Income Tax Appellate Tribunal - Hyderabad
Satyam Venture Engineering Service ... vs Assessee on 26 August, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
ITA No. AY. Appellant Respondent
1590/Hyd/2010 2004-05 Satyam Venture Deputy
Engineering Services Commissioner of
Private Limited, Income Tax,
SECUNDERABAD Circle-3(1),
[PAN: AAFCS3287D] HYDERABAD
217/Hyd/2009 2004-05 Deputy Satyam Venture
Commissioner of Engineering Services
Income Tax, Private Limited,
Circle-3(1), SECUNDERABAD
HYDERABAD [PAN: AAFCS3287D]
197/Hyd/2011 2005-06 Addl. Commissioner
of Income Tax,
Satyam Venture Range-3,
Engineering Services HYDERABAD
354/Hyd/2011 2006-07 Private Limited, Deputy
SECUNDERABAD Commissioner of
1905/Hyd/2011 2007-08 Income Tax,
[PAN: AAFCS3287D] Central Circle-9,
1138/Hyd/2013 2008-09 HYDERABAD
For Assessee : Shri C.S. Subramanyam &
Shri V. Siva Kumar, ARs
For Revenue : Shri V. Srinivas, DR
Date of Hearing : 04-08-2016
Date of Pronouncement : 26-08-2016
ORDER
PER BENCH:
These are group of appeals mainly by assessee and one cross- appeal in AY. 2004-05 by the Revenue against the orders of the Satyam Venture Engineering :- 2 -: Services Private Limited Commissioner of Income Tax(Appeals) [CIT(A)] / Dispute Resolution Panel [DRP] in respective assessment years. Since common issues are involved in all these appeals, these are heard together and decided by this common order.
Condonation of delay in ITA No. 1590/Hyd/2010:
2. This appeal by assessee was filed with a delay of 667 days. Assessee has stated that he has received the order of the CIT(A) on 18-12-2008 and that appeal was to have been filed on or before 16-02-2009. However, the appeal was filed on 14-12-2010 with a delay of 667 days. Assessee filed a condonation petition by stating as under:
"3.1 The appellate order passed by the C.I.T(Appeals) was received by the assessee on 18-11-2008. Appeal to the Hon'ble ITAT was to have been filed on or before 16-02-2009. As already submitted, the assessee company is a joint venture between Satyam Computer Services Ltd., [SCSL] and Venture Global Engineering LCC, USA. In January, 2009, a major event having unprecedented repercussions on the assessee's affairs occurred in that the then promoter and Chairman of SCSL, Sri B.Ramalinga Raju, submitted a letter to the Board of Directors, the Securities and Exchange Board of India, and the Stock Exchanges acknowledging manipulation in accounts of SCSL running into several hundreds of crores. Considering the circumstances in the case of SCSL, and on a request made by it, the company Law Board extended time limit for filing various returns/documents upto 31st December, 2009 and later again till 30-062010 in the case of SCSL.
3.2 Having regard to the upheaval in the Sat yam group there was a major dislocation of work in the assessee company throwing accounting work out of gear. Since all the transactions between the assessee and SCSL had to be accounted and also closing balances had to be reconciled, the assessee company found that it would be difficult to finalise its accounts in time and accordingly petitioned to the Central Board of Direct Taxes, New Delhi [CBOT] seeking time for finalisation of accounts so that genuine hardship and financial loss are not caused to its investors.
Satyam Venture Engineering :- 3 -: Services Private Limited 3.3.The CBDT, considering the fact that investigation was being carded out by the Central Bureau of Investigation, Serious Fraud Investigation Office, Enforcement Directorate and the Income Tax Department and also considering the fact that the management of SCSL was taken over by M/s.Tech Mahindra Ltd., and also considering that the Company Law Board had allowed time to SCSL to file return and documents under different statutes till 30-06-2010/ condoned delay in performing various statutory obligations like obtaining tax audit reports, other reports, carry forward losses etc. till 31-03-2010. A copy of the order dated 25-01-2010 passed by the CBDT, New Delhi under Sec.119(2) of the Income Tax Act, 161 is submitted herewith.
3.4 In view of certain internal issues and other disturbances pursuant to the developments in Sat yam Computer Services Limited, one of the shareholder in the appellant company as narrated above, and in view of the change in the personnel working in the finance department the order of the C.I.T(Appeals) was misplaced and traced only in second week of December, 2010 when the appellant company conducted a comprehensive review. As such the appellant was not in a position to file the appeal in time and there is a delay of 667 days for which the appellant prays for condonation.
3.5 The assessee submits that the delay in filing the appeal was on account of extraordinary circumstances as narrated above which caused complete dislocation of work in the assessee company particularly in the finance and accounts wing".
