Income Tax Appellate Tribunal - Mumbai
Sanchez Capital Services P. Ltd, Mumbai vs Assessee on 1 August, 2012
1
IN THE INCOME TAX APPELLATE TRIBUNAL
"E" Bench, Mumbai
Before Shri B.R. Mittal, Judicial Member and
Shri B. Ramakotaiah, Accountant Member
ITA No.8682/Mum/2011
(Assessment Year: 2007-08)
Sanchez Capital Services Vs Income Tax Officer, 3(3)2 Room
Private Limited, 1st Floor, No. 672, AayakarBhavan,
FaimontBuilding, High Street, Mumbai 400020
HiranandaniBusinessPark,
Powai, Mumbai 400076
PAN: AAECS 1373 D
(Appellant) (Respondent)
Assessee by: Shri P.J. Pardiwala and
Shri Nishant Thakkar
Department by: Shri Ajit Kumar Jain, DR
Date of Hearing: 1/8/2012
Date of pronouncement: 22/8/2012
Per B. Ramakotaiah, A.M.
This is an appeal by assessee against the order of the ITO 3(3)(2) Mumbai u/s 143(3) r.w.s. 144C of the I.T. Act, 1961. The issues in this appeal is whether the provisions of sec 92A are applicable to the transactions of the assessee in their service activity and if so whether adjustment can be made under Transfer Pricing provisions and appropriate method to be used for arriving at such adjustment.
2. The facts relating to the present issue is that assessee M/s. Sanchez Capital Services Private Limited is in the business of providing services. M/s Fidelity International Services which is a 100% subsidiary of M/s Sanchez Computer Associates Inc., USA holds 20% shares in the assessee company. The remaining 80% is held by Peninsula Capital Services Private Limited India. Assessee has provided services to Fidelity International Services and Fidelity Outsourcing Services (FIS & FOS) respectively. The Transfer Pricing 2 Officer was of the view that the entire services were to the group entity/entities, provisions of transfer pricing will apply to assessee. Another reason for considering that transfer pricing provisions are applicable is also on the basis that the assessee has filed Form No.3CEB as prescribed in section 92E of the Act and maintained documents as prescribed in section 92D r.w.r 10D of the I.T. Rules. It was a submission of the assessee that the assessee being a joint venture between Peninsula Capital Services India Ltd., (80% share holding) and Sanchez Computer Associates Inc. USA (20% share holding) is an individual provider of I.T. Product and services. It was the contention of the assessee that even though they submitted Form No.3CEB by way of abundant precaution, these two entities (FIS & FOS) are not associated enterprises and did not satisfy any conditions prescribed under section 92A of the I.T. Act. The AO in his brief reasoning rejected the objection stating that "plea is not acceptable as the sale of its entire services were to the group entity/entities". The matter has gone before the DRP, when the assessee objected to the T.P. adjustments made. The assessee objected before the DRP as under:
"2. The ld Transfer Pricing Officer ("TPO") ought to have accepted that there is no associated party relationship between the assessee and FIS & FOS. FIS stands for Fidelity Information Services, USA and Fidelity Outsourcing Services, USA. Assessee states that in so far as provisions of section 92A are concerned, sub-section1 and sub-section 2 are to be read together to identify whether an associated enterprise relationship exists between assessee and the said two parties. Assessee's submission is that Sanchez Computer Associates Inc, USA which is 100%subsidiary of Fidelity Information Services holds 20% share in the assessee company. The remaining 80% is held by Peninsula Capital Services Pvt. Ltd, India. Therefore, Fidelity Information services can only be stated to be holding 20% in assessee company indirectly. Assessee also submits that none of the other conditions prescribed in section 92A (2) are fulfilled in the assessee's case in so far as assessee's relationship with Fidelity Information Services and Fidelity Outsourcing Services (i.e. FIS and FOS respectively) are concerned and therefore these 2 companies cannot be considered as associate enterprises 3 of assessee. Specifically the provisions of sec 92A(2)(i) also do not apply as the assessee is a service provider and not to manufacture. In the circumstances there been no relationship of any associated enterprise provisions of transfer pricing are not applicable. The adjustment made by Transfer Pricing Officer is void ab initio and should not be warranted. Assessee states that the submissions had been made before the TPO as well who had not considered the same. An application u/s 154 was also filed before the TPO but does not seem to have been dealt with".
