DCIT., Circle-16(1), Hyderabad, Hyderabad v. NET Cracker Technology Solutions (India) Private Limited (formerly knowns as Convergys Information Mangament (India) Private Limted, Hyderabad

ITA 115/HYD/2015 | 2010-2011
Pronouncement Date: 28-09-2016 | Result: Dismissed

Appeal Details

RSA Number 11522514 RSA 2015
Assessee PAN AACCC0701B
Bench Hyderabad
Appeal Number ITA 115/HYD/2015
Duration Of Justice 1 year(s) 7 month(s) 26 day(s)
Appellant DCIT., Circle-16(1), Hyderabad, Hyderabad
Respondent NET Cracker Technology Solutions (India) Private Limited (formerly knowns as Convergys Information Mangament (India) Private Limted, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 28-09-2016
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 28-09-2016
Date Of Final Hearing 05-07-2016
Next Hearing Date 05-07-2016
Assessment Year 2010-2011
Appeal Filed On 02-02-2015
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI D. MANMOHAN VICE PRESIDENT AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA.NO.115/HYD/2015 ASSESSMENT YEAR 2010-2011 THE DCIT CIRCLE-16(1) HYDERABAD. VS. M/S. NET CRACKER TECHNOLOGY SOLUTIONS (INDIA) P. LTD. HYDERABAD. PAN AACCC0701B (APPELLANT) (RESPONDENT) ITA.NO.235/HYD/2015 ASSESSMENT YEAR 2010-2011 M/S. NET CRACKER TECHNOLOGY SOLUTIONS (INDIA) P. LTD. HYDERABAD. PAN AACCC0701B VS. DCIT CIRCLE 16(1) HYDERABAD. (APPELLANT) (RESPONDENT) FOR REVENUE : MR. SVSS. PRASAD FOR ASSESSEE : MR. DHANESH K. BAFNA DATE OF HEARING : 28.09.2016 DATE OF PRONOUNCEMENT : 28.09.2016 ORDER PER D. MANMOHAN V.P. THESE CROSS-APPEALS ARE DIRECTED AGAINST THE ORDER PASSED BY DCIT CIRCLE-16(1) HYDERABAD. IN THE APP EAL FILED BY THE ASSESSEE THE ORDER PASSED BY ASSESSING OFFICER U NDER SECTION 143(3) READ WITH SECTION 92CA(3) AND 144C OF THE ACT W AS CHALLENGED BY RAISING THE FOLLOWING GROUNDS : 2 ITA.NO.115 & 235 /H/2015 M/S. NET CRACKER TECHNOLOGY SOLUTIONS (INDIA) P. LTD. HYDERABAD. THE GROUNDS MENTIONED HEREIN ARE WITHOUT PREJUDICE TO ONE ANOTHER. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. AO / LD. PANEL/TRANSFER PRICING OFFICE R ('LD. TPO') ERRED IN MAKING AN ADJUSTMENT OF RS.11 83 65 791 TO THE PROVISION OF SOFTWARE DEVELOPMENT AND SUPPOR T SERVICES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. AO / LD. PANEL / LD. TPO ERRED IN: (I) REJECTING THE TRANSFER PRICING STUDY WHICH WAS MAINTAINED IN GOOD FAITH AND WITH DUE DILIGENCE; (II) REJECTING THE SEARCH PROCESS FOLLOWED BY THE APPELLANT; (III) REJECTING MULTIPLE YEAR DATA; (IV) INCLUDING CERTAIN COMPARABLES WHICH WERE NOT COMPARABLE; (V) NOT INCLUDING CERTAIN COMPARABLES SELECTED BY THE APPELLANT IN ITS TP STUDY (VI) NOT INCLUDING CERTAIN COMPARABLES FORMING PART OF THE TPO'S SEARCH WHICH OUGHT TO BE INCLUDED IN THE FINAL SET OF COMPARABLE; (VII) NOT APPLYING THE FILTER ON RESEARCH AND DEVELOPMENT EXPENSES AND DIFFERENT FINANCIAL YEAR ENDING FILTER ADOPTED BY THE APPELLANT FOR ELIMINATING COMPANIES DURING THE SEARCH PROCESS; (VIII) APPLYING THE FILTER ON EXPORT SALES EMPLOYEE COST FILTER DIMINISHING REVENUE FILTER AND PERSISTENT LOSSES FILTER FOR SELECTION OF COMPANIES; AND (IX) NOT GRANTING RISK ADJUSTMENT. 