DCIT CIR 8(1), MUMBAI v. DIEBOLD SOFTWARE SERVICES P.LTD, MUMBAI

ITA 4347/MUM/2012 | 2007-2008
Pronouncement Date: 25-04-2014 | Result: Dismissed

Appeal Details

RSA Number 434719914 RSA 2012
Assessee PAN OFUSD2900P
Bench Mumbai
Appeal Number ITA 4347/MUM/2012
Duration Of Justice 1 year(s) 9 month(s) 29 day(s)
Appellant DCIT CIR 8(1), MUMBAI
Respondent DIEBOLD SOFTWARE SERVICES P.LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 25-04-2014
Appeal Filed By Department
Order Result Dismissed
Bench Allotted K
Tribunal Order Date 25-04-2014
Date Of Final Hearing 02-04-2014
Next Hearing Date 02-04-2014
Assessment Year 2007-2008
Appeal Filed On 26-06-2012
Judgment Text
K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH MUMBAI .. ; BEFORE SHRI P.M. JAGTAP AM AND SHRI VIVEK VARMA J M ./ I.T.A. NO.4347 /MUM/2012 ( / ASSESSMENT YEAR : 2007-2008 DY. COMMISSIONER OF INCOME TAX RANGE 8(1) ROOM NO. 260A 2 ND FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI 400 020. / VS. M/S DIEBOLD SOFTWARE SERVICES PVT. LTD. INTERFACE I.T. PARK BLDG. NO. 16 MALAD (W) MALAD LINK ROAD MUMBAI 400 064. ./ PAN : AACCDO755C ( # / APPELLANT ) .. ( $%# / RESPONDENT ) A PPELLANT BY SHRI VIVEK BATRA R E SPONDENT BY : SHRI JIGER SAIYA ) * / DATE OF HEARING : 2-4-2014 ) * / DATE OF PRONOUNCEMENT : 25-04-2014 [ / O R D E R PER P.M. JAGTAP A.M . : .. THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST T HE ORDER OF LD. CIT(A) - 15 MUMBAI DATED 24-04-2012 WHEREBY HE DELETED THE ADDITION OF RS. 15 73 624/- MADE BY THE A.O./TPO BY WAY OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF PAYMENT MADE BY THE ASSESSEE TO ITS AE F OR AVAILING IT SUPPORT SERVICES. 2. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY W HICH IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. THE RETURN OF INC OME FOR THE YEAR UNDER ITA 4347/M/12 2 CONSIDERATION WAS FILED BY THE ASSESSEE ON 30-10-20 07 DECLARING TOTAL INCOME OF RS. 5 57 88 432/-. DURING THE COURSE OF ASSESSME NT PROCEEDINGS A REFERENCE WAS MADE BY THE A.O. TO THE TPO U/S 92CA( 1) OF THE INCOME TAX ACT 1961 FOR DETERMINING THE ARMS LENGTH PRICE (A LP) IN RELATION TO THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE. ONE OF SUCH TRANSACTIONS WAS RELATING TO THE I.T. SUPPORT SERVI CES AVAILED BY THE ASSESSEE COMPANY FROM ITS AE BY MAKING THE PAYMENT OF RS. 15 73 624/-. IN THIS REGARD THE ASSESSEE WAS CALLED UPON BY THE TPO TO PROVIDE THE BASIS OF PRICING OF THESE TRANSACTIONS. THE ASSESSEE WAS ALS O REQUIRED BY THE TPO TO PROVIDE NECESSARY DETAILS ALONG WITH ALLOCATION KEY S AND BASIS OF CALCULATION OF PAYMENT MADE FOR I.T. SUPPORT SERVICES. ACCORDIN G TO THE TPO THE ASSESSEE HOWEVER FAILED TO COMPLY WITH THESE REQU IREMENTS AND THE ALP OF THE RELEVANT TRANSACTIONS THEREFORE WAS DETERMINED BY THE TPO AT NIL THEREBY MAKING TP ADJUSTMENT OF RS. 15 73 624/-. 