3. The DRP however, rejected the contentions by stating as under:-
"2.1 The assessee's objection is considered. It is seen from the assessee's transfer pricing case record of this year and earlier years that the assessee has been filing form No.3CEB consistently and stating these 2 companies i.e. FIS and FOS as its associated enterprises. Transactions of assessees with these 2 companies have been considered by the assessee consistently for purposes of transfer pricing and stated to be at arm's length. It is only in the TP study filed during the audit process of transfer pricing before the TPO that it is stated that these 2 companies are not associated enterprises but were declared so as an abundant precaution. The TP report, however, continues to analyse the transactions with these 2 companies and selecting the most appropriate method in assessee's case to establish that the transactions with these 2 companies were at arm's length. In similar facts and circumstances in earlier years, the TPO passes an order u/s 92CA(3) of the Income Tax Act 1961 though no adjustments were made. Nevertheless, on the issue of associate enterprise the assessee had neither challenged the TPO/AO's orders in appeal nor u/s 264 or in any other forum. The emerging facts indicate that in similar facts and circumstances assessee had earlier furnished its return of income accompanies with Form 3 CEB showing these 2 companies as associate enterprises and accepted order u/s 92CA (3) with regard to transactions with those companies. It is only in AY 07-08 i.e. the present proceeding where an adjustment has been made that assessee has challenged the same.
2.2 It is also seen that 80% of assessee shares are held by Peninsula Capital Services Pvt. Ltd India which in turn is held hundred percent by the Zenta Private Limited, Mumbai, India. The Zenta Private Limited Mumbai is a BPO on the Zenta group of USA (in the FY 2006-07, this group was H Cube, Global realty Outsourcing, Blackheath Financial and Zenta etc.). The share holding structure of Zenta Private Limited, Mumbai and its parent companies 4 whether in India or abroad has not been narrated by the assessee. Moreover, these shareholding structures and relationships between Zenta and Fidelity groups remaining unstated and unexplained, the claim of abundant caution while filing form 3CEB remains unsubstantiated and questionable".
4. Thereafter the DRP went on to make its observations on various objections raised by the assessee and TPO accordingly passed the order in compliance to the DRP directions.
5. Aggrieved, the assessee raised main ground as under:
"1. On the facts and in the circumstances of the case and in law, the ld AO/Hon'ble Dispute Resolution Panel(DRP) has erred in considering/treating Fidelity Information Services (FIS) and Fidelity Outsourcing Services, Inc (FOS), collectively referred to as Fidelity Group Entities, as Associated Enterprises and consequently erred in making a transfer pricing adjustment of `.3,16,49,090/-
to the services rendered by the Appellant to Fidelity Group entities. It is prayed that it be held that Fidelity Group entities are not to be considered/treated as Associated Enterprises of the Appellant and consequently the transfer pricing adjustment be deleted".
6. Without prejudice to the above Ground No.1, the assessee also raised Ground Nos.3 to 5 on the merits of the adjustment made and the methodology adopted.
7. The ld Counsel at the outset has submitted that if the issue in Ground No.1 is decided i.e. entities FIS & FOS (collectively referred to as Fidelity group entities) are considered as not associated enterprises, the issue of making transfer pricing adjustment to the services rendered by the assessee to the Fidelity group entities does not arise. Therefore, at the outset submitted that the issue whether Fidelity Group entities can be considered as associated enterprises can be decided.
