IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES: "I-1 ": NEW DELHI
BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER
AND
SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
ITA No: 2630/Del/2011
Asstt. Year : 2002-03
Income Tax Officer Vs. M/s ICC India Pvt. Ltd.,
Ward 11(3), New Delhi 4th Floor, NSIC-STP,
Okhla Industrial Estate,
New Delhi
(PAN:AAACI1843G)
(Appellant) (Respondent)
Assessee by : Ms. Vandana Bhandari
Department by : Sh. Amrendra Kumar, CIT,DR
Date of Hearing : 02.09.2015
Date of pronouncement : 09.09.2015
ORDER
PER INTURI RAMA RAO, AM
This is an appeal filed by the Revenue directed against the order of the
CIT(A)-XX, New Delhi, dated 22.03.2011 for the assessment year 2002-03.
The Revenue raised the following grounds of appeal:
1. On the facts and circumstances of the case and in law the order of the
Ld. CIT(A) is wrong, and the against the provisions of law which is
liable to be set aside.
2. On the facts and in the circumstances of the case & in law, the order of
deleting the addition of Rs. 53,23,591/- on account of upward
adjustment of Arm's Length Price of the Internation Transaction
ignoring the facts that......
(a) The upward adjustment was made by the TPO based upon the date
of Comparables.
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(b) The CIT(A) has simply accepted the contention of the assessee
without discussing the relevant date based on M/s Datamatics
Technologies Ltd. and Infotech Enterprises Ltd., for which he has
directed to exclude the names of these companies to arrive at the
mean of OP/TC Ratio.
(c) The CIT(A) has not established that the above two companies in
fact had the international transactions of more than 15-20% with
the related parties.
3. The appellant craves leave to add, alter or amend any ground of appeal
raised above at the time of hearing.
2. Brief facts of the case are that the respondent assessee-company is a
company duly incorporated under the provision of the Companies Act, 1956. It
is engaged in the business of providing information technology enabled services
to its parent company Interactive Composition Corporation (ICC). The return of
income for the assessment year 2002-03 was filed on 07.01.2003 disclosing nil
income. The case was selected for scrutiny assessment. Since the respondent
assessee-company reported international transaction in its report in form 3CEB,
a reference under Section (3) was made to Transfer Pricing Officer (TPO)-1,
New Delhi.
3. It is reported that during the year under consideration, the respondent
assessee-company entered into the following international transactions with its
AEs:
S. No. International Transaction Method Value (in Rs. )
1. Export of Software/IT CPM 6,98,47,580
Services
2. Import of Computer hardware CUP 14,62,516
4. In support of the respondent assessee-company's claim that the price
charged by it for the service rendered to its AE was at arm's length, the
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respondent assessee-company filed a report in Form 3CEB as required under the
provisions of Section 92E of the Act. The respondent assessee-company also
made a detailed analysis of international transactions. The respondent assessee-
company had adopted Cost Plus Method (CPM) as the most appropriate method
for determining the arm's length price. The international transactions entered
into by it are at arm's length. Due to availability of reliable data, the respondent
assessee-company has made itself as the tested party, i.e., assessee's operating
profit margin over the cost has been compared with the margin of other
comparable companies in India engaged in similar function. The operating
profits to total cost was adopted as the profit level indicate ("PLI"). In the
transfer pricing study, the respondent assessee-company had chosen the
following 12 comparables and their weighted average operating profit margin
was worked out at 4.82% as below:
Name of the company OP/TC
Allsoft Corporation Ltd. 5.80%
Fortune Informatics Ltd. -1.90%
Intellivisions Software Ltd. 2.03%
Oasis Infotech Ltd. 6.73%
Sriven Multitech Ltd. 7.29%
Neilsoft Ltd. 5.07%
Eastern Software Systems Ltd. 6.29%
Cummins Infotech Systems Ltd. -0.90%
C S Software Enterprise Ltd. 8.74%
Agenda Metmarketing Ltd. 8.93%
Savvion India Ltd. 6.11%
D C Elcot Software Ltd. 3.69%
Average OP/TC 4.82%
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5. Computation of arm's length price by the assessee
Since the OP/TC ratio of the assessee as worked out by it was -2.68% as
compared to 4.82% of the comparables, it made an adjustment of Rs.
53,82,342/- in the Income and offered the same for taxation. The adjustment has
been worked out as under:
Total Cost Rs. 7,18,19,973
(The assessee has removed foreign exchange fluctuation loss and interest expense being non
operating expenses from the total cost to arrive at the adjusted total expenditure)
Arm 's Length Consideration (A) Rs. 7,52,29,922
(applying 4.82% OP/TC ratio)
Consideration actually received (B) Rs. 6,98,47,580
Difference (A-B) Rs. 53,82,342
6. The learned Transfer Pricing Officer while accepting the most
appropriate method used by the respondent assessee-company for
benchmarking the international transactions rejected the transfer pricing study
conducted by the respondent assessee-company and chosen his own
comparables, which are as follows:
Name of the company Adjusted OP/TC%
Ace Software Exports Ltd. 11.66%
Allsec Technologies Ltd. 2.79%
Datamatics technologies Ltd. 30.93%
Genesys Internation Corp. Ltd. 29.45%
Infotech Enterprises Ltd. 26.65%
Karvy Consultants Ltd. 8.03%
MCS Ltd. 1.62%
Max Healthscribe Ltd. 1.77%
Ask Me Info Hub Ltd. (-)6.28%
Average OP/TC 11.85%
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The TPO computed the Arm's length price as follows:
"13. COMPUTATION OF THE ARM'S LENGTH PRICE (ALP):
In the manner discussed above, the arithmetic mean of operating profit
over the total cost margins of the comparables for the financial year
2001-02 works out to 11.85%. The arm's length price of the internation
transactions entered into by the assessee with its AE is worked out as
under:
Total Cost of Provision of services by the assessee: Rs. 7,20,21,767/-
(Adjusted total Cost of the services provided to AE as provided by the assessee
increased by the financial expenses of Rs. 2,51,187/- since the margins of the
comparables are on total cost basis which includes financial charges also.)
Margin @ 11.85% of the above Rs. 85,32,246
Arm's length price to be charged from the AE: Rs. 8,05,53,513/-
13.1 In the manner discussed above the arm's length price of the
international transaction entered into by the assessee with its AE is
determined at Rs. 8,05,53,513/- in place of Rs. 6,98,47,580/-.
Accordingly, an adjustment of Rs. 1,07,05,933/- is to be made to the
income of the assessee being the difference between the arm's length
price and the price charged by the assessee from its AEs for rendering
services to them. Since the assessee has itself offered Rs. 53,82,342/- for
taxation only the balance amount of Rs. 53,23,591/- shall be added to the
income of the assessee."
7. The Assessing Officer passed the consequential final assessment order
dated 21st March, 2005 after taking into consideration the order of TPO passed
under section 92CA(3) of the Act. Being aggrieved by this assessment order,
an appeal was filed before the CIT(A)-XX, New Delhi, who vide order dated
22nd March, 2011 deleted two comparables chosen by TPO i.e. (1) Datamatics
Technologies Ltd, and (2) Infotech Enterprises Ltd. on the ground that these
parties had substantial related party transactions. The relevant paragraph of the
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CIT(A)'s order is reproduced below:
"I have carefully considered the facts and submissions filed by the
appellant. After considering the facts, documentary evidences placed on
records and arguments presented by the AR, I am satisfied that the two
comparables used by the TPO i.e. 1) Datamatics Technologies Ltd.; and
2) Infotech Enterprises Limited have substantial related party transactions
and therefore cannot be used for determination of arms's length price of
the international transaction. Hon'ble ITAT has held in the case of Sony
India (P.) Ltd. Vs. DCIT [2008] 114 ITD 448 (DELHI) that "an entity
can be taken as uncontrolled if its related party transaction do not exceed
10 to 15 per cent of total revenue. Within the above limit, transactions
cannot be held to be significant to influence the profitability of
comparables."
