DCIT, Hyderabad v. M/s Convergys Information Management (India)Pvt. Ltd., Hyderabad

ITA 229/HYD/2009 | 2004-2005
Pronouncement Date: 31-01-2011 | Result: Dismissed

Appeal Details

RSA Number 22922514 RSA 2009
Assessee PAN AACCC0701B
Bench Hyderabad
Appeal Number ITA 229/HYD/2009
Duration Of Justice 1 year(s) 11 month(s) 12 day(s)
Appellant DCIT, Hyderabad
Respondent M/s Convergys Information Management (India)Pvt. Ltd., Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 31-01-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 31-01-2011
Date Of Final Hearing 23-12-2010
Next Hearing Date 23-12-2010
Assessment Year 2004-2005
Appeal Filed On 17-02-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A HYDERABAD BEFORE SHRI N.R.S. GANESAN JUDICIAL MEMBER AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO.229/H/2009 ASSESSMENT YEAR 2004-05 THE DY. CIT CIRCLE 1(2) HYDERABAD VS M/S CONVERGYS INFORMATION MANAGEMENT (INDIA) (P) LTD. HYDERABAD. (PAN AA CCC 0701 B) (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. V. MADHUVANI DR RESPONDENT BY : SHRI KUNJ VAIDYA O R D E R PER CHANDRA POOJARI ACCOUNTANT MEMBER: THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED A GAINST THE ORDER PASSED BY THE CIT(A) III HYDERABAD DATED 15.12.20 08 AND PERTAINS TO THE ASSESSMENT YEAR 2004-05. 2. THE REVENUE RAISED THE FOLLOWING GROUNDS IN ITS APPEAL: 1. THE CIT(A) FAILED TO APPRECIATE THAT ALLOWABILI TY OF AN EXPENDITURE DEPENDS NOT MERELY ON AN AGREEMENT BETWEEN THE ASSE SSEE AND THE A.E. BUT ON THE EVIDENCE OF SPECIFIC SERVICES HAVIN G BEEN RENDERED BY THE TAX PAYER TO THE AE EITHER DIRECTLY OR INDIRECT LY. 2. THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFF ICER TO MAKE ADJUSTMENT ONLY RS.25 41 757/- I.E. 10% OF RS.2 54 17 576/- BEING EXPENSES INCURRED DURING 1.1.2004 TO 14.3.2004. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS A 100% SUBSIDIARY OF M/S CONVERGYS INFORMATION MANAGE MENT INC. USA AND IS ALSO REGISTERED AS A 100% EOU UNDER THE STPI SCH EME. IT IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT AND PRODUCT SUPPORT SERVICES TO ITS PARENT ITA NO.229/H/2009 CONVERGYS INFORMATION MANAGEMENT (I)(P) LTD. HYD. 2 2 COMPANY. THE RELEVANT FINANCIAL YEAR 2003-04 IS T HE FIRST YEAR OF OPERATION FOR WHICH THE ASSESSEE HAS FILED ITS RETU RN OF INCOME FOR THE ASSESSMENT YEAR 2004-05 DECLARING THE TOTAL LOSS OF RS.1 56 23 690/- THE ASSESSING OFFICER REFERRED THE CASE TO TPO TO DETER MINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE. IT WAS NOTICED BY THE TPO THAT THE ASSESSEE ENTERED INTO A N R&D AGREEMENT WITH ITS AE ON 1 ST JANUARY 2004 WHICH PROVIDED THAT A PROFIT MARK UP EQUAL TO 10% OF COST SHALL BE ADDED TO THE REIMBURSEMENT TO BE MADE BY PRINCIPLE TO THE R&D COMPANY. THE ASSESSEE RAISED INVOICES O N THE AE FOR PRODUCT DEVELOPMENT CHARGES