DCIT, New Delhi v. M/s. First Rain Software Centre Pvt. Ltd., Gurgaon

ITA 4006/DEL/2010 | 2003-2004
Pronouncement Date: 30-09-2011 | Result: Dismissed

Appeal Details

RSA Number 400620114 RSA 2010
Assessee PAN AAACF5301L
Bench Delhi
Appeal Number ITA 4006/DEL/2010
Duration Of Justice 1 year(s) 1 month(s) 3 day(s)
Appellant DCIT, New Delhi
Respondent M/s. First Rain Software Centre Pvt. Ltd., Gurgaon
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 30-09-2011
Date Of Final Hearing 16-08-2011
Next Hearing Date 16-08-2011
Assessment Year 2003-2004
Appeal Filed On 27-08-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B NEW DELHI) BEFORE SHRI RAJPAL YADAV AND SHRI B.C. MEENA ITA NO. 4006/DEL/2010 ASSESSMENT YEAR: 2003-04 DEPUTY CIT VS. M/S. FIRST RAIN SOFTWARE CENTRE CIRCLE 11(1) PVT. LTD. 15 TH FLOOR TOWER B NEW DELHI. UNITECH CYBER PARK SEC. 39 GURGAON-122 002 (PAN: AAACF5301L) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI NK CHA ND SR.DR RESPONDENT BY: MS. LALITA KRISH NAMURTY CA & SHRI MP RASTOGI ADV. ORDER PER RAJPAL YADAV: JUDICIAL MEMBER THE REVENUE IS IN APPEAL BEFORE US AGAINST THE ORD ER OF LEARNED CIT(APPEALS) DATED 28.06.2010 PASSED FOR ASSESSMENT YEAR 2003-04. THE SOLITARY GRIEVANCE OF THE REVENUE IS THAT LEARNED C IT(APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS.55 78 476 MADE BY THE A SSESSING OFFICER IN THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS CO NDUCTED BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES AND WHOSE ADJUSTMENT WAS RECOMMENDED BY THE LEARNED TRANSFER PRICING OFFICER. 2. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE CO MPANY HAS FILED ITS RETURN OF INCOME ON 02.12.2003 DECLARING LOSS OF RS .7 39 640. THE CASE OF 2 THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT A ND A NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED ON 7.10.2004 WHICH WAS DULY SERVED UPON THE ASSESSEE. THE ASSESSEE COMPANY AT THE RELEVANT TIME WAS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES. IT HAS PRO VIDED SERVICES TO ITS ASSOCIATE ENTERPRISES ONLY. ASSESSING OFFICER FOUND VALUE OF INTERNATIONAL TRANSACTIONS REPRESENTING SERVICES PROVIDED BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISES AT RS.6 65 81 615. HE MADE A REFERENCE TO THE LEARNED TPO FOR DETERMINING ARMS LENGTH PRICE IN RESPECT OF THE IN TERNATIONAL TRANSACTION UNDER SEC. 92CA(3) OF THE INCOME-TAX ACT 1961. LEA RNED TPO ON AN ANALYSIS OF THE RECORD FOUND THAT ASSESSEE HAS USED TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINATION OF ITS ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION UNDERTAKEN BY IT WITH ITS ASSOCIATED ENTERPRISES. IT CHOSE PROFIT LEVEL INDICATOR BY DIVIDING OPERATING INCOME WITH OPERATING COST. IN ITS TP STUDY REPORT