3. THE APPELLANT PRAYS THAT APPROPRIATE RELIEF BE GRAN TED. 3 ITA.NO.115 & 235 /H/2015 M/S. NET CRACKER TECHNOLOGY SOLUTIONS (INDIA) P. LTD. HYDERABAD. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. AO ERRED IN LEVYING INTEREST UNDER SEC TION 234B OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD TO AND/OR TO ALTE R AMEND RESCIND MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. 2. THEREAFTER THE ASSESSEE ALSO FILED FOLLOWING AD DITIONAL GROUNDS : '2 (X). ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW THE LD. AO/LD. TPO ERRED IN COMPUTING THE OPERATING MARK-UP ON TOTAL COST OF THE APPELLANT BY INCLUDING 'OTHER INCOME' AS A PART OF THE OPERATING INCOME AND EXCLUDING PROVISION FOR DOUBTFUL DEBTS F ROM THE 'OPERATING COST'' 3. FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. THE ASSESSEE FURNISHED ITS RETURN OF INCOME BY DECLARING TOTAL INCO ME OF RS.6 21 103 WHICH WAS PROCESSED ACCORDINGLY. SUBSEQ UENTLY THE CASE WAS TAKEN-UP FOR SCRUTINY BY ISSUING A NOTICE UND ER SECTION 143(2) OF THE ACT WHEREIN BASED ON THE ALP DETERMINE D BY THE TPO THE ASSESSMENT WAS COMPLETED BY DETERMINING THE TO TAL INCOME AT RS.11 95 45 890 BY MAKING CERTAIN ADJUSTMENTS . SOME OF THE COMPARABLE CASES TAKEN INTO CONSIDERATION B Y THE TPO WERE CHALLENGED BY THE ASSESSEE BEFORE US. 4. BOTH THE PARTIES ADMITTED THAT THOUGH THE MARGI N OF PROFIT DECLARED BY THE ASSESSEE WORKS-OUT TO 23.49% AFTER MAKING SOME ADJUSTMENTS REFERABLE TO FOREX LOSSES ETC. IT FINALLY WORKS OUT TO 14.15%. AS PER THE ASSESSING OFFICER THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES WORK-OUT TO 21.84% AND THUS THE ASSESSING OFFICER SOUGHT TO MAKE CERTAIN ADJUSTMENTS ; ON THE 4 ITA.NO.115 & 235 /H/2015 M/S. NET CRACKER TECHNOLOGY SOLUTIONS (INDIA) P. LTD. HYDERABAD. OTHER HAND THE CASE OF THE ASSESSEE IS THAT IF ONE OF THE COMPARABLE I.E. E-INFOCHIPS BANGALORE LTD. IS NOT T AKEN INTO CONSIDERATION THE ARITHMETIC MEAN MARGIN OF COMPARABLE S WOULD BE AROUND 18% IN WHICH EVENT SAFE HARBOUR RULE COME S INTO PLAY AND NO ADJUSTMENT CAN BE MADE TO THE INCOME DECLARED. 5. IN THIS REGARD LEARNED COUNSEL FOR THE ASS ESSEE SUBMITTED THAT PROFIT MARGIN OF E-INFOCHIPS BANGALORE LTD. WHICH IS ONE OF THE COMPARABLES THAT WAS TAKEN INTO CONSIDERATION BY THE TPO WORKS OUT TO 68.86% BUT THE S AID COMPANY BEING A SOFTWARE DEVELOPER AND ALSO ENGAGED IN ITES THE FUNCTIONS OF THE SAID COMPANY ALSO BEING DIFFEREN T FROM THE NATURE OF BUSINESS OF THE ASSESSEE THE SAME CANNOT BE TAKEN AS COMPARABLE APART FROM THE FACT THAT SEGMENTAL DETAILS OF THE SAID COMPANY ARE NOT AVAILABLE AND UNDER IDENTICAL CIRCUMS TANCES THE ITAT HYDERABAD BENCH IN THE CASE OF PAREXEL INTERNA TINOAL (INDI) P. LTD. HYDERABAD VS. ACIT CIRCLE-16(2) HYDERABAD (ITA.NO.1918/HYD/ 2014 DATED 