SYBASE SOFTWARE (INDIA) P.LTD, MUMBAI v. DCIT 14(3)(2), MUMBAI

SYBASE SOFTWARE (INDIA) PRIVATE LIMITED ASSESSMENT YEARS: 2010-11 & 2011-12 1 IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH MUMBAI BEFORE HONBLE SHRI MAHAVIR SINGH JM AND HONBLE SHRI MANOJ KUMAR AGGARWAL AM ./ I.T.A. NO.2658/MUM/2015 ( / ASSESSMENT YEAR:2010-11) & ./ I.T.A. NO.1126/MUM/2016 ( / ASSESSMENT YEAR:2011-12) SYBASE SOFTWARE (INDIA) PRIVATE L TD 4 TH FLOOR PLATINA C-59 G-BLOCK BANDRA KURLA COMPLEX BANDRA (EAST) MUMBAI-400 098. / VS. D CIT - RANGE 14(3) (1) MUMBAI. ./ ./PAN/GIR NO. AAHCS-5015-K ( /APPELLANT ) : ( !' / RESPONDENT ) A PPELLANT BY : S/SHRI DHANESH BAFNA AND ARPIT AGGARWAL- LD. ARS R ESPONDENT BY : SHRI ANAND MOHAN - LD.CIT-DR / DATE OF HEARING : 11/09/2019 / DATE OF PRONOUNCEMENT : 11/11/2019 / O R D E R MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER): - 1. AFORESAID APPEALS BY ASSESSEE FOR ASSESSMENT YEA RS [IN SHORT REFERRED TO AS AY] 2010-11 & 2011-12 PRIMARILY CO NTEST CERTAIN TRANSFER PRICING (TP) ADJUSTMENTS MADE IN FINAL ASSESSMENT O RDERS OF THOSE YEARS. SINCE IDENTICAL ISSUES ARE INVOLVED WE PROC EED TO DISPOSE-OFF THE SYBASE SOFTWARE (INDIA) PRIVATE LIMITED ASSESSMENT YEARS: 2010-11 & 2011-12 2 APPEALS BY WAY OF THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE & BREVITY. ITA NO.2658/MUM/2015 AY 2010-11 2.1 THIS APPEAL CONTEST TP ADJUSTMENTS MADE IN FINA L ASSESSMENT ORDER DATED 31/12/2014 PASSED BY LD. DEPUTY COMMISS IONER OF INCOME TAX-CIRCLE 14(3)(1) (AO) U/S 143(3) R.W.S. 144C (13 ) OF THE INCOME TAX ACT 1961 PURSUANT TO THE DIRECTIONS OF LD. DISPUTE RESOLUTION PANEL-IV MUMBAI U/S 144C(5) DATED 19/12/2014 ON FOLLOWING GR OUNDS OF APPEAL: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED DEPUTY COMMISSIONER OF INCOME-TAX RANGE-14(3)(1) MUMBAI ('THE AO') ERRED IN MAKING AN ADJUSTMENT IN RELATION TO THE INTERNATIONAL TRANSAC TION OF PROVISION OF SOFTWARE RESEARCH AND DEVELOPMENT (IT OR 'SOFTWARE R&D') TO THE ASSOCIATE D ENTERPRISES OF RS. 2 79 79 018. IN DOING SO THE AO ERRED IN THE FOLLOWING: 1.1. NOT ADHERING TO THE DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP') WHEREBY THE HON'BLE DRP HAD DIRECTED THE AO TO EXCL UDE ONE COMPARABLE (M/S INFOSYS TECHNOLOGIES LIMITED). THIS LEADS TO REDUCTION OF A DJUSTMENT TO RS. 2 31 83 646 THEREBY RELIEF OF RS. 47 95 373. HOWEVER THE LEARNED AO DI SREGARDED THE DRP DIRECTIONS AND MADE THE ADJUSTMENT OF RS. 2 79 79 018. 