Income Tax Appellate Tribunal - Delhi
Syniverse Technologies Services ... vs Acit, Circle- 4(1), Gurgaon on 13 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-1 : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No.500/Del/2018
Assessment Year : 2013-14
Stay Application No.151/Del/2018
(ITA No.500/Del/2018)
Assessment Year : 2013-14
Syniverse Technologies Services Vs. ACIT,
(India) Pvt. Ltd., Circle-4(1),
DLF Building No.5, Gurgaon.
Tower-A, 15th Floor,
DLF Phase-III,
Gurgaon.
PAN: AANCS1158H
(Appellant) (Respondent)
Assessee By : Shri Rohit Tiwari, Advocate
Department By : Shri Sanjay I. Bara, CIT, DR &
Shri Kumar Pranav, Sr. DR
Date of Hearing : 13.03.2018
Date of Pronouncement : 13.03.2018
ITA No.500/Del/2018
SA No.151/Del/2018
ORDER
PER R.S. SYAL, VP:
This appeal filed by the assessee is directed against the final assessment order dated 21.11.2017 passed by the Assessing Officer (A.O.) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2013-14.
2. The only issue raised in this appeal is against the addition on account of transfer pricing adjustment amounting to Rs.16,26,63,782/-.
3. Succinctly, the facts of the case are that the assessee reported certain international transactions including 'Provision of software development services' with a transacted value of Rs.64,82,23,982/-. The Assessing Officer (A.O.) made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The TPO observed that the assessee employed the Transactional Net Margin Method (TNMM) for determining the ALP of the international transaction of 'Provision of software development services'. The TPO noticed that the assessee furnished segmental accounts which were not audited. He, therefore, rejected the assessee's separate operating profit 2 ITA No.500/Del/2018 SA No.151/Del/2018 margin from the international transactions declared at 17.00% as against loss from the non-international transactions at 43.26%. He proceeded to calculate profit of the assessee on overall basis. Thereafter, he computed OP/TC of comparables at average of 18.67%. On this basis, he determined the amount of transfer pricing adjustment at Rs.21,25,54,922/- as under :-
Total Operating Cost 875,283,158
Arm's length Price at a margin of 18.67% 163,415,366
Operating margin of the assessee -49,139,556
Shortfall of Transfer Price from ALP 212,554,922
4. The assessee assailed the draft order, incorporating the above transfer pricing adjustment, before the Dispute Resolution Panel (DRP). The DRP gave certain directions in this regard. The TPO, after giving effect to the directions of the DRP, passed a fresh order on 12.10.2017 determining the amount of transfer pricing adjustment at Rs.16,26,63,782/- as under:-
Total Operating Cost 87,52,83,158
Arm's Length Price at a margin of 12.97% 11,35,24,226
Operating margin of the assessee -4,91,39,556
Shortfall of Transfer Price from ALP 16,26,63,782
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ITA No.500/Del/2018
SA No.151/Del/2018
5. The assessee is aggrieved against the final assessment order making addition of Rs.16.26 crore and odd on account of transfer pricing adjustment in the international transaction of 'Provision of software development services.'
6. We have heard both the sides and perused the relevant material on record. Shorn of unnecessary details, it is seen that the first and the foremost issue raised in this appeal is against the addition of Rs.16,26,63,782/- made by the authorities on account of transfer pricing adjustment in respect of transactions with the Associated Enterprises (AEs) and non-AEs. Computation of the arm's length price (ALP) by the TPO in his order passed before and after the DRP directions, whose relevant parts have been reproduced above, divulges that he took total Operating costs at Rs.87,52,83,158/- . By applying arithmetic mean of the comparables at 12.97%, he finally proposed a transfer pricing adjustment of Rs.16,26,63,782/-. It is, thus, seen that the TPO considered total Operating costs at Rs.87.52 crore. When we advert to the Final accounts of the assessee, whose copy is available at page 115 of the stay file, it emerges that the assessee earned revenue of Rs.64,82,23,982/- from its 4 ITA No.500/Del/2018 SA No.151/Del/2018 AEs at Bangalore office and Rs.17,79,19,620/- from non-AEs at its Gurgaon office, thereby making total revenue of Rs.82,61,43,602/-. Total operating costs in respect of AE and non-AE transactions have been reported in such Annual accounts at Rs.86,76,03,015/-, which are exclusive of Amortization of goodwill amounting to Rs.76,80,144/-. The A.O. added up total operating costs at entity level amounting to Rs.86.76 crore with amortization of goodwill at Rs.0.76 crore to compute total Operating costs at Rs.87,52,83,158/-, which is the starting point of the calculation of the transfer pricing adjustment. It is on this total Operating costs of the entity, that the TPO applied arm's length margin of 12.97% for computing the final amount of transfer pricing adjustment at Rs.16.26 crore.
7. The ld. AR contended that the AO/TPO erred in making/proposing transfer pricing adjustment even in respect of transactions with non-AEs, which is impermissible under law.
8. It is uncontroverted, as is also apparent from the TPO's order, that the transfer pricing adjustment has been made by considering total costs 5 ITA No.500/Del/2018 SA No.151/Del/2018 incurred by the assessee in respect of transactions with the associated enterprises (AE) and non-AEs. Under the TNMM, the process is simple in initially finding out the operating profit margin of the assessee and then the average adjusted operating profit margin of comparables. Such adjusted profit margin of the comparables constitutes the benchmark margin, which is then compared with the operating profit margin from the assessee's international transactions, which only comprise of transactions with AEs. It is not permissible to make transfer pricing adjustment, by applying the average operating profit margin of the comparables, on the assessee's universal transactions entered into with both the AEs and non- AEs. As the entire exercise under Chapter-X of the Act is confined to computing total income of the assessee from international transactions having regard to the arm's length price, there is no scope for computing income from non-international transactions also having regard to the ALP. Since the TPO has computed the transfer pricing adjustment qua all the transactions carried out by the assessee with reference to the base of 'Total costs', also inclusive of costs relevant for transactions with non-AEs, we cannot countenance such a point of view.
6ITA No.500/Del/2018 SA No.151/Del/2018
9. Our view in holding that no transfer pricing adjustment can be made on transactions with the non-AEs is supported by the judgment of the Hon'ble Delhi High Court in CIT VS. Keihin Panalfa Ltd. (2016) 381 ITR 407 (Del), in which it has been held that the transfer pricing adjustment can be made only with reference to the international transactions and not the transactions with the non-associated enterprises. Similar view has been espoused by the Hon'ble Bombay High Court in CIT vs. Thyssen Krupp Industries India Private Ltd. (2016) 381 ITR 413 (Bom). In view of the above discussion, it is clear that the transfer pricing adjustment cannot be made with reference to the non-AE transactions, but, the same has to be confined only to the international transactions. Since the TPO/AO has proposed/made the addition on the basis of transactions even with non- AEs, we set aside the impugned order and send the matter back to the file of the AO/TPO for deciding the issue afresh as per law after allowing a reasonable opportunity of hearing to the assessee. In deciding the issue afresh, it will be open to the TPO/assessee to depart from the earlier stand and take into consideration later developments in law having bearing on 7 ITA No.500/Del/2018 SA No.151/Del/2018 the issue, wherever applicable. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
10. In the result, the appeal is allowed for statistical purposes.
11. In view of our decision in the appeal, the stay application has become infructuous and the same is, therefore, dismissed.
12. In the result, the stay application is dismissed.
The order pronounced in the open court on 13.03.2018.
Sd/- Sd/-
[SUCHITRA KAMBLE] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 13th March, 2018.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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