3. Ld. Counsel reiterating the above also placed on record various notices received from Investigation Agencies during the period and also the list of directors who have been appointed at various times. Ld. Counsel also submitted that rules of limitation are not meant to destroy the rights of the parties. They are meant to see that the parties do not resort to dilatory tactics to seek remedy promptly. While admitting that condonation of delay is the discretion of the court, it was submitted that length of the delay is not the matter but acceptability of the explanation is the only criteria. It was submitted that due to various investigations by various authorities, the matters of assessee could not be attended Satyam Venture Engineering :- 4 -: Services Private Limited to. It was submitted that the Co-ordinate Bench of Delhi in the case of Foramer France Vs. DCIT [2 ITR (Trib) 773] (Del) has elaborated the principles relying on various Supreme Court judgments and formulated certain principles reiterating them. It was submitted that the delay may be condoned and the appeal may be admitted to render substantial justice to assessee.
4. Ld. DR however, objected to the petition filed by assessee seeking condonation of the delay. It was submitted that the explanation furnished does not make out a case for sufficient cause, which is distinguishable from reasonable cause. The averments of dislocation caused by the admission of impropriety and malfeasance by the Chairman of its parent company is no more than a part of the factual backdrop, with no demonstrable casual nexus to the everyday happenings at the assessee company more so as continuing without remit for the entire duration of 667 days. It was submitted that the ongoing enquiries commenced more than a month after receipt of the order of the CIT(A) and cannot be seen as detaining the key personnel of the assessee company for the entire length of the delay caused. It was further submitted that in addition to the existence of sufficient cause for delay, the assessee should be able to demonstrate presence of due diligence along with the absence of negligence. Reliance was placed upon the following decisions for the above propositions:
a. JCIT, Spl Range 1 Vs. TAFE Ltd., [104 ITD 149, ITAT (Chennai) (TM);
Satyam Venture Engineering
:- 5 -: Services Private Limited
b. AP Housing Board Vs. DIT (Exemptions), ITA No. 110/H/08 dt. 14.05.2010 ITAT 'A' Hyderabad;
c. CIT Vs. Ram Mohan Kabra, [257 ITR 773] (P&H) and the references contained therein to the Supreme Court decision in the case of Mst Katji [167 ITR 471] and K. Ramachandran Vs. State of Kerala (AIR 1998 SC 2276];
d. M.S. Nulon India Ltd., Vs. DCIT [219 ITR 736] (Del);
e. M/s. Karnataka Forest Development Corporation Ltd., Vs. ACIT, ITA No. 266/Bang/08, dt. 23.10.2008;
5. Ld. CIT DR referred to the order of the Co-ordinate Bench of the ITAT in the case of Karnataka Forest Development Corporation Ltd., submitted that parties must act bonafidely, expeditiously and with due care. A casual or negligent litigant who has acted with utter irresponsibility attitude cannot claim the condonation of delay in law and right has accrued to the other side. He also relied on various case law and the fact that the director was travelling abroad as made out by the AO do indicate that there was no cause for condonation of delay.
6. We have considered the rival contentions and perused the documents and case law placed on record. It is true that Satyam Computer Services Ltd., is one of the promoters of this company and the Chairman cum Managing Director therein has given a public statement about a serious fraud that was committed therein, which lead to various investigations. This company is also affected by the said investigations and there is reasonable cause in Satyam Venture Engineering :- 6 -: Services Private Limited not attending to the filing of appeal in time. It is noticed that CBDT has permitted the Satyam Company to file returns belatedly and except this year in all other years, the appeals were filed in time. There is also general compliance with the said group companies subsequent to the initial period. Considering these facts, we are of the opinion that there is sufficient and reasonable cause for not preferring the appeal in time. Both the Ld. Counsels relied on various case law for and against the condonation. What we notice is that the case law are rendered on certain fact conditions. However, it is the appreciation of the facts and examining whether there is sufficient and reasonable cause in preferring the appeal belatedly which can decide the issue. As submitted by assessee, various statutory authorities investigations have lead to dislocation of the administrative work, consequently, we are satisfied that there is reasonable and sufficient cause in not preferring the appeal in time. Accordingly, the delay in filing the appeal is condoned and the appeal is maintained.
7. As far as assessee's appeals are concerned, the issue mainly in all the years is with reference to disallowance of commission paid to one of the promoter Venture Global Engineering Services LLC (Venture). Assessee-company, SVES was incorporated on 03-01-2000 as a private limited company with two companies as promoters i.e., Satyam Computer Services Ltd., India and Venture (Group), USA. These two promoters hold share capital in assessee-company in equal proportion at 50:50. At the relevant point of time, Satyam (now merged with Tech Mahindra Ltd.,) was a leading global consulting company. Venture Global Engineering is an US based tier one automotive component Satyam Venture Engineering :- 7 -: Services Private Limited supplier and developmental services speared across USA, Australia, South Africa, China and India. It has expertise in interior and exterior trimming, compound tooling and manufacturing. Both SCSL and Venture Global were rendering engineering services to various entities in automotive industries prior to the formation of assessee-company. Venture LLC, being the leader in automotive designing has entered into joint venture with Satyam and has decided to share their expertise. By virtue of joint venture agreement, various terms and conditions were proposed. We are not on the issue of joint venture but the issue in appeal, considered by the AO in the Transfer Pricing study, is with reference to commission paid to Venture on assessee's sales. There was an export sales commission agreement dt. 11-02-2000 by which assessee-company was to pay 10% commission on all the export sales, other than those orders received from Venture or its affiliates. There was another sales commission agreement on 18-02-2000 as well at 10% on all domestic sales, other than orders received from Venture or its affiliates. AO initially in AY. 2004-05 has noticed that there were certain sales received from SCSL i.e., one of the promoter companies on which 10% commission was paid to Venture and claimed as 'deduction'. On the reason that there is no necessity for paying commission on the sales received from SCSL, in the TP study, the TPO disallowed an amount of Rs. 85,64,314/- being commission paid to Venture Global. It was contested before the CIT(A) that the TPO's methodology in adopting CUP method is not correct and further determining the amount at NIL is also not correct. Ld. CIT(A) however, in his order has examined the commission payment in a different perspective and held that there is no need to pay the commission u/s. 37(1) and Satyam Venture Engineering :- 8 -: Services Private Limited accordingly, he disallowed the amount invoking the provisions of Section 37(1).