1.2. CONSIDERING VARIOUS COMPANIES IN THE COMPARABL ES SET WHICH ARE FUNCTIONALLY NOT COMPARABLE TO THE APPELLANT; 1.3. CONSIDERING COMPANIES IN THE COMPARABLES SET W HICH HAVE SUBSTANTIALLY HIGH TURNOVER AS COMPARED TO THE APPELLANT; 1.4. CONSIDERING BAD DEBTS WRITTEN OFF AS NON-OPERA TING IN CASE OF ONE COMPARABLE M/S TELEDATA MARINE SOLUTIONS LIMITED WHILE RECALCULATI NG THE OPERATING MARGIN; AND 1.5. NOT GRANTING THE ADJUSTMENT FOR THE DIFFERENCE S IN THE LEVEL OF RISK PROFILE OF THE APPELLANT AS COMPARED WITH THE COMPARABLE COMPANIES . IT IS PRAYED THAT THE LEARNED AO BE DIRECTED TO CON SIDER THE INTERNATIONAL TRANSACTION OF THE APPELLANT AS ARM'S LENGTH AND ACCORDINGLY THE TRANS FER PRICING ADJUSTMENT OF RS. 2 79 79 018 SHOULD BE DELETED. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LEARNED AO ERRED IN GRANTING SHORT CREDIT OF TAX DEDUCTED AT SOURCE OF RS. 31 03 807 (TAX DEDUCTED AT SOURCE OF RS. 4 57 24 375 WAS CLAIMED IN THE BY THE APPELLANT IN THE RETURN OF INCOME OUT OF WHICH THE LEARNED AO HAS GRANTED CREDIT FOR ONLY RS. 4 26 20 568). THE APPELLANT PRAYS THAT THE LEARNED AO BE DIRECTED TO GRANT FULL CREDIT FOR THE TAX DEDUCED AT SOURCE CLAIMED BY THE APPELLANT IN THE RETURN OF INCOME. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. 2.2 THE INCOME OF THE ASSESSEE IN THE FINAL ASSESS MENT ORDER WAS DETERMINED AT RS.1036.45 LACS UNDER NORMAL PROVISIO NS INTER-ALIA AFTER TRANSFER PRICING (TP) ADJUSTMENT OF RS.279.79 LACS AS AGAINST RETURNED SYBASE SOFTWARE (INDIA) PRIVATE LIMITED ASSESSMENT YEARS: 2010-11 & 2011-12 3 INCOME OF RS.756.45 LACS E-FILED BY THE ASSESSEE ON 30/09/2010. THE ASSESSEE BEING RESIDENT CORPORATE ASSESSEE WAS STAT ED TO BE ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS A SSOCIATED ENTERPRISES (AE) I.E. SYBASE INC. AND ALSO ENGAGED IN CARRYING OUT THE DISTRIBUTION OF SYBASE INC. PRODUCTS IN INDIA. 2.3 THE INTERNATIONAL TRANSACTIONS OF SOFTWARE DEVE LOPMENT SERVICES STATED TO BE CARRIED OUT BY THE ASSESSEE WITH ITS A E AND AS REPORTED IN FORM NO. 3CEB WERE SUBJECTED TO DETERMINATION OF AR MS LENGTH PRICE (ALP) U/S 92CA (1) BY LD. TRANSFER PRICING OFFICER- II(1) MUMBAI (TPO). THE ASSESSEE WAS IN RECEIPT OF AGGREGATE AMOUNT OF RS.41.46 CRORES ON ACCOUNT OF SOFTWARE DEVELOPMENT SERVICES AND REFLEC TED MARGIN (OP/TC) OF 15% AS AGAINST