Income Tax Appellate Tribunal - Bangalore
Assistant Commissioner Of Income Tax, ... vs M/S Manhattan Associates India ... on 31 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND
SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER
IT(TP)A No. 1293/Bang/2014
Assessment Year :2009-10
M/s. Manhattan Associates (India)
Development Centre Pvt. Ltd., The Deputy Commissioner of
Plot No. 170/171 & 172, Phase II, Income Tax,
Vs.
EPIP Zone, Whitefield Road, Circle - 12 (1),
Bangalore - 560 066. Bangalore.
PAN: AADCM0727A
APPELLANT RESPONDENT
IT(TP)A No. 1342/Bang/2014
Assessment Year : 2009-10
M/s. Manhattan Associates (India)
The Assistant
Development Centre Pvt. Ltd.,
Commissioner of Income
Plot No. 170/171 & 172, Phase II,
Tax, Vs.
EPIP Zone, Whitefield Road,
Circle - 12 (1),
Bangalore - 560 066.
Bangalore.
PAN: AADCM0727A
APPELLANT RESPONDENT
Shri Ved Jain & Shri Darpan Kirpalani,
Assessee by :
Advocates
Revenue by : Shri C.H. Sundar Rao, CIT (DR-I)
Date of hearing : 04.04.2018
Date of Pronouncement : 31.05.2018
ORDER
Per Shri A.K. Garodia, Accountant Member
These are cross appeals filed by the assessee and revenue and these are directed against the order of ld. CIT(A)-IV, Bangalore dated 18.08.2014 for Assessment Year 2009-10.
2. The grounds raised by the assessee are as under.
"Based on the facts and circumstances of the case and in law.
IT(TP)A Nos. 1293 & 1342/Bang/2014 Page 2 of 12 Manhattan Associates India) Development Centre Pvt. Ltd. (hereinafter referred to as "MA India' or the Company- or the "Appellant'), respectfully craves leave to prefer an appeal against the appeal order passed by the learned Commissioner of Income-Tax (Appeals) - IV [hereinafter referred to as the "learned CIT(A)"] under section 250 of the Income-tax Act, 1961 ("Act") on the following grounds:
On the facts and circumstances of the case and in law:
1. The learned CIT(A) has erred in law and facts, by upholding the addition of Rs. 8,58,68,414 made by the learned Assessing Officer ("AO") / Transfer Pricing Officer ("TPO") on account of adjustment to the arm's length price of the payments made by the Appellant to its Associated Enterprise ("AE") towards software development services:
a) The learned CIT(A) has erred in law and facts by not accepting the Appellant's plea in entirety and confirming with the learned Assessing Officer ("AO")/Transfer Pricing Officer ("TPO") on not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("Rules"), and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length;
b) The learned CIT(A) has erred in law and facts by upholding the action of AO/ TPO in determination of the arm's length margin/ price using only single year data i.e. for FY 2008-09 and not allowing the use of multiple year data as applied by the Appellant in the transfer pricing documentation;
c) The learned CIT(A) has erred in law and facts by upholding the action of AOITPO in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters:
i. The learned CIT(A) has erred, in law and in facts, by not accepting the Appellant's plea that companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) should not be rejected.
ii. The learned CIT(A) has erred, in law and in facts, by not accepting the Appellant's plea that companies should not be rejected using employee cost greater than 25% of the total revenues as a comparability criterion.
iii. The learned CIT(A) has erred. in law and in facts, by not accepting the Appellant's plea that rejecting companies using IT(TP)A Nos. 1293 & 1342/Bang/2014 Page 3 of 12 export sales less than 75% of the operating revenues as a comparability criterion in respect of the software development services transaction, is not appropriate.
iv. The learned CIT(A) has erred in law and in facts, by not accepting the Appellant's plea that in case of certain comparable companies consolidated results can be used for analysis. The Appellant had considered the consolidated results in only those cases where the income of the Indian company constituted more than 75% of the consolidated company-wide/ segmental revenues.
d) The learned CIT(A) has erred, in law and in facts, by upholding the action of AO/TPO in accepting/ rejecting certain comparable companies based on unreasonable comparability criteria.
e) The learned CIT(A) has erred, in law and facts, by considering incorrect receivables and payables in computing the working capital adjustment and further erred, by upholding the action of the AO/TPO in restricting the benefit on account of working capital adjustment to 1.71 percent.
f) The learned CIT(A) has erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-à-vis the comparables and concluding that once the working capital adjustment is granted, there is no necessity of providing any further adjustments.;
g) The learned CIT(A) has erred, in law and facts by, ignoring the fact that the Appellant is availing tax holiday under section 10A of the Act, and there is no motive/ reason to shift the profits out of India, which is one of the basic intention of the introducing the transfer pricing provisions.
