Income Tax Appellate Tribunal - Hyderabad
Hellosoft India Pvt.Ltd, Hyderabad vs Assessee on 7 August, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 1716/Hyd/2011
Assessment Year : 2007-08
Hellosoft India Pvt. Ltd., ... Appellant
Hyderabad.
(PAN - AAACZ0688E)
Vs.
Dy. Commissioner of Income-tax, ... Respondent
Hyderabad.
Appellant by : Shri A. Gopal
Respondent by : Shri D. Sudhakar
Date of Hearing : 07/08 /2013
Date of Pronouncement : 27/09/2013
ORDER
PER SAKTIJIT DEY, J.M.:
This appeal preferred by the assessee is directed against the assessment order passed u/s 143(3) r.w.s. 144C(5) of the IT Act on the direction of the Dispute Resolution Panel (DRP) pertaining to the AY 2007-08.
2. Briefly the facts are, the assessee is a company incorporated under the Indian Companies Act, 1956 and is a wholly owned subsidiary of Hellosoft Inc., USA. The assessee is engaged in the business of development of software on behalf of its holding company (hereinafter called 'Associate Enterprise'. The company is mainly involved in mass deployment of low cost, power efficient, 2 ITA No. 1716/Hyd/2011 Hellosoft India Pvt. Ltd.
fully-featured multi-mode wire line and wireless devices by providing highly optimized RISC-based VoIP product with superior voice quality. The assessee is a captive service provider to its AE only for which it gets remunerated at cost plus 8% mark up as per the terms and conditions enumerated in the agreement between the parties. For the assessment year under dispute, the assessee filed its return of income on 31/10/2007 declaring total income of Rs. 1,92,500/- after claiming deduction u/s 10A of the Act. During the FY relevant to AY under dispute, the assessee had entered into international transactions with its AE worth Rs. 20,90,12,312/-. The assessee adopted the Cost Plus Method (CPM) for computing arm's length price for its international transactions. In course of scrutiny assessment proceeding, the Assessing Officer noticing that the assessee has entered into international transactions with its AE, made a reference u/s 92CA(2) of the Act to the Additional Commissioner of Income- tax/Transfer Pricing Officer (hereinafter called 'TPO') for determining ALP.
3. In course of proceeding, the TPO called upon the assessee to produce all the documents, which was complied by the assessee. The TPO after verifying the TP study and other documents submitted by the assessee did not accept the CPM adopted by the assessee. The TPO was of the view that Transactional Net Margin Method (TNMM) is the most appropriate method for determining ALP in case of assessee. The TPO also did not accept the TP study done by the assessee and rejected it. After rejecting the TP study, the TPO 3 ITA No. 1716/Hyd/2011 Hellosoft India Pvt. Ltd.
undertook a fresh search by applying certain filters and ultimately determined the arm's length price of the international transaction at Rs. 24,10,44,129/- thereby arriving at an upward transfer pricing adjustment of Rs. 3,20,31,817/-. In terms with the order by the TPO, the Assessing Officer passed draft assessment order incorporating the transfer pricing adjustment made by the TPO. The assessee challenged the draft assessment order by raising objections before the DRP. The DRP, however, upheld the draft assessment order passed in terms with the adjustment recommended by the TPO except excluding one of the comparables adopted by the TPO i.e. Celestial Labs Ltd. As per the directions made in the order passed by the DRP, the impugned assessment order was passed by the Assessing Officer by only excluding M/s Celestial Labs Ltd. from the list of comparables and accordingly determined the ALP.
4. Being aggrieved of the assessment order and the order passed by the DRP, the assessee is in appeal before us.
5. The learned AR has submitted before us a brief note summarizing his contentions to the following seven issues:
"1. No adjustment required as there is no allegation of shifting profits from one tax jurisdiction to another especially when the assessee is eligible to claim assessee is eligible for deduction u/s 10A of the Act.
2. Most appropriate method to determine ALP is CPM and not TNMM.
3. Turnover Filter.4 ITA No. 1716/Hyd/2011
Hellosoft India Pvt. Ltd.
4. Risk Filter.
5. Onsite Revenue Filter.
6. Employee Cost filter.
7. Relief as per the proviso to section 92C(2) to be allowed as tolerance band and not as standard deduction."
6. The learned AR submitted that all these issues are covered by the earlier order passed by the ITAT in assessee's own case in ITA No. 645/Hyd/09 for AY 2005- 06, C.O. No. 40/Hyd/09 (in ITA No. 645/Hyd/09 for AY 2005-06) and in ITA No. 1411/Hyd/10 for AY 2006-07, vide order dated 15/01/2013.
7. So far as the first and second issues are concerned, the learned AR fairly conceded that both these issues are decided against the assessee by the Tribunal in its order passed in case of the assessee for the AY 2005-06 and 2006-07.
8. So far as the third issue relating to application of turnover filter is concerned, the learned AR submitted that the scale of operations is a determining factor for deciding whether a particular company is comparable or not. He submitted that a company with small turnover cannot be compared with a company with large turnover. He further submitted that the tribunal in assessee's own case for the AY 2005-06 and 2006-07 vide order dt. 15/01/2013 (supra) have accepted that turnover filter is a relevant filter for selecting comparables. In this context he drew our attention to the finding of the 5 ITA No. 1716/Hyd/2011 Hellosoft India Pvt. Ltd.
Tribunal in para 11 and 12 of the order passed for the assessment years 2005-06 and 2006-07 a copy of which is at page 170 of the paper book. The learned AR also relied upon a decision of the Hon'ble Delhi High Court in case of Agnity India Technologies Pvt. Ltd. to contend that big companies like Infosys, Satyam and Wipro cannot be treated as comparable with the assessee.
9. With regard to the risk filter, the learned AR submitted that the assessee is not exposed to any risk. Referring to the FAR analysis at pages 68 and 69 of the paper book, he submitted that the ownership of the intangibles belong to the AE. The assessee is a captive service provider assuming no risk under the agreement. He submitted that the Tribunal has decided the issue in favour of the assessee by allowing risk adjustment in AY 2005-06. The learned AR further submitted that CBDT Circular No. 6/2013, dated 29/06/2013 is in similar line.
10. With regard to the TPO selecting/rejecting comparables by applying onsite Revenue filter, the learned AR submitted that this filter should not have been applied by TPO since relevant information/material required for the same are not available in public domain. He further submitted that the TPO has not applied this filter uniformly while selecting comparables. The learned AR submitted that the Tribunal has disapproved such approach of the TPO in the order passed in case of the assessee for the AY 2005-06.
11. So far as application of Employee Cost Filter is concerned, the learned AR submitted that this filter 6 ITA No. 1716/Hyd/2011 Hellosoft India Pvt. Ltd.
cannot be applied for selecting comparables since many companies report employee cost under various heads like software development charges, project charges, product development charges, professional charges etc. instead of reporting the same as employee cost. The learned AR submitted, the Tribunal in assessee's own case for the assessment year 2005-06 has held that against application of this filter as relevant data/information are not available.
12. The learned AR finally submitted that the Assessing Officer/TPO may be directed to determine the ALP in terms with the direction given in the order passed by the Tribunal in assessee's own case for the AYs 2005-06 and 2006-07.
13. The learned DR also submitted that since the issues raised are covered by the earlier order passed by the Tribunal in case of the assessee for the assessment years 2005-06 and 2006-07, a direction can be given to the Assessing Officer to determine the ALP for this assessment year also keeping in view the earlier order of the Tribunal.
14. We have considered the submissions of the parties and perused the material on record. On perusal of the order dated 15/01/2013 passed by the Tribunal in assessee's own case for AY 2005-06 and 2006-07 (supra), we find that all the issues raised in the present appeal are squarely covered by the order passed by the Tribunal. So far as the first issue is concerned the coordinate bench has rejected such contention of the 7 ITA No. 1716/Hyd/2011 Hellosoft India Pvt. Ltd.
assessee in para 25 of the said order, which is as follows:
"25. We have heard rival submissions and perused the materials on record. We have also examined the decisions relied upon by the assessee. Our finding on the issue is though it is a fact that assessee's income is exempt u/s 10A of the Act but that does not necessarily mean that the Assessing Officer has to prove the shifting of profits by the assessee to its AE before applying Transfer Pricing Provision. The Hon'ble P & H High Court in the case of Coca Cola India Inc V/s. ACIT (309 ITR page 14) while considering somewhat similar issue held in the following manner:-
" We do not find any ambiguity or absurd consequence of application of Chapter-X to persons who are subject to jurisdiction of taxing authorities in India nor we find any statutory requirement of establishing that there is transfer of profit outside India or that there is evasion of tax. Only condition precedent for invoking provisions of Chapter X is that there should be income arising from International transaction an d such income is to be computed having regard to arms length price. "International transaction" as defined u/s 92B of the Act, as already observed, certainly stands on a different footing than any other transaction. Arms length price is nothing but a fair price which would have been normal price. There is always a possibility of transaction between a non-resident and its associates being under valued and having regard to such tendency, a provision that income arising out of the said transaction could be computed having regard to arms length price, will not be opened to question and is within the legislative competence to effectuate the charge of taxing real income in India."
The Income-tax Appellate Tribunal, Bangalore Bench in case of M/s SAP Labs India Pvt. Limited V/s. ACIT (ITA No.398/Bang./2008) dated 30th August, 2010 while considering identical issue held in the following manner:-
"The argument of the assessee with reference to sec. 10A status also needs a mention. It is the case of the assessee that it is enjoying sec. 10A benefit and no tax is payable on export income, which makes the Indian tax rate more attractive than German tax rate and therefore, there could be no motive to understate assessee's income. This argument could be a good logic, but only for those assessment years covered by sec. 10A benefit. Once the benefit is exhausted, the assessee would be liable for taxation in which case, the German tax rate may be more attractive. If the pricing for the exempted years is accepted without analysis there is every chance that the assessing authority might be estopped, on the doctrine of consistency, 8 ITA No. 1716/Hyd/2011 Hellosoft India Pvt. Ltd.
from examining the pricing for the subsequent non- exempted years. This is quite uncalled for."
In view of the aforesaid judicial pronouncements, the contention raised by the assessee is not acceptable. Accordingly, the ground raised by the assessee in its Cross Objection is dismissed."
15. Respectfully following the decision of the coordinate bench in assessee's own case (supra), we reject this argument of the assessee.
16. As regards the second issue relating to the contention of the assessee that CPM is most appropriate method to determine the ALP and not TNMM, we find that this issue is squarely covered by the decision of the Tribunal in assessee's own case for AY 2005-06 and 2006-07 (supra), which fact has been accepted by the learned AR. Accordingly, following our earlier order we hold that TNMM is the most appropriate method to determine the ALP.
17. As regards the third issue pertaining to Turnover Filter, we find that the Tribunal in assessee's own case for AY 2005-06 and 2006-07 (supra) has accepted turnover filter as a relevant factor following the decision of the ITAT, Hyderabad Bench in case of DEloittee Consulting (61 DTR 101). The Hon'ble Delhi High Court has also upheld this view in case of Agnity India Technologies P. Ltd., dated 10/07/2013, a copy of which has been placed on record. We, therefore, remit this issue to the file of the AO for consideration afresh keeping in view our order dated 15/01/2013 in assessee's own case for the assessment years 2005-06 and 2006-07 as well as the decision of the Hon'ble Delhi High Court (supra). However, we would like to make it clear that while 9 ITA No. 1716/Hyd/2011 Hellosoft India Pvt. Ltd.
applying the turnover filter a fixed upper limit cannot be applied uniformly and across the board in all cases. The upper limit has to be fixed reasonably, keeping in view the turnover of the assessee in a given case.
18. As regards 4 th issue relating to risk filter, as submitted by the learned AR, this issue is also covered by the decision of the coordinate bench in assessee's own case for AY 2005-06 and 2006-07 (supra), wherein the coordinate bench vide para 17, held as follows:
"17. We have heard the submissions of the parties in this regard. The materials on record clearly prove the fact that the assessee is a captive service provider. It has transactions only with its AE. It is also a fact that all the risks lies with the AE. Different benches of the Tribunal have also taken a divergent view on this issue. The Income-tax Appellate Tribunal, Mumbai Bench in the case of Simontech (supra) has held that no separate adjustment is required on account of risk and functional difference, the Income- tax Appellate Tribunal Delhi Bench in the case of Sony India Pvt. Limited V/s. DCIT (114 ITD 448) has held that deduction on account of ownership of intangibles, risk factors can be allowed. In aforesaid view of the matter, we are inclined to accept the view favorable to the assessee. We therefore uphold the direction of the CIT (A) in this regard in allowing the benefit of risk adjustments at 1%. Accordingly, the ground raised by the department is dismissed."
19. Since the issue under consideration is identical to that of the case of the assessee in AY 2005-06 and 2006-07 (supra), respectfully following the decision of the coordinate bench in the said years, we allow the benefit of risk adjustments at 1%. This ground is allowed.
20. As regards the 5 th and 6 th issues relating to onsite revenue filter and employee cost filter, we find that the issues are squarely covered by the decision of the coordinate bench in assessee's own case for AY 2005-06 and 2006-07 (supra) wherein 10 ITA No. 1716/Hyd/2011 Hellosoft India Pvt. Ltd.
the coordinate bench vide para NO. 12 in its order, held as follows:
"12. In view of the aforesaid, we uphold the decision of the CIT (A) in excluding companies whose turnover is more than Rs.100 crores. Similarly the CIT (A) is equally correct in not sustaining the rejection of comparables selected by the assessee by applying 'employee cost to sale' filter as relevant data/information for this filter are not available. Moreover, it is also a fact that part of the employee cost is included by many companies under different other heads. Selection of comparables applying the 'onsite income' filter also stands on the same footing as relevant data/information are not available in respect of all the companies in the database. It is also a fact that though the TPO has himself not applied this filter by observing that the companies having onsite income of more than 75% cannot be treated as comparables but two of the companies i.e. M/s Foursoft Limited and Sankya Infotech Limited selected as comparables by the TPO were having onsite income/expenses of more than 75%. In this view of the matter, the CIT (A) was correct in holding that rejection of comparables selected by the assessee by applying this filter is not correct. We also fully subscribe to the view of the CIT (A) that loss making companies and companies having super normal profits cannot be considered as comparables in view of the ratio laid down in case of Mentor Graphics (India) Pvt. Ltd. V/s. DCIT (109 ITD 101) and Philips Software (119 TTJ 721). In aforesaid view of the matter, the companies selected by the CIT (A) as comparables is rational and appropriate in the facts of the present case. We therefore uphold the order of the CIT (A) in directing the Assessing Officer to compute the arithmetic mean of 11 comparables selected by him and determine the ALP after computing the adjusted average PLI. As result, grounds Nos. 1,2 and 3 are dismissed."
21. Respectfully following the said decision, we direct the AO to decide the said issues following the decision of the coordinate bench in AY 2005-06 and 2006-07 (supra).
22. We therefore set aside the order of the CIT(A) and remit the matter back to the file of the AO/TPO who shall determine the ALP afresh keeping in view our direction given hereinabove. On determination of ALP by the AO/TPO if it is found that the price shown by the assessee for the international transaction is within (+)/(-) 5% of the ALP determined then no adjustment is required to be made.
11 ITA No. 1716/Hyd/2011Hellosoft India Pvt. Ltd.
23. In the result, appeal of the assessee is partly allowed for statistical purposes.
Pronounced in the open court 27/09/2013.
Sd/- Sd/- (CHANDRA POOJARI) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 27 th September, 2013. kv Copy to:-
1) Hellosoft India Pvt. Ltd., 8-2-7036, Road No.12, Banjara Hills, Hyderabad - 500 034.
2) DCIT, Circle - 2(2), Hyderabad
3) DRP, Hyderabad
4) Addl. CIT(Transfer Pricing), Hyderabad.
5) The Departmental Representative, I.T.A.T., Hyderabad.
Description Date Intls
S.No.
1. Draft dictated on Sr.P.S./P.S
2. Draft placed before author Sr.P.S/PS
Draft proposed & placed before JM/AM
3 the second Member
4 Draft discussed/approved by JM/AM
second Member
5 Approved Draft comes to the Sr.P.S./P.S
Sr.P.S./PS
6. Kept for pronouncement on Sr. P.S./P.S.
7. File sent to the Bench Clerk Sr.P.S./P.S
8 Date on which file goes to the
Head Clerk
9 Date of Dispatch of order