M/s i Soft Health Services (India) Pvt. Ltd.,, Chennai v. ITO, Bangalore

ITA 1256/BANG/2012 | 2008-2009
Pronouncement Date: 30-09-2016 | Result: Dismissed

Appeal Details

RSA Number 125621114 RSA 2012
Assessee PAN AADCM5659D
Bench Bangalore
Appeal Number ITA 1256/BANG/2012
Duration Of Justice 4 year(s) 2 day(s)
Appellant M/s i Soft Health Services (India) Pvt. Ltd.,, Chennai
Respondent ITO, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2016
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 30-09-2016
Date Of Final Hearing 27-07-2016
Next Hearing Date 27-07-2016
Assessment Year 2008-2009
Appeal Filed On 27-09-2012
Judgment Text
IT(TP)A.1256/BANG/2012 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU BENCH 'A' BENGALURU BEFORE SMT. ASHA VIJAYARAGHAVAN JUDICIAL MEMBERS AND SHRI. S. JAYARAMAN ACCOUNTANT MEMBER I.T(TP).A NO.1256/BANG/2012 (ASSESSMENT YEAR : 2008-09) M/S. ISOFT HEALTH SERVICES (I) P. LTD (FORMERLY M/S. IBA HEALTH SERVICES (INDIA) P. LTD ) HAFIZ COURT NEW NO.19 (OLD NO.8) KODAMBAKKAM HIGH ROAD NUNGAMBAKKAM CHENNAI 600 034 .. APPELLANT PAN : AADCM5659D V. INCOME TAX OFFICER WARD 11(2) BENGALURU .. RESPONDENT ASSESSEE BY : SHRI. RAGHUNATHAN P CA REVENUE BY : SMT. PRISCILLA SINGSIT CIT DR- I HEARD ON : 25.07.2016 PRONOUNCED ON : 30.09.2016 O R D E R PER S. JAYARAMAN ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF DRP DT.06.06.2012 FOR THE ASSESSMENT YEAR 2008-09. IT(TP)A.1256/BANG/2012 PAGE - 2 02. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF COMP UTER SOFTWARE DEVELOPMENT AND CONSULTANCY IN PROVIDING S OFTWARE SERVICES AND MAINTENANCE TO VARIOUS CLIENTS ENGAGED IN RUNNING HOSPITALS. DURING THE YEAR UNDER CONSIDERA TION IT HAD ENTERED INTO INTERNATIONAL TRANSACTIONS. 03. THE TPO GAVE A SHOW-CAUSE NOTICE DT.07.10.2011 TO THE ASSESSEE GIVING REASONS FOR REJECTING COST PLUS METHOD AND CUP METHOD AND PROPOSING TNMM TO ARRIVE AT THE ALP. AFTER CONSIDERING THE ASSESSEES REPLY ETC. THE TP O SUBSTITUTED TNM METHOD IN THE PLACE OF THE COST PUS METHOD (CPM) USED BY THE ASSESSEE AND CONSEQUENTLY REJEC TED THE CUP METHOD AND THEN DETERMINED THE ALP. 04. AGGRIEVED THE ASSESSEE APPROACHED THE DRP AND THE DRP BY ITS ORDER DT.06.06.2012 INTER ALIA UPHELD THE ORDER OF TPO. BEING AGGRIEVED WITH THE ORDER OF ITO WARD -11(2) BENGALURU DT.31.07.2012 IN PURSUANCE OF DRP ORDER THE ASSESSEE IS IN APPEAL BEFORE THIS TRIBUNAL. ITS GR OUNDS OF APPEAL ARE AS UNDER : IT(TP)A.1256/BANG/2012 PAGE - 3 IT(TP)A.1256/BANG/2012 PAGE - 4 05. ASSESSEE HAS ALSO FILED AN ADDITIONAL GROUND WH ICH IS AS FOLLOWS: THE LEARNED. TPO AND DRP ERRED IN REJECTING THE COMPARABLE UNCONTROLLED PRICE METHOD ADOPTED BY T HE APPELLATE (SIC) CORRECT ONE IS APPELLANT) AS THE M OST APPROPRIATE METHOD OF SUBSTANTIATING THE ARMS LENG TH NATURE OF THE INTERNATIONAL TRANSACTIONS. 