5, the department has raised the issue of the CIT (A) not providing any opportunity to the TPO while disturbing the margins by adopting financials for the year ended on 31-3-2003.
14. We have heard the submissions of the parties on this issue and perused the orders of the lower authorities. It is a fact n record that the TPO has used multiple year data for arriving at the average OP/TC margin of the comparable companies. Whereas Rule 10B(4) of IT Rules specifically provides for considering the current year data of the comparable companies unless it falls within the exception as provided in proviso to Rule 10B(4). It is also a fact on record that current year data of the comparable companies were available in public domain. The CIT (A) has simply followed the statutory provision while determining the OP/TC margin of the comparable companies by applying the current year data, hence in these circumstances, the grievance of the department that no 8 ITA no.1604 of 2010 Infotech Enterprises Ltd., Hyd.
opportunity was granted to the TPO cannot be accepted. Accordingly, we dismiss the ground raised by the department.
15. In the result, appeal filed by the department stands dismissed.
Order pronounced in the court on13 -11-2013.
Sd/- Sd/-
( CHANDRA POOJARI) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad,
Dated the 13 th November, 2013
Jmr*
Copy to:-
1) ACIT, Cir-2(1), 8-B, IT Towers, AC Guards, Masabtank,
Hyderabad.
2) M/s Infotech Enterprises Ltd., 4 th Floor, A- Wing, Plot
No.11, Software Units Layout, Infocity, Madhapur,
Hyderabad.
3) CIT (A)-XX, New Delhi.
4) CIT, Delhi-VI, New Delhi.
5) The Departmental Representative, I.T.A.T., Hyderabad.
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Infotech Enterprises Ltd., Hyd.