8. In AY. 2005-06 the TPO, following the orders in AY. 2004-05, has again disallowed the commission paid to Venture on orders received from Satyam (Satyam sales) to an extent of Rs. 3.20 Crores. The CIT(A) in that year however, upheld the orders of the TPO/AO, without invoking the provisions of Section 37(1). However, in subsequent years of 2006-07 to 2008-09, even though AO was following the earlier year's orders of disallowing the commission to Venture of Satyam sales, however, disallowed the entire commission paid to Venture on all sales, In different years there are different methodologies adopted by the Revenue, purportedly disallowing commission paid to Venture on Satyam Sales. In addition to the above issue, there are two other issues, one arising out of re-working out of deduction u/s. 10A and other issue is with reference to adjustment made under TP provisions on an hourly basis payment by the TPO. For the sake of clarity, appeals in AY. 2004-05 are decided here under.
AY 2004-05:
9. In AY. 2004-05, assessee has preferred an appeal in ITA No. 1590/Hyd/2010 and the only cross-appeal by the Revenue is in ITA No. 217/Hyd/2009. In this year, assessee filed return of income declaring total income of Rs. 1,25,02,860/- after claiming deduction u/s. 10A. Assessee claimed an amount of Rs. 1,90,26,559/- as exempted u/s. 10A. AO has excluded certain expenditure involving communication expenses and also foreign exchange in providing technical services outside India totaling to Satyam Venture Engineering :- 9 -: Services Private Limited Rs. 22,74,75,484/- from export turnover. Therefore, as against Rs. 26.03 Crores of export turnover, the AO determined the export turnover at Rs. 3.28 Crores. Accordingly, the deduction u/s. 10A was reduced to an amount of Rs. 23,99,728/-. In addition to the above addition under the TP provisions, the TPO vide his order dt. 22-12-2006 has suggested TP adjustment of Rs. 5,15,778/- towards export of service income and disallowance of Rs. 85,65,314/- for payment of sales commission. Accordingly, the final order was passed by the AO incorporating the adjustments and re-working out the deduction u/s. 10A.
10. Ld. CIT(A) did not agree with the contention of assessee that the amount of Rs. 22,24,75,804/- was not liable to be considered under Explanation-2, Section 10A. However, Ld. CIT(A) accepted the alternate claim of assessee that such expenses if at all reduced from export turnover should also be reduced from the total turnover. Accordingly, he gave a direction to the AO for reduction of the same account from the total turnover as well. On this issue, Revenue is aggrieved and raised the grounds in its appeal, whereas assessee has accepted the legal position. In connection with the TP adjustment of Rs. 5,15,778/- for export of services, the Ld. CIT(A) concluded that the Arm's Length Price [ALP] determined by the AO fall under the proviso to Section 92C(2), wherein the benefit of (+/-) 5% was provided. Since TPO did not consider such benefit, Ld. CIT(A) granted the benefit and accordingly the addition of Rs. 5,15,778/- was deleted. Revenue is aggrieved on this issue as well. With reference to the TP adjustment of Rs. 85,64,314/- proposed by the TPO, Ld. CIT(A) however, held that expenditure of above amount being commission paid to Venture was not allowable as Satyam Venture Engineering :- 10 -: Services Private Limited 'business expenses' as the same was not incurred wholly and exclusively for the purpose of business. He invoked the provisions of Section 37(1) and confirmed the disallowance. Assessee has raised the material Ground No. 2 on the above issue as under:
"2. The learned Commissioner of income-tax (Appeals) erred in law and facts of the case on confirming the addition of Rs. 85,64,314/- being the commission paid to Venture Global for the customer introduction and management services as the same is expenditure deductible under section 37 of the Income-tax Act, 1961".ITA No. 1590/Hyd/2010:
11. Referring to the agreements placed on record and also other correspondence between the parties, it was the submission of Ld. Counsel that Venture Group being the leader in the automotive services has entered into a joint venture with Satyam and it was agreed upon between the parties that on all the sales, except from the orders of Venture Group, assessee-company has to pay 10% commission. Referring to the order of the TPO, it was the submission of the Ld. Counsel that TPO has wrongly considered the Satyam as affiliate of Venture, whereas Satyam is not an affiliate of Venture but a competitor and an independent promoter of assessee-company. Referring to the terms of the agreement, it was submitted that no commission was paid on sales made to Venture or to its affiliates and referred to the schedule placed on record that commission was paid on all the orders received from other companies, including orders routed through Satyam. It was further submitted that Satyam was also in the business of providing CAD/CIM services to various automotive companies and they have placed a consolidated order to Satyam and part of which Satyam Venture Engineering :- 11 -: Services Private Limited was in turn ordered to assessee-company. Such orders are from independent companies and as per the agreement commission was payable to Venture. It was further submitted that no commission was paid to Satyam, but entire commission was paid/payable to Venture only. He submitted that the commission was a business necessity, wholly and exclusively for the purpose of business. It was further submitted that 10% provided in the agreement is as per the guidelines and regulations prescribed under FEMA. Therefore, payment is to be considered as Arm's Length for this reason. It was also submitted that they are within the guidelines of RBI for remittance of the amounts. Therefore, there is no need to consider any TP adjustment.