ASSESSEE HAS SELECTED SIX COMPARABLE FOR THE PURPOSES OF BENCH MARKING. LEARNED TPO DID NOT FIND ANY DEFECT IN THE METHOD OF TNMM ADOPTED BY THE ASSESSEE FOR COMPUTAT ION OF ARMS LENGTH PRICE. HE ALSO ACCEPTED THE MANNER IN WHICH ASSESSE E CALCULATED THE PLI I.E. OPERATING PROFIT/OPERATING COST. HE ALSO CONSIDERED FOUR COMPARABLE OUT OF THE SIX COMPARABLE CONSIDERED BY THE ASSESSEE FOR T HE PURPOSE OF BENCH MARKING. THE FINDING OF THE LEARNED TPO IN THIS RES PECT READS AS UNDER: 3 3.4 SELECTION OF THE PROFIT LEVEL INDICATOR THERE IS NO DISPUTE IN REGARDING THE SELECTION OF T RANSACTIONAL NET MARGIN CHOSEN BY THE ASSESSEE. HOWEVER THE ASS ESSEE WAS APPRISED THAT SALES HAVE BEEN MADE TO RELATED PARTY AND HENCE OPERATING PROFIT EXPRESSED AS A PERCENTAGE OF TOTAL COST IS A MORE COGENT INDICATOR. THE ASSESSEE HAS IN TURN REPLIED VIDE LETTER DATED 12 TH JANUARY 2006 THAT VARYING INTERPRETATION OF TOTAL C OST EXISTS WHICH MAKES ITS DETERMINATION A SUBJECTIVE EXERCISE. THE CONTENTION OF THE ASSESSEE THAT VARYING INTERPR ETATION OF TOTAL COST IS AS A SUBJECTIVE EXERCISE IS FOUND WAN TING ON MERITS. THE OPERATING PROFIT CAN NOT BE DETERMINED WITHOUT DEFI NING THE COST BASE. IN CASE OF THE ASSESSEE THE ENTIRE COST BASE IS AN OPERATING COST BUT THE COSTS WHICH HAVE BEEN EXCLUDED BY THE ASSESSEE IN T HE CALCULATION OF OPERATING PROFIT OF THE COMPARABLES HAVE BEEN ANALY ZED. THESE EXCLUSIONS ARE ACCEPTED AND NOT DISPUTED. IN VIEW O F THIS DISCUSSION IT IS FELT THAT OPERATING PROFIT MARGIN OVER TOTAL COS T IS THE ONLY COGENT INDICATOR. MOREOVER THE FACT THAT THE SALES OF THE ASSESSEE ARE TO THE RELATED PARTY AND ARE CONTROLLED CANNOT BE USED FO R PURPOSE OF BENCHMARKING. 3.5 THE COMPARABLES OF THE ASSESSEE ARE NOT DISPUTE D AND IT IS FELT THAT THE SEARCH SHALL NOT BE CARRIED OUT OUTSIDE TH E MATRIX OF THE COMPARABLES ALREADY CHOSEN BY THE ASSESSEE. HOWEVER THE FOLLOWING FACTORS WILL BE THE BASIS FOR COMPARABILITY. (A) ONLY COMPARABLES HAVING DATA FOR THE YEAR 2003 WILL BE ANALYZED AND 4 (B) COMPARABLES HAVING A TURNOVER RANGING FROM RS. 1 CR AND 10 CR WILL BE ANALYZED. NO DATA FOR F.Y. 2003 COULD BE FOUND IN THE DATABAS E FOR NET AXIS SOFTWARE AND AS SUCH THIS COMPARABLE WAS NOT C ONSIDERED. THE TURNOVER OF M/S. SOFFIA SOFTWARE LTD. FOR THE Y EAR 2003 WAS RS.42.98 CR. AND AS SUCH IT WAS EXCLUDED FROM COMPA RABILITY ANALYSIS. FINAL LIST OF COMPARABLES AND DETERMINATION OF THE ARMS LENGTH PRICE THE FINAL LIST OF COMPARABLES CHOSEN IN VIEW OF TH E DISCUSSIONS ABOVE IS AS UNDER: THE CORRESPONDING OPERATING PROF IT MARGINS ON TOTAL COST SELECTED IS AS UNDER: S.NO. NAME OF THE COMPANY OP/TC (%) 1 ACE SOFTWARE EXPORTS LIMITED 10.88 2 MEGA CHANNELS SOFTWARE 2.77 3 ONLINE MEDIA SOLUTIONS 13.29 4 ICSA SOFTWARE 14.72 MEAN 10.41% 3. THE ASSESSEE HAS SHOWN ITS OPERATING PROFIT AT 1 .96% WHEREAS THE MEAN OPERATING PROFIT MARGIN OF COMPARABLES WORKED OUT BY HIM IS OF 10.41%. HE CALCULATED THE ARMS LENGTH PRICE AS UND ER: 5 4.2 THE ARMS LENGTH PRICE OF SERVICES PROVIDED TO ITS ASSOCIATED ENTERPRISES IS CALCULATED AS UNDER: TOTAL COST AS CALCULATED ABOVE RS.6 53 56 481 (A ) OPERATING PROFIT @ 10.41% RS. 68 03 610 (B) ARMS LENGTH SALES (A) +(B) RS.7 21 60 091 (C) 95% OF (C) RS.6 85 52 086 (D) SALES BOOKED BY THE ASSESSEE RS.6 65 81 615(E) SINCE THE SALES IS LESS THAN THE PERMISSIBLE LIMIT IN THE TOLERANCE BAND THE ARMS LENGTH VALUE OF SALES IS TO BE TAKEN AT THE ARITHMETIC MEAN WHICH IS (C) ABOVE. DIFFERENCE (C) (E) RS.55 78 476 4. ON THE BASIS OF THE RECOMMENDATIONS MADE BY THE TPO LEARNED ASSESSING OFFICER HAS MADE ADJUSTMENT IN THE ARMS LENGTH PRICE SHOWN BY THE ASSESSEE. DISSATISFIED WITH THE ACTION OF THE A SSESSING OFFICER ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LEARNED CIT (APPEALS). IT CONTENDED THAT THE LEARNED TPO FAILED TO DISCLOSE THE WORKING OF PROFIT MARGIN IN RESPECT OF FOUR COMPARABLES. AS PER THE ASSESSEE T HE MEAN OF OPERATING PROFIT MARGIN IN RESPECT OF ALL THESE COMPARABLES D OES NOT GO BEYOND THE TOLERANCE BAND OF +/- 5% PROVIDED IN SEC. 92C OF TH E ACT. THE ASSESSEE FURTHER CONTENDED THAT ITS BILL IS NOT COST PLUS BU T IT USED TO CHARGE ON AN HOURLY RATE WHICH IS FIXED WHICH HAS BEEN ACCEPTED IN THE LAST YEAR ALSO. THE ASSESSEE HAS MADE ADJUSTMENTS TOWARDS EMPLOYEES COS T WHICH ADJUSTMENT HAS BEEN EXCLUDED BY THE LEARNED TPO. IT WAS EXPLAI NED TO THE LEARNED CIT(APPEALS) THAT IN THIS LINE OF BUSINESS THE MAJ OR OPERATIONAL COST IS THE COST OF EMPLOYEES. IT IS THE SECOND YEAR OF OPERATI ON OF THE ASSESSEE AND IT 6 WAS IN AN EXPANDING PHASE. IT WAS RECRUITING MORE PEOPLE. THE EMPLOYEES COST AS A PERCENTAGE OF THE TOTAL COST OF THE ASSES SEE WAS 54.80% WHEREAS THE EMPLOYEE COST OF THE COMPARABLES IS AT 17.14%. ON THE BASIS OF THIS VARIATION ASSESSEE HAD CLAIMED AN ADJUSTMENT OF 1 .12 CRORES IN THE OPERATING COST BUT THIS ADJUSTMENT WAS WRONGLY REJE CTED BY THE LEARNED TPO. ACCORDING TO THE ASSESSEE THE LEARNED TPO FAILED T O APPRECIATE THE ISSUE. HE CONSTRUED AS IF ASSESSEE HAS CREATED A HIGHER CAPAC ITY WHICH IS A CAPTIVE ONE. SINCE THE ASSESSEE WAS UNABLE TO UTILIZE THE FULL C APACITY THEREFORE IT IS REQUESTING FOR THE ADJUSTMENT OF IDLE CAPACITY. THE CONTENTIONS OF THE ASSESSEE WAS THAT IF ASSESSING OFFICER IS COMPARIN G THE RESULTS OF COMPARABLES THEN THE SUBSTANTIAL FACTOR OF EMPLOYE ES COST FOR WORKING OUT OPERATING COST HAS TO BE CONSIDERED. LEARNED FIRST APPELLATE AUTHORITY HOWEVER DID NOT GO IN THIS ISSUE BUT ON A COMPARAT IVE ANALYSIS OF THE RESULT ARRIVED AT A CONCLUSION THAT PROFIT MARGIN SHOWN BY THE ASSESSEE IS WITHIN THE TOLERANCE BAND PROVIDED IN SECTION 92C OF THE ACT. 5. LEARNED DR WHILE IMPUGNING THE ORDER OF THE LEAR NED CIT(APPEALS) PLACED ON RECORD THE FINANCIAL DETAILS OF ALL THE C OMPARABLES. HE POINTED OUT THAT THE ASSESSEE HAS DEMONSTRATED BEFORE THE LEARN ED CIT(APPEALS) THAT ITS PROFIT MARGIN ON INTERNATIONAL TRANSACTION IS WITHI N THE TOLERANCE BAND PROVIDED IN SEC. 92C OF THE ACT THEREFORE NO ADJU STMENT IS REQUIRED. IN THIS EXERCISE ASSESSEE HAS INCLUDED OTHER INCOME OF THE COMPARABLES AND EXCLUDED THE EXPENSES RELATABLE TO THOSE INCOMES WH ICH GIVE A DIFFERENT RESULTS. TAKING US THROUGH THE DETAILS OF ACE SOFTW ARE EXPORTS LTD. HE POINTED OUT THAT THE ASSESSEE DID NOT CONSIDER THE STOCK ADJUSTMENT OF RS.4 02 370. SIMILARLY ASSESSEE HAS INCLUDED THE M ISCELLANEOUS EXPENSES OF RS.3 52 262 BUT DID NOT INCLUDE OTHER INCOME OF RS. 5 70 928. IF THESE 7 ADJUSTMENTS ARE CARRIED OUT IN A LOGICAL WAY THEN A HIGHER PROFIT MARGIN WOULD COME UP. AFTER GOING THROUGH THE DETAILS SUBMITTED BY THE LE ARNED DR WE CONFRONTED THE ASSESSEE AND DIRECTED LEARNED COUNSEL FOR THE A SSESSEE TO PREPARE A CHART IN TABULAR FORM EXHIBITING ALL THESE DETAILS AND HO W ASSESSEE HAS INCLUDED OR EXCLUDED CERTAIN ITEMS. THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED ON RECORD TWO CHARTS WHICH READ AS UNDER: 8 6. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVES WE HAVE GONE THROUGH THE RECORD CAREFULLY. ON ALL MAJOR ISSUES THERE I S NO QUARREL BETWEEN THE PARTIES. THEY HAVE ACCEPTED THE MOST APPROPRIATE ME THOD PROVIDED IN SECTION 92C SUB-SECTION(1) FOR COMPUTATION OF ARMS LENGTH PRICE I.E. TNMM. THEY HAVE ALSO ACCEPTED THAT PROFIT LEVEL INDICATOR HAS TO BE DETERMINED ONLY BY DIVIDING OPERATING INCOME WITH OPERATING COST I.E. OP/TC. THE ONLY DISPUTE BETWEEN THE PARTIES IS INCLUSION OF OTHER INCOME IN THE OPERATING INCOME OF COMPARABLES AND EXCLUSION OF MISCELLANEOUS EXPENSES BECAUSE IF OPERATING INCOME WOULD INCREASE AND OPERATING EXPENSES DECREE S THEN PROFIT LEVEL INDICATOR WOULD BE HIGHER. THUS ENDEAVOUR OF THE L EARNED DR IS TO INCREASE THE OPERATING INCOME AND REDUCE THE OPERATING COST. ON THE OTHER HAND THE EFFORTS OF THE ASSESSEE ARE TO REDUCE THE OPERATING INCOME OF THE COMPARABLES AND ENHANCE THE OPERATING EXPENSES WHICH WOULD RESU LT LOW PLI. ON AN 9 ANALYSIS OF THE ABOVE TABLE WE FIND THAT BOTH THE PARTIES HAVE AGREED ON MOST OF THE ITEMS. IN THE CASE OF ACE SOFTWARE EXPORTS LEARNED DR HAS INCLUDED STOCK ADJUSTMENT IN THE OPERATING INCOME AS WELL AS IN THE OPERATING COST. THE ASSESSEE HAS INCLUDED IN THE OPERATING COST ONL Y. BUT IN THE ALTERNATIVE COLUMN WHICH IS ACCEPTABLE TO THE ASSESSEE IT AGRE ED ITS INCLUSION IN THE OPERATING INCOME. IT COULD NOT BE INCLUDED IN