58. Continuing his argument, it was his submission that there is no associated party relationship with the assessee and FIS & FOS. Since FIS can only be stated to be holding 20% in assessee company indirectly. It was his submission that none of the other conditions prescribed in sec 92A(2) are fulfilled in the assessee's case. He then referred to the detailed objections filed with reference to 'no associated enterprise relationship' and the objections raised before the DRP placed in paper book from page No.35 to 43 and detailed explanation given for each of the provision u/s 92A to submit that there cannot be any associated enterprise relationship. He then referred to the order of the DRP to submit that DRP also did not give any finding about this associated relationship on the reason that complete details of holding of Peninsula Capital Services Inc, in turn Zenta group of USA, have not been placed. He then referred to the letter filed before the authorities dated 3.10.2011 signed by Chairman and CEO of Zenta stating that ZentaLLC, Delaware, USA does not currently have and has never had in the past any associated enterprises relationship with the Fidelity Information Services, USA. He also then placed share holding pattern of Sanchez as under:
6Zenta LLC (Delaware) 100% 100% Zenta Business Zenta Group LLC Process Solutions (Delaware) Inc. (Delaware) 100% Zenta Holdings (Barbados) Ltd 100% 100% Zenta Global Ltd Zenta SPE (Barbados) (Barbados) Ltd % 100% Zenta Europe Ltd. Zenta Global (England) Philippines Inc. 100% 100% Outsourcing Outsourcing Mauritius 1 Ltd Mauritius 2 Ltd (Mauritius) (Mauritius) 50% 50% Zenta Knowledge Services Pvt. Ltd India 50% ZentaPvt. Ltd 50% (India) 100% 100% Peninsula Capital Fidelity Info. Sanchez Services Pvt. Ltd Services Computer (India) USA Associates Inc. 80% (USA) 20% Sanchez Capital Services Pvt. Ltd (India) Shareholding Capital Consulting Services Provision of Ind. (Maryland) service 7
9.On the query whether this share holding pattern has been examined by the Assessing Officer or by the DRP, he submitted that this issue is being inquired on the directions of the DRP in assessment year 2008- 09 and no finality has come so far and the matter is pending before the TPO.
10. The learned Departmental Representative in reply however submitted that:
"Section 92A has two limbs. The first limb which is Sub section (1) prescribes that there can be two situations in which two enterprises are associated enterprises. These two situations are narrated in clause (a) and (b) of sub- section (1) of Section 92A of the Act.
According to clause (a) when one enterprise participates in the (i) management or (ii) control or (iii) capital of the other enterprise then the two enterprises become associated enterprises. The clause states that such participation can be (i) directly or (ii) indirectly or (iii) through one or more intermediaries.
According to clause (b) when the same person (s) participates in the (i) management or (ii) control or (iii) capital of two enterprises then the two enterprises become associated enterprises. The clause states that such participation can be (i) directly or (ii) indirectly or
(iii)through one or more intermediaries.
The clause (a) or (b) of sub-section (1) of section 92A of the Act does not prescribe a minimum threshold that can lead to creation of an associated enterprise relationship. Hence even 1% shareholding can also lead to creation of the relationship of association enterprises.
In the present case it is beyond doubt that there is an indirect participation in the shareholding of the assessee company by Fidelity Information Services (FIS). Further Fidelity Outsourcing Services (FOS) is a group company of FIS.
Following the provisions of section 92A(1) (b) it is beyond doubt that the assessee company and the foreign companies viz. FIS and FOS are associated enterprises.
8Coming to the other limb of sec. 92A which is sub-section (2) of section 92A, this is a deeming provisions which has illustrated various situations as enlisted in clauses
(a) to (m) in which the two enterprises shall be deemed to be associated enterprises for the purposes of sub-section (1) of section 92A of the Act.
Both the sub-sections independently define "associated enterprises". When two enterprises become "associated enterprises" under sub-section (1) of section 92A, there is no need to consider the deeming provisions as contained in sub-section (2) of section 92A of the Act.
In the case of the assessee there is no need to go to the provisions of section 92A(2) of the Act, since the assessee and FIS & FOS become associated enterprises in terms of provisions of section 92A(1)(b) of the Act".
