Income Tax Appellate Tribunal - Delhi
Global Vantedge Pvt. Ltd., New Delhi vs Assessee on 29 October, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C': NEW DELHI
BEFORE SHRI C.L.SETHI, JUDICIAL MEMBER AND
SHRI K.D. RANJAN, ACCOUNTANT MEMBER.
I.T. A. No.116/Del/2011
Assessment Year: 2005-06
Asstt. Commissioner of Income-tax, M/s. Global Vantedge (P) Ltd.,
Circle 12(1), New Delhi. Vs. 77-B, IFFCO Road,
Sector-18, Gurgaon.
PAN: AABCR8435J
I.T.A.No.323/Del/2011
Assessment Year : 2005-06
M/s. Global Vantedge Pvt. Ltd., Dy. Commissioner of I.Tax,
A-16/9, Vasant Vihar, Vs. Circle 12(1), New Delhi.
New Delhi.
PAN:AABCR8435J
(Appellants) (Respondents)
Department by : Shri Sanjay Puri, CIT-DR.
Assessee by : S/Sh. Vikas Srivastava, Mayank Aggarwal &
Atul Ninawat.
ORDER
PER C.L. SETHI, JUDICIAL MEMBER:
These are cross appeals, filed by the assessee as well by the revenue, against the order dated 29.10.2010 passed by the Commissioner of Income- tax (Appeals), pertaining to the Assessment Year 2005-06. 2 ITA No.323/Del/2011:
2. We shall first take the appeal filed by the assessee. The grounds of appeal raised by the assessee revolve around the following issues:-
(1) Whether interest-free fixed deposits with bank for bank guarantees, interest in fixed deposit kept as lien in favour of IBM for the purpose of obtaining computers on lease and other interest earned during the course of business are eligible for deduction under sec.10A of the Act?
(2) Whether the Assessing Officer was justified in excluding miscellaneous income while computing the deduction under sec. 10A of the Act.
3. In the course of hearing of this appeal, the learned counsel for the assessee pointed out that identical issue has been decided against the assessee by the Tribunal vide order dated 17.12.2009 passed by the ITAT, Delhi Bench `C' pertaining to the Assessment Years 2003-04 and 2004-05 in ITA Nos.2763 & 2764/Del/2009 along with ITA Nos. 1432 & 2321/Del/2009. The learned DR has also submitted so.
4. We have gone through the aforesaid Tribunal's order and find that this issue was decided against the assessee in the light of the decision of Hon'ble Supreme Court in the case of Liberty India vs. CIT (2009) 317 ITR 218 (SC). The learned CIT(A) in the current assessment year has decided this issue in the light of the order of Tribunal for the earlier year where the 3 reliance on the decision of Hon'ble Supreme Court in the case of Liberty India vs. CIT (supra) was placed.
5. Respectfully following the Tribunal's order in the earlier year's order, we decide this issue against the assessee by upholding the order of the learned CIT(A). Thus, the grounds raised by the assessee are rejected.
6. In the result, the appeal filed by the assessee stands dismissed. ITA No.116/Del/2011:
7. Now we shall come to the appeal filed by the revenue.
8. The effective grounds raised by the revenue are as under:-
"1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.12,37,05,850/- made on account of difference of Arm's Length Price.
2, On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not affording any opportunity to the TPO before proceeding to compute the margin of the comparables and the assessee."
9. The assessee company is primarily engaged in providing receivable management services to its offshore clients. During the year under consideration, the assessee had undertaken international transactions with its associate enterprises. The AO referred the matter under sec. 92CA to the Transfer Pricing Officer for determining the arm's length price of the international transactions entered into by the assessee with the associate 4 enterprises. The TPO passed his order under sec. 92CA(3) dated 26.09.2008 wherein he had made an adjustment of Rs.12,37,05,850/- to price declared by the assessee. In the light of the TPO's order, the AO made an addition of Rs.12,37,05,850/- to the income of the assessee, being difference between the arm's length price determined by the TPO and the price shown by the assessee in respect of the international transactions entered into with associate enterprises.
10. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).
11. In the Transfer Pricing Officer's report the assessee has characterized its Associate Enterprise broadly has a market support service provider being engaged in rendering a collection service and telemarketing service. The assessee provided services to the clients and its associate enterprises, namely Global Vantedge Inc. raises the invoice on the clients and collect the remuneration for the same. The money was passed on to the assessee after deduction of the associate enterprise's share of its contribution. In this backdrop it was mentioned by the assessee that the overseas AE negotiates with clients in USA to provide them back office processing service, and thereafter, it enters into back to back agreements with the assessee for execution of the said services. Thus, the overseas entity provides market 5 support services and the assessee provides back office support service. In the transfer pricing report submitted by the assessee, the assessee stated that since the correct tested party i.e. AE of the assessee, earned less than its comparables, the international transactions undertaken by the assessee with it's AE were at arm' length.
12. After analyzing the international transactions, business profile and relationship between the assessee and GVI in details, the TPO did not accept GVI as the tested party for the application of TNMM. The TPO after having considered the assessee's method and comparables selected by him selected OP/TC as a PLI for the bench marking of the international transaction entered into by the assessee. The TPO then computed the arm's length price at Para 8 on page 23 of his order as under:-
TC of assessee = Rs.58,85,00,000
Arm's Length revenue = Rs.122.21% *58,85,00,000
Rs.71,92,05,850
Book value of revenue= Rs.59,55,00,000
Difference of arm's length revenue
and book value of international
transactions= Rs.12,37,05,850
Arm's length value of
international transactions Rs.57,41,44,735+Rs.12,37,05,850 Rs.69,78,50,585/-
The TPO further held that since the percentage of adjustment of arm's length value was 17.7% being more than 5%, Proviso to sec. 92C(2) providing 6 benefit of 5% was not attracted. The TPO, therefore, suggested an adjustment of Rs.12,37,05,850/-.
13. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).
14. The learned CIT(A) framed following issues for adjudication in relation to transfer pricing:-
1. Whether AO/TPO have erred while determining the ALP by taking appellant as the tested party as opposed to the analysis carried out by the appellant in which RCS was accepted as the tested party?
2. Whether AO/TPO have erred in rejecting the ALP determined by the appellant?
3. In case the ALP determined by either the appellant or the AO is found to be improper, what will be the appropriate ALP?
4. Can the ALP of the international transaction between the appellant and its associated enterprise exceed the total amount of revenue earned from Clients by the appellant and RCS together?
15. The first issue was decided by the CIT(A) against the assessee in the light of the learned CIT(A)'s order passed in Assessment Years 2003-04 and 2004-05 which was affirmed by the Tribunal. The CIT(A) observed that there being no change in the facts in the current year vis-à-vis earlier years, he did not interfere with the finding for the earlier years.
16. Regarding issue No.2, the learned CIT(A) has observed as under:- 7
"17. The main argument of the appellant is that the appellant is better equipped to carry out the Transfer Pricing Analysis as it has a better understanding of the intricacies of the business and can carry on the analysis on the basis of `FAR analysis' in amore comprehensive manner. Therefore, the ALP determined by the appellant should have been accepted.
18. I have considered the contentions of the appellant and I am of the view that the contentions of the appellant are unacceptable. The case that the appellant is trying to make is that in every case, the ALP determined by the taxpayer should be accepted. This cannot be accepted since if the assessee is given the power to determine the ALP which cannot be challenged by the tax officers, then the transfer pricing regulations introduced into the tax legislation shall become infructuous. The taxpayer should be the one determining the same, however, it should be subject to scrutiny by the tax administration so that any profit shifting methodology being adopted by the assessee can be rejected. However, with this power, also comes the responsibility of being judicious and thus, the AO/TPO have to exercise their authority in accordance the Transfer Pricing Regulations.