08.01.2016) OBSERVED ( VIDE PARA- 7 ONWARDS) THAT THE SAID COMPANY IS NOT COMPARABLE SI NCE ITS FUNCTIONS ARE DIFFERENT. IN THE SAID ORDER THE ITAT HYDERABAD BENCH RELIED UPON AN EARLIER DECISION OF THE HYDERA BAD BENCH IN THE CASE OF PEGASYSTEMS WORLDWIDE INDIA P. LTD. HYDE RABAD VS. ACIT CIRCLE-16(2) HYDERABAD (ITA.NO.1758/HYD/2014 ) DATED 16.10.2015) WHEREIN THE BENCH OBSERVED AS UNDER : 8.1. IT WAS CONTENDED THAT AO RELIED ON THE ANNUA L REPORT OF FY. 2010-11 AND USED THE INFORMATION APPLICABLE TO FY. 2009- 10 FROM THAT REPORT AS THE INFORMATION FOR FY. 200 9-10 WAS NOT AVAILABLE IN PUBLIC DOMAIN. IT IS ALSO SUBMITTED T HAT THIS COMPANY WAS NEVER SELECTED EITHER BY TPO IN EARLIER YEAR OR IN LATER YEAR. IT WAS ALSO SUBMITTED THAT PROFITABILITY VARIES FROM Y EAR TO YEAR AND IN THIS YEAR THERE WAS ABNORMALLY VERY HIGH MARGIN THE REASONS OF WHICH COULD NOT BE ANALYSED IN THE ABSENCE OF AN NUAL REPORT. IT WAS FURTHER CONTENDED THAT SEGMENTAL INFORMATION WA S NOT 5 ITA.NO.115 & 235 /H/2015 M/S. NET CRACKER TECHNOLOGY SOLUTIONS (INDIA) P. LTD. HYDERABAD. AVAILABLE. ON THE ARGUMENT THAT THE SAID COMPANY IS PROVIDING BOTH SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES L D. COUNSEL PLACED THE DISCLOSURES IN ANNUAL REPORT OF FY. 2008 -09 AND ANNUAL REPORT OF FY. 2009-10 TO SUBMIT THAT THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMENT AND IT ENABLED SERV ICES AND HAS REPORTED BOTH OF THEM AS ONE SEGMENT. THEREFOR E COMPANY IS NOT COMPARABLE WITH ASSESSEES ON FUNCTIONAL ANALYSI S. IT WAS FURTHER SUBMITTED THAT COMPANY HAS MERGED IN 2012 W ITH ANOTHER COMPANY AND IT WILL BE DIFFICULT TO OBTAIN FURTHER INFORMATION/SEGMENTAL INFORMATION ABOUT THE COMPANY NOW. IN VIEW OF ITS FLUCTUATING PROFITS OVER THE YEARS THI S COMPANY WAS NOT SELECTED AS A COMPARABLE EARLIER OR IN LATER YEARS BY REVENUE. SINCE THE DISCLOSURE IN ANNUAL REPORT IS COMMON AS SESSEE RELIED ON THE DECISION OF AHMADABAD BENCH OF ITAT IN THE C ASE OF ALL SCRIPS (INDIA) PRIVATE LTD. IN ITA NO. 771/AHD/201 4 FOR AY. 2009-10 WHEREIN THIS COMPARABLE WAS REJECTED ON TH E BASIS OF LACK OF SEGMENTAL INFORMATION. ASSESSEE RELIED ON PARA 10 OF THE CO-ORDINATE BENCH ORDER WHICH IS AS UNDER: PARA 10 WITH RESPECT TO E-INFOCHIP BANGALORE LT D. WE FIND THAT IN THE ANNUAL ACCOUNTS OF THE COMPANY WITH RESPECT TO THE SEGMENT INFORMATION IT IS STATED THA T THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMEN T AND I.T ENABLED SERVICES WHICH IS CONSIDERED THE ON LY REPORTABLE BUSINESS SEGMENT AS PER ACCOUNTING STAND ARD AS-17 SEGMENT REPORTING PRESCRIBED IN COMPANIES (ACCOUNTING STANDARD) RULES 2006. WE THUS FIND T HAT NO SEGMENTAL INFORMATION IS AVAILABLE ..CONSIDERING THE AFORESAID FACTS WE ARE O F THE VIEW THAT THE AFORESAID TWO COMPANIES NEEDS TO BE EXCLUDED WHILE WORKING OUT THE COMPARABILITY ANALYS IS AND THEREFORE UPHOLD THE PLEA OF THE ASSESSEE IN EXCLUDING THE MARGINS OF THE AFORESAID 2 COMPANIES . 