3. WHEN THE ADDITION ON ACCOUNT OF TP ADJUSTMENT W AS MADE BY THE A.O. VIDE ASSESSMENT ORDER DATED 19-1-2011 PASSED U/S 14 3(3) OF THE ACT AN APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LD. CIT(A) DISPUTING THE SAID ADDITION. DURING THE COURSE OF APPELLATE PROCEEDING S BEFORE THE LD. CIT(A) ELABORATE SUBMISSIONS WERE MADE ON BEHALF OF THE AS SESSEE IN SUPPORT OF ITS CASE THAT THE ADDITION MADE ON ACCOUNT OF TP ADJUST MENT WAS NOT JUSTIFIED. AFTER DISCUSSING THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE THE LD. CIT(A) RECORDED HIS FINDINGS/OBSERVATIONS ON THE IS SUE OF TP ADJUSTMENT IN HIS IMPUGNED ORDER AS UNDER:- I. IT IS THE FACT OF THE CASE THAT THE COMPANY IS INVOLVED IN SOFTWARE DEVELOPMENT ACTIVITY AND SUCH SOFTWARE SERVICES ARE PROVIDED TO THE AE OF THE APPELLANT SOLELY. II. THE APPELLANT FOR BENCH MARKING ITS INTERNATION AL TRANSACTION OF SOFTWARE SERVICES TOGETHER WITH THE INTERNATIONAL T RANSACTION RELATING TO RECEIPT OF IT SUPPORT HAS ADOPTED TNMM AS THE MOST APPROPRIATE METHOD AND HAS SELECTED A SET OF EXTERNAL COMPARABL ES AND SUCH ITA 4347/M/12 3 ANALYSIS BY THE APPELLANT HAS NOT BEEN DISPUTED BY THE TPO. ACCORDINGLY THE TRANSACTIONS ON THE BASIS OF THE AN ALYSIS CONDUCTED FOLLOWING TNMM IS AT ARMS LENGTH. III. THE TPO ASKED FOR CERTAIN DETAILS SUCH AS THE ALLOCATION KEY BASIS OF CALCULATION AND THE WORKING OF THE IT SUPP ORT SERVICES RECEIVED BY THE APPELLANT. FURTHER HE HAS OBSERVED THAT THE APPELLANT COULD NOT PROVIDE THE BASIS OF THE PRICING OF THE TRANSACTION ALLOCATION BASIS OF COST AND NUMBER OF PCS DEPLOYED. THE APPELLANT BEFO RE THE TPO AND DURING THE INSTANT PROCEEDINGS HAS SUBMITTED THAT T HE PAYMENT HAS BEEN MADE AT THE FIXED STANDARD RATE OF USD 2900 P. M. FOR THE SUPPORT SERVICES AND AS SUCH IT IS NOT THE CASE THAT SUCH C OST HAS BEEN ALLOCATED TO THE APPELLANT EITHER ON THE BASIS OF N UMBER OF COMPUTERS OR NUMBER OF HOURS USED OR ANYTHING O THAT SORT. IV. IN THE DETAILS GIVEN THE APPELLANT HAS SUBMITT ED THAT IT HAS RECEIVED NUMBER OF SERVICES INCLUDING THE USE OF IN TRANET FACILITY AND ALSO USE OF LICENCE OF APPLICATION SOFTWARE / SYSTE M SOFTWARE MICROSOFT WINDOW COMPUTER AIDED DESIGN SOFTWARE MCAFEE ANTI VIRUS SAFEBOOT PSYNCH SERVICE MANAGER 7 ETC. THROUGH THE INTRANET IT HAS GOT SERVICES RELATING TO DEFINING GROUP POLICIES ACCESS TO LITE RATURE TECHNICAL NOTES SHARING OF EXPERIENCE KNOWLEDGE WITHIN THE GROUP A ND THE EMERGENCY MANAGEMENT SERVICES. V. FOR ALL THESE SERVICES RECEIVED BY THE APPELLANT IT HAS PAID A SUM OF USD 2900 P.M. AS IT SUPPORT SERVICES TO THE AB WHICH AS PER THE SUBMISSION OF THE APPELLANT IS ONLY REQUIRED TO REC OVER THE COSTS FROM THE GROUP ENTERPRISE OF THE APPELLANT. AS SUCH THRO UGH ITS ACTIVITIES THE AE WHICH IS THE GROUP HOLDING COMPANY HAS NOT EARNE D ANY MARGIN. VI. IT HAS BEEN FURTHER STATED THAT W.E.F.. 01/12/2 006 THE APPELLANT COMPANY HAS RECOVERED THE AMOUNT OF THE SAID COST A S A PART OF ITS COST RECOVERY MECHANISM ALONGWITH MARK UP OVER SUCH COST . PRIOR TO DEC 2006 THE APPELLANT USED TO CHARGE ON A MONTHLY BAS IS BASED ON THE SERVICES RENDERED TO THE AE. VII. THE APPELLANTS INTERNATIONAL TRANSACTION OF P ROVISION OF SOFTWARE SERVICES TO THE AE HAS BEEN BENCH MARKED TAKING TNM M AS THE MOST APPROPRIATE METHOD AND COMPARED ITS OPERATING PROFI T MARGIN WITH THE