THE O PERATING COST. ON THIS LEARNED DR DID NOT DISPUTE. THE ONLY DISPUTE NOW RE MAINS HOW MUCH MISCELLANEOUS EXPENSES ARE TO BE EXCLUDED FROM THE OPERATING COST. THERE IS NO DISPUTE THAT EXPENSES WHICH ARE NOT RELATABLE TO EARNING OF OPERATING INCOME ARE TO BE EXCLUDED FOR WORKING OUT THE PROFI T MARGIN. THE LEARNED COUNSEL FOR THE ASSESSEE DEMONSTRATED THAT ALL THE EXPENSES DEBITED UNDER THE HEAD MISCELLANEOUS EXPENSES CANNOT BE SAID THAT T HEY HAVE NO NEXUS WITH OPERATING INCOME. THERE ARE CERTAIN EXPENSES WHICH ARE NECESSARY FOR MAINTAINING THE STATUS OF THE COMPANY. WE FIND THAT EXACT DETAILS OF EXPENSES COULD NOT BE ASCERTAINED IN RESPECT OF COM PARABLES. THESE DETAILS HAVE BEEN TAKEN OUT FROM CAPITAL LINE DATABASE AND NOT DIRECTLY FROM THERE BOOKS OF ACCOUNT. THERE ARE SMALL ADJUSTMENTS. THE DETERMINATION OF ARMS LENGTH PRICE IS NOT BASED ON ANY MATHEMATICAL FORMU LA WHICH COULD BE ACHIEVED WITH MATHEMATICAL PRECESSION. IT IS A SCIE NTIFIC MECHANISM BASED ON COMPARABLES DATA WHICH ON SMALL VARIATION GIVE D IFFERENT RESULTS. SUCH AS HAD THE FILTER CLAIMED BY THE ASSESSEE IN RESPECT O F EMPLOYEES COST IS BEING ADJUDICATED THEN THERE WOULD NOT BE ANY ADJUSTMENT . LEARNED TPO IN THE FINDINGS EXTRACTED SUPRA HAS NOT MADE ANY REFEREN CE TO THE WORKING OF THE PROFIT MARGIN IN RESPECT OF COMPARABLES. ON THE OTH ER HAND WE HAVE SEEN THE DETAILED ANALYSIS IN THE TABLE EXTRACTED SUPRA WHIC H HAS BEEN ACCEPTED BY THE LEARNED CIT(APPEALS) ALSO. IN THE ALTERNATIVE COLUM N ASSESSEE HAS ACCEPTED ALMOST ALL THE OBJECTIONS OF THE LEARNED DR EXCEPT THE ADJUSTMENT OF 10 MISCELLANEOUS EXPENSES WHICH IS ALSO NOT A VERY SUB STANTIAL ITEM. CONSIDERING THESE DETAILS THE ANALYSIS MADE BY THE LEARNED CIT(APPEALS) AND THE PROCEDURE PROVIDED TO COMPUTE ALP WE ARE OF THE VIEW THAT SOME ELEMENT OF GUESS WORK ESTIMATION IS ALWAYS INVOL VED FOR DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS. DUE TO THIS VER Y REASON AT THE RELEVANT TIME OF THIS ACCOUNTING YEAR MECHANISM OF TOLERAN CE BAND IS PROVIDED. WE ARE OF THE VIEW THAT RESULTS SHOWN BY THE ASSESSEE IS WITHIN THE TOLERANCE BAND OF THE PROVISO APPENDED IN SEC. 92C OF THE ACT . THE ARITHMETIC MEAN OF THE COMPARABLES IS 6.84% IN THE FIRST ANALYSIS AND 5.63% IN THE SECOND ANALYSIS EXTRACTED SUPRA. THE AVERAGE PROFIT MARGIN SHOWN BY THE ASSESSEE IS 1.96% WHICH IS WITHIN THE TOLERANCE BAND OF + - 5%. THEREFORE LEARNED CIT(APPEALS) HAS RIGHTLY HELD THAT NO ADJUSTMENT IS REQUIRED IN THIS CASE. WE DO NOT FIND ANY MERIT IN THE APPEAL OF THE REVENUE. IT IS DISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 30.09.2011 SD/- SD/- ( B.C. MEENA ) ( RAJ PAL YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 30/09/2011 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR