Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S Vedaris Technology Pvt. Ltd., New ... on 29 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-1", NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
MS. SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No.166/Del/2011
Assessment Year : 2003-04
DCIT, Circle-17(1), Vedaris Technology Pvt. Ltd.,
New Delhi. Vs. B-1/471, Madanpur Khadar,
JJ Colony, New Delhi.
PAN : AABCV6220H
(Appellant) (Respondent)
Department by : Shri Kumar Pranav, Sr.DR
Assessee by : None
Date of hearing : 10-08-2017
Date of pronouncement : 29-09-2017
ORDER
PER R. K. PANDA, AM :
This appeal filed by the Revenue is directed against the order dated 29.10.2010 of CIT(A)-XX, New Delhi relating to assessment year 2003-04.
2. Despite service of notice none appeared on behalf of the assessee. Therefore, this appeal is being decided on the basis of material available on record and after hearing the ld. DR.
3. The Revenue in the grounds of appeal has challenged the order of the CIT(A) in deleting the addition of Rs.1,93,13,063/- towards adjustment to the arm's length price and an amount of Rs.35,854/- towards depreciation on assets which according to the Revenue are not put to use.
2ITA No.166/Del/2011
4. Facts of the case, in brief, are that the assessee is a company engaged in the business of software development. It filed its return of income on 25.11.2003 declaring loss of Rs.27,19,530/-. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has entered into following International Transactions during the financial year 2002-03, as reported in Form 3CEB, filed along with the return of income :-
S. Type of International Transactions Method Value of No. selected transactions 1 Software Development Cost Rs. 11.72 plus crores method
5. A reference was made by the AO under Section 92CA (1) of the Act to the Transfer Pricing Officer (TPO) for computation of Arm's Length Price in respect of the above International Transaction. After the case was referred to the TPO by the AO for computation of arm's length price in respect to international transactions, it was found by the TPO that the transfer pricing report does not indicate as to how the 'Cost Plus Method' has been selected as the 'Most Appropriate Method'. Further steps required for applying the CPM as per Rule 10D have also not been followed.
6. In response to the above query the assessee stated before the TPO as under :-3
ITA No.166/Del/2011
The assessee applied the 'Cost Plus Method' in their billing for the work done during the relevant assessment year as this was best suited to the assessee looking at the nature of work, business risk involved, assured sales and utilization of capacity.
(i) In the case of the assessee, they carried no risk at all as marketing and sales activities, product conceptualization, market research and client management were all done by the foreign enterprise.
(ii) The foreign enterprise engaged the assessee in producing the software as per the design given by the said enterprise. The activities of the assessee covered only a small portion of the entire business
(iii) Also, the assessee was fully assured of business throughout the year with no risk of sales, collection, under utilization of capacity etc.
7. In the documentation, the company has mentioned that total billable cost per employee is 100 per day. It was stated that the same is comparable to the rates prevailing in the market during the relevant period. Some reports and articles available on internet were referred to in support of the claim.
8. The TPO, however, held that the assessee failed to substantiate as to how the legal requirements for applying CPM had been fulfilled. It was observed by him that the assessee had failed to properly apply as the same was not based on any study or analysis of comparable uncontrolled transactions. Therefore the method adopted i.e. CPM was rejected by the TPO because even the Note appended to the report shows that Cost Plus Method (CPM)only been casually mentioned in Form 3CEB. The Transfer Pricing report does not indicate as to how the 'Cost Plus Method' has been selected as the 'Most Appropriate Method'.
The factors specified in Rule 10 D for selecting the Most Appropriate Method have not been analysed by the assessee. Further, the report does not show as to how the 'Cost Plus Method' as specified in Rule has been applied in the case. No 4 ITA No.166/Del/2011 bench marking of the gross margin earned by the comparable controlled independent enterprise(s) with its own margin has been done.
9. According to the TPO comparable Uncontrolled Price (CUP) method evaluates the amount charged in a controlled transaction with reference to the amount charged is a comparable uncontrolled transaction. In this case the taxpayer does not render same service to any third party. The AE also does not receive comparable services from third parties in India. Further, as per assessee's own submission no public information is available regarding same/ similar service rendered by Indian third parties. Hence, CUP is not applicable in this case. The TPO held that man hour rates would be different for different sectors within the software industry. For the software sector in 'which the assessee is working i.e. energy derivative trading and risk management, man day rates would be different from other software sectors say banking or insurance. As per assessee's own submissions, there is no other company in India doing the work in energy derivatives trading and risk management software sector. Obviously, there are no proper comparable man day rates available. In its Transfer Pricing documentation or during the course of proceeding u/s 92 CA, assessee could not cite any basis or details regarding comparable cases, which charge at lesser man hour rates than the rates charged by the assessee. Only a general claim has been made that assessee's 5 ITA No.166/Del/2011 man hour rates are higher. Without having been substantiated, such a claim is of no value and cannot be relied upon. Moreover the assessee has not relied upon Comparables Uncontrolled Price (CUP) method and Cost Plus Method (CPM) has been considered as the most appropriate method. For Cost Plus Method, the comparison of price (since the same are not comparable) is irrelevant and comparison of mark up earned on uncontrolled transaction by the enterprise or the independent enterprises has to be considered.
10. In the backdrop of the above circumstances the TPO concluded that in the fact and circumstances of the assessee's case TNMM was the most appropriate method for determining the arm's length price of the assessee's international transaction with its AE. Even if comparable companies appearing in the databases use different accounting yard sticks for computing their Gross Profit, the inconsistencies get eliminated at the net profit level. For the purpose of TNMM, the net profit margins of the comparable companies can be calculated on a relatively uniform, consistent and meaningful basis considering their financial information appearing in publicly available database, such as PROWESS managed by CMIE and Capitaline. Accordingly, the TPO applied TNMM for determining the ALP of the international transaction.
11. The TPO held that TNMM is the most tolerant method to take care of functional differences between different enterprises and is less affected by 6 ITA No.166/Del/2011 transactional differences than other methods. Therefore, even though the comparable companies may be in varying kinds of software development work, TNMM is still the most Appropriate Method. This is fully supported by Para 3.27 of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators. The TPO accordingly treated the assessee as a tested party and net profit margin based on total cost was taken as an appropriate profit level indicator (PLI).
12. The TPO after searching the Prowess database and after using certain filters identified 44 companies and after carrying out FAR analysis finally selected 9 companies whose average margin was 17.20% as against that of assessee at 0.62%.
13. Finally following companies have been selected as comparables by the TPO. The data for F.Y. 2002-03 has been used for determining the PLI :-
Name OP/TC for F. Y. 2002-03
Blue Star Infotech Ltd. 37.27
KPIT Cummins Infosystems Ltd. 11.20
Nucleus Software Export Ltd. 15.68
Softcell Technologies Ltd. 0.85
Sonata Software Ltd. 23.46
Subox Systems Ltd. 16.63
Tata Technologies Ltd. 14.37
Zensar Technologies Ltd. 10.42
Zylog Systems Ltd. 24.93
Mean 17.20
7
ITA No.166/Del/2011
14. In View of above, the arithmetic mean of OP/TC ratio of these companies i.e. 17.20% was considered as arm's length profit level indicator.
Determination of Arm's Length Price:
The arm's Length Price is computed as follows:
Total expenditure as per P&L A/c Rs.11,72,953/-
Less:
Closing Stock Rs.6,00,000/-
Loss on sale of assets Rs.1,91,114/- Rs.7,91,114/-
Total Operating Cost Rs.1,16,504,263/-
Arm's Length markup 17.20%
15. Arm's Length Price of software development comes to Rs.13,65,42,996/-.
16. The difference between arm's length price i.e. Rs.13,65,42,996/- and price received/ receivable Rs.11,72,29,933/- is Rs.1,93,13,063/-. The difference of Rs.1,93,13,063/- is more than 5% of arm's length price. Therefore, proviso to section 92C is not applicable in this case. Since the assessee's margin did not fall within +-5% range, an adjustment of Rs.193,13,063/- was proposed by the TPO.
17. The Assessing Officer thereafter passed the order making upward adjustment of Rs.1,93,13,063/- to the arm's length price of the international transaction of the assessee with its AE. The Assessing Officer also made addition of Rs.35,854/- out of the depreciation on the ground that the assets were purchased in the last day of the accounting period and cannot be said to have been put to use by the assessee for the purpose of business. 8 ITA No.166/Del/2011
18. In appeal, ld. CIT(A) deleted the addition for which the Revenue is in appeal before the Tribunal.
19. The ld. DR strongly objected to the order of the CIT(A). The ld. DR submitted that the CIT(A) had grossly erred while rejecting the method applied by the TPO for computing arm's length price and accordingly deleted the addition of Rs.1,93,13,063/-. The assessee had computed cost plus method vide TPO order and had further submitted that no company in India is doing the work in energy derivatives trading and risk management software sector. The assessee could not cite any basis or detail regarding comparables. However, the assessee company had provided services to its AE on the basis of requirements as received from the parent company. In absence of the comparable not cited by the assessee the TPO was left with no other alternative and accordingly considered the TNMM as the most tolerant method to take care of functional differences between different enterprises and is less affected by transactional differences than other methods in case of service PE. The same is fully supported by OECD transfer pricing guidelines for multinational enterprises and tax administrators. TNMM requires establishing comparability at a broad functional level. It requires comparison between net margin derived from the operation of the uncontrolled parties and net margin derived by an AE. The 9 ITA No.166/Del/2011 assessee had stressed that its business model is different and no comparable to other entity(s) available.
20. The Ld. DR submitted that under TNMM the net profit margin realized by an enterprise from an international transaction is computed in relation to a particular factor such as costs incurred, sales, assets utilized, etc. The net profit margin realized by an associated enterprise is compared with net profit margin of the uncontrolled transactions to arrive at the ALP. This was exactly done by Ld TPO while computing ALP of the assessee by invoking the provisions of section 92C(3). He submitted that if the assessee wants to adopt a particular method to demonstrate that the international transaction in question is at arm's length, then it is its duty to maintain and furnish adequate required data. When the burden of proving that a particular method is the most appropriate method is initially on the assessee, it is for the assessee to demonstrate the same by furnishing adequate records and data, irrespective of the fact whether they are statutorily required or not. For the above proposition he relied on the decision of the Tribunal in the case of VCB India P. Ltd. vs. CIT reported in 30 SOT 95 (Mum.).
21. So far as the deletion of depreciation is concerned, ld. DR submitted that the CIT(A) was not justified in deleting the depreciation disallowed by the Assessing Officer on assets purchased on the last day of the previous year. He 10 ITA No.166/Del/2011 submitted that since the assets were not used by the assessee, therefore, in view of the decision of the Hon'ble Madras High Court in the case of CIT vs. Maps Tours & Travels reported in 260 ITR 655 (Mad.), the order of the CIT(A) on this issue also deserves to be reversed.
22. We have heard the ld. DR and perused the material available on record.
We find force in the argument of the ld. DR that ld. CIT(A) has not considered the issue properly and was carried away by the arguments advanced by the assessee. We find the assessee has not given any basis or detail regarding the comparables before the TPO for which he was left with no other alternative and considered the TNMM as the most appropriate method to take care of the functional differences. We find the issue needs a revisit to the file of the ld. CIT(A) especially when the assessee failed to demonstrate that the international transaction in question is at arm's length in absence of maintenance and furnishing of adequate data. Similarly, ld. CIT(A) also has not given justifiable reasons as to how the depreciation can be allowed on assets which were purchased on the last day of the accounting year and were not put to use. Considering the totality of the facts of the case, we are of the considered opinion that the matter requires a fresh adjudication by the ld. CIT(A). We, therefore, restore the issue to the file of the CIT(A) with a direction to adjudicate both the issues afresh and in accordance with law after giving due opportunity of being 11 ITA No.166/Del/2011 heard to the assessee. We hold and direct accordingly. The grounds raised by the Revenue are accordingly allowed for statistical purposes.
23. In the result, the appeal filed by the Revenue is allowed for statistical purposes.
Order pronounced in the open on this 29th day of September, 2017.
Sd/- Sd/-
(SUCHITRA KAMBLE) (R. K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 29-09-2017.
Sujeet
Copy of order to: -
1) The Appellant
2) The Respondent
3) The CIT
4) The CIT(A)
5) The DR, I.T.A.T., New Delhi
By Order
//True Copy//
Assistant Registrar
ITAT, New Delhi