Income Tax Appellate Tribunal - Delhi
Motherson Sumi Infotech & Design Ltd.,, ... vs Department Of Income Tax on 22 July, 2015
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I": NEW DELHI
BEFORE SHRI S.V.MEHTORA, ACCOUNTANT MEMBER
AND
SHRI A. T. VARKEY, JUDICIAL MEMBER
ITA No4340/Del/2012
(Assessment Year: 2005-06)
ACIT, M/s Motherson Sumi Infotech &
Centre Curcle-09, Design Ltd.,
Jhandewalasn, Vs. 2nd Floor, F-7, B-1,
New Delhi Mohan Coop Indl, Estate,
Muthra Road, New Delhi
(PAN : AACCM3199B)
(Appellant) (Respondent)
Appellant by:- Shri K. M. Gupta Adv,
Respondent by : Adv. Judy James, Standing Counsel,
Date of Hearing : 30.04.2015
Date of Pronouncement : 22.07.2015
O R D E R
PER A.T. VARKEY, JUDICIAL MEMBER :
This appeal filed by the Revenue arises out of the order passed by the Ld. CIT(A)-XX, New Delhi dated 30.5.2012 pertaining to assessment year 2005-06.
2. The grounds raised in the Revenue's appeal read as under:-
"1. That the Commissioner of Income Tax (Appeals) erred in law and on facts of the case in deleting the 1 addition of Rs. 74,80,644/- made on the basis of Arm's Length Price determined by the Transfer Pricing Officer u/s. 92CA(3) of the Income Tax Act, 1961.
2. That the Commissioner of Income Tax (Appeals) erred in law and on facts of the case in holding that the International Transactions of the assessee should be treated as at Arm's Length.
3.(a) The order of Ld. CIT(A) is erroneous and not tenable in law and on facts.
(b) The assessee craves leave to add, alter or amend any / all of the grounds of appeal before or during the course of the hearing of the appeal."
3. Facts, in brief are that the assessee company filed its return of income on 31.10.2005 for the AY 2005-06 declaring a loss of Rs. 51,83,340/-. The case was processed u/s. 143(1)(a) of the Income Tax Act 1961,(herein after the Act) on 07.8.2006. and statutory notice were issued. Later on this case was selected for scrutiny, since being connected with SK Gupta Group of Cases, in which search and 2 seizure action took place on 12.1.2006, so was transferred u/s. 127 of the Act, to Central Circle-9, New Delhi. As a result of transfer of jurisdiction, fresh statutory notices were issued and the assessee responded to it before the AO.
4. The assessee's case was referred to the Transfer Pricing Officer (TPO). The assessee filed its computation of profitability taking results of 87 selected comparables as given in pages 189, 190 & 191 of the paper book. The TPO passed order dated 29.10.2008 u/s. 92CA(3) of the Act as under :-
"With the above discussions, all the contentions made by the assessee has been discussed at length and the search adopted in order to fine tune the one made by the assessee shall stand.
Particulars (Export Segment) Amount
Income
Sales 153,031,100
Expenditure
Personnel Expenses 67,758,494
Administration and other expenses 44,948,174
Less : Loss on sale of assets 20,078
Depreciation 17,598,916
Total Cost (TC) 130,285,506
Operating Profit (OP) 22,745,594
OP/TC 17.46%
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OP/TC Margin of the comparables
The comparables as proposed to the assessee and their corresponding OP/TC margins are as under :-
Sl.No. Name of the Company Data OP/TC Source (%)
1. Sonata Software Ltd. P 14.94%
2. Infosys Technologies Ltd P 43.05%
3. Geometric Software P 20.32% Solutions Co. Ltd.
4. Larsen & Toubro P 10.30% Infotech Ltd.
5. Satyam Computer P 28.41 % Services Ltd.
Mean 23.20%
Computation of Arm's length price's of the
International Transaction:
The arm's length price's of the International transaction related to software development services is computed in the following :
Total revenue as shown in TPR = Rs.153,031,100 Revenue relating to International transactions= Rs.126,316,542 Revenue related to uncontrolled transactions = Rs. 26,714,558 The revenue related to uncontrolled transactions have an embedded profit of 23.2% as per the arm's length standards. As such the total cost related to the uncontrolled revenue is computed as under :-
26,714,558/ 1.232 = Rs.21,683,894
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Cost related to international
transactions = (130,285,506-21,683,894)
= 108,601,612
Revenue at 23.2% operating profit
On Rs.108,601,612 (Arm's Length Revenue)= Rs.133,797,186
Revenue booked by the assessee = Rs.126,316,542
Difference = Rs.74,80,644
Difference as a percentage of ALP = 5.59%
Accordingly, the Arm's length price of the international transaction related to software development and designing services is determined as under :-
S.No. International Book Vale Difference Arm's Difference Transaction loaded length (%) price 1 Software 124156267 7352709 131508976 5.59% Development services 2 Designing 2160275 127935 2288210 5.59% services Total 126316542 7480644 Since the difference computed as a percentage of the Arm's Length Price is more than 5% no benefit under the proviso to section 92C(2) is available to the assessee. The assessing officer shall accordingly increase the income of the assessee by Rs.74,80,644/-."