06. HEARD THE AR AND THE DR. IT IS SEEN THAT THI S ISSUE AROSE IN THE ASSESSEES CASE IN A Y 2007-08 WHICH HAS BEEN THE SUBJECT MATTER BEFORE THE DRP AND THE DRP HAS UPHELD THE T NMM METHOD . THE RELEVANT PORTION OF THE DRPS ORDER FOR THIS A. Y IS EXTRACTED AS UNDER: 1. THE ASSESSEE HAS STATED THAT THE PROWESS AND CAPITALINE DATA BASES ARE DEAD AND LIFELESS DATA BA SES. THESE ALLEGATIONS DO NOT MERIT CONSIDERATION THESE DATA BASES HAVE BEEN USED IN TP PROCEEDINGS FOR SEVERAL YEARS THE ASSESS EE HAS ALSO NOT STATED HOW IT HAS ARRIVED AT SUCH A CONCLUSION. IT APPEARS THAT THE MAIN GRIEVANCE ARISING TO THE ASSESSEE IN THIS GROUND IS THE SUBSTITUTION OF TNMM METHOD IN PLACE OF THE COST PU S METHOD (CPM) USED BY THE ASSESSEE AND THE CONSEQUENT REJECTION O F THE CUP METHOD. THIS ISSUE ALSO AROSE FOR AY 2007-08 WHICH HAS BEEN THE IT(TP)A.1256/BANG/2012 PAGE - 5 SUBJECT MATTER BEFORE THE DPP TNMM METHOD HAS BEEN UPHELD BY THE DRP. THE REASON WHY THE CPM METHOD CANNOT BE APPLIED TO THE ASSESSEE A CASE IS AS UNDER: 1 THE CPM METHOD PRESENTS SOME PRACTICAL DIFFICULTI ES IN IDENTIFYING THE COSTS INCURRED FOR THE PROVISION OF SERVICE LIKE WHETHER AN INDI R ECT COST IS TOWARDS RENDERING SERVICES OR IT IS AN ENTERPRISE LEVEL EXPENSE. 2 WHILE APPLYING CPM THE TAXPAYER SHOULD HAVE CONSI DERED ALL DIRECT AND INDIRECT COSTS INCURRED IN RESPECT O F THE SERVICES RENDERED BY IT. BUT IT IS APPARENT FROM D ETAILS GIVEN BY THE TAXPAYER THAT IT DID NOT INCLUDE ALL THE DIR ECT AND INDIRECT COSTS WHILE COMPUTING GROSS MARK UP. THE D ETAILS OF EXPENSE EXCLUDED WERE SIMPLY NOT AVAILABLE. THUS IT WAS DIFFICULT TO SAY WHETHER THE GRASS PROFIT WORKED OU T IN THE CASE OF THE COMPARABLES IS AT THE SAME LEVEL AS THA T OF THE TAXPAYER. 3 AS PER THE AGREEMENT THE TAXPAYER'S COST OF PROV IDING SERVICES INCLUDED ALL COSTS THAT HAVE BEEN INCURRED BY THE TAXPAYER. ALL THESE EXPENSES ARE REIMBURSED ON COST PLUS BASIS. THE TAX PAYER IS FORGETTING THAT IT IS ALSO GETTING A PERCENTAGE ON OTHER COSTS WHICH HAVE BEEN EXCLUDED BY THE TAXPAYER IN CPM SO THE CROSS MARGIN SHOWN BY THE TA XPAYER DISTORTS THE TRUE PICTURE OF ITS FINANCIALS FOR WHI CH TNMM METHOD IS THE MOST APPROPRIATE METHOD AS IT CAPTURE S ALL EXPENSES EXCEPT INTEREST COINCIDING THE COST BASE OF THE TAX PAYER FOR REIMBURSEMENT (AS PER THE AGREEMENT AND I NVO I CES RAISED BY THE TAX PAYER). 