FROM 15 TH MARCH TO 31 ST MARCH 2004 AND ADDED 10% MARK UP ON THESE CHARGES. IT WAS HELD BY THE TPO T HAT EVEN THOUGH THE AGREEMENT WAS ENTERED ON 1 ST JANUARY 2004 THE ASSESSEE HAD RECRUITED TECHNICALLY SKILLED MANPOWER ALONG WITH ADMINISTRAT IVE SUPPORT STAFF PRIOR TO THE DATE OF AGREEMENT. IT WAS HELD THAT ALL TH ESE EXPENSES WERE MEANT FOR CARRYING OUT R&D WORK PRIOR TO COMMENCEMENT OF COMMERCIAL OPERATIONS. HENCE THE ENTIRE EXPENSES INCURRED FR OM JULY 2003 ONWARDS WAS REQUIRED TO BE PAID BY THE AE ALONG WITH MARK U P 10%. TPO COMPUTED THE EXPENDITURE INCURRED BY THE ASSESSEE F ROM JULY 2003 TO 15 TH MARCH 2004 AT RS.3 89 02 467/- WHICH WAS REQUIRED TO BE REIMBURSED BY THE AE ALONG WITH MARK UP OF 10% AMOU NTING TO RS.38 90 247/-. THUS THE ALP OF REIMBURSEMENT OF EXPENSES WAS DETERMINED AT RS.4 27 92 714/- AND THE DIFFERENCE O F RS.38 90 247/- WAS ADJUSTED IN THE SAID INTERNATIONAL TRANSACTION VID E ITS ORDER DATED 9.10.2006 U/S 92CA(3) OF THE ACT. ON APPEAL THE C IT(A) DIRECTED THAT THE EXPENSES INCURRED DURING 1.1.2004 TO 14.3.2004 IS T O BE TREATED AS EXPENSES INCURRED TOWARDS THE PRODUCT DEVELOPMENT S ERVICE ON WHICH THE ASSESSEE IS ELIGIBLE FOR 10% MARK UP. HENCE THE R EVENUE IS IN APPEAL BEFORE US. ITA NO.229/H/2009 CONVERGYS INFORMATION MANAGEMENT (I)(P) LTD. HYD. 3 3 4. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMI TTED THAT THERE IS NO EVIDENCE REGARDING THE PRICE ADOPTED BY THE A SSESSEE. AS SUCH ARMS LENGTH PRICE ARRIVED AT BY THE TRANSFER PRICING OFF ICER IS TO BE CONSIDERED. THE DIFFERENCE BETWEEN THE ARMS LENGTH PRICE WORKE D OUT BY THE TRANSFER PRICING OFFICER AND THE PRICE SHOWN BY THE ASSESSEE AT RS.38 90 247/- IS TO BE CONSIDERED AS INCOME OF THE ASSESSEE. SHE RELIE D ON THE ORDER OF THE ASSESSING OFFICER AS WELL AS THE ORDER OF THE TRANS FER PRICING OFFICER. 5. ON THE OTHER HAND THE LEARNED AUTHORISED REP RESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE EVIDENCE BEFORE THE LOWER AUTHORITIES SHOWS THAT AN AMOUNT OF RS.2 54 17 576/- HAS INCURR ED FROM 1.1.2004 TO 14.3.2004 WHICH IS AFTER THE DATE OF INTER COMPANY AGREEMENT AND ONLY THIS AMOUNT IS LIABLE FOR ADJUSTMENTS TOWARDS MARK- UP AND SUBMITTED THAT THE EVIDENCE BEFORE THE LOWER AUTHORITIES LIKE COMM ENTS IN NOTES TO ACCOUNTS BY STATUTORY AUDITOR ON THE DATE OF COMMEN CEMENT CHARTERED ACCOUNTANTS CERTIFICATE INTIMATING THE DATE OF COMM ENCEMENT TO STPI INTIMATION TO COMMISSIONER OF CUSTOMS & EXERCISE RE GARDING THE COMMENCEMENT OF COMMERCIAL OPERATIONS AND INTER COM PANY SERVICES AGREEMENT EXECUTED ON 1.1.2004 SHOWS PROVISIONS OF SERVICES AS COMMENCED FROM THE DATE OF SERVICE AGREEMENT. WITH OUT PREJUDICING THE ABOVE HE SUBMITTED THAT EVEN IF THE REVENUES CONT ENTION WAS ACCEPTED THE INCOME RECEIVED SHOULD FALL WITHIN 5% RANGE AS PROVIDED UNDER PROVISO (2) TO SECTION 92C. ACCORDING TO AUTHORISED REPRES ENTATIVE TRANSFER PRICE FALLS WITHIN 5% RANGE OF THE ARMS LENGTH PRICE AND IF SO THE PROVISO TO SECTION 92C(2) AS APPLICABLE THERE WILL BE NO REQU IREMENT OF ANY ADJUSTMENT. 6. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE TPO DETERMINED THE ARMS LENGTH PRICE TO BE 6.34% IN THE TP ORDER. AS PER THE ABOVE COMPUTATION EVEN T HE INCOME RECEIVED BY ITA NO.229/H/2009 CONVERGYS INFORMATION MANAGEMENT (I)(P) LTD. HYD. 4 4 CIMG WHICH IS A SUM OF REIMBURSEMENT OF PRE OPERATI VE EXPENSES AND THE SALES REVENUE THE ACTUAL TRANSFER PRICE FALLS WITH 5% RANGE OF THE ARMS LENGTH PRICE. 7. HE FURTHER SUBMITTED THAT IF ONE WERE TO APPL Y THE ABOVE BENEFIT OF 5% PER THE SECOND PROVISO TO SECTION 92C (2) AS APPLICABLE FOR THE ASSESSMENT YEAR 2004-05 THE ASSESSEES ACTUAL TRAN SFER PRICE WILL BE COMPLIANT WITH THE ARMS LENGTH PRINCIPLE WITHOUT A NEED FOR ANY ADJUSTMENT. 8. HE PLACED RELIED ON THE FOLLOWING JUDGEMENTS: 1. DEVELOPMENT CONSULTANTS (P) LTD. (2008) 23 SOT 455 KOLKATA 2. SSSKODA AUTO PVT. LTD. (2009) (122 TTJ 699 ) (PU NE) 3. SONY INDIA (P) LTD. (2008) (114 ITD 488) (DELHI). 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE EXPENSES INCURRED BY THE ASSESSEE IS TOTALING OF RS.3 89 02 642/- UP TO 15.3.2004 AND THIS HAS BEEN BIFURCATED INTO AS FOLLOWS: A) INCURRED UP TO 31.12.2003 IS AT RS.1 34 84 88 5/- B) INCURRED FROM 1.1.2004 TO 14.3.2004 IS AT RS. 2 54 17 576/- 10. THE CIT(A) NOTED THAT THE ASSESSEE HAS INCURR ED EXPENDITURE FROM 1.1.2004 TO 14.3.2004 I.E. AFTER ENTERING INTO AGREEMENT WITH AE ON 1.1.2004 AT RS.2 54 17 576/- AND THIS AMOUNT IS LI ABLE FOR MARK UP AT 10% BECAUSE NO CUSTOMER WOULD PAY MARK UP BEFORE EN TERING INTO AGREEMENT AND THE EXPENDITURE INCURRED IS ONLY AFTE R AGREEMENT HAS TO BE MARK UP. ACCORDINGLY THE CIT(A) IS JUSTIFIED IN C ONSIDERING THE ITA NO.229/H/2009 CONVERGYS INFORMATION MANAGEMENT (I)(P) LTD. HYD. 5 5 EXPENDITURE INCURRED AFTER 1.1.2004 TO 14.3.2004 TO MAKE ADJUSTMENTS AT 10% OF THESE EXPENSES AT RS.24 41 757/-. THE REVEN UE HAS NOT BROUGHT ANY MATERIAL ON RECORD TO SHOW THAT THE ASSESSEE HA S INCURRED ANY EXPENDITURE BEFORE ENTERING INTO SERVICE AGREEMENT ON THE IMPUGNED ISSUE. ACCORDINGLY WE CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE AND DISMISS THE GROUND TAKEN BY THE REVENUE. 11. IN THE RESULT THE APPEAL FILED BY THE REVENU E STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON: 31.1.2011 SD/- SD/- N.R.S. GANESAN CHANDRA POOJARI JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 31 JANUARY 2011 COPY FORWARDED TO: 1. THE DY. COMMISSIONER OF INCOME TAX CIRCLE 1 (2 ) HYDERABAD 2. M/S CONVERGYS INFORMATION MANAGEMENT (I) (P) LTD . LIFE SCIENCE BUILDING PLOT NOS.5 & 43 HITECH CITY MADHAPUR H YDERABAD- 33. 3. CIT(A)- III HYDERABAD. 4. CIT HYDERABAD 5. THE D.R. ITAT HYDERABAD. NP