SET OF COMPARABLES. SUCH BENCH MARKING HAS NOT BEE N DISPUTED BY THE TPO. FURTHER IN WORKING OF THE NET PROFIT COST OF IT SUPPORT SERVICES ALSO IS CONSIDERED AS THE COST AND ACCORDINGLY IN S UCH ANALYSIS CONDUCTED BY THE APPELLANT THIS INTERNATIONAL TRANS ACTION HAS BEEN DULY CONSIDERED. VIII. THE TPO IN HIS ORDER HAS MENTIONED THAT THE B ASIS OF PRICING ALLOCATION BASE OF THE COST AND NUMBER OF PCS HAS N OT BEEN SUBMITTED BY THE APPELLANT AND ACCORDINGLY THE ALP OF THIS IN TERNATIONAL TRANSACTION HAS BEEN TAKEN AT NIL. SUCH CONCLUSION OF THE TPO IS NOT ITA 4347/M/12 4 SUPPORTED BY ANY FACT OF THE KIND THAT THE APPELLAN T HAS NOT RECEIVED SUCH SERVICES AS THE APPELLANT HAS MENTIONED TO BE RECEIVING ALONGWITH ACCESS TO INTRANET GROUP SUPPORT SERVICES AND RIGHT TO USE THE APPLICATION AND SYSTEM SOFTWARE. UNDER SUCH CIRCUM STANCES THE ALP OF THIS TRANSACTION CANNOT BE NIL. IX. THERE IS NO POSITIVE ANALYSIS DONE BY THE TPO A S TO HOW THIS TRANSACTION COULD HAVE BEEN BENCH MARKED COMPARING IT WITH THE PRICE OF SUCH TRANSACTION IN THE OPEN MARKET. FURTHER THE TPO HAS NOT ARRIVED AS TO HOW AND WHY THE BENCH MARKING CONDUCT ED BY THE APPELLANT IS NOT ACCEPTABLE. WITHOUT REJECTING THE BENCH MARKING OF THE APPELLANT THE TPO IS NOT WITHIN HIS JURISDICTION T O REDETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION. FURTHER IT CANNOT BE FACT OF THE CASE THAT WHEN THE SERVICES HAS BEEN RECEIVED WHICH ARE OF THE NATURE OF USE OF INTRANET SERVICES TOGETHER WITH GROUP SUPPORT SE RVICES AND USING RIGHT OF SYSTEM AND SOFTWARE CLEARLY THE COST OF S UCH BENEFIT RECEIVED CANNOT BE NIL. X. IT HAS BEEN MENTIONED BY THE APPELLANT THAT DURI NG THE YEAR IT HAS USED ALMOST 170 COMPUTERS AND EQUAL NUMBER OF U SERS AND THE MANAGEMENT OF THE APPELLANT COMPANY AGREED TO THE S AID CHARGE OF USD 2900 P.M. BY THE A XI. THE APPELLANT HAS ALSO GIVEN COMPARABLE TRANSAC TIONS THOUGH IT PERTAINS TO F.Y. 2008-09 WHICH IS A QUOTATION FROM REL NETWORKS A LOCAL VENDOR PROVIDING IT SERVICES WHO QUOTED A FEE OF RS. 52.93 LACS. IN THIS REGARD IT IS MENTIONED THAT WHEREAS THERE IS N O PROVISION IN THE T.P. REGULATIONS TO USE THE DATE OF THE FUTURE YEAR S HOWEVER SUCH DATA CLEARLY GIVES A HINT AS TO THE PRICE OF THE TRANSAC TION IN THE SUBSEQUENT YEAR. 4. ON THE BASIS OF ABOVE OBSERVATIONS/FINDINGS REC ORDED BY HIM THE LD. CIT(A) HELD THAT THE ACTION OF THE TPO IN ARRIVING AT THE ALP OF THE RELEVANT INTERNATIONAL TRANSACTIONS AT NIL WAS WITHOUT ANY BASIS AND ACCORDINGLY HE DELETED THE ADDITION MADE ON ACCOUNT OF TP ADJUSTME NTS MADE BY THE A.O./TPO HOLDING THE SAME TO BE UNSUSTAINABLE. AGGR IEVED BY THE ORDER OF THE LD. CIT(A) THE REVENUE HAS PREFERRED THIS APPEAL B EFORE THE TRIBUNAL. 