MEAN MARGIN OF 14.35% REFLECTED B Y 16 COMPARABLE ENTITIES IN ITS TRANSFER PRICING STUDY REPORT. THE LD. TPO SHOW-CAUSED THE ASSESSEE TO INCLUDE 5 COMPARABLE ENTITIES WHICH WERE REJECTED BY THE ASSESSEE IN ACCEPT/ REJECT MATRIX. ALTHOUGH THE ASSESSEE CONTESTED THE EXCLUSION OF THE SAME HOWEVER LD. TPO FINALLY PROPOSED INCLUSION OF 4 COMPARABLE ENTITIES VIZ. (I) INFOSYS TECHNOLOG IES LTD.; (II) KALS INFORMATION SYSTEMS LTD.; (III) PERSISTENT SYSTEMS LTD.; (IV) WIPRO LTD.(SEGMENT). FURTHER 2 ENTITIES VIZ. CRAZY INFOT ECH LTD. AND RELIANCE INFO SOLUTIONS LTD. AS SELECTED BY THE ASSESSEE WE RE REJECTED. 2.4 ACCORDINGLY ADOPTING COMPARABLE MATRIX OF 18 E NTITIES LD. TPO RECOMPUTED MEAN MARGIN OF 22.76% AND THUS PROPOSED ADJUSTMENT OF RS.279.79 LACS AGAINST THESE TRANSACTIONS WHICH WER E SUBJECTED TO OBJECTIONS BEFORE LD. DRP. 2.5 BEFORE LD. DRP THE ASSESSEE FURNISHED ADDITION AL EVIDENCES ASSAILING THE PROPOSED ADJUSTMENTS HOWEVER THE SA ME COULD NOT FIND SYBASE SOFTWARE (INDIA) PRIVATE LIMITED ASSESSMENT YEARS: 2010-11 & 2011-12 4 FAVOR OF LD. TPO IN THE REMAND PROCEEDINGS. THE ASS ESSEE WHILE ACCEPTING THE EXCLUSION OF 2 ENTITIES WHICH WERE AC CEPTED BY THE ASSESSEE IN THE ORIGINAL MATRIX OBJECTED TO 4 COMP ARABLE ENTITIES AS FRESHLY INTRODUCED BY LD. TPO. HOWEVER THE SAID OB JECTIONS WERE REJECTED BY LD. DRP EXCEPT THE OBJECTION TO EXCLUDE ONE COMPARABLE ENTITY VIZ. INFOSYS TECHNOLOGIES LIMITED. THE OTHER OBJECTIONS VIZ. GRANT OF WORKING CAPITAL / RISK ADJUSTMENT ETC. WERE ALSO REJECTED. IN OTHER WORDS THE COMPARABLE ANALYSIS CARRIED OUT BY LD. T PO WAS ACCEPTED EXCEPT TO THE EXTENT OF INCLUSION OF ONE COMPARABLE ENTITY VIZ. INFOSYS TECHNOLOGIES LIMITED WHICH WAS DIRECTED BY LD. DRP TO BE EXCLUDED. AGGRIEVED THE ASSESSEE IS UNDER FURTHER APPEAL BEF ORE US. 3.1 THE LD. AUTHORIZED REPRESENTATIVE FOR ASSESSEE (AR) HAS DRAWN OUR ATTENTION TO THE FACT THAT ALTHOUGH LD. DRP HAD DIRECTED FOR EXCLUSION OF ONE COMPARABLE ENTITY VIZ. INFOSYS TECHNOLOGIES LIMITED HOWEVER LD.AO IN THE FINAL ASSESSMENT ORDER DID NOT CARRY OUT THE SAID DIRECTIONS AND ADDED THE PROPOSED TP ADJUSTMENT IN ITS ENTIRET Y. IT HAS ALSO BEEN SUBMITTED THAT THE RECTIFICATION APPLICATION FILED BY THE ASSESSEE IN THIS REGARD IS ALREADY PENDING BEFORE LD. AO. IN VIEW O F THE ADMITTED FACT WE DIRECT LD. AO TO EXCLUDE THIS ENTITY IN THE FINA L LIST OF COMPARABLE. 3.2 PROCEEDING FURTHER LD. AR DURING THE COURSE O F HEARING RESTRICTED HIS ARGUMENT TOWARDS EXCLUSION OF FOLLOWING REMAINI NG 3 ENTITIES AS INTRODUCED BY LD. TPO VIZ. (I) KALS INFORMATION SYS TEMS LTD.; (II)PERSISTENT SYSTEMS LTD.; (III) WIPRO LTD. (SEGM ENT). THE LD. AR SOUGHT EXCLUSION OF THESE ENTITIES BY DRAWING OUR ATTENTIO N TO THE FAVORABLE ORDERS OF THE TRIBUNAL FOR SAME AY RENDERED IN THE CASE OF OTHER ASSESSEE UNDER SIMILAR FACTUAL MATRIX AND HAVING SI MILAR FUNCTIONAL SYBASE SOFTWARE (INDIA) PRIVATE LIMITED ASSESSMENT YEARS: 2010-11 & 2011-12 5 PROFILE. THE LD. DR SUBMITTED THAT FINAL SET OF COM PARABLE WOULD NOT REQUIRE ANY INTERFERENCE ON OUR PART. 4.1 WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS PERUSED RELEVANT MATERIAL ON RECORD AND DELIBERATED ON VARIOUS JUDIC IAL PRONOUNCEMENTS AS CITED BEFORE US. AS PER THE ARGUMENTS ADVANCED B Y LD. AR OUR FINDINGS SHALL BE RESTRICTED TO SELECTION OF 3 COMP ARABLE ENTITIES ONLY. 4.1.1 KALS INFORMATION SYSTEMS LTD. THE PRIME ARGUMENT OF LD. AR REVOLVES AROUND THE FA CT THAT THIS ENTITY WAS ENGAGED IN SOFTWARE DEVELOPMENT AS WELL AS PROD UCTS AND THE SEGMENTAL RESULTS RELATING TO THE AFORESAID TWO SEG MENTS WERE NOT AVAILABLE IN ITS ANNUAL REPORT. DRAWING OUR ATTENTI ON TO THE FINANCIAL STATEMENT OF THE COMPANY THE LEARNED AR SUBMITTED THAT 27% OF THE TOTAL CURRENT ASSET OF THIS ENTITY COMPRISES OF INV ENTORIES WHICH DEMONSTRATES THAT THE COMPANY IS INTO DEVELOPMENT O F SOFTWARE PRODUCTS. RELIANCE HAS BEEN PLACED ON FOLLOWING DEC ISIONS IN SUPPORT OF THE SAID SUBMISSIONS: - ( I ) CIT V/S PRINCIPAL GLOBAL SERVICES P. LTD. (HONBLE BOMBAY HIGH COURT ITA NO. 57 OF 2016 AY 2009-10) ( II ) LIONBRIDGE TECHNOLOGIES PVT . LTD. V/S ITO (MUMBAI TRIBUNAL ITA NO. 668/MUM/2014 AY 2010-11) ( III ) DCIT V/S ELECTRONICS OF IM AGING INDIA (BANGALORE TRIBUNAL ITA NO. 212/BANG/2015 AY 2010-11) ( IV ) DIALOGIC NETWORKS INDIA P. LTD. V/S ACIT (MUMBAI TR IBUNA L ITA NO.7280/MUM/2012 AY 2008-09) FURTHER THIS COMPARABLE ENTITY IS STATED TO HAVE B EEN EXCLUDED BY TRIBUNAL IN ASSESSEES OWN CASE FOR 2006-07. AFTER GOING THROUGH THE SUBMISSIONS WE CONCUR WITH THE STAND OF LD. AR THA T THIS ENTITY COULD NOT SYBASE SOFTWARE (INDIA) PRIVATE LIMITED ASSESSMENT YEARS: 2010-11 & 2011-12 6 BE A COMPARABLE ENTITY FOR THE ASSESSEE. THEREFORE WE DIRECT FOR EXCLUSION OF THE SAME. 4.1.2 PERSISTENT SYSTEMS LTD. SIMILAR ARGUMENT OF FUNCTIONAL NON-COMPARABILITY HA S BEEN RAISED FOR THIS ENTITY AND IT HAS BEEN SUBMITTED THAT THIS ENTITY W AS PROVIDING SOFTWARE DEVELOPMENT SERVICES AND ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS. HOWEVER SEGMENTAL RESULTS WERE NOT AVAIL ABLE TO FACILITATE DESIRED COMPARISON. FURTHER THE REVENUE OF THIS EN TITY INCLUDE REVENUE FROM LICENSING OF PRODUCTS & ROYALTY WHICH ARE IN T HE NATURE OF R & D SERVICES AND THEREFORE THIS ENTITY COULD NOT BE HE LD TO BE COMPARABLE ENTITY. RELIANCE HAS BEEN PLACED ON FOLLOWING DECIS IONS IN SUPPORT OF SUBMISSIONS: - ( I ) CIT V/S CASHEDGE INDIA P. LTD. (HONBLE DELHI HIGH COURT ITA NO. 279 OF 2016 AY 2010-11) ( II ) LIONBRIDGE TECHNOLOGIES PVT. LTD. V/S ITO (MUMBAI T RIBUNAL ITA NO. 668/MUM/2014 AY 2010-11) ( III ) DCIT V/S ELECTRONICS OF IM AGING INDIA (BANGALORE TRIBUNAL ITA NO. 212/BANG/2015 AY 2010-11) ( IV ) DIALOGIC NETWORKS INDIA P. LTD. V/S ACIT (MUMBAI TR IBUNA L ITA NO.7280/MUM/2012 AY 2008-09) SINCE THE REVENUE IS UNABLE TO CONTROVERT THESE DEC ISIONS WE DIRECT FOR EXCLUSION OF THIS ENTITY. 4.1.3 WIPRO LTD.(SEGMENT) THE LD. AR ASSERTED THAT THIS ENTITY WAS A MARKET L EADER AND HAD BRAND VALUE ASSOCIATED WITH IT. IT WORKED AS A FULL-FLEDG ED RISK-TAKING ENTREPRENEUR AND ITS REVENUE DURING THE YEAR WERE M ORE THAN 547 TIMES THAN THAT OF ASSESSEE. THIS ENTITY IS STATED TO BE ENGAGED IN DIVERSIFIED ACTIVITIES SUCH AS IT SERVICES BPO SERVICES IT PR ODUCTS BPO SERVICES SYBASE SOFTWARE (INDIA) PRIVATE LIMITED ASSESSMENT YEARS: 2010-11 & 2011-12 7 CONSUMER CARE ETC. AND SEGMENTAL RESULTS WERE NOT A VAILABLE. OUR ATTENTION IS FURTHER DRAWN TO THE FACT THAT THIS EN TITY OWNED KNOW-HOW PATENTS BRANDS ETC. AND ALSO HAD HUGE YEAR-END INV ENTORIES. RELIANCE HAS BEEN PLACED ON FOLLOWING DECISIONS IN SUPPORT O F SUBMISSIONS: - ( I ) DIALOGIC NETWORKS INDIA P. LTD. V/S ACIT (MUMBAI TR IBUNA L ITA NO.7280/MUM/2012 AY 2008-09) ( II ) CIT V/S PENTAIR WATER INDIA P. LTD. (BOMBAY HIGH CO URT ITA NO. 18 OF 2015) FINDING FORCE IN AFORESAID SUBMISSIONS WE DIRECT F OR EXCLUSION OF THIS ENTITY. 4.2 NO OTHER ARGUMENTS HAVE BEEN ADVANCED BY RESPEC TIVE REPRESENTATIVES BEFORE US AND THEREFORE THE SAME A RE NOT BEING DELVED INTO. GROUND NO.1 OF THE APPEAL STANDS PARTLY ALLOW ED. 4.3 IN GROUND NO. 2 THE ASSESSEE IS AGGRIEVED BY S HORT GRANT OF CREDIT FOR TDS TO THE EXTENT OF RS.31.03 LACS. FOR THE SAM E WE DIRECT LD. AO TO VERIFY THE CLAIM OF THE ASSESSEE IN THIS REGARD AND GRANT CREDIT OF TDS AS PER LAW AFTER DUE VERIFICATION. GROUND NO. 2 STA NDS ALLOWED FOR STATISTICAL PURPOSES. 4.4 THE APPEAL STANDS PARTLY ALLOWED IN TERMS OF OU R ABOVE ORDER. ITA NO.1126/MUM/2016 AY 2011-12 5.1 FACTS ARE PARI-MATERIA THE SAME IN THIS AY AS IN AY 2010-11. THE LD. TPO BY DISTURBING THE COMPARABLE MATRIX HAS P ROPOSED TP ADJUSTMENT OF RS.331.46 LACS. THE STAND OF LD. TPO UPON CONFIRMATION BY LD. DRP IS UNDER APPEAL BEFORE US. BEFORE US L D. AR HAS SOUGHT EXCLUSION OF 2 ENTITIES VIZ. (I) INFOSYS TECHNOLOGI ES LTD.; (II) WIPRO LTD. RELIANCE HAS BEEN PLACED ON THE DECISION OF THIS TR IBUNAL IN NESS TECHNOLOGIES INDIA P. LTD. V/S DCIT (188 TTJ 8 MUM) AND DELHI SYBASE SOFTWARE (INDIA) PRIVATE LIMITED ASSESSMENT YEARS: 2010-11 & 2011-12 8 TRIBUNAL IN THE CASE OF AGILENT TECHNOLOGIES (I) LTD. V/S ITO (91 TAXMANN.COM 59) FOR EXCLUSION OF THESE TWO ENTITIES. WE FIND THAT THE FIRST ENTITY I.E. INFOSYS TECHNOLOGIES LTD. WAS ALR EADY EXCLUDED BY LD. DRP IN AY 2010-11 IN VIEW OF THE FACT THAT THE SAID ENTITY WAS FOUND TO BE A WELL-DIVERSIFIED ENTITY AND NON-COMPARABLE TO THE ASSESSEE. THE SECOND ENTITY I.E. WIPRO LIMITED HAS BEEN EXCLUDED BY US IN AY 2010-11 FOR THE REASONS STATED THEREIN. THEREFORE FOLLOWIN G THE SAME WE DIRECT FOR EXCLUSION OF BOTH THESE ENTITIES. NO OTHER ARGU MENTS HAVE BEEN ADVANCED BEFORE US IN THIS YEAR FOR TP ADJUSTMENT. THE TP GROUND STAND PARTLY ALLOWED. 5.2 IN GROUND NO. 2 THE ASSESSEE IS AGGRIEVED BY S HORT GRANT OF CREDIT FOR TDS TO THE EXTENT OF RS.4.42 LACS. FOR THE SAME WE DIRECT LD. AO TO VERIFY THE CLAIM OF THE ASSESSEE IN THIS REGARD AN D GRANT CREDIT OF TDS AS PER LAW AFTER DUE VERIFICATION. GROUND NO. 2 STANDS ALLOWED FOR STATISTICAL PURPOSES. THE OTHER GROUNDS ARE CONSEQUENTIAL IN NA TURE. 5.3 THE APPEAL STANDS PARTLY ALLOWED IN TERMS OF OU R ABOVE ORDER. CONCLUSION 6. BOTH THE APPEAL STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11TH NOVEMBER 2019. SD/- SD/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 11/11/2019 SR.PS JAISY VARGHESE SYBASE SOFTWARE (INDIA) PRIVATE LIMITED ASSESSMENT YEARS: 2010-11 & 2011-12 9 ! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. !' / THE RESPONDENT 3. * ( ) / THE CIT(A) 4. * / CIT CONCERNED 5. + !$- - / DR ITAT MUMBAI 6. ./0 / GUARD FILE / BY ORDER / (DY./ASSTT.REGISTRAR) / ITAT MUMBAI.