19. I am though in agreement with the contention of the appellant that `FAR analysis' forms the basic foundation on which the ALP is determined and its importance just can not be overemphasized.
20. The appellant has been provided full opportunity during the course of appellate proceedings before me, to present the facts of the case, including FAR analysis and on consideration of same the ALP has been determined in subsequent paras." Having observed so, the learned CIT(A) decided this issue against the assessee for statistical purposes.
17. Regarding issue No.3 whether ALP of international transaction between the assessee and its AE can exceed a total amount of revenue 8 earned from clients by the assessee and its associate enterprises together, the learned CIT(A) has held and observed as under:-
"23. The crux of the contention raised by the appellant is that in a revenue sharing arrangement between the entities, what may be questioned is the proportion of sharing between the entities and not the absolute amount of revenue itself which is subject of sharing because that is beyond the control of either the appellant or its associated enterprise(s). I would agree with such a view because the prevailing Transfer Pricing Regulations only require us to analyse the transactions between associated enterprises and not the transactions with third parties since extraneous factors cannot be controlled. Moreover, if an entity is unable to earn adequate profits on account of legitimate business exigencies and not due to manipulation of transactions undertaken by the associated enterprises, such entity cannot be penalized.
24. Thus the contention of appellant is found to be acceptable, especially with reference to the object and scheme of transfer pricing regulation which govern the international transaction undertaken by an assessee with its associated enterprise and not when transactions take place between assessee and independent clients.
25. It is also very pertinent to note that the same issue has been decided in favour of the appellant for the assessment year 2003-04 by the CIT(A) and ITAT. In fact in the AY 2003-04 the CIT(A) held that if ALP is determined to be maximum i.e. 100% of the revenue earned by GVI from third party independent clients it would mean that GVI performs the marketing activities without any consideration which again is an absurd proposition since in a commercial world no person of ordinary prudence would perform any activity without any reward. Based on the functional profile of the two entities (appellant and GVI) CIT(A) held that a share of 1.40% of the revenue is adequate to compensate GVI for its activities and therefore it was decided that the ALP determined for the international 9 transactions of the appellant cannot exceed 98.60% of the revenue earned by the GVI from independent clients.
26. As in the current year there is no significant change in facts it is decided that the 1.40% of the revenue to be retained by GVI is adequate to compensate it for its marketing activities and the appellant is entitled to 98.6% of the amount earned by GVI from independent clients. Thus in the current year the ALP has to be restricted to Rs.60,32,18,954 (Rs.611,783,929 X 98.6%)."
18. While deciding the aforesaid issue No.3, the learned CIT(A) has held that the same issue was decided in favour of the assessee in the Assessment Year 2003-04 by the CIT(A) which was confirmed by the Tribunal and since there was no consequent change in facts of the current year, the CIT(A) held that 1.40% of the revenue to be retained by the associate enterprises is adequate to compensate it for its marketing activities and the assessee is entitled to 98.6% of the amount earned by associated enterprises from independent clients. The learned CIT(A) therefore, restricted the ALP to Rs.60,32,18,954/- being 98.6% of the total revenue of Rs.61,17,83,929/-.
19. On issue No.4, the learned CIT(A)'s order is as under:-
"28. I have carefully gone through the various contentions and submission made by the appellant. Though there is merit in the appellant's argument that there is no tax benefit being obtained by the appellant though shifting of profits, it cannot be the only basis to accept appellant's contentions in this regard. It is well understood that one associated enterprise can try to use its influence to determine the transaction in a manner prejudicial to the interests of the other associated enterprise because of several reasons.10
29. The issue relating to use of current year data is well settled now in view of the decision of Bangalore Tribunal in the case of Aztec Software & Technology Services Ltd. and reaffirmed in the case of Mentor Graphic Pvt. Ltd. Even in the recent order dated 10.02.2009 in the case of Honeywell Automation India Ltd. Vs. DCIT the ITAT Pune Bench (2009- TIOL-104-ITAT-Pune) has also reaffirmed this issue. Thus, it is held that the TPO is correct in using single year data while determining arm's length price in the case of the appellant.