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERV ED THAT THE ASSESSEES INTERNATIONAL TRANSACTIONS WITH ITS AE INVOLVING TH E AVAILING OF IT SUPPORT SERVICES WERE BENCH-MARKED BY THE ASSESSEE IN THE T P STUDY REPORT BY ITA 4347/M/12 5 ADOPTING THE TNMM AS THE MOST APPROPRIATE METHOD AN D SELECTING A SET OF EXTERNAL COMPARABLES. AS NOTED BY THE LD. CIT(A) IN HIS IMPUGNED ORDER THIS EXERCISE OF BENCH-MARKING MADE BY THE ASSESSEE TO S HOW THAT THE PRICE CHARGED BY ITS AE FOR PROVIDING IT SUPPORT SERVICES WAS AT ARMS LENGTH HAD NOT BEEN DISPUTED BY THE TPO AND THIS POSITION CLEA RLY EVIDENT FROM THE ORDER OF THE TPO HAS NOT BEEN DISPUTED EVEN BY THE LD. D. R. AT THE TIME OF HEARING BEFORE US. IT IS ALSO OBSERVED THAT THE ALP OF THE SAID TRANSACTIONS WAS DETERMINED BY THE TPO AT NIL WITHOUT APPLYING ANY OF THE PRESCRIBED METHODS AND THE ENTIRE PAYMENT MADE BY THE ASSESSEE FOR AVAILING THE IT SUPPORT SERVICES FROM ITS AE WAS ADDED AS TP ADJUST MENT. IN THE CASE OF MERCH LTD. DCIT (IT APPEAL NO. 925/MUM/2007 ORDER D ATED 19 TH JULY 2013) CITED BY THE LD. COUNSEL FOR THE ASSESSEE SIMILAR FACTS WERE INVOLVED INASMUCH AS THE ASSESSEE HAD APPLIED TNMM TO SHOW T HAT THE MARGIN EARNED BY IT FROM THE RELEVANT TRANSACTIONS WITH ITS AE WA S HIGHER THAN THE COMPARABLE COMPANIES. THE TPO HOWEVER DID NOT ACC EPT THE TP ANALYSIS MADE BY THE ASSESSEE WITHOUT GIVING ANY REASONS AND MADE TP ADJUSTMENT WITHOUT APPLYING ANY PRESCRIBED METHODS. THE TPO AL SO DID NOT MAKE ANY EFFORTS TO DETERMINE THE MARKET VALUE OF SERVICES R ECEIVED BY THE ASSESSEE FROM ITS AE IN ORDER TO SHOW THAT THE ASSESSEE HAD PAID MORE TO ITS AE AS COMPARED TO ANY INDEPENDENT PARTY FOR THE SAME SERV ICES. IN THESE FACTS AND CIRCUMSTANCES THE COORDINATE BENCH OF THIS TRIBUNA L HELD THAT THE ADDITION MADE BY WAY OF TP ADJUSTMENT WAS NOT SUSTAINABLE AS IT WAS NOT PERMISSIBLE UNDER TRANSFER PRICING REGULATION TO MAKE TP ADJUST MENT ON ACCOUNT OF ANY INTERNATIONAL TRANSACTION WITHOUT APPLYING ANY ONE OF THE PRESCRIBED METHODS. RELIANCE ON THIS REGARD WAS PLACED BY THE TRIBUNAL ON THE CASE OF MCCAN ERICSSON (INDIA) (P.) LTD. ADDL. CIT [2012] 24 TAXM ANN.COM 21 (DEL) WHEREIN THE TP ADJUSTMENT MADE BY THE A.O./TPO BY TAKING VA LUE OF CERTAIN SERVICES AT NIL WAS HELD TO BE UNSUSTAINABLE BY THE TRIBUN AL. KEEPING IN VIEW THESE DECISIONS OF CO-ORDINATE BENCH OF THIS TRIBUNAL AND HAVING REGARD TO ALL THE RELEVANT FACTS OF THE CASE AS SUMMARIZED BY THE LD. CIT(A) IN HIS IMPUGNED ITA 4347/M/12 6 ORDER WE HOLD THAT THE ADDITION MADE BY THE A.O./T PO ON ACCOUNT OF TP ADJUSTMENTS IN RESPECT OF THE INTERNATIONAL TRANSAC TIONS OF THE ASSESSEE COMPANY WITH ITS AE INVOLVING AVAILING OF IT SUPPOR T SERVICES WAS NOT SUSTAINABLE EITHER IN LAW OR ON THE FACTS OF THE CA SE AND THE LD. CIT(A) WAS FULLY JUSTIFIED IN DELETING THE SAME. WE THEREFOR E UPHOLD THE IMPUGNED ORDER OF THE LD. CIT(A) GIVING RELIEF TO THE ASSESSEE AND DISMISS THIS APPEAL FILED BY THE REVENUE. 6. IN THE RESULT APPEAL OF THE REVENUE IS DISMIS SED. ORDER PRONOUNCED IN THE OPEN COURT ON 25-04-2014 . ) 0 1 25-04-2014 ) SD/- SD/- (VIVEK VARMA) (P.M. JAGTAP ) JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; 1 DATED 25-04-2014 [ .../ RK SR. PS ' #%& '& / COPY OF THE ORDER FORWARDED TO : 1. # / THE APPELLANT 2. $%# / THE RESPONDENT. 3. 4 () / THE CIT(A)15 MUMBAI. 4. 4 / CIT 8 MUMBAI 5. $8 * 8 / DR ITAT MUMBAI A BENCH 6. / GUARD FILE. / BY ORDER % $ //TRUE COPY// / ( DY./ASSTT. REGISTRAR) / ITAT MUMBAI