4. THE CPM METHOD PRESENTS SOME DIFFICULTIES IN PR OPER APPLICATION PARTICULARLY IN THE DETERMINATION OF COSTS. ALTHOU GH IT IS TRUE THAT AN ENTERPRISE MUST COVER ITS COSTS OVER A PERI OD OF TIME TO REMAIN IN BUSINESS THOSE COSTS MAY NOT BE THE DETE RMINANT OF THE APPROPRIATE PROFIT IN A SPECIFIC CASE FOR ANY O NE YEAR. WHILE IN MANY CASES COMPANIES ARE DRIVEN BY COMPETITION T O SCALE IT(TP)A.1256/BANG/2012 PAGE - 6 DOWN PRICES BY REFERENCE TO THE COST OF CREATING TH E RELEVANT GOODS OR PROVIDING THE RELEVANT SERVICE THERE ARE OTHER CIRCUMSTANCES WHERE THERE IS NO DISCERNIBLE LINK BE TWEEN THE LEVEL OF COSTS INCURRED AND A MARKET PRICE. SO WHE N PRICING OF SERVICES IS DETERMINED BY MARKET FORCES AND IT IS A LMOST CONSTANT ACROSS THE INDUSTRY THE COST PLUS METHOD CANNOT BE THE MOST RELIABLE OR APPROPRIATE METHOD. 2) HENCE FOR THE ABOVE DETAILED REASONS CPM WAS REJECTED AS THE MOST APPROPRIATE METHOD. AND TNMM W AS UTILIZED ESPECIALLY WHEN THE RELIABLE DATA EITHER IN THE TAX PAYER'S CASE OR IN THE COMPARABLE CASES IS NOT AVAILABLE FOR ASCERTAIN ING THE DIRECT AND INDIRECT COST OF PRODUCTION OF SERVICES. THE OTHER METHODS SUCH AS CUP RESALE PRICE METHOD AND PROFIT SPILT METHOD AR E ALSO REJECTED DUE TO THE NON AVAILABILITY OF DATA AND NON APPLICA BILITY IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THUS THE TNMM WAS TH E MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES O F THE TAXPAYER'S CASE. ACCORDINGLY OBJECTION NO.4 IS REJECTED. 7) GROUND OF OBJECTION-5: THE DRAFT ORDER PASSED WI THOUT REGARD TO THE INTERNAL INSTRUCTIONS ISSUED BY THE DEPARTME NT THAT NO ALP ADJUSTMENT NEED TO BE MADE IN A ROUTINE MANNER WHEN THE QUANTUM OF INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED E NTERPRISES IS LESS THAN RS.15 CRORES ITSELF CONSTITUTES AN ARBITRARIN ESS IN THE PASSING OF THE ORDER AND THE ASSESSEE OBJECTS ON THIS GROUND A LSO. 1) BEFORE THE DRP IN ITS SUBMISSION DATED 02/06/20 12 THE ASSESSEE HAS STATED THAT THE TOTAL CONSIDERATION IN VOLVED WHICH WAS PROPOSED TO BE DISALLOWED BY THE TPO WAS RS. 1 77 1 9 075/- WHICH IS FAR BELOW THE THRESHOLD LIMITATION PROVIDED BY THE BOARD. CONSEQUENTLY IT WAS SUBMITTED THAT THE REFERENCE TO THE TPC WAS HAD AND THE ORDER OF THE TPO SUGGESTING ADJUSTMENTS TO THE DECLARED IT(TP)A.1256/BANG/2012 PAGE - 7 INCOME WAS WITHOUT JURISDICTION AND IMPLEMENTATION OF THE SAME BY THE AC WAS AGAIN WITHOUT JURISDICTION. THE ASSES SEES SUBMISSIONS ARE NOT ACCEPTABLE. THE INTERNATIONAL TRANSACTION I N TERMS OF SECTION 92CA WAS REFERRED BY THE AO WITH THE PERMISSION OF THE GT TO THE