Income Tax Appellate Tribunal - Bangalore
M/S Subex Limited , Bangalore vs Deputy Commissioner Of Income Tax ... on 5 October, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND
SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER
IT(TP)A No. 190/Bang/2018
Assessment Year : 2013-14
M/s. Subex Limited,
The Deputy
RMZ Ecoworld, Outer Ring
Commissioner of Income
Road,
Vs. Tax,
Devarabisanahalli,
Circle 6 (1) (2),
Bangalore - 560 103.
Bangalore.
PAN: AABCS9255R
APPELLANT RESPONDENT
Assessee by : Shri S. Venkatram, Sr. Advocate
Revenue by : Smt. Bhavna C. Yashroy, CIT (DR)
Date of hearing : 25.09.2018
Date of Pronouncement : 05.10.2018
ORDER
Per Shri A.K. Garodia, Accountant Member
This appeal is filed by the assessee and the same is directed against the assessment order dated 04.10.2017 for Assessment Year 2013-14 passed by the AO u/s. 143(3) r.w.s. 144C(13) of IT Act, 1961 as per the directions of DRP.
2. The grounds raised by the assessee are as under.
"The grounds stated hereunder are independent of and without prejudice to one another. The Appellant submits as under:
1. Assessment and Reference to Transfer Pricing Officer are bad in law 1.1 The Deputy Commissioner of Income Tax. Circle 6(1)(2) ('Ld. AO') erred in making a reference to the Deputy Commissioner of Income-tax, Transfer Pricing -- Range 2(2)(2) ('Ld. TPO'), inter-alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Income-tax Act, 1961 (the Act'), were satisfied in the instant case.
Accordingly, the order passed by the Ld. TPO is without jurisdiction. The Hon'ble Dispute Resolution Panel ('DRP') erred in upholding the actions of the Ld. AO/ Ld. TPO.
IT(TP)A No. 190/Bang/2018 Page 2 of 9 1.2 On the facts and in the circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in its international transactions. which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. The Hon'ble DRP erred in upholding the actions of the Ld. AO/ Ld. TPO.
1.3 The assessment order passed by the Ld. AO is without jurisdiction, inter-alia, in so far as it purports to give effect to an invalid order of the Ld. TPO. The Hon'ble DRP erred in upholding the actions of the Ld. AO/ Ld. TPO.
I
2. Incorrect rejection of aggregated approach 2.1 The Ld. AO/ Ld. TPO erred in rejecting the entity level Transactional Net Margin Method ('TNMM') approach (aggregated approach) adopted by the Appellant and in preparing a segmental profit and loss of the Company on his own surmises. The Hon'ble DRP erred in upholding the actions of the Ld. AO/ Ld. TPO and concluding that the Appellant had not provided any rationale supporting its claim.
3. Incorrect segmental account drawn by the Ld. TPO 3.1 Without prejudice to the fact that an aggregated approach is appropriate, given the facts and circumstances of the case, the Ld. AO/ Ld. TPO erred in appropriating all costs other than sales and marketing costs on the basis of sales. Further, the Hon'ble DRP erred in upholding the actions of the Ld. AO/ Ld. TPO and in doing so ignored the contentions of the Appellant.
3.2 Without prejudice to the fact that an aggregated approach is appropriate, given the facts and circumstances of the case, the Ld. AO/ Ld. TPO erred in considering foreign exchange loss on FCCBs as operating in nature and not following the decision of the Tribunal in Appellant's own case for AY 2010-11 in IT(TP)A No. 373/Bang/2015 dated 18 March 2016, while considering the segmental accounts. The Hon'ble DRP erred in upholding the actions of the Ld. AO/Ld. TPO
4. Determination of arm's length price by the Ld. TPO 4.1. The Ld. AO/ Ld. TPO erred on facts and in law in conducting a fresh benchmarking analysis using non-contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the learned Ld. TPO is liable to be quashed. The Hon'ble DRP erred in upholding the actions of the Ld. AO/ Ld. TPO.
4.2. The Ld. AO/ Ld. TPO erred on facts in rejecting the comparable IT(TP)A No. 190/Bang/2018 Page 3 of 9 companies (i.e. Nucleus Software Exports Ltd & Tata Elxsi Ltd) arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant. The Hon'ble DRP erred in upholding the actions of the Ld. AO/ Ld. TPO.
4.3. The Ld. AO/ Ld. TPO grossly erred on facts in benchmarking the international transactions of the Appellant with so-called product companies without considering the differences in the functions performed, assets employed, and risk undertaken by the Appellant vis- a-vis comparable companies. The Hon'ble DRP erred in upholding the actions of the Ld. AO/ Ld. TPO.
4.4. The Ld. AO/ Ld. TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per Rule 10A of the Income-tax Rules, 1962 and arbitrarily applying a 25% related party criteria in accepting/ rejecting comparables. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
4.5. The Ld. AO/ Ld. TPO erred in selecting Sasken Communications Technologies Ltd as a comparable company even though the company does not satisfy the export revenues filter of 75% of total sales as applied by the Ld. TPO himself. The Hon'ble DRP erred in upholding the actions of the Ld. AO/ Ld. TPO.
4.6. Without prejudice to Ground 4.5 above, the Ld. AO/ Ld. TPO erred in selecting only the product segment of Sasken Communications Technologies Ltd without appreciating the business profile of the Appellant. In doing so, the Ld. TPO erred in considering only the segmental data (product segment) for Sasken Communications Technologies Limited and not at entity level. The Hon'ble DRP erred in upholding the action of the Ld. AO/Ld. TPO and concluding that software services segment of Sasken Communications Technologies Ltd is into telecom software and embedded designs and hence is not functionally comparable to the Appellant.
4.7. Without prejudice to Grounds 4.5 and 4.6 above, the Ld. AO/ Ld. TPO erred in selecting the product segment of Sasken Communications Technologies Limited even though the revenue of the segment is unreliable owing to the same being subjected to litigation.
4.8. The Ld. AO/ Ld. TPO erred on facts in selecting Larsen and Toubro Infotech Limited as a comparable which is engaged only in the rendering of services while selecting other comparable companies which are into development and owning of software products and rendering services. The Ld. AO/ Ld. TPO has inconsistently applied the functional comparability parameter and the Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
IT(TP)A No. 190/Bang/2018 Page 4 of 9 4.9. The Ld. AO/ Ld. TPO erred in selecting Larsen and Toubro Infotech Limited as a comparable without considering the fact that the company has significant related party transactions (i.e17.52%). The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
4.10. The Ld. AO/ Ld. TPO erred on facts by inconsistently applying the functional comparability parameter and in selecting Persistent Systems Limited as a comparable which is engaged in Outsourced Product Development activities. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
4.11. The Ld. AO/ Ld. TPO erred in selecting Persistent Systems Limited as a comparable without considering the fact that the company has significant related party transactions (i.e., 19.66%). The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
4.12. The Ld. AO/ Ld. TPO erred in selecting Persistent Systems Limited as a comparable even though the company has achieved inorganic growth through acquisition of other companies. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
4.13. The Ld. AO/ Ld. TPO erred in selecting Tech Mahindra Limited as a comparable even though the company fails the related party transactions filter of 25% applied by the Ld. TPO (i.e., 43.17%). The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
4.14. The Ld. AO/ Ld. TPO erred in rejecting Mindtree Ltd and CG Vak Software & Exports Ltd as functionally not comparable to the Appellant. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO and in doing so erred in not applying the functional comparability filter consistently.
4.15 The Ld. AO/ Ld. TPO erred in not applying an upper- turnover filter to identify comparable companies. However, the Ld. AO/ Ld. TPO has applied a lower turnover filter and has accordingly rejected comparable companies with turnover less than INR 1 crore. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
4.16 The Ld. AO/ Ld. TPO erred in utilizing details collected under section 133(6) of the Act, without providing the Appellant an opportunity of examining and validating the data relied upon. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
IT(TP)A No. 190/Bang/2018 Page 5 of 9
5. Erroneous transfer pricing adjustment for both software development services and marketing and allied charges 5.1. Without prejudice to the grounds above, the Ld. AO/ Ld. TPO erred on facts and in law in adjusting the price of international transaction twice while determining the arm's length price for software development income and marketing and allied charges. The Hon'ble DRP erred in upholding the actions of the Ld. AO/ Ld. TPO.