11.1. Objecting the method adopted by the TPO i.e., CUP method, the Counsel's objections are as under:
1. The learned TPO observed that no tangible benefit was received by SVES to justify the commission payment to Venture Global LLC., USA.
As explained above, the customers through whom SVES received income either directly or indirectly were brought in and monitored by Venture Global LLC., USA. Hence the learned TPO's objection that there was no benefit was not correct.
2. Further, the learned TPO applied CUP method as Most Appropriate Method for arriving at the Arm's Length Price. In order to apply such CUP method, availability of valid comparables either internally or externally is needed. Without a valid comparable, the CUP method cannot be applied".
11.2. Ld. Counsel submitted that Co-ordinate Bench in the case of Qual Core Logic Limited [22 Taxmann.com 4] (Hyd), has held that for the purpose of CUP method, there should be similarity of transactions to be compared. In the absence of any Satyam Venture Engineering :- 12 -: Services Private Limited internal comparable or external comparable, the analysis made by the TPO is not correct. Ld. Counsel also referred to Section 10B(1)(a) dealing with CUP method on the decision of Mumbai Bench of the Tribunal in the case of Gharda Chemicals Limited., [35 SOT 406] (Mum), submitted that in order to apply CUP method, the identification of comparable uncontrolled price transaction is mandatory if such uncontrolled price either internally or externally is not available, then the method needs to be rejected. Relying on the Co-ordinate Bench decision of Mumbai in the case of Cabot India Ltd., [12 taxmann.com 70] (Mum), it was submitted that where no data was available in respect of uncontrolled comparable transactions, CUP method could not be regulated as most appropriate method for determining ALP. Ld. Counsel however, submitted that even though the TPO has analysed the issue on CUP method, Ld. CIT(A) modified the order so as to disallow the amounts u/s. 37(1) and Revenue is not in appeal on the above issue. In view of that, it was submitted that the arguments on CUP method are academic in nature in this year and assessee is mainly contesting disallowance made u/s. 37(1).
12. Ld. DR however, reiterated the orders of the TPO and the order of the CIT(A) in coming to a conclusion that there is no need to pay commission to Venture on the sales made by Satyam as Satyam is one of the promoter companies and accordingly, the expenditure cannot be considered as wholly and exclusively for the purpose of business.
13. We have considered the rival contentions and perused the orders of the authorities. As rightly pointed out by the Ld. Satyam Venture Engineering :- 13 -: Services Private Limited Counsel, even though Ld.TPO invoked the CUP method and determined the ALP at NIL so as to disallow part of the commission paid to Venture on the so called sales made to Satyam, on the reason that 'Satyam is an affiliated company and no commission need to be paid on sales made to the affiliated companies'. This aspect was examined in detail and we found that Satyam is an independent promoter and not an affiliate of Venture. Venture Global Services LLC is an independent globally operated lead company which was competing with Satyam before forming a joint venture company. The sales commission is provided by virtue of the agreement dt. 11-02-2000 and another agreement placed to be 18-02-2000 (Both are similarly worded except that one deals as export sales and other deals with domestic sales). The terms of agreement are as under:
"2. SALES COMMISSION:
(a) VENTURE shall receive a sales commission payment from the COMPANY of 10% of sales of all 'Engineering Services' sold by the COMPANY (other than to VENTURE or for COMPANY's contract which are listed on Exhibit a hereto) for sales to customers located outside of India. 'Engineering Services' is defined as CAD-based, CAE-based and CAM-based product and tool design projects.
(b) Sales commission payments shall be made within fifteen (15) days of the end of each calendar quarter for all Engineering Services receipts during such calendar quarter. All payments to be made by the COMPANY to VENTURE shall be made in U.S. Dollars.
Payments for sales which originate from outside the USA shall be converted to U.S. dollars as of the last day of the calendar quarter when received.