30. As regards contention of the appellant that transaction of the appellant with independent clients, should not be benchmarked under TNMM I agree that when TNMM is used as the Most Appropriate Method to determine the Arm's Length Price, the TNMM, as the name itself suggests, evaluates profitability of transactions rather than profitability of an enterprise. Transaction of different nature cannot be aggregated for the purpose of comparison under TNMM. The same issue has also been decided in favour of the appellant in earlier years (AY 2003-04 and 200-05) hence in the current year as well I hold that while applying the TNMM to determine ALP, the revenue earned by the appellant from servicing the independent clients, without any involvement of RCS should not be benchmarked. The proportionate costs (3.28%) attributable to such revenue should be ignored while computing ALP of the international transactions.
31. As regard the objection raised by the appellant against the selection of comparables performing dissimilar functions, I have perused the profile of comparables and disagree with the appellant. Besides the two comparables against whom objection has been raised by the appellant were considered comparables by the CIT(A) in the earlier years i.e. 2003-04 and 2004-05. Thus, objections of the appellant on this count is rejected.
32. With regard to the working capital adjustment, I have carefully examined the contentions raised by the appellant and I am of the view that a suitable adjustment is necessary to 11 adjust the profitability of the comparable before benchmarking the international transaction undertaken by the appellant. The suitable working capital adjustment was also made by the TPO while determining ALP in the case of the appellant for the A.Y. 2003-04. The contention of the appellant regarding allowance of working capital adjustment has also been accepted by the CIT(A) in AY 2004-05 and has been upheld by ITAT, thus, in the current year as well the claim of the appellant needs to be accepted and a suitable adjustment is called for. The detailed computation of Working Capital adjustment to be made to the four comparables is given at Annexure 1."
While deciding issue No.4, the learned CIT(A) has relied upon his order passed in Assessment Years 2003-04 and 2004-05 which was upheld by the Income-tax Appellate Tribunal.
20. After deciding the aforesaid 4 issues in the manner as indicated above, the learned CIT(A) recomputed the ALP as under:-
"Re-computation of ALP
33. To summarize, the ALP determined by the AO/ TPO needs to be recomputed in view of matters adjudicated above. Therefore, the ALP is recomputed after making the following adjustments:
1. The four comparables chosen by the TPO for determining the ALP are found appropriate.
2. A suitable working capital adjustment has been made to adjust the operating margin of the abovementioned remaining 4 comparables. The final operating margin of the comparables, after giving effect to the said working capital adjustment comes to 24.13%. The detailed computation of the operating is given at Annexure 1.
The computation of ALP on the basis of aforesaid average operating margin of comparables is given hereunder:
12
Particulars Amount
Total Operating Cost of the 58,85,15,696
appellant
Less: Operating Cost incurred in 1,93,03,315
relation to service to third parties
(3.28%)
Net Operating cost in relation to 56,92,12,381
the International transaction
with GVI(A)
Arm's Length margin that should 13,73,50,98
have been earned by the
appellant
i.e. 24.13% of the Operating cost
(B)= (A)* 2.13%
Arm's Length Value of the 70,65,63,329
International Transaction
undertaken by the appellant
(C)=(A) + (B)
Thus, the ALP determined on the basis of above working comes to Rs. 70,65,63,329/- which exceeds the total revenue earned by the group as a whole. In view of the adjudication made for ISSUE 3 hereinbefore, the ALP cannot exceed Rs. 60,32,18,954 (Rs. 611,783,929 X 98.6%), therefore, the ALP is determined to be Rs. 60,32,18,954/-. Hence, additions to the income of the appellant is confirmed at Rs. 29,074,219 (i.e. Rs. 603,218,954 - i.e. the maximum ALP less Rs. 574,144,735 i.e. the actual value of the international transaction with the associated enterprise i.e. GV Inc)."
21. From the aforesaid recomputation of ALP done by the learned CIT(A), it is seen that ALP was determined at Rs.70,65,63,329/-, which exceeded the total revenue earned by the group as a whole. Therefore, in the light of his decision on issue No.3, the learned CIT(A) held that the ALP cannot exceed Rs.60,32,18,954/- (Rs.61,17,83,929/98.6%). He, therefore, 13 determined the ALP at Rs.60,32,18,954/-. He, therefore, confirmed the addition to the extent of Rs.2,90,74,219/- being the difference of Rs.60,32,18,954/- (maximum ALP) less Rs.57,41,44,735/- being the actual value of international transactions entered into with associated enterprises by the assessee. The learned CIT(A) proceeded further to decide the issue as to whether the adjustment of + 5% under Proviso to section 92C(2) is available to the assessee. On this issue his decision is as under:-
"34. The only objection of the TPO in relation to availability of the benefit of the proviso to sec. 92C(2) was that the difference between the ALP determined and value of international transaction is more than 5% of the ALP so determined. As in view of ALP determined hereinbefore the difference (Rs. 29,074,219) between the ALP determined (603,218,954) and value of transaction declared (Rs. 574,144,735) does not exceeds 5% of the ALP (30,160,948). Therefore, adjustment of 5% is allowable to the appellant under proviso to sec. 92C(2) of the Act and it is held that the appellant is transacting with its associated enterprise at arm's length price and the additions made by the AO/TPO are deleted.
Thus, this ground is adjudicated in favour of the appellant."
22. From the aforesaid finding of the learned CIT(A), it is clear that the learned CIT(A) has given a benefit of + 5% to the assessee inasmuch as the difference of Rs.2,90,74,219/- between the ALP determined by him at Rs.60,32,18,954/- and the value of transactions declared by the assessee at Rs.57,41,44,735/- did not exceed 5% of the ALP determined by him.
23. Now, the department is in appeal before us.
14
24. In the course of hearing of this appeal, the learned counsel for the assessee pointed out that the various issues decided by the learned CIT(A) in relation to transfer pricing matter had come for consideration in earlier 2 assessment years 2003-04 and 2004-05, and the learned CIT(A) has decided this issue in the light of his decision for the earlier years, which has been upheld by the Tribunal vide order dated 17th December, 2009 passed in ITA Nos. 2763 and 2764/Del/2009 and 1432 & 2321/Del/009 pertaining to the Assessment Years 2003-04 and 2004-05, a copy of which has been placed at Pages 80 to 111 of the Paper Book dated March 18, 2011 filed by the assessee.
25. The learned DR on the other hand, submitted that though the issues are covered by the decision of Tribunal passed in earlier years where the order of the learned CIT(A) was upheld, the various points were not raised and considered at that stage. The learned DR contended that observation of the learned CIT(A) as accepted by the Tribunal would go against the basic principles of transfer pricing which under sec. 92 mandates,....."Any income arising from international transactions, shall be computed having regard to the arm's length price." He pointed out the following points against the finding of the learned CIT(A) in earlier years, which was accepted by the 15 Tribunal, to the effect that ALP cannot be more than the total revenue earned by the A.E:-
"The observation of the CIT(A) accepted by Hon'ble ITAT goes against the back principles of TP, which u/s 92 mandates......."Any income arising from an international transaction shall be computed having regard to the arm's length price".
The law does not require that in the quest for ALP it is necessary to look into losses or profits of the party with whom the assessee has transacted. Even in a domestic situation, there is never an attempt to see how whether the party with whom the assessee transacted incurred loss or profit. For example, an enterprise can have profitable dealings with another enterprise that incurs losses using goods or services supplied by the former.
The question is whether an independent enterprise would have bothered about earnings of the enterprise at the other end of the transaction?