5.2. Without prejudice to the grounds above, the Ld. AO/ Ld. TPO has erred in considering the software development income and marketing and allied charges as separate transactions. each requiring independent benchmarking even though both transactions were subsumed in the TNMM approach adopted by the Ld. AO/ Ld. TPO. The Ld. AO/ Ld. TPO erred in not considering either one of software development income or marketing and allied charges as the primary adjustment and not granting credit for the same, while computing the secondary adjustment. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
6. Transfer pricing adjustments arising from interest on loans and interest on trade receivables 6.1. The Ld. AO/ Ld. TPO has erred in considering outstanding receivables from Subex Americas Inc.. to be a separate international transaction and computing interest on the same. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
6.2. The Ld. AO/ Ld. TPO erred in not appreciating that creation of trade receivables was a secondary transaction arising out of international transactions with Subex Americas Inc., which has already been benchmarked at the time of income recognition. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
6.3. The Ld. AO/ Ld. TPO erred in not appreciating that the underlying agreement does not have a clause for interest on outstanding balance and hence no such interest is payable by Subex Americas Inc. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
6.4. Without prejudice to the above, the Ld. AO/ Ld. TPO has erred in computing interest on receivables from Subex Americas Inc. on closing balances as against the average amount outstanding during the year. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
7. Transfer pricing adjustments arising from Corporate IT(TP)A No. 190/Bang/2018 Page 6 of 9 guarantee 7.1. The Ld. AO/ Ld. TPO erred in not appreciating the fact that the provision of corporate guarantee by the Appellant to Subex Technologies Inc., does not have a bearing on the profit or loss or income or assets of the Appellant during FY 2012-13 and hence is not an international transaction as envisaged under section 92B of the Act. Accordingly. the Ld. AO/ Ld. TPO erred in computing a fee on the corporate guarantee provided by the Appellant. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
7.2. The Ld. AO/ Ld. TPO erred in not appreciating that corporate guarantee given by the Company to Subex Technologies Inc., was in the nature of shareholder service and such guarantee was extended with a view to protect its investment. The Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO.
8. Erroneous computation of income 8 1. Without prejudice to the grounds above, the Ld. AO has erred in computing the assessed income of the Appellant at INR 90,79,17,131 in the final assessment order. The Ld. AO erred in adding the returned loss to the adjustment arising on account of transfer pricing matters, instead of reducing the returned loss from the transfer pricing adjustment.
9. Set off of brought forward business losses and unabsorbed depreciation 9.1. The Ld. AO has erred in not setting-off brought forward business losses and unabsorbed depreciation pertaining to AY 2008-09. The Hon'ble DRP has erred in not adjudicating the grounds raised by the Appellant before it.
10. Set off of MAT credit 10.1. The Ld. AO has erred in law in not allowing set-off of MAT credit pertaining to AY 2007-08, AY 2008-09 and AY 2012-13. The Hon'ble DRP has erred in not adjudicating the grounds raised by the Appellant before it.
11. Grant of Foreign Tax Credit 11.1. The Ld. AO has erred in law in not granting Foreign Tax Credit. The Hon'ble DRP has erred in not adjudicating the grounds raised by the Appellant before it.
12. Levy of interest under section 234B 12.1. The Ld. AO has erred in levying interest of INR 14,86,04,445 under section 234B of the Act.
13. Initiation of penalty proceedings under section 271(1)(c) of the Act 13.1. On the facts and in the circumstances of the case and in IT(TP)A No. 190/Bang/2018 Page 7 of 9 law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. The DRP has erred in dismissing the Appellant's objection against initiation of penalty proceedings.
14. Relief 14.1. The Appellant prays that directions be given to grant all such relief arising from the preceding grounds as also all reliefs consequential thereto.
The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal. at any time before or during the hearing of the appeal."
3. At the very outset, it was submitted by ld. senior counsel of the assessee that in the present case, the matter has to be restored back to the file of TPO for fresh decision because the TPO has committed some fundamental mistakes. In this regard, he drawn our attention to para no. 6 of the order of TPO and pointed out that as per this Para, the TPO had made separate additions/disallowance in respect of TP adjustment on marketing and allied charges paid to AE of Rs. 12,3,19,59,360/- and the TPO has also made TP adjustment on account of sale of software to AE of Rs. 1,51,95,29,978/- and on this account, the adjustment made by him is of Rs. 48,92,80,300/-. After pointing out this, he placed reliance on a Tribunal order rendered in the case of M/s. Mphasis Ltd. vs. Addl. CIT in IT(TP)A No. 242/Bang/2014 dated 09.08.2017. He submitted a copy of this Tribunal order and drawn our attention to para 9 of this Tribunal order and submitted that as per this Para of Tribunal order, it was held by the Tribunal that once TNMM is applied, for an item of expenditure forming part of operating expenditure, no separate adjustment is justified. He pointed out that in that case, the TPO has applied CUP method for computing ALP for commission without appreciating the fact that the assessee has adopted the TNMM at each segment level while considering selling commissions as closely linked transaction. He submitted that in the present case also, the payment of marketing and allied charges are part of operating expenditure for computing the profit margin of the assessee on sale of software and once, the profit margin on sale of software is examined under TNMM, no separate adjustment is called for in respect of marketing and allied charges being part of operating expenditure.
IT(TP)A No. 190/Bang/2018 Page 8 of 9
4. He also placed reliance on another Tribunal order rendered in the case of ACIT Vs. Gates India (P) Ltd. in ITA No. 75/Del/2011 dated 31.07.2017. He submitted a copy of this Tribunal order also and drawn our attention to para no. 7 of this Tribunal order and pointed out that in that case, the TPO considered the TNMM as well as CUP method as most appropriate method in respect of two transactions of import of goods and sale of finished products to the A.E. because in that case, the assessee was importing raw material from its A.E. and also making exports of the finished goods to the A.E. He pointed out that under these facts, it was held by Tribunal in that case that it is not proper to apply separate methods for determining the ALP for each of the transactions particularly when the international transactions are closely linked and inter- depending having direct bearing on the price of each other. The ld. DR of revenue supported the orders of authorities below and he also submitted that the matter may be restored back to the file of TPO for fresh decision in the light of these Tribunal orders.
5. In the rejoinder, the ld. AR of assessee further submitted that there is one more defect in the order of TPO because the TPO has bifurcated domestic sale and export sales for the purpose of computing operating profit and thereafter, considered the profit of export segment only for TP analysis. He submitted that this action of TPO is not justified and in support of his contention, he placed reliance on a Tribunal order rendered in the case of DCIT Vs. JDSU Indian Pvt. Ltd. in ITA No. 1120/Del/2015 dated 02.04.2018. He submitted a copy of this Tribunal order and pointed out that in that case, the TPO has segregated the financials of assessee into two segments i.e. distribution and commission segments in proportion to sales by the assessee in distribution business and commission income from indenting activities. He drawn our attention to paras 19 and 20 of this Tribunal order and pointed out that in that case, it was held by the Tribunal that no compelling reasons are forthcoming before the Tribunal as to why the ld. TPO should discard the method of TNMM which has been consistently and continuously adopted in the last three preceding years. He submitted that in view of this Tribunal order, this action of TPO should also be disproved.
IT(TP)A No. 190/Bang/2018 Page 9 of 9
6. We have considered the rival submissions. We find that the objections which are raised before us were not raised by assessee before the TPO or DRP and hence, on this aspect, there is no finding of TPO & DRP. Hence we feel it proper that in the facts of present case, the entire issue should go back to the file of TPO for fresh decision in the light of various Tribunal orders which are cited before us as noted above. Accordingly we set aside the assessment order and restore the matter back to the file of AO/TPO for fresh decision in the light of above discussion after providing adequate opportunity to the assessee. In view of this decision, no adjudication is called for in respect of various specific grounds raised by the assessee in the present appeal.
7. In the result, the appeal filed by the assessee is allowed for statistical purposes in the terms indicated above.
Order pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/-
(SUNIL KUMAR YADAV) (ARUN KUMAR GARODIA)
Judicial Member Accountant Member
Bangalore,
Dated, the 05th October, 2018.
/MS/
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Assistant Registrar,
Income Tax Appellate Tribunal,
Bangalore.