(c) VENTURE shall have the right to set-off the sales commission payments owned to it against any obligations owned by it to the COMPANY for services of the COMPANY. The COMPANY shall have the right to set-off payments owned to it by VENTURE for services Satyam Venture Engineering :- 14 -: Services Private Limited against any obligations owned by the COMPANY to VENTURE for sales commissions".
13.1. As seen from the recital itself, Venture does mean affiliates referred to or group concerns of Venture Global Engineering LLC and does not include Satyam Group at all. Therefore, there is fundamental flaw in analysis of the TPO in considering Satyam as affiliate of Venture. Be that as it may, while accepting that payment of commission to Venture is permissible as per agreement, in our view, the TPO and CIT(A) has erred in restricting the disallowance on the so called sales made to Satyam. First of all, the commission was not paid to Satyam, so as to disallow on the sales made to Satyam. The commission is being paid to Venture, as part of export / domestic sales commission agreements. The sales made to Satyam, whether directly placed by the Satyam or indirectly passed on from the orders received from other automotive companies form part of domestic sales of assessee-company and commission is payable to Venture from the agreement. In view of this, we do not see any reason to disallow the amount of commission, particularly with reference to sales made to/orders received from Satyam. Assessee also placed on record that most of the orders received from Satyam are part of consolidated orders received from various other automobile/ automotive companies like Ford, a part of which was passed to assessee-company. We also notice that TPO/AO has no objection for payment of commission to Venture per se. Out of the total claim of commission of Rs. 3,66,00,492/- in this year, the AO/TPO disallowed only an amount of Rs. 85,64,314/-. This amount was also paid to Venture on the domestic sales made to Satyam. These sales are not made to any affiliated company of Venture.
Satyam Venture Engineering
:- 15 -: Services Private Limited
Therefore, the commission is payable to Venture. Accordingly, the same is allowable u/s. 37(1) of the Act. In view of this, we direct the AO to allow the amount. The ground is considered allowed for statistical purposes.
ITA No. 217/Hyd/2009:14. This is a cross-appeal by Revenue against the order of the CIT(A)-III, Hyderabad dt. 10-12-2008. Revenue is aggrieved on two issues and raised four grounds i.e., Ground Nos. 2 to 5.
15. Ground No. 2 pertains to the direction of the CIT(A) to exclude the so called expenses incurred abroad both from export turnover as well as total turnover. It was the contention of the Revenue that no such adjustment has been provided for 'total turnover' in Section 10A.
15.1. We have considered the submissions of the parties on the issue and perused the materials on record. This issue is squarely covered by the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] (Bom) and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. [313 ITR (AT) 353] wherein it has been held that communication charges etc., attributable to the delivery of the computer software outside India which are to be reduced from the export turnover should also be reduced from the total turnover as well, while computing the deduction u/s. 10A. Therefore, following the ratio laid down in the aforesaid cases, we uphold the direction of Ld.CIT(A) to reduce the amount from the export turnover as well as total turnover, while computing the Satyam Venture Engineering :- 16 -: Services Private Limited deduction u/s. 10A of the I.T. Act. This Ground is accordingly rejected.
16. Ground Nos. 3, 4 & 5 pertain to the issue of differential amount towards export of IT Engineering Services between non- AEs and AEs. Ld.TPO in his order found that the services to AE i.e., Venture were provided @ $39 per hour whereas the same was shown to have been provided to non-AEs @ $45 per hour. After reducing the sales commission paid @ 10% on the sales made to non-AEs, the adjusted rate based on net realisation basis was arrived @ $40.5 per hour. The difference was brought to tax and an addition of Rs. 5,15,778/- was made. It was the claim of assessee that rate charged from AE is within 5% range provided in Section 92C(2) of the Act. Ld. CIT(A) has accepted the above contention and held as under:
"3.3 On due consideration of the material available on record, I agree with the contention of the appellant. TPO has selected two non-AEs as internal comparables in CUP method, which were provided different technical services by the appellant. However, without going into this aspect of the issue, the adjustment made by the TPO is otherwise required to be deleted since the difference in the rates charged from AE & non-AEs is within the 5% range provided u/s.92C(2) of the Act. Benefit of +/-5% variation in terms of proviso to S.92C(2) is allowed in view of the decision of ITAT, Kolkata in the case of Development Consultants (P) Ltd (115TTJ577) & ITAT, Delhi in the case of Sony India Pvt. Ltd.(supra) where it has been held in para 163.4 as under -.