IPO. ONCE SUCH EXPEDIENCY HAS BEEN EXPRESSED BY THE AO AND THE CIT TO REFER A MATTER TO THE TPO NOTHING IN THE SEC TION 920A PROHIBITS THE MAKING OF SUCH REFERENCE THE INSTRUCTION TO WHI CH THE ASSESSEE REFERS IS ONLY AN INTERNAL MATTER FOR GUIDANCE OF O FFICERS AND THERE IS NO STATUTORY PROHIBITION TO THE MAKING OF SUCH REFEREN CE OR THE ORDER OF THE TPO ON SUCH REFERENCE. ACCORDINGLY THIS GROUND IS REJECTED 8) GROUND OF OBJECTION-6: THE TPO / AO HAS ARRIVED ARBITRARY MARGIN OF 23.65% AND APPLIED ON THE COST INCURRED TO ARRIVE AT THE PROPOSED ALP & HAS MADE T HE ARBITRARY ADJUSTMENT OF RS.1.44 CRORE WHICH THE ASSESSEE VEHEMENTLY OBJECTS AS IT IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE AND AGAINST THE PRINC IPLES OF PRACTICAL BUSINESS OPERATIONS. THIS ASSUMES THE VERY IMPRACTICABLE POSSIBILITY OF BUSINESS ALWAYS O N PROFIT & ASSURED PROFIT WHICH IS INCORRECT. GROUND OF OBJECTION-7 : IN VIEW OF THE ABOVE IT IS PRAYED BEFORE THE DISPUTE RESOLUTION PANEL TO CONSIDER THE MERITS OF THE CASE. GROUND OF APPEAL AND THE HARDSHIP TO THE ASSESSEE AND DROP THE ADDIT IONS MADE BY THE TPO AND AO AND ISSUE ADEQUATE DIRECTION S TO THEM ACCORDINGLY U/S.144C AND FINALISE THE ASSESSMENT. 1) OBJECTIONS 6 & 7 ARE DEALT WITH TOGETHER THE TP O HAS ARRIVED AT THE MARGIN OF 23.65% WHICH IS NOTHING BU T THE AVERAGE OF OP/IC PERCENTAGE. SUCH MARGIN HAS BEEN ARRIVED AT A FTER CONSIDERING THE TAXPAYERS OBJECTION IN THIS CONNECTION THE ADJ USTMENT WAS BROUGHT TO THE NOTICE OF TAXPAYER VIDE SHOW CAUSE N OTICE DATED 07/10/2011. SINCE THE ASSESSEE HAS NOT SPECIFICALL Y BROUGHT TO THE NOTICE OF THIS PANEL ITS OBJECTIONS TO THE MARGIN P ROPOSED BY THE TPO IT IT(TP)A.1256/BANG/2012 PAGE - 8 IS NOT POSSIBLE TO DELIBERATE ON THIS MATTER FURTHE R. IT SHOULD ALSO BE NOTED THAT SUFFICIENT OPPORTUNITY HAS BEEN AFFORDED TO THE ASSESSEE FROM THE RECORDS OF THE TPO. ACCORDINGLY OBJECTION 6 & 7 ARE REJECTED. 07. FROM THE ABOVE IT IS CLEAR THAT THE DRP CONSID ERED ALL THE ISSUES RAISED BY THE ASSESSEE INCLUDING THE RATIO NALE FOR TNMM ON WHICH WE COULD NOT FIND ANY INFIRMITY. THUS THE AS SESSEE HAS NOT MADE OUT A CASE IN ITS FAVOUR. 08. IN THE RESULT APPEAL OF THE ASSESSEE IS DISMI SSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH DAY OF SEPTEMBER 2016. SD/- SD/- (SMT. ASHA VIJAYARAGHAVAN) (S. JA YARAMAN) JUDICIAL MEMBER ACCOU NTANT MEMBER MCN* COPY TO: 1. THE ASSESSEE 2. THE ITO WARD 11(2) BENGALURU / THE TPO V BENGA LURU 3. THE PRINCIPAL COMMISSIONER OF INCOME TAX- I BENGAL URU 4. THE DRP BENGALURU. 5. THE DR 6. GF ITAT BANGALORE BY ORDER ASSISTANT REGISTRAR