Income Tax Appellate Tribunal - Bangalore
Genesis Microchip (India) Pvt. Ltd.,, ... vs Assessee on 31 December, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH 'A'
BEFORE SHRI N BARATHVAJA SANKAR, VICE RESIDENT
AND
SMT. P MADHAVI DEVI, JUDICIAL MEMBER
ITA No.1254/Bang/2010
(Asst. Year - 2006-07)
M/s Genesis Microchip (I) Pvt. Ltd.,
Bangalore-. . Appellant
Vs.
The Dy. Commissioner of Income-tax,
Circle-11(3),
Bangalore. . Respondent
Appellant by : Shri B Vijay Raghavan
Respondent by : Shri Etwa Munda
Date of Hearing : 31-12-2011
Date of Pronouncement : 31-01-2012
ORDER
PER P MADHAVI DEVI, JUDICIAL MEMBER :
The appeal is filed by the assessee. The appeal is directed against the order of the Dy. Commissioner of Income-tax at Bangalore dated 17.09.2010. The appeal arises out of the assessment completed u/s 143(3) r.w.s 144C of the Income-tax Act, 1961. ITA No.1254/B/10 2
2. In this appeal, the assessee is aggrieved by the order of the AO in denying the benefit u/s 10A of the Income-tax Act of Rs.1,65,904/- on the ground that the assessee has not satisfied all the stipulated conditions as per the provisions of sec. 10A of the Act. The assessee is also aggrieved by the order of the AO and the DRP in making the Transfer Pricing (TP) adjustments.
3. The various grounds of appeal raised by the assessee are as under :
1) "the order of the learned AO, based on directions of Hon'ble DRP, erred in assessing the total income at Rs.3,70,84,666/- as against returned income of Rs.14,39,049/- computed by the assessee.
2) on the facts and in the circumstances of the case and in law, based on directions of DRP, the learned AO has erred in law by holding that the communication expenses (i.e internet charges) attributable to the delivery of computer software outside India should be reduced from export turnover while computing the deduction u/s 10A of the Act.
ITA No.1254/B/103
3) on the facts and in the circumstances of the case and in law, the learned AO has erred in law by not considering that, if the communication expenses (i.e internet charges) attributable to the delivery of computer software outside India are reduced from export turnover, an equal amount should also be reduced from total turnover for computing the deduction u/s 10A of the Act.
4) the learned AO/Transfer Pricing Officer (TPO) erred in making an addition of Rs.3,54,18,922/- to the total income of the appellant on account of adjustment in the arm's length price of the software research and development services transaction entered by the appellant with its associated enterprise;
5) the learned AO/TPO erred in disregarding the economic analysis undertaken by the appellant and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction;
6) the learned AO/TPO have erred in ignoring the fact that since that appellant is availing tax holiday u/s 10A of the Act, there is no intention to ITA No.1254/B/10 4 shift the profit base out of India, which is one of the basic intention of the introduction of transfer pricing provisions;
7) the learned AO/TPO erred in determining the arm's length margin/price using only financial year 2005-06 data, which was not available to the assessee at the time of complying with the transfer pricing documentation requirements;
8) the learned AO/TPO erred in rejecting certain comparables considered by the assessee in the comparability analysis by applying different quantitative and qualitative filters;
a) the learned AO/TPO has erred by rejecting certain comparable companies identified by the assessee as having economic performance contrary to the industry behavior (e.g companies which showed a diminishing revenue trend);
b)the learned AO/TPO erred in rejecting certain comparables considered by the assessee in the comparability analysis on the ground that the comparables were having ITA No.1254/B/10 5 different accounting year (other than March 31 or companies whose financial statements were for a period other than 12 months);
c) the learned AO/TPO erred in rejecting certain comparables considered by the appellant in the comparability analysis using 'onsite revenues greater than 75% of the export revenue's as a comparability criterion; and
d) the learned AO/TPO erred in rejecting certain comparables considered by the appellant in the comparability analysis using 'employee cost greater than 25% of the total revenues' as a comparability criterion.
9. the learned AO/TPO erred in by accepting certain companies using unreasonable comparability criteria;
10. the learned TPO erred in obtaining information which was not available in public domain by exercising powers u/s 133(6) of the Act and relying on the information for comparability analysis;
ITA No.1254/B/106
11. the learned AO/TPO erred in not considering the foreign exchange fluctuation gain (loss) as part of the operating income while computing the operating margin;
12. the learned AO/TPO erred in not considering the provisions written back as part of the operating income while computing the operating margin;
13. learned AO/TPO erred in not making suitable adjustments on account of differences in the risk profile of the appellant vis-à-vis the comparables, while conducting comparability analysis;
14) the learned AO/TPO erred in determining the adjustment in respect of the arm's length price without appreciating that the adjustment to arm's length price, if any, should be limited to the lower end of the 5% range as the appellant has the right to exercise this option under the proviso to sec. 92C of the Act.
15. the learned AO erred in levying interest of Rs.65,26,005/- and Rs.10,536/- u/s 234B and 234C of the Act respectively;
ITA No.1254/B/107
16. the learned AO erred, in law, and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act.
5. Ground No.1 is general in nature. Coming to the ground Nos.2 and 3, we find that it is relating to the reduction of export turnover by communication expenses i.e internet charges attributable to the delivery of computer software outside India and not reducing the same from total turnover also. for the purpose of computing deduction u/s 10A of the Act.
6. The learned counsel for the assessee submitted that this issue is now covered by the Hon'ble Chennai Special Bench in the case of Sak Soft Ltd., 313 ITR 353 (AT) and by the decision of Hon'ble Bombay High Court in the case of M/s Gem Plus Jewellery India Ltd, 2010- TIOL-456-HC-Mum-IT) and also the by decision of the jurisdictional High Court in the case of CIT Vs. Tata Elxsi Ltd. & Others (2011- TIOL-684-HC-Kar-II, wherein it has been held that if certain expenditure is reduced from the export turnover, the same has to be reduced from the total turnover also.
7. The learned DR however, relied upon the order of the AO. ITA No.1254/B/10 8
8. Respectfully following the decision of the jurisdictional High Court in the case of CIT Vs. Tata Elxsi Ltd. & Others (2011-TIOL- 684-HC-Kar-II, we direct the AO to reduce the total turnover also by communication expenses for the purpose of computing deduction u/s 10A of the Act. These grounds are accordingly allowed.
9. Coming to ground Nos. 4 to 13, relating to Transfer Pricing (TP) adjustments, the brief facts of the case are that the assessee is a company which is engaged in the business of backend computer research and development activity. It filed its return of income for the assessment year 2006-07 on 28.11.2006 declaring income of Rs.14,39,049/- after claiming deduction u/s 10A of the Income-tax Act of Rs.5,07,13,687/-. During the assessment proceedings u/s 143(3) of the Income-tax Act, the Assessing Officer observed that the assessee had international transaction exceeding Rs.15 crores. In view of the same with the prior approval of the CIT-I, Bangalore, he made a reference to the Transfer Pricing Officer (TPO) to determine the Arms' Length Price (ALP) for the transaction as per the provisions of sec. 92CA of the Income-tax Act 1961. The Jt. Director of Income- tax, Transfer Pricing-II vide order dated 27.10.2009 decided that the ITA No.1254/B/10 9 adjustments of ALP should be to the extent of Rs.3,55,93,801/-. He decided the ALP to be @ 119.45% of the operating cost and reduced the same by the price shown in the international transaction and arrived at the short fall of Rs.3,55,93,801/-. The Assessing Officer furnished copy of the order of the TPO to the assessee vide office letter dated 6.11.2009. In response to the said letter, the assessee company filed its objections and after taking the same in to consideration, the Assessing Officer drafted the assessment order adding a sum of Rs.3,55,93,801/- to the returned income as per the provisions of sec. 92CA of the Income-tax Act.
10. Against this adjustment of ALP in the draft assessment order, the assessee company filed an application before the Dispute Resolution Panel (DRP) along with its objections and submissions. The DRP after considering the assessee's contentions directed the AO to re-determine the ALP after taking into consideration the margin of Megasoft Ltd., one of the final comparables, at 51.73% on cost as against 52.74% on cost adopted by the TPO. With regard to the other issues, the DRP confirmed the order of the AO, which is made on the basis of the order of the TPO and accordingly, the ALP was re- ITA No.1254/B/10 10 determined and the adjustment u/s 92CA was made at Rs.3,54,18,922/-.