"163.4 The other view is the one accepted by Kolkata 'A' Bench of the Tribunal in the case of Development Consultants (P) Ltd. Vs DCIT, Circle 2, Kolkata (ITA No. 79 & BO/KOL/200B) decided on 4.4.200B . As per the said decision, the benefit of second limb of the proviso was allowed to the taxpayers although the price disclosed by it was more than 5% of arithmetic mean. The decision of the Coordinate Bench is binding on us and we are inclined to follow the same. That apart, we are of the view that Kolkata Bench of the Tribunal has taken a right view of the provision. We are to go by the language of the provision and when we do so, we do not see anything in the Satyam Venture Engineering :- 17 -: Services Private Limited language to restrict the application of the provision only to marginal cases where price disclosed by the taxpayer does not exceed 5% of the arithmetic mean. In our considered opinion, the Arm's Length Price determined on application of Most Appropriate Method is only an approximation and is not a scientitic evaluation. Therefore, the legislature thought it proper to allow marginal benefit to cases who opt for such benefit.............. Hence, we are of the view that second limb is applicable even to cases where the taxpayer intends to challenge Arm's Length Price taken as arithmetic mean and determined through the Most Appropriate Method. As stated above, the second proviso is intended to give marginal relief to all taxpayers as determination of Arm's Length Price is not an exact science but is an approximation. .................Therefore, in line with the view taken by Kolkata Bench of the Tribunal, we are of the view that benefit of the second limb is available to all taxpayers irrespective of the fact that price of international transaction disclosed by them exceeds the margin provided in the provision".
It was further held that the Circular 12/2001 was issued prior to insertion of the Proviso to Section 92(2). Hence, it would be incorrect to assume that the Circular explains the Proviso to Section 92(2)".
17. Provisions of Section 92C(2) provide for range of (+/-) 5%. ALP determined by the TPO is within that range. Consequently, we do not see any reason to interfere with the order of the Ld. CIT(A). Grounds are accordingly rejected.
18. In the result, appeal in ITA No. 217/Hyd/2009 is dismissed.
ITA No. 197/Hyd/2011 (AY. 2005-06)19. In this assessment year, assessee has raised as many as seven grounds. Out of which, 1 and 7 are general in nature. Ground Nos. 2 & 3 on the issue of capital investment subsidy, Ground No. 6 is on the issue of commission paid on sales u/s. 37(1) of the Act and Ground No. 5.1 on the issue of adjustment made of Rs. 3.07 Lakhs towards ITES sales are not pressed. Accordingly, these grounds are treated as withdrawn.
Satyam Venture Engineering
:- 18 -: Services Private Limited
20. The major issue is with reference to disallowance of Rs. 3.20 Crores paid towards commission on sales made to Satyam Computer Services, invoking TP provisions and also CUP method. As discussed earlier in the AY. 2004-05, the TPO held that Satyam Computer Services is an affiliate of Venture Group and no amount need be paid as commission on the sale made to Satyam. Ld. Counsel submitted that in the year 2004-05, Ld. CIT(A) has converted the disallowance under the TP provisions to the disallowance u/s. 37(1), whereas in this assessment year, Ld.CIT(A) confirmed the order of TPO of disallowing the entire amount. In addition to the objections with reference to the CUP method when there are no comparable cases, it was the contention that Satyam cannot be considered as an affiliate company. Ld. Counsel further submitted that the agreement with Venture is independent of sales made to all others, except to Venture Group and Satyam cannot be considered as 'part of Venture Group'.
20.1. It was further submitted that there were disputes between the two promoter companies and in later year, commission was not paid and has disallowed by assessee-company as suo motto adjustment under the TP provisions. It was contended that for the impugned assessment year, the amount is to be paid as per the agreement on which there is no dispute.
21. For the reasons stated in AY. 2004-05, we agree with the contention of assessee that the TPO cannot disallow the amount paid to Venture as the agreement under which assessee is operating covers export and domestic sales, other than those made to Venture or Venture Group. Satyam is not the part of Venture Satyam Venture Engineering :- 19 -: Services Private Limited Group. Therefore, there is no valid reason for disallowing on that ground. Moreover, the TPO has to consider the ALP only under one of the methods prescribed and as already discussed in earlier year, CUP method cannot be invoked as there are no uncontrolled comparable prices. In view of that, the methodology adopted by the AO/TPO in disallowing the amount or fixing the ALP at NIL itself is not correct. Moreover, the Hon'ble Delhi High Court in the case of EKL Appliances (2012) [24 taxmann.com 199] has already held that TPO cannot disallow the amounts u/s. 37(1) invoking transfer pricing provisions. In view of this, we direct the AO to allow the amount as claimed. Ground No. 5 of assessee is accordingly allowed.
22. The next issue for consideration is the disallowance made under the provisions of 10A. AO has excluded certain expenditure holding them to be communication expenses and excluded them only from export turnover and not from total turnover thereby effecting the deduction claimed u/s. 10A. Assessee contested the same in earlier year before the Ld.CIT(A) who, considering the alternate claim directed the AO to exclude the same from total turnover as well. Revenue has come up in appeal which was discussed in Revenue's appeal above in ITA No. 217/Hyd/2009 vide para 15. However, in this year, Ld.CIT(A) did not follow his predecessor's order and confirmed the action of the AO consequently, this ground by assessee.