8.2. LD. DR HOWEVER REFERRED TO THE EXTRACTS MAD E BY TPO IN THE ORDER TO SUBMIT THAT ASSESSEE IS A COMPA RABLE COMPANY WITH THAT OF ASSESSEE. 8.3. AFTER CONSIDERING THE RIVAL CONTENTIONS AND P ERUSING THE ANNUAL REPORTS PLACED ON RECORD WE ARE OF THE OPINION THAT THIS COMPANY CANNOT BE SELECTED AS COMPARABLE COMPA NY FOR TP ANALYSIS. FIRST OF ALL THIS COMPANY IS ENGAGED IN BOTH SOFTWARE DEVELOPMENT AS WELL AS ITES. ASSESSEE BEING ONLY C APTIVE SERVICE PROVIDER THE ABOVE COMPANY CANNOT BE CONSIDERED AS COMPARABLE ON FUNCTIONAL BASIS. NOT ONLY THAT AS POINTED OUT SEGMENTAL INFORMATION PERTAINING TO THE ABOVE COMPANY IS NOT AVAILABLE. AS SEEN FROM THE TP ORDERS DOCUMENTS PLACED ON RECORD TPO RELIED 6 ITA.NO.115 & 235 /H/2015 M/S. NET CRACKER TECHNOLOGY SOLUTIONS (INDIA) P. LTD. HYDERABAD. ON LATER YEARS ANNUAL REPORT IN EXTRACTING THE INF ORMATION. VARIATION IN PROFITABILITY OVER THE YEARS ALONE CAN NOT BE A REASON TO EXCLUDE THE COMPANY FROM COMPARABILITY ANALYSIS BUT AS RIGHTLY POINTED THE ABSENCE OF SEGMENTAL INFORMATION HOW MUCH PROFIT EARNED WAS ON THE SOFTWARE DEVELOPMENT OR ITES CAN NOT BE EXAMINED. IN THE ABSENCE OF CLARITY ON OPERATIONAL DETAILS AND COMPARABLE COMPANY HAVING DIVERSIFIED ACTIVITIES W E ARE OF THE OPINION THAT THIS COMPANY CANNOT BE CHOSEN AS A CO MPARABLE COMPANY IN ASSESSEES CASE IN THIS ASSESSMENT YEAR. WE ARE ALSO AWARE OF THE DECISION OF THE CO-ORDINATE BENCH GIVE N IN EARLIER ASSESSMENT YEAR ON THE REASON THAT SEGMENTAL REPORT ING WAS NOT AVAILABLE. BE THAT AS IT MAY SINCE THE SAID COMPA NY IS FUNCTIONALLY DIFFERENT FROM ASSESSEES ACTIVITIES A ND IN THE ABSENCE OF SEGMENTAL INFORMATION WE DIRECT AO/TPO TO EXCLUDE THE ABOVE WHILE WORKING OUT THE COMPARABILITY ANALY SIS. WE UPHOLD THE PLEA OF ASSESSEE IN THIS REGARD. 5.1. THE TRIBUNAL CATEGORICALLY OBSERVED THAT THE RE IS NO CLARITY ON OPERATIONAL DETAILS AND FUNCTIONS AND THE SAID C OMPANY IS NOT COMPARABLE. BOTH THE PARTIES ADMITTED THAT THERE IS NO DISPUTE WITH REGARD TO THE FACTS. UNDER THESE CIRCUMSTANCES WE HOLD THAT E- INFOCHIPS BANGALORE LIMITED WHICH HAS SHOWN 68.86% PROFIT IS FUNCTIONALLY DIFFERENT AND THEREFORE SHOULD NOT BE TAKEN INTO CONSIDERATION AS A COMPARABLE CASE. 5.2. THOUGH MOST OF THE OTHER COMPARABLES WHICH A RE ADOPTED BY THE TPO WERE ALSO CHALLENGED BY THE ASSESSEE AN D SUPPORTED BY THE ORDERS OF THE ITAT IN ASSESSEES OWN CASE FOR THE E ARLIER YEARS OR THE ORDERS PASSED BY THE ITAT HYDERABAD BENCHES IN SEV ERAL OTHER CASES THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IF E-INFOCHIPS BANGALORE LIMITED IS NOT TAKEN INTO CONSIDERATION THE PROFIT MARGIN DECLARED BY THE ASSESSEE AND THE ARITHMETIC MEAN MA RGIN OF COMPARABLES ADOPTED SANS E-INFOCHIPS BANGALORE LIM ITED WOULD FALL WITHIN THE SAFE HARBOUR RULE AND THEREFORE IT IS N OT NECESSARY FOR US TO GO INTO THE CORRECTNESS OF TAKING INTO ACCOUNT THE OTHER COMPANIES AS COMPARABLE COMPANIES. ACCORDINGLY WE DO NOT WISH T O GO INTO THE OTHER ISSUES AND DIRECT THE ASSESSING OFFICER TO EX CLUDE E-INFOCHIPS 7 ITA.NO.115 & 235 /H/2015 M/S. NET CRACKER TECHNOLOGY SOLUTIONS (INDIA) P. LTD. HYDERABAD. BANGALORE LIMITED FOR THE PURPOSE OF COMPUTATION OF ARITHMETIC MEAN MARGIN OF COMPARABLES. 