5. In view of the said transfer pricing order,of the TPO, the assessee was asked some questions by the AO vide questionnaire dated 27.11.2008 as under:-
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"16. Please refer to the order TPO dated 29.10.2008 u/s. 92CA(3) of the I.T. Act, 1961 a copy of which has been issued to you by him. As per the said order the arms length price of the international transaction related to software development and designing services has been determined as under:-
S.No. International Book Difference Arm's Difference Transaction Value Loaded Length (%) Price 1 Software 124156267 7352709 131508976 5.59% Development Services 2 Designing 2160275 127935 2288210 5.59% services Total 126216542 7480644 - -
Since the difference computed at percentage of the Arm's Length Price is more than 5% no benefit under the proviso to section 92CA(2) is available to you. As such your income shall be accordingly increased by Rs. 74,80,644/-."
6. In response to the aforesaid questions, the assessee submitted his reply on 17-I2-2008. The relevant portion of which is reproduced as below:
"With regard to the said notice issued by your goodself on the company I would first of all like to bring to your goodself's kind attention, the fact during the F. Y 2004-05, it was entitled to tax holiday u/s 1OB of the Act in respect of the profit of its Export Oriented Unit ('EOU) which form a significant part of the ' Export Segment' wherein your goodself proposes to make the adjustment. In this 6 scenario, it is but obvious that the Company or its group companies would not have any untoward motive to derive any tax advantage by manipulating transfer prices of the international transactions between themselves."
7. The Assessing Officer, after considering the submissions made by the assessee, computed the income in conformity, as per section 92CA(4) of the Act, with the order of the TPO, and as a result thereof, made the addition of Rs.74,80,644/- and assessed the income of the assessee at Rs.22,97,300/- vide his order dated 23.12.2008 passed u/s. 143(3) of the Act.
8. Against the aforesaid order of the Assessing Officer, assessee appealed before the Ld. CIT(A), who vide impugned Order dated 30.5.2012 has allowed the appeal of the assessee by deleting the addition.
9. Now the Revenue is in appeal before us.
10. The sole issue is the impugned action of the Ld CIT(A) to exclude M/s Satyam computers Ltd,from the list of comparables selected by the by the TPO,/AO. Ld. DR relied upon the order of the TPO and the Assessing Officer and assailed the CIT(A) decision to 7 exclude M/s Satyam computers Ltd from the list of comparables when it was functionally similar to the tested party.
11. On the contrary, Ld. Counsel of the assessee has relied upon the order of the Ld. CIT(A) and defended the same and does not want us to interfere in the impugned order.
12. We have heard both the parties and perused the records. We find that the assessee was incorporated in the year 2000, in India as a 100% Export Oriented Unit ('EOU'). The Company is a joint venture between Sumitomo Wiring Systems Ltd., Japan (33.89%), the Motherson Group, India (29.6%) and the remaining are held by others. The Company is engaged in providing customized software and engineering design services to its customers and caters to both domestic and export markets. The export sales of the Assessee are primarily from software development service and the design services form only a small proportion of export sales. The Assessee has an Export Oriented Unit ("EOU") registered under Software Technology Park Scheme of India (STPI) and enjoys a tax holiday under section 10B of the Act in respect of the profits of the EOU. 8 12.1 We further find that during the year the company has entered in the following International transactions:-
Table - 1 :
Particulars Amount (in Rs.)
Software Development 124,156,267
Services rendered
Design services 2,160,275
Reimbursement of 201,739
expenses
12.2 The assessee had selected 87 comparables using Operating Profit/ Total Cost (OP / TC) as the Profit Level Indicator (PLI). The mean margin of the comparables was at 13% as against 17.46% of the assessee. TPO accepted the most appropriate method as Transactional Net Margin Method (TNMM) as done by the assessee and OP / TC as the PLI. The calculation of the profit margin of the assessee was also not challenged by the TPO. After using various filters, the TPO came to the conclusion that only 5 comparables as given in Table-2 below are comparable to the case of the assessee. It is pertinent to mention here that the filters used were only on the set of comparable cases selected by the assessee and TPO did not introduce any fresh comparables and computed the OP/TC margin as 23.20% . 9
Table - 2 :
Sl.No. Name of Company OP/TC
Margin
(March
2005)
1. Sonata Software Ltd. 14.94%
2. Infosys Technologies Ltd 43.05%
3. Geometric Software 20.32%
Solutions Co. Ltd.
4. Larsen & Toubro Infotech 10.30%
Ltd.