11. Aggrieved by the said adjustment, the assessee is in appeal before us.
12. The learned counsel for the assessee Shri R Vijay Raghavan, while reiterating the assessee's submissions before the authorities below has submitted that the international transaction of the assessee with its AE during the relevant financial year is relating to software research and development services. He submitted that for the purpose of establishing the ALP of its international transactions with its AE, the assessee had undertaken the transfer pricing study carried out by an independent external consultant in accordance with a provisions of the Act and Rules. According to him a detailed analysis was undertaken to determine the functions performed, risks assumed and assets utilized by the assessee and its AE in respect of the international transactions and based on the TP study, the independent external consultant concluded the price received by the assessee in respect of its transaction with AEs, to be at ALP. ITA No.1254/B/10 11
13. He submitted that the 'Transaction Net Margin Method' (TNMM) was determined as the most appropriate method to determine ALP and the search was conducted on Prowess and Capitaline databases updated till 15th Feb, 2006 to select comparable components. He submitted that searches on the databases yielded a set of 44 comparables for the software services with weighted average operating profit/operating cost of 7% after providing a working capital adjustment of 4%. He further submitted that TPO however did not accept the analysis conducted by the assessee and he conducted a fresh economic analysis and failed to appreciate that such data was not available in the public domain to the assessee at the time of complying with the mandatory TP documentation by the prescribed due date. According to him, the learned TPO obtained information which was not available in public domain from some of the companies by exercising his powers vested u/s 133(6) of the Act and used the same for comparing with the net margin of the assessee. He submitted that the TPO after providing the working capital adjustment of 1.23%, arrived at the net margin at 19.45% on operating cost. He submitted that the difference in the net margin arrived at by the assessee and by the TPO was on account of various differences such as -
ITA No.1254/B/1012
i) the TPO has recomputed the operating margin of comparable companies by treating foreign exchange gain/loss as non operating in nature;
ii) By rejecting certain comparables identified by the assessee on various untenable grounds;
iii) Not making suitable adjustments to account for differences in the risk profile of the assessee vis-a-vis the comparable companies;
iv) By not providing the 5% range to the assessee under the proviso to sec. 92C(2) of the Act.
14. He submitted that after receipt of the order of the TPO, the assessee had submitted its various objections before the Assessing Officer but without taking the same into consideration the AO has determined the ALP by proposing the draft assessment order and aggrieved by the draft assessment order, the assessee preferred an appeal to the DRP but the DRP also without considering the ITA No.1254/B/10 13 assessee's submissions, summarily accepted the contentions of the TPO.
16. The learned counsel for the assessee has also filed detailed written submissions before us and the learned DR has also filed his counter arguments. Taking all these arguments into consideration, we find that the basic objection of the assessee is that the TPO has rejected the filters adopted by the assessee and has adopted untenable filters for arriving at the comparables and in his detailed submission before the TPO as well as the Tribunal, the assessee has brought out the various factors that would justify the adoption of comparables by the assessee. He has also brought out the distinguishing factors relating to the comparables adopted by the TPO to demonstrate before us as to how they cannot be compared with the assessee. According to him, the TPO has rejected the loss making companies as comparables but has adopted super-profit making companies as comparables. He further submitted that some of the companies are not only into services but are also product companies and without taking the bifurcated profit margins of the respective units, the TPO has arrived at the net margin of 19.23% which is very excessive. He submitted if the super profit making companies are excluded from the ITA No.1254/B/10 14 comparables and if the + 5% deduction is given to the assessee, the ALP adopted by the assessee would fall within the said margins and the adjustments made by the TPO would have to be deleted. The learned DR however, strongly supported the orders of the TPO and the DRP and submitted that both the TPO as well as the DRP have exhaustively dealt with the issues in their orders and have also dealt with the objections of the assessee in detail and, therefore, the ALP adjustment made by the TPO and as confirmed by the DRP is justifiable and needs no interference.
17. Having heard both the parties and having considered the rival contentions, we find that the assessee had adopted 44 comparables while the TPO has adopted 20 companies as comparables, which are as under :
S.No. Company Name Sales OP to Provisions Adjusted (Rs. Total written OP / TO Cr.) Cost% back
1. Aztec Software Ltd. 128.61 18.09 0 18.09%
2. Geometric Software Ltd. 98.59 6.70 0 6.70% (seg)
3. Infosys Ltd. 9028.00 40.38 0 40.38% ITA No.1254/B/10 15
4. KALS Info Systems Ltd. 1.97 39.75 0 39.75%
5. Mindtree Consulting Ltd. 448.79 14.67 0 14.67%
6. Persistent Systems Ltd. 209.18 24.67 0.05 24.71%
7. R Systems International Ltd. 79.42 22.20 0 22.20% (Seg)
8. Sasken Communication Ltd. 240.03 13.90 0 13.90% (Seg)
9. Tata Elxi Ltd. (Seg) 188.81 27.65 0 27.65%
10. Lucid Software Ltd. 1.02 8.92 0 8.92%
11. Mediasoft Solutions P. Ltd. 1.76 6.29 0 6.29%
12. R.S Software (I) Ltd. 91.57 15.69 0 15.69%
13. SIP Technologies & Exports 6.53 3.06 0 3.06% Ltd.
14. Bodhtree Consulting Ltd. 5.32 15.99 0 15.99%
15. Accel Transmataic Ltd. 8.02 44.07 0 44.07% (Seg)
16. Synfosys Business Solutions 4.49 10.61 0 10.61% Ltd.
17. Flextronics Software 595.12 27.24 2.17 27.83% Systems Ltd.
18. Lanco Global Solutions Ltd. 35.63 5.27 0 5.27%
19. Megasoft Ltd. 56.15 52.74 0 52.74%
20. iGate Global Solutions Ltd. 527.91 15.61 0 15.61% (Seg) Average 20.68% 20.71% ITA No.1254/B/10 16
18. Out of these companies, the assessee is mainly aggrieved by the adoption of Infosys Technologies Ltd., KALS Information System Ltd., Accel Transmatic Ltd. and Floctronics Software System Ltd. We find that the TPO has his given reasons for adopting these companies as comparables on the basis of the data obtained by him on account of notices issued u/s 133(6) of the Income-tax Act. However, the learned counsel for the assessee has brought before us various differences which will have to be taken into account while considering these companies as comparables. The information acquired by the TPO u/s 133(6) was no doubt provided to the assessee. However, the assessee was not allowed to rebut the said information by way of any evidences. Now similar issues had arisen under similar facts before us in the case of Genesis Integrating System India Pvt. Ltd., Bangalore and this Tribunal vide orders dated 5.8.2011 had answered the various issues raised by the assessee therein and has also issued guidelines for adoption of comparables and has also directed the TPO to allow the assessee to cross examine the comparables whose replies were sought to be used against the assessee if the assessee so desires. In view of the same, we feel that justice would be done if the issue of dealing with the objections of the assessee regarding the comparables adopted by the TPO is remitted ITA No.1254/B/10 17 back to the file of the Assessing Officer with a direction to follow the guidelines issued by this Tribunal in the case of Genesis Integrating System India Pvt. Ltd., Bangalore. The copy of the order of the Tribunal in the case of Genesis Integrating System India Pvt. Ltd., Bangalore shall be appended to this order as part of this order.
19. In the result, the issue of transfer pricing adjustment is remitted back to the file of the AO for reconsideration and the appeal is accordingly allowed for statistical purposes.
20. As regards the ground No.14 is concerned, we find this issue is already covered in favour of the assessee by various decisions of this Tribunal and the assessee has also placed reliance upon the decisions of the Hon'ble Pune Bench in the case Starent Networks (I) Pvt. Ltd., in ITA No.1350/Pune/2010, whereby it has been held that benefit of + range should be provided under the proviso to sec. 92CA of the Income-tax Act and the amendment was not only prospective and not applicable to the said assessment year.
21. In view of the same, we direct the AO to give the benefit of + 5% range while making the adjustment of the ALP. ITA No.1254/B/10 18
22. The ground Nos.15 and 16 are consequential in nature and, therefore, are also remitted back to the file of the AO to be adjudicated in accordance with law.
23. In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 31st Jan, 2012.
Sd/- Sd/-
(N BARATHVAJA SANKAR) (P MADHAVI DEVI)
VICE PRESIDENT JUDICIAL MEMBER
Vms.
Bangalore
Dated : 31/01/2012
Copy to :
1. The Assessee
2. The Revenue
3.The CIT concerned.
4.The CIT(A) concerned.
5.DR
6.GF By order
Asst. Registrar, ITAT, Bangalore.