6. NOW WE TAKE-UP THE DEPARTMENTAL APPEAL W HEREIN THE ONLY GROUND URGED BY THE REVENUE READS AS UNDER : THE DRP ERRED BOTH IN LAW AND ON FACTS AND CIRCUMS TANCES OF THE CASE IN GRANTING RELIEF TO THE ASSESSEE BY EXCLUDIN G THE COMMUNICATION CHARGES FROM EXPORT TURNOVER AND AS W ELL AS TOTAL TURNOVER. 7. THIS ISSUE HAS COME-UP BEFORE THE ITAT HYD ERABAD BENCH IN ASSESSEES OWN CASE FOR THE A.Y. 2008-09 AS WELL AS 2009-10 (ITA.NO.86/HYD/2013 & ITA.NO.70/HYD/2016). IN PARA- 6 OF THE ORDER PASSED BY ITAT FOR THE A.Y. 2008-09 (I N ITA.NO.86/HYD/2013) THE TRIBUNAL OBSERVED AS UNDER : 6. AS BRIEFLY STATED A.O. EXCLUDED THE COMMUNICAT ION CHARGES FROM EXPORT TURNOVER HOLDING THAT THEY ARE NOT TO BE INCLUDED IN THE EXPORT TURNOVER. ASSESSEE CONTESTED THE SAME STATING THAT DATA LINK CHARGES CANNOT BE CONSIDERED AS ATTRIBUTABLE TO EXPORT SERV ICE HOWEVER ALTERNATE PLEA WAS MADE THAT IF THE SAME WAS EXCLUDED FROM THE EXPORT TURNOVER THE SAME WAS ALSO TO BE EXCLUDED FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10A. FOLLOWING TH E DECISION OF ITAT IN THE CASE OF CIT VS. MENTOR GRAP HICS (I) P. LTD. IN ITA NO.696/HYD/2009 DATED 18.08.200 9 AND SPECIAL BENCH DECISION IN THE CASE OF ITO VS. SAKSOFT 313 ITR (AT) 353 DRP SHOULD HAVE GIVEN A DIRECTION TO EXCLUDE COMMUNICATION CHARGES FROM THE TOTAL TURNOVER AS WELL. SINCE THE ISSUE IS HELD IN FAVOUR OF ASSESSEE IN THE CASE OF ITO VS. SAK SOFT LIMITED 313 ITR (AT) 353 AND ALSO AS APPROVED BY HONBLE BOMBA Y HIGH COURT IN THE CASE OF CIT VS. GEMPLUS JEWELLERY LTD. 330 ITR 175 WE DIRECT THE AO TO EXCLUDE THE COMMUNICATION CHARGES FROM TOTAL TURNOVER AS WELL. GROUND IS ALLOWED ACCORDINGLY. 8 ITA.NO.115 & 235 /H/2015 M/S. NET CRACKER TECHNOLOGY SOLUTIONS (INDIA) P. LTD. HYDERABAD. 7.1. BY RESPECTFULLY FOLLOWING THE DECISION OF ITAT HYDERABAD BENCH IN ASSESSEES OWN CASE FOR THE EARLI ER YEAR WE DISMISS THE GROUND URGED BY THE REVENUE. 8. IN THE RESULT APPEAL FILED BY THE ASSESSEE IS TREA TED AS ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL FILED B Y THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.09.2016. SD/- SD/- (B. RAMAKOTAIAH) (D.MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT HYDERABAD DATED 28 TH SEPTEMBER 2016 VBP/- COPY TO 1. DCIT CIRCLE-16(1) ROOM NO.612 6 TH FLOOR AAYAKAR BHAVAN BASHEERBAGH HYDERABAD. 2. M/S. NET CRACKER TECHNOLOGY SOLUTIONS (INDIA) P. L TD. (FORMERLY KNOWN AS CONVERGYS INFORMATION MANAGEMENT (INDIA) P. LTD. PLOT NO.5 & 43 SURVEY NO.6H HI-TE CH CITY MADHAPUR HYDERABAD 500 081. 3. THE DISPUTES RESOLUTION PANEL 2 ND FLOOR I.T.TOWERS 10-2-3 A.C. GUARDS HYDERABAD. 4. THE DIRECTOR OF INCOME TAX (I.T. & T.P.) HYDERAB AD 5. THE ADDL. CIT (TRANSFER PRICING) HYDERABAD. 6. CIT(A)/MEMBER D.R.P. HYDERABAD. 7. D.R. ITAT A BENCH HYDERABAD. 8. GUARD FILE