5. Satyam Computer Services 28.41 %
Ltd.
Average 23.20%
12.3. And thereafter TPO, computed the ALP and made an addition of Rs 74,80,644/-. Before the CIT (A), the assessee has raised the inclusion of M/s. Satyam Computer Services Ltd. in the list of aforesaid comparables to compute the ALP. It was contended before the ld. CIT (A) that the financial results of M/s. Satyam Computer Services Ltd. cannot be relied upon because of the fraud exposed in this case during the relevant period.
12.4 It is common knowledge that M/s. Satyam Computers Services Ltd. indulged in fraud and its financial statements cannot be taken as true because it has botched up the financials and doctored it, which led to lodging of several criminal cases against its directors ; and 10 subsequent to the scandal being unearthed the company (M/s. Satyam Computer Services Ltd.) itself has come up with a statement that it's financial results are not reliable, for the relevant assessment year too, comes in that net.
12.5 The ld. CIT (A) has taken note of the Annual Report of M/s. Satyam Computer Services Limited for financial year 2009-10, - Corporate Governance Reports - makes a mention of the fact that the financial statements of preceding years should not be relied upon. An extract from page no. 23 of the report reads as follows:-
"M/s Price Waterhouse, the erstwhile auditors of the Company communicated vide a letter dated January 13, 2009, that their audit reports issued on the financial statements of the Company from the quarter ended June 30, 2000 until the quarter ended September 30, 2008 should no longer be relied upon. Further, in view of the financial irregularities identified, the statements for the said period furnished under clause 41 of listing agreement with Indian stock exchanges did not reflect the true position. In addition there was a violation of the ESOP Guidelines issued by SEBI in respect of Accounting and Disclosure requirements relating to ASOP-A for which the Company is in the process of seeking condonation."
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12.6 We further find that the Ld. CIT(A) has noted that in the case of Agnity Technologies Private Limited vs. Income Tax Officer, Ward 12(1), New Delhi decided by ITAT, Delhi 2010 (IDT2)GJX 1031 - TDEL has upheld the decision of the DRP which had excluded M/s. Satyam from the list of comparables. Ld. CIT(A) further observed that in view of this, M/s Satyam Computers Services Ltd. should be taken out from the list of comparable companies. In the light of the aforesaid facts, ld. CIT (A) took the decision to exclude M/s. Satyam from the list of comparables, which we uphold since the financial results of the said company is the result of admitted financial irregularities and conspiracy hatched and committed by the directors and cannot be relied upon. So the financial result of the said company cannot be used by the TPO to compute the ALP, which has been rightly done by the ld. CIT (A), so we concur with his decision to exclude M/s. Satyam from the list of comparables, so the Revenue's ground is dismissed.
12.7 Thereafter, we find that once M/s. Satyam was excluded. from the list of the comparables, the workings of the margin of the comparables are given in Table-3 below:
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Table - 3:
Sl. Name of Company OP/TC Working
No. Margin Capital
(March Adjusted
2005) Margin
1. Sonata Software Ltd. 14.94% 13.15%
2. Infosys Technologies Ltd 43.05% 43.72%
3. Geometric Software Solutions 20.32% 19.92%
Co. Ltd.
4. Larsen & Toubro Infotech Ltd. 10.30% 10.42%
Average 22.15% 21.80%
12.8 The ld. CIT (A) takes note of the fact that the margin of the assessee even without working capital adjustment is at 22.15%. So, according to him, the proviso to Section 92C(2) is applicable in this case. Since the margin of the assessee is at 17.46%, the working of the +/- 5% is given as per the Table-4 reproduced as given by the ld. CIT (A) :
Table-4:
Particulars Assessee Arm's ALP +5% ALP -5% Length Price ('ALP') Sales 153,031,100 159,143,746 167,100,933 151,186,558 Total Cost 130,285,506 130,285,506 130,285,506 130,285,506 ('TC') Operating 22,745,594 28,858,240 36,815,427 20,901,052 Profit ('OP') OP/TC 17.46% 22.15% 28.26% 16.04% 13 12.9 On the basis of the aforesaid computation, since the margin of the assessee falls within +/-5% of 22.15% i.e. ALP margin, the international transaction was treated by him as at arm's length.
Therefore, he deleted the addition made by the AO /TPO in this case. The ld. DR could not point out any mistake in the calculation given above in Table 4. In the said scenario, we find that by excluding M/s. Satyam from the list of comparables, the mean of the assessee falls within ± 5% of 22.15%. Hence, we do not see any reason to interfere with the impugned order passed by the Ld. CIT(A), hence, we uphold the same. Therefore, the issues in dispute raised by the Revenue are rejected.
13. In the result, the Appeal filed by the Revenue stands dismissed.
Order pronounced in the open court on 22.07.2015.
Sd/- sd/-
(S.V.MEHROTRA) (A. T. VARKEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 22/07/2015
TS
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Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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