23. After considering the rival contentions, we are of the opinion that the action of the AO in excluding all expenditure is not correct as he has to identify only the expenses relatable to Satyam Venture Engineering :- 20 -: Services Private Limited delivery of goods and services as provided under the Act. No such exercise seems to have been done. Moreover, AO also cannot exclude the branch expenses under this head. Therefore, in principle, the contention of assessee is to be accepted. However, assessee also raised an alternate ground that the same expenditure which was disallowed from export turnover should also be excluded from total turnover. This alternate contention was allowed in earlier year and assessee has not questioned the treatment of various expenses as communication expenses in its appeal. Considering that, we are of the opinion that the alternate ground can be allowed. Accordingly, AO is directed to work out deduction, after excluding the so called communication expenses determined by him, from both export turnover and total turnover. This view was supported by the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] (Bom) and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. [313 ITR (AT) 353] wherein it has been held that communication charges etc., attributable to the delivery of the computer software outside India which are to be reduced from the export turnover should also be reduced from the total turnover as well while computing the deduction u/s. 10A. Accordingly the ground is considered allowed.
24. In the result, the appeal in ITA No. 197/Hyd/2011 is allowed.
ITA No. 354/Hyd/2011 (AY. 2006-07)25. This appeal by assessee is against the order of the DRP, Hyderabad dt. 24-09-2010, raising grounds 1 to 6 and also an additional ground on the issue of not excluding foreign currency Satyam Venture Engineering :- 21 -: Services Private Limited which was considered as part of communication expenses. This additional ground being legal in nature, is allowed after due consideration.
26. Ground No.2 pertains to addition made under TP provisions of Rs. 4,12,493/- being difference of export of engineering services. This issue has come up for consideration in AY. 2004-05 in Revenue's appeal in ITA No.217/Hyd/2009 for the reasons stated therein, since the difference is within (+/-) 5% range as provided u/s. 92CA(2) proviso, there is no need to make the adjustment. AO is directed to determine the ALP after considering the above said proviso. Ground of assessee is considered allowed.
27. Ground No. 3 pertains to disallowance of commission paid on sales to Venture Global at Rs. 4.38 Crores. Instead of disallowance on the commission attributable to sales made to Satyam Group as in earlier years, the entire commission paid was disallowed without assigning any reasons. As seen from the order of TPO, he was mainly discussing about the disallowance made of similar nature in earlier years, but surprisingly, disallowed the entire commission paid to Venture Capital even on the amounts payable on sales, other than to venture group, which was being allowed in earlier years. However, for the reasons stated in earlier years, we are of the opinion that TPO is not correct in disallowing the amount by determining the ALP at NIL. For the reasons stated in earlier year, the commission paid to Venture is payable and accordingly, the ground is considered allowed.
Satyam Venture Engineering
:- 22 -: Services Private Limited
28. Ground No. 4 pertains to making adjustment to the export turnover by an amount of Rs. 1,25,32,717/- being the communication charges. It was the contention that the same were not communication charges for delivery of computer software or services outside India and accordingly, same should not have been disallowed. However, following the decision in earlier years i.e., AY. 2004-05 & 2005-06, we are of the opinion that the alternate contention that the same amount should also be excluded from total turnover has to be allowed. Following the principles laid down in the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] (Bom) and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. [313 ITR (AT) 353], we direct the AO to exclude whatever communication expenses disallowed from the export turnover, the same amount was also be disallowed from the total turnover while computing the deduction u/s 10A. With these directions, the ground is considered allowed.
29. Ground No. 5 pertains to exclusion of the disallowances made under TP provisions from export turnover. The AO in his wisdom has excluded the amounts disallowed under TP provisions from export turnover. We are unable to understand how the TPO can exclude the additions being made under the TP provisions. The addition of difference of export of engineering services (contested in Ground No. 2) of Rs. 4,12,493/- and also the amount of Rs. 4,83,27,840/- being commission disallowed on entire sales paid to Venture Global were the amounts considered. These can not be considered as 'communication expenses' so as exclude from export turn over. Moreover, when these amounts are disallowed Satyam Venture Engineering :- 23 -: Services Private Limited out of the expenditure claims/adjustments made, it will result in increasing the profits of assessee-company, but in no way can be considered as 'turnover' so as to exclude from the export turnover. There is no legal base for the AO/TPO to exclude the profits from the export turnover and so the computation made by the AO is not according to the provisions of law. As there is no legal base to exclude the amount from export turn over, we direct the TPO not to exclude the above amounts from either export turnover or total turnover, as the profit enhanced cannot become turnover. The ground is considered allowed.
30. The additional ground raised in this year is with reference to exclusion of foreign currency from the export turnover. For the reasons stated in Ground No. 4 above, we direct the AO/TPO to exclude the same amount from the total turnover as well. Additional ground is allowed.
31. In the result, appeal in ITA No. 354/Hyd/2011 is allowed.
ITA No. 1905/Hyd/2011 (AY. 2007-08)32. In this appeal, assessee filed revised grounds from 1 to
4. Out of which, Ground Nos. 1 and 4 are general in nature.
33. Ground No. 2 pertains to disallowance of commission paid to Venture Global at Rs. 6.42 Crores. Instead of disallowance of commission attributable to sales made to Satyam Group, the entire commission paid was disallowed without assigning any reasons. This disallowance is similar to one made in immediate preceding year. We are of the opinion that TPO is not correct in Satyam Venture Engineering :- 24 -: Services Private Limited disallowing the amount by determining the ALP at NIL. For the reasons stated in earlier years above in other assessee appeals, the commission paid to Venture is payable and accordingly, the ground is considered allowed.
34. Ground No. 3 pertains to making adjustment to the export turnover by an amount of Rs. 22,91,09,664/- being the communication charges. Following the decision in earlier years i.e., AY. 2004-05, 2005-06 & 2006-07, we are of the opinion that the alternate contention that the same amount should be excluded from total turnover has to be allowed. Following the principles laid down in the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] (Bom) and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. [313 ITR (AT) 353], we direct the AO to exclude whatever communication expenses disallowed from the export turnover, also from the total turnover while computing the deduction u/s 10A. With these, the ground is considered allowed.
35. The additional ground raised in this year is with reference to exclusion of foreign currency from the export turnover. For the reasons stated above, we direct the AO/TPO to exclude the same amount from the total turnover as well while computing the deduction u/s 10A. Additional ground is allowed.
36. In the result, ITA No. 1905/Hyd/2011 is allowed Satyam Venture Engineering :- 25 -: Services Private Limited ITA No. 1138/Hyd/2013 (AY. 2008-09)
37. In this appeal, assessee has filed 10 revised grounds. Out of which, Ground Nos. 2 & 3 on reopening of assessment are withdrawn.
38. Ground No. 4 pertains to the issue of reference made to special audit u/s. 142(2A). It was the contention that assessee's accounts are not cumbersome and reference was made with an intention to gain time which constitutes misuse of provisions of law. However, after considering the order of the AO and the circumstances in which Satyam Group was operating at the relevant point of time, we are of the opinion that, AO has exercised his jurisdiction to refer the matter to special u/s. 142(2A) for valid reasons and accordingly this ground is rejected.
39. Ground No. 5 pertains to exclusion of communication charges from export turnover. It was also contention that AO excluded the branch expenses as part of communication charges which are not to be included. The branch expenses cannot be considered as communication expenses unless there is a finding that these are incurred for delivery of products or services as per the provisions and do fall within the definition. AO is directed to examine this issue after giving due opportunity to assessee.. As held by the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] (Bom) and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. [313 ITR (AT) 353], AO is directed to exclude what ever expenses including communication expenses so determined are Satyam Venture Engineering :- 26 -: Services Private Limited excluded from export turn over, the same is also to be excluded from total turnover as well. This ground is allowed.
40. Similarly, Ground Nos. 6 & 7 pertains to exclusion of expenditure in foreign currency. The ground itself is that the same amount may be excluded from the total turnover as well. Following the principles on the subject as laid down by the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] (Bom) and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. [313 ITR (AT) 353], AO is directed to exclude the same from the total turnover as well. Ground is allowed.
41. Ground No. 8 is on the issue of not allowing deduction u/s. 10A on the enhance income, after disallowance of entire commission paid. It was the contention that the disallowance of expenditure claim will increase the profits of the business and therefore, a higher deduction should have been allowed by the AO. Even though, there is merit in assessee's contention, since we have allowed the commission payment in the next ground, there is no such consideration required for this ground. The ground is academic in nature. Accordingly, same is rejected.
42. Ground No. 9 pertains to disallowance of commission paid to Venture Global on entire sales to the tune of Rs. 6.36 Crores, under the CUP method with out there being any comparable cases. For the reasons stated above in the earlier assessment years, instead of disallowance of the commission attributable to sales made to Satyam Group, the entire commission Satyam Venture Engineering :- 27 -: Services Private Limited paid was disallowed without assigning any reasons. For the reasons stated in earlier years, we are of the opinion that TPO is not correct in disallowing the amount by determining the ALP at NIL. As stated in earlier years, the commission paid to Venture is payable and accordingly, the ground is considered allowed.
43. In the result, appeal in ITA No. 1138/Hyd/2013 is partly allowed.
44. To sum-up, Revenue appeal in ITA No. 217/Hyd/2009 is dismissed.
Assessee's appeals in ITA No. 1590/Hyd/2010 is allowed for statistical purposes, ITA No. 1138/Hyd/2013 is partly allowed & all the remaining appeals of assessee are allowed.
Order pronounced in the court on 26th August, 2016 Sd/- Sd/-
(P. MADHAVI DEVI) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 26th August, 2016
TNMM
Satyam Venture Engineering
:- 28 -: Services Private Limited
Copy to :
1. Satyam Venture Engineering Services Private Limited, 1-8-301 to 306, Ashoka My Home Chambers, SP Road, Secunderabad.
2. Additional Commissioner of Income Tax, Range-3, Hyderabad.
3. Deputy Commissioner of Income Tax, Circle-3(1), Hyderabad.
4. Deputy Commissioner of Income Tax, Central Circle-9, Hyderabad.
5. Asst. Commissioner of Income Tax, Central Circle-3(2), Hyderabad.
6. Dispute Resolution Panel (DRP), Hyderabad.
7. The Director of Income Tax, International Taxation, Income Tax Towers, Hyderabad.
8. The Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad.
9. D.R. ITAT, Hyderabad.
10. Guard File.