He also placed on record written submissions without prejudice to the arguments including the reliance on the Hon'ble Bombay HC judgment in the case of Gopal Purohit (2010) 188 Taxman 140 (Bom.) for consistency on the reason that the assessee has been consistently filing Form No.3CEB showing assessee and the FIS/FOS as associated enterprises.
11. The learned AR in reply, however, objected to the arguments of the DR to submit that the memorandum explaining the provisions in the Finance Bill 2002 reported in Vol.254 ITR Statute 190 particularly Page No.215 explaining the provisions of Transfer Pricing areas under:
"Under the existing provisions contained in section 92 of the Income Tax Act, any income arising from an international transaction shall be computed having regard to the arm's length price.
The intention underlying the provision is to prevent avoidance of tax by shifting taxable income to a jurisdiction outside India, through abuse of transfer pricing. With a view to clarify this intention, it is proposed to substitute the section so as to provide that even where the international transaction comprises of only an outgoing, the allowance for such expenses or interest arising from the international transaction shall also be determined having regard to the arm's length price, and that the provision would not be applicable in a case where the application of arm's length price results in a downward revision in the income chargeable to tax in India.9
The existing provisions contained in section 92A of the Income Tax Act to provide as to when two enterprises shall be deemed to be associated enterprises.
It is proposed to amend sub-section (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in sub-section (2) are fulfilled".
11. Relying on the above explanation it was his submission that Section 92A(2) and 92A(1) are inter-related and unless the criteria specified in sub-section 2 are fulfilled, the two enterprises cannot be considered as associated enterprises just because there is no threshold prescribed for share holding. If the argument of the learned CIT is to be accepted then any person holding a single share in another company also could become an associated enterprise. That is the reason why sub section (1) has to be read alongwith the sub section (2) of Sec. 92A. It was his submission that there is no enterprise relationship between assessee and the other group.
12. We have considered the issue and examined the orders of the authorities. It is a fact that assessee has been filing form No.3CEB as an abundant precaution admitting the other two enterprises as associated enterprises. However, just because assessee has been filing Form No.3CEB it cannot be stated that these two are associated enterprises unless provisions of section 92A are satisfied. As far as the conditions in 92A(2) are concerned, assessee has given detailed explanation how these provisions are not applicable so as to hold the two companies as associated enterprises. However, it is not clear on record whether there is any relationship as prescribed u/s 92A(1) (a)
(b) which specify that an associated enterprise in relation to another enterprise means, an enterprise (a) which participates, directly or indirectly, or through one or more intermediaries, in the management 10 or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
13. This aspect of participating directly or indirectly in the management and control or capital of other enterprises is being examined by the TPO in assessment year 2008-09 consequent to the details filed by assessee in assessment year on the directions of the DRP. Since inquiries are pending before the TPO to examine whether there is any direct or indirect participation of Sanchez in Zenta or otherwise and share holding pattern of 80% share holder also has any direct or indirect control in Sanchez, we do not propose to give any finding at this juncture whether there is any relationship of associated enterprise between the parties involved herein. Therefore, in the interest of justice, without adjudicating on this issue, we set aside the order of the DRP as well as TPO on this issue and restore the matter to the file of the TPO to decide afresh whether there is any associated enterprise relationship between the parties and whether provisions of section 92A are applicable. Only if this issue is examined and decided, then the issue on merits can be decided whether any adjustment are required or not. Therefore, the orders on this issue are set aside and matter is restored to the file of the TPO for fresh examination. The decision taken if any already by this time in assessment year 2008-09 can be made applicable to this year, if the facts are similar. With these directions the matter is set aside for doing the assessment denovo as per the provisions of law. Assessee's grounds are allowed for statistical purposes.
1114. In the result, appeal filed by assessee is allowed for statistical purposes.
Order pronounced in the open court on 22nd August, 2012.
Sd/- Sd/-
(B.R. Mittal) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 22nd August, 2012.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "E " Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI