ITO, Bangalore v. M/s Open Silicon Research Pvt. Ltd.,, Bangalore

ITA 1060/BANG/2012 | 2005-2006
Pronouncement Date: 13-10-2016 | Result: Allowed

Appeal Details

RSA Number 106021114 RSA 2012
Assessee PAN AAACO5915B
Bench Bangalore
Appeal Number ITA 1060/BANG/2012
Duration Of Justice 4 year(s) 1 month(s) 22 day(s)
Appellant ITO, Bangalore
Respondent M/s Open Silicon Research Pvt. Ltd.,, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 13-10-2016
Appeal Filed By Department
Order Result Allowed
Bench Allotted B
Tribunal Order Date 13-10-2016
Date Of Final Hearing 26-09-2016
Next Hearing Date 26-09-2016
Assessment Year 2005-2006
Appeal Filed On 22-08-2012
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BANGALORE BEFORE SHRI A. K. GARODIA ACCOUNTANT MEMBER AND SMT ASHA VIJAYARAGHAVAN JUDICIAL MEMBER ITA NO.1072 (BANG) 2012 (ASSESSMENT YEAR : 2005-06) M/S OPEN SILICON RESEARCH PRIVATE LTD. 11/1 & 12/1 THIRD FLOOR MARUTHI INFOTECH CENTRE INDIRANAGAR KORAMANGALA INTERMEDIATE RING ROAD BANGALORE -560 078 PAN: AAACO5915B APPELLANT VS THE ITO WARD 12 (1) BANGALORE RESPONDENT ITA NO.1060(BANG) 2012 (ASSESSMENT YEAR : 2005-06) THE ITO WARD 12 (1) BANGALORE APPELLANT VS M/S OPEN SILICON RESEARCH PRIVATE LTD. 11/1 & 12/1 THIRD FLOOR MARUTHI INFOTECH CENTRE INDIRANAGAR KORAMANGALA INTERMEDIATE RING ROAD BANGALORE -560 078 PAN: AAACO5915B RESPONDENT ASSESSEE BY : SHRI T. SURYANARAYANA. ADVOCATE REVENUE BY : MS. NEERA MALHOTRA CIT DATE OF HEARING : 26-09-2016 DATE OF PRONOUNCEMENT: : 13-10-20 16 IT(TP)A NO.1072 & 1060(B)2012 2 O R D E R PER SHRI A.K.GARODIA AM THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND T HE REVENUE AND THESE ARE DIRECTED AGAINST THE ORDER OF LEARNED CIT (A) IV BANGALORE DATED 20.06.2012 FOR A. Y. 2005 06. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER : THE GROUNDS HEREINAFTER TAKEN BY THE APPELLANT ARE WITHOUT PREJUDICE TO ONE ANOTHER. 1. THAT THE ORDER PASSED BY THE LEARNED COMMISSION ER OF INCOME TAX (APPEALS) - IV BANGALORE ['CIT (APPEALS)'] TO THE EXTENT PREJUDICIAL TO THE APPELLANT IS BAD IN LAW AND LIABLE TO BE QUASH ED. 2. THAT THE LEARNED CIT (APPEALS) ERRED IN UPHOLDI NG THE REJECTION OF TRANSFER PRICING ('TP') DOCUMENTATION BY THE LEARNE D TRANSFER PRICING OFFICER ('TPO')/ ASSESSING OFFICER ('AO') AND THERE BY ERRED IN NOT APPRECIATING THAT THE APPELLANT HAD PREPARED THE TP DOCUMENTATION BONA FIDE AND IN GOOD FAITH AND CONDUCTED THE COMPARABLE ANALYSIS BASED ON THE DETAILED FUNCTIONAL ASSET AND RISK ('FAR') ANALYSIS PERFORMED WITH DUE DILIGENCE AND THE DATA AVAILABLE AT THE TIME OF CON DUCTING THE COMPARABILITY ANALYSIS. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT (APPEALS) ERRED IN DETERMINING UPWARD ADJUSTMEN T TO THE TRANSFER PRICE OF THE APPELLANT UNDER SECTION 92CA OF THE INCOME T AX ACT 1961 (THE 'ACT') IN RESPECT OF ITS CONTRACT SOFTWARE DE VELOPMENT SERVICES AND IN DOING SO GROSSLY ERRED IN: (A) IGNORING THE LIMITED RISK NATURE OF THE SERVICES PR OVIDED BY THE APPELLANT AS DETAILED IN THE TP DOCUMENTATION AND I N UPHOLDING THE CONCLUSION OF THE LEARNED TPO THAT NO ADJUSTMENT ON ACCOUNT OF RISK DIFFERENTIAL IS REQUIRED WHILE D ETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION S OF THE APPELLANT AS THE ARITHMETIC MEAN OF THE MARGINS OF THE COMPARABLES UNDER TRANSACTIONAL NET MARGIN METHOD TAKES CARE OF SUCH INSIGNIFICANT DIFFERENCES. (B) R E JECTING TH E F ACT THAT TH E APPELLANT HAD C ONTINUED TO B E RE MUN E RAT E D ON AN A RM 'S L E N G TH BASIS FOR ITS S E RVI C ES DURING IT S IT(TP)A NO.1072 & 1060(B)2012 3 START UP PERIOD OF OPERATIONS E VEN THOUGH TH E ASS O C I A T E D ENTERPRISE HAD S UFFER E D LOSSES DURING THE RELEVANT FINANCIAL YEA R. (C) REJECTING THE ADDITIONAL FACTUAL EVIDENCES FILED BY THE APPELLANT TO SUPPORT THE FACT THAT THE ASSOCIATED ENTERPRISE HAD REMUNERATE THE APPELLANT MORE THAN WHAT THE ASSOCIATED ENTERPRISE HAD RECEIVED FROM INDEPENDENT THIRD PARTIES FOR SIMILAR SERVICES WITHOUT PROVIDING ANY COGENT REASONS. (D) UPHOLDING TH E REJECTION O F C OMPARABILIT Y A NAL Y SIS OF TH E APPELLANT IN THE TP D OCU M EN T A T IO N AND ACC E PTING TH E COMPARABILIT Y ANAL Y SI S P E RFORMED B Y THE LEARN E D TPO IN TH E T P O R D E R . (E) UPHOLDING THE INTRODUCTION OF ADDITIONAL FILTERS AN D COMPARABLES BY THE LEARNED TPO THAT DO NOT SATISFY THE TEST OF COM PARABILITY. (F) PERFORMING HIS OWN COMPARABILITY ANALYSIS BY MODIF YING CERTAIN FILTERS APPLIED BY THE LEARNED TPO AND THEREIN SELE CTING CERTAIN COMPANIES THAT OUGHT TO HAVE BEEN REJECTED AS NOT S ATISFYING THE TEST OF COMPARABILITY AND REJECTING COMPANIES THAT OUGHT TO HAVE BEEN CONSIDERED AS THEY ARE FUNCTIONALLY SIMILAR TO THE APPELLANT. (G) DISREGARDING APPLICATION OF MULTIPLE YEAR/ PRIOR YE AR DATA AS USED BY THE APPELLANT IN THE TP DOCUMENTATION AND HOLDING T HAT CURRENT YEAR (I.E. FINANCIAL YEAR 2004-05) DATA FOR COMPARABLE C OMPANIES SHOULD BE USED. (H) NOT APPRECIATING THE FACT THAT THE SEARCH STRATEGY APPLIED BY THE LEARNED TPO FOR INTRODUCTION OF COMPANIES AS COMPAR ABLES AND THE RESPONSES OBTAINED BY THE LEARNED TPO BY EXERCISING HIS POWER UNDER SECTION 133(6) OF THE ACT WAS NOT PROVIDED T O THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS. 4. THE LEARNED CIT (APPEALS) ERRED IN UPHOLDING TH E CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT. 5. THAT THE APPELLANT CRAVES LEAVE TO ADD TO AND / OR ALTER AMEND RESCIND OR MODIFY THE GROUNDS TAKEN HEREINABOVE BEF ORE OR AT THE TIME OF HEARING OF THIS APPEAL. 3. 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. IT(TP)A NO.1072 & 1060(B)2012 4 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE THE LEARNED CIT(A) ERRED IN HOLDING THAT COMMUNICATION & TRAVEL ING EXPENSES AMOUNTING - TO RS. 19 63 837 ARE TO BE EXCLUDED FRO M THE TOTAL TURNOVER AS WELL FOR COMPUTATION OF DEDUCTION U/S. 10A OF THE ACT WHEREAS SUCH EXCLUSION IS PERMITTED TO ARRIVE AT THE EXPORT TURN OVER ONLY AS PER THE DEFINITIONS GIVEN IN SECTION 10A OF THE IT ACT AND TOTAL TURNOVER HAS NOT BEEN DEFINED IN SECTION 10A OF THE ACT. 3. THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE D ECISION OF HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF M/S TATA ELX SI LTD. ON THE ISSUE OF COMPUTING DEDUCTION U/S 10A BY EXCLUDING THE ABOVE EXPENSES FROM EXPORT TURNOVER AND TOTAL TURNOVER AS WELL HAS NOT REACHE D FINALITY IN VIEW OF THE PENDING DEPARTMENT'S SLP BEFORE THE HON'BLE SUPREME COURT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE THE LEARNED CIT(A) ERRED IN HOLDING THAT THE TPO OUGHT TO HAVE EXCLUDED COMPARABLES HAVING ANY RELATED PARTY TRANSACTIONS NOT ONLY THO SE WITH MORE THAN 25% RELATED PARTY TRANSACTIONS ON SALES. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN HOLDING THAT THE SIZE TURNOVER AND BRAND OF THE COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS A COMPAR ABLE AND ACCORDINGLY ERRED IN EXCLUDING M/S INFOSYS TECHNOLOGIES LTD AS A COMPARABLE. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) ERRED IN EXCLUDING M/S EXENSYS SOFTWARE SOLUTION LT D. M/S THIRDWARE SOLUTIONS LTD. AND M/S TATA ELXSI LTD. AS COMPARABL ES TO THE SOFTWARE DEVELOPMENT SEGMENT OF THE ASSESSEE COMPANY. 7. 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 ASSES SING OFFICER MAY BE RESTORED. 8. THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEND A ND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 4. IT WAS SUBMITTED BY THE LEARNED AR OF THE ASSE SSEE THAT LEARNED CIT(A) HAS ADOPTED 0% RPT FILTER AND NOW THE TRIBUN AL IS TAKING A VIEW THAT THIS FILTER SHOULD BE 15%. HE SUBMITTED THAT IF 15% RPT FILTER IS APPLIED VARIOUS COMPARABLES REJECTED BY CIT (A) WILL GET RE INSTATED BUT THEREAFTER THOSE COMPARABLES HAS TO EXAMINED ON OTHER ASPECTS SUCH AS FUNCTIONAL IT(TP)A NO.1072 & 1060(B)2012 5 SIMILARITY ETC. AND THEREFORE THE ENTIRE TP MATTER MAY BE RESTORED BACK TO CIT (A) FOR A FRESH DECISION BY APPLYING 15% RPT FI LTER. LEARNED DR OF THE REVENUE ALSO AGREED WITH THIS PROPOSITION. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND WE FIND FORCE IN THE SUBMISSIONS OF THE LEARNED AR OF THE ASSESSEE BECAU SE 15% RPT FILTER IS THE ACCEPTED NORMS AND ONCE THIS 15% RPT FILTER IS APPL IED VARIOUS COMPARABLES REJECTED BY CIT (A) WILL GET REINSTATED BUT THEREAFTER THOSE COMPARABLES HAS TO EXAMINED ON OTHER ASPECTS SUCH A S FUNCTIONAL SIMILARITY ETC. HENCE WE SET ASIDE THE ORDER OF THE LEARNED C IT (A) ON TOTAL TP ISSUES AND RESTORE BACK THE MATTER TO HIM FOR A FRESH DECI SION BY APPLYING 15% RPT FILTER AND EXAMINING THE COMPARABLES LEFT AFTER APP LYING THIS FILTER ON VARIOUS OTHER ASPECTS SUCH AS FUNCTIONAL COMPARABIL ITY ETC. AFTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO BOTH SIDES. THERE IS NO OTHER ISSUE IN THESE APPEALS EXCEPT INTEREST ISSUE IN ASSESSEES A PPEAL WHICH IS CONSEQUENTIAL. 6. IN THE RESULT THE APPEAL OF THE ASSESSEE AS WE LL AS OF REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. SD/- (SMT ASHA VIJAYARAGHAVAN) SD/- (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER PLACE: BANGALORE: D A T E D : 13.10.2016 DS* IT(TP)A NO.1072 & 1060(B)2012 6 COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) - II BANGALORE 4 CIT 5 DR ITAT BANGALORE. 6 GUARD FILE BY ORDER AR ITAT BANGALORE