2. The learned CIT (A) has erred, in law and facts, in computing the ALP without giving benefit of +/-5 percent under the proviso to section 92C (2) of the Act;
3. The learned CIT(A) has erred, in law and facts, in confirming the imposition of interest under Sections 234B of the Act by the learned AO.
4. The learned CIT(A) has erred, in law and facts, in upholding initiation of penalty proceedings under section 271(1)(c) of the Act by the learned AO.
The Appellant submits that each of the above grounds is independent and without prejudice to one another.
The Appellant craves leave to add, alter, amend, vary, omit or IT(TP)A Nos. 1293 & 1342/Bang/2014 Page 4 of 12 substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law."
3. The assessee has also raised some additional grounds which are as under.
"5. The Appellant prays for application of higher turnover filter to the following comparables selected by the learned TPO. The appellant further prays that there is no Estoppel in law against pointing out a mistake in the assessment
a) Tata Elxsi Limited
b) Sasken Communications Technologies Ltd
c) Persistent Systems Ltd
d) Zylog Systems Ltd
e) Mindtree Ltd
f) Larsen and Tubro Infotech Ltd
g) lnfosys Ltd
6. Without prejudice to the ground 5 above. the Appellant prays that the following companies should be rejected as comparables to the appellant as they are functionally dissimilar. The appellant further prays that there is no Estoppel in law against pointing out a mistake in the assessment
a) Tata Elxsi Limited
b) Sasken Communications Technologies Ltd
c) Persistent Systems Ltd
d) Larsen and Tubro Infotech Ltd
e) Infosys Ltd
7. The learned TPO has erred in law and in facts in treating the following expenditure items as non-operating while computing the margins of comparable companies.
a) Foreign exchange gain/loss
b) Provision for bad and doubtful debts/advances
c) Depreciation The additional ground raise issue which is fundamental to the appeal and the non-admission and non-adjudication of the same would result in an incomplete appreciation and adjudication of the matter. The Petitioner submits that the failure to raise this ground at an earlier stage is neither wilful nor wanton but due to the reasons stated above.
Further the above ground has been raised based on the ruling of Bangalore Tribunal in the case of Yodlee Infotech Private Limited [IT(TP)A No. 108/Bang/2014] for AY 2009-10 and Trilogy E-Business Software India Private Limited (1054/Bang/2011) for AY 2007-08 wherein, the Hon'ble ITAT has upheld the application of upper limit for the turnover filter. No prejudice would be caused to the Respondent by reason of the above additional grounds being admitted and adjudicated and accordingly the balance of convenience is in IT(TP)A Nos. 1293 & 1342/Bang/2014 Page 5 of 12 favour of such an order being passed by this Hon'ble Tribunal.
The Petitioner states and submits that the issues raised in the additional ground above are legal issues and arise out of the order of the lower authorities. Reliance is based on the decisions of the Hon'ble Supreme Court in the case of Chandigarh Special Bench in the case of DCIT vs. Quark Systems (P.) Ltd. (IT Appeal No.100(CHD.) of 2009).
In the above circumstances the Petitioner prays that this Hon'ble Tribunal be pleased to:
i. admit and adjudicate the above additional ground. ii. pass any other order that may be required in the circumstances of the case and render justice."
4. The grounds raised by the revenue are as under.
"1. The order of the learned CIT(A) is opposed to law and facts of the case.
2. "Whether on the facts and in the circumstances of the case, the CIT(A) was justified in law in holding that expenses incurred in foreign currency being traveling expenses of Rs.4,73,20,263/-, is to be excluded from both the export turnover and the total turnover for the purpose of computation of deduction u/s 10A of the Act whereas such exclusion is permitted to arrive at the export turnover only as pet the definitions given in Sec.10A of the Act and total turnover has not been defined in the Section".
3. In the facts and circumstances of the case the learned CIT(A) erred in holding that foreign exchange loss/gain is operating in nature when such loss/gain that is attributable to the operating activity is not derived from the operating activity.
4. The Ld. CIT(A) erred in law in directing to include forex gain/loss as part of operating income/loss without ascertaining the nexus with the business activity of the taxpayer.
5. The Ld.CIT(A) erred in concluding that forex gain/loss are to be treated as operating in nature as while they may be incidental but cannot be deemed as operating in nature since, they are not critical to operational activities of the business conducted by the taxpayer.
6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
7. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above."
IT(TP)A Nos. 1293 & 1342/Bang/2014 Page 6 of 12
5. It was submitted by ld. AR of assessee that assessee has submitted a big chart before the Tribunal in which the assessee has given its arguments for exclusion of five comparables i.e. 1) Bodhtree Consulting Ltd., 2) Infosys Technologies Ltd., 3) Persistent Systems Ltd., 4) Tata Elxsi Ltd. and 5) Larsen and Toubro Infotech Ltd. He also pointed out that in respect of the first four companies, the assessee's request for exclusion is on this basis that these four companies are functionally different but in respect of the 5th company i.e. Larsen & Toubro Infotech Ltd., the assessee's request is on this basis that if the turnover filter of 10 times more than the turnover as compared to assessee's turnover filter is applied then this company should be excluded because the turnover of this company is Rs. 1950 Crores whereas the assessee's turnover is only Rs. 104.82 Crores. He also submitted that the assessee's request for exclusion of these companies is covered by the Tribunal order rendered in the case of M/s. Yodlee Infotech Pvt. Ltd. Vs. ITO in IT(TP)A No. 108/Bang/2014 dated 12.12.2014, copy available on pages 1 to 32 of paper book-II filed by the assessee. He also pointed out that this Tribunal order is for the same Assessment Year i.e. Assessment Year 2009-10 and the functional profile of assessee company and this company is similar i.e. software development support services. He submitted that by following this Tribunal order, these five companies should be excluded from the final list of comparables. The ld. DR of revenue supported the order of CIT(A).
6. We have considered the rival submissions. First of all, we consider the applicability of this Tribunal order cited before us i.e. rendered in the case of Yodlee Infotech Pvt. Ltd. vs. ITO (supra). We find that in the present case, as per the order of TPO, business profile of Assessee Company has been noted on page no. 2 of the order of TPO in which it is stated that the assessee company provides software development services to its AE in US on a cost plus 15 percent markup basis. In the case of Yodlee Infotech Pvt. Ltd. vs. ITO (supra), it is noted by the Tribunal on page no. 2 of this Tribunal order that the assessee company in that case is primarily engaged in the provision of software development support services to its AE in US and hence, it is seen that the business profile of the present assessee and that company i.e. Yodlee IT(TP)A Nos. 1293 & 1342/Bang/2014 Page 7 of 12 Infotech Pvt. Ltd. is similar and therefore, in our considered opinion, this Tribunal order cited before us is applicable in the present case. Thereafter we find that in that case, the TPO considered 11 comparables including these five companies for which the assessee is requesting for exclusion in the present case. In para no. 21 of this Tribunal order available on page no. 25 of paper book, it is noted by the Tribunal regarding M/s. Bodhtree Consulting Ltd. that ld. DR has not rebutted the argument of the assessee that it was software product company and functionally different from the assessee which was into software development services and after considering another Tribunal order rendered in the case of M/s. Cisco System Pvt. Ltd. Vs. DCIT in ITA No. 271/Bang/2014 dated 14.08.2014, the Tribunal directed in that case for exclusion of M/s. Bodhtree Consulting Ltd. on this basis that this company is functionally different.
7. Similarly regarding M/s. Infosys Technologies Ltd., it was held by the Tribunal on page no. 24 of that Tribunal order that M/s. Infosys Technologies Ltd. had considerable intangibles like IPR and was into software product development.
8. Regarding M/s. Persistent Systems Ltd., it was noted on the same page i.e. 24 of that Tribunal order that regarding this company, it was held by Tribunal in the case of 3DPLM Software Solutions Ltd. Vs. DCIT in IT (TP) A No. 1303/Bang/2012 dated 28.11.2013 that this company was into product designing services and into software product development.