In TP what is required to be ascertained is how an arm's length or an independent or uncontrolled entity would have responded to a business situation and whether the assessee responded in a similar manner in a controlled situation.
Any independent Indian enterprise entering into a transaction with a foreign enterprise for providing similar services would have negotiated for highest amount of profit for itself and would not have bothered about the profit/loss of the foreign enterprise. 16 At what price the services were ultimately sold to the third party is on no consequence while determining ALP for the enterprise under examination.
The only question that needs to be answered is, whether the assessee acted at an arm's length while dealing with the A.E. Therefore, the proposition of the CIT(A) and accepted by the Hon'ble Tribunal that "the proportion of sharing between the entities and not the absolute amount of revenue" is the subject matter of transfer pricing, with utmost respect, is an incorrect proposition. It is the absolute amount of revenue earned by the assessee that is the subject matter of transfer pricing provisions and what needs to be examined is whether that was earned at an arm's length. The revenue from the third party might be "beyond control" of the AE but the revenue from the AE was not. And, the law also required that the said revenue should have been at an arm's length. Therefore, if the observation of the ITAT/CIT(A), that the ALP cannot be more than the total revenue earned by the AE, is disregarded - the order of the CIT(A) is in Revenue's favour and is relied upon."
26. We have heard both the parties and have gone through the orders of the authorities below. We have also gone through the Tribunal's order passed in Assessment Years 2003-04 and 2004-05.
27. The decision of the learned CIT(A) on the issue that ALP of the international transactions earned by the assessee should be restricted to 17 98.6% of the total revenue earned by the assessee and its associate enterprises in Assessment Year 2003-04 and 2004-05 has been reproduced by the Tribunal at Para 13 of its order. The learned CIT(A)'s findings on other issues were reproduced in Para 14, 15, 16 & 17 of the order. After reproducing CIT(A)'s findings, the Tribunal upheld the order of the learned CIT(A) vide Para 19 of the order. The decision taken by the Tribunal in Assessment Year 2003-04 was also applied in the Assessment Year 2004-05 vide consolidated order dated 17th December, 2009.
28. With regard to the benefit of 5% adjustment under Proviso to sec. 92C(2) of the Act, no benefit was granted by the learned CIT(A) in Assessment Years 2003-04 and 2004-05 inasmuch as difference between the ALP determined by the learned CIT(A) and the price declared by the assessee was more than 5%. Therefore, this issue was decided against the assessee in earlier year. However, in the assessment year under consideration, the benefit of adjustment of 5% has been allowed to the assessee because of the reason that difference between the ALP determined by the learned CIT(A) and the price of international transactions declared by the assessee was within the range of 5%. Since the ALP determined by the CIT(A) is within 5% range of the price declared by the assessee, the benefit 18 of 5% adjustment under Proviso to sec. 92C(2) has been rightly given by the learned CIT(A) in the current year under consideration.
29. Since the various issues relating to the determination of ALP are covered by the decision of Tribunal in earlier years, against which it is stated by the learned counsel for the assessee that both the assessee and department is in appeal before the Hon'ble High Court, we are incline to follow the decision of coordinate Bench and decide all these issues accordingly. Therefore, the various points raised by the learned DR that the view of the learned CIT(A), which has been accepted by the Tribunal in earlier years, is an incorrect proposition, cannot be accepted at this stage.
30. Respectfully following the Tribunal's order passed in earlier Assessment Years 2003-04 and 2004-05 upholding the findings given by the learned CIT(A) in those years, we uphold the order of the CIT(A) on the issue of determination of ALP in the current year under consideration. Thus, the grounds raised by the revenue are rejected.
31. In the result, both the appeals filed by the assessee as well by the department are dismissed.
32. This decision is pronounced in the Open Court on 6th May, 2011.
Sd/- Sd/-
(K.D. RANJAN) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 6th May, 2011.
19
ITA Nos.116 & 323/Del/2011
Copy of the order forwarded to:-
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
By Order
*mg Deputy Registrar, ITAT.