9. Regarding M/s. Tata Elxsi Ltd. also, it was held by the Tribunal on page 24 that Tata Elxsi Ltd. was developing niche products and into product designing services and hence, on this basis, it was held that all these three companies viz., M/s. Infosys Technologies Ltd., M/s. Persistent Systems Ltd. and M/s. Tata Elxsi Ltd. should be excluded from the final list of comparables being functionally different. Respectfully following this Tribunal order, we hold that in the present case also, these four companies i.e. M/s. Bodhtree Consulting Ltd., M/s. Infosys Technologies Ltd., M/s. Persistent Systems Ltd. and M/s. Tata Elxsi Ltd. should be excluded from the final list of comparables.
IT(TP)A Nos. 1293 & 1342/Bang/2014 Page 8 of 12
10. Regarding the remaining 5th comparable i.e. M/s. Larsen & Toubro Infotech Ltd., the assessee's request for exclusion of this company is on this basis that this company is having high turnover which is more than 10 times of assessee company's turnover because the turnover of that company is Rs. 1950 Crores whereas the turnover of assessee company is Rs. 104.82 Crores. In this regard, this Tribunal is now following the judgement of Hon'ble Delhi High Court rendered in the case of Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT as reported in 376 ITR 183 wherein it was held that huge profit or huge turnover, ipso facto does not lead to the exclusion of a comparable and the TPO, first, has to be satisfied that such differences do not materially affect the price or cost and secondly, an attempt is to be made for making reasonable adjustment to eliminate the material effect of such differences. Respectfully following this judgement of Hon'ble Delhi High Court, we restore the matter back to the file of TPO regarding the exclusion of this company in the light of this judgement of Hon'ble Delhi High Court rendered in the case of Chryscapital Investment Advisors (India) (P.)Ltd. vs. DCIT (supra) after providing adequate opportunity of being heard to the assessee. In this manner, the assessee's request regarding the exclusion of five comparables stands decided as per above paras.
11. The remaining grounds of the assessee's appeal are regarding treating various expenditure as non-operating while computing the margins of comparable companies i.e.
a) Foreign exchange gain / loss
b) Provision for bad and doubtful debts / advances
c) Depreciation In this regard, this Tribunal is taking a consistent view that even if an expenditure/income is of operating nature, it has to be seen as to whether the same can be considered for T.P. analysis because even if an expenditure / income is of operating nature, it has to be seen as to whether the same can be considered for the purpose of TP analysis. In TP analysis by using TNMM as MAM, profit percentage of the tested party and the comparable companies are compared and therefore, it has to be seen that the expenses / incomes in IT(TP)A Nos. 1293 & 1342/Bang/2014 Page 9 of 12 dispute can be considered for this purpose. Regarding the foreign exchange gain / loss it has to be seen whether such gain / loss is in respect of the turnover of the present year and if that is so, it can be considered because the corresponding turnover is being considered for working out the profit percentage of the tested party or comparable as the case may be. But if the foreign exchange gain / loss is in respect of earlier year's turnover then such foreign exchange gain / loss cannot be considered for TP analysis because the corresponding turnover is not forming part of the denominator to work out the profit percentage. Similarly, in respect of provision for bad and doubtful debts also, it has to be seen as to whether the same is in respect of turnover of the present year or of the earlier year and for this item of expenditure also, the same logic will apply and if such provision for bad and doubtful debts is against turnover of the present year then it can be considered for TP analysis and otherwise not. No material has been brought on record by ld. AR of assessee that these two items i.e. foreign exchange gain / loss and provision for bad and doubtful debts are in respect of the current year's turnover and therefore, regarding these two items, we find no reason to interfere in the order of CIT (A).
12. Regarding depreciation, we find that in the case of M/s. Persistent Systems Ltd., the AO has added depreciation in total cost. We have already directed for exclusion of this comparable i.e. M/s. Persistent Systems Ltd. from the final list of comparables and therefore, this issue does not survive regarding this comparable company at least. In addition to that, depreciation has been added in case of Zylog Systems Ltd. as per Annexure - B of TPO order and after adding depreciation of Rs. 19,37,05,047/-, the operating cost has been increased and operating profit has been reduced resulting into OP/OC of 7.81%. We fail to understand what is the request of the assessee as per ground no. 7 (c) raised before us by way of additional grounds of appeal because depreciation has been considered as operating cost by the AO in respect of Zylog Systems Ltd. and also Persistent Systems Ltd. and the AO has not considered the depreciation cost as non-operating cost while computing the margins of comparable companies and therefore, this ground no. 7 (c) of assessee's appeal is also rejected.
IT(TP)A Nos. 1293 & 1342/Bang/2014 Page 10 of 12
13. There is one more issue raised by the assessee as per ground no. 1 (e) as per which this is the grievance of the assessee that CIT (A) has erred in law and facts by considering incorrect receivables and payables in computing the working capital adjustment and further erred by upholding the action of the AO/TPO in restricting the benefit on account of working capital adjustment to 1.71 percent. On this issue, no argument was raised by ld. AR of assessee in the course of hearing before us and therefore, we infer that this ground is not pressed by ld. AR of assessee and accordingly, rejected as not pressed.
14. In the result, the appeal filed by the assessee stands partly allowed in the terms indicated above.
15. Now we take up the appeal of the revenue. Ground no. 1 of the revenue's appeal is general in nature and the issue involved in ground no. 2 is squarely covered in favour of the assessee by the judgement of Hon'ble Karnataka High Court rendered in the case of CIT vs. Tata Elxsi Ltd., 349 ITR 98 wherein it was held that total turnover is sum total of export turnover and domestic turnover and therefore, if an amount is reduced from export turnover then the total turnover also goes down by the same amount automatically. The direction of CIT (A) on this issue is in line with this judgment of Hon'ble Karnataka High Court and therefore, on this issue, we find no infirmity in the order of CIT (A) and hence, we decline to interfere in the order of CIT (A) on this issue. Ground no. 2 is rejected.
16. Regarding ground nos. 3 to 5, it was submitted by ld. DR of revenue that on this aspect, the decision of CIT (A) is contained in para no. 10.5(v), 10.5.1 to 10.5.3 of his order. He submitted that even if the expenditure in question are operating in nature, it has to be seen as to whether the same can be considered for TP analysis because if such expenses on account of foreign exchange gain / loss and provision for bad and doubtful debts etc. are in respect of the earlier year's turnover then the same cannot be considered for TP analysis because the corresponding turnover is not forming part of denominator and from the order of CIT(A) on this issue, this is not coming out that this aspect has been examined by him. He submitted that this issue may IT(TP)A Nos. 1293 & 1342/Bang/2014 Page 11 of 12 be restored back to the file of CIT(A) to examine this aspect of the matter. The ld. AR of assessee supported the order of CIT(A).
17. We have considered the rival submissions and we find force in the submissions of ld. DR of revenue that the issue regarding inclusion of foreign exchange gain / loss for the purpose of TP analysis has to be examined after finding out whether such gain / loss is in respect of current year's turnover or earlier year's turnover. Since there is no finding of authorities below on this aspect, we feel it proper to restore this matter back to the file of TPO for fresh decision with the direction that the assessee should furnish the detail of corresponding turnover against which this foreign exchange gain / loss and provision for bad and doubtful debts etc. has arisen and if it is found that such gain / loss and provision for bad and doubtful debts are in respect of current year's turnover then the same should be considered for TP analysis in the hands of tested party and comparable both as the case may be but if it is found that the same is related to turnover of earlier year then the same should be ignored because in that situation, the corresponding turnover is not forming part of denominator and therefore, the numerator also cannot be increased or decreased. Accordingly ground nos. 3 to 5 of revenue's appeal are allowed for statistical purposes.
18. In the result, the appeal filed by the revenue stands partly allowed for statistical purposes in the terms indicated above.
19. In the combined result, both the appeals filed by the revenue and assessee are partly 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/-
(N.V. VASUDEVAN) (ARUN KUMAR GARODIA)
Judicial Member Accountant Member
Bangalore,
Dated, the 31st May, 2018.
/MS/
IT(TP)A Nos. 1293 & 1342/Bang/2014
Page 12 of 12
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Senior Private Secretary,
Income Tax Appellate Tribunal,
Bangalore.