After eliminating the above two companies from the comparables;
arithmetical mean margin based on the remaining companies is arrived at
7.01% and the arm's length price based on arithmetical mean margin
comes to Rs. 76,801,693/-. Since the price of international transaction
offered to tax by the appellant i.e. Rs. 75,229,922/- is within the
permissible +/-5% range of the price (upper limit 80,641,783/-, and lower
limit 72,961,613/-) based on arithmetic mean as allowed under proviso to
sub section 2 of section 92C, I hold the appellant's international
transaction of Export of Software/IT Services with AEs during the year
to be at arm's length.
Keeping in view the above, this ground of appeal of the appellant is
allowed. The assesse officer is directed to make necessary
modifications."
Being aggrieved by the above findings of the CIT(A), the Revenue had
come up with the present appeal before us.
8. The learned CIT-DR vehemently argued that the CIT(A) was not justified
in deleting the two comparables chosen by the TPO, inasmuch as, no evidence
was brought on record establishing that these two comparables had substantial
related party transactions.
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9. On the other hand, the ld. Authorized Representative relied upon the
order of the CIT(A).
10. We heard the rival submission and perused the material on record. The
CIT(A) deleted the two comparables, namely, M/s Datamatics Technologies
Ltd. and Infotech Enterprises Ltd. on the ground that these companies had
substantial related party transactions. The provisions of Section 92 provides that
income arising from international transaction is to be computed having regard
to ALP. Section 92F(ii) defines "arm's length price" to mean a price which is
applied or proposed to be applied in a transaction between persons other than
associated enterprises, in uncontrolled conditions. To compute ALP the results
of the international transaction are benchmarked against comparable
uncontrolled transaction. The mandate of s. 92F(ii) is that ALP shall be
computed considering price applied or proposed to be applied in transactions
between non-AE's.
11. When selection of external comparables, one needs to ensure that such
external comparables are uncontrolled. The companies having controlled
transactions therefore needs to be eliminated. Then the issue that crops up is
what should be the related party transaction ratio for excluding as comparable.
This issue had come up before the Tribunal in numerous cases. The Delhi
Coordinate Bench in the case of M/s Sony India Pvt. Ltd. Vs. DCIT [2008] 114
ITD 448 (Del), held that the companies having relating party transactions of not
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exceeding 15% can be taken as a comparable. This ratio was followed by the
Coordinate Benches of the Tribunal in the following decisions:
i. Customer.Com Pvt. Ltd. Vs. DCIT, [2012] 28 taxmann.com 258 (Bang.)
: [2013] 140 ITD 344 (Bang.) : [2013] 21 ITR (Trib.) 514 (Bang.)
ii. ITO Vs. CRM Services India (P.) Ltd. [2011] 14 taxmann.com 96 (Del) :
[2011] 48 SOT 41 (Del) (URO).
iii. CSR India (P) Ltd. Vs. ITO [2013] 31 taxmann.com 265 (Bang.)
iv. Logica Pvt. Ltd. Vs. ACIT, IT(TP)A No. 1129/Bang/2011: TS-131-
ITAT-2013-BANG-TP.
v. Avaya India (P.) Ltd. Vs ACIT [2013] 33 taxmann.com 569 (Del-Trib.)
: [2012] 15 ITR (T) 237 (Del-Trib.)
vi. ACIT Vs. Sakata Inx. (India) Ltd. [2012] 21 taxmann.com 37 (JP.)
:[2012] 53 SOT 165 (JP.)
vii. Huawei Tehnologies India Pvt. Ltd. Vs. ITO, IT(TP) No.
1338/Bang/2010.
viii. Wills Processing Services (India) (P.) Ltd. vs. DCIT, TS-49-OITAT-
2013 (Mum.)-TP
12. Thus, the law is fairly well settled to the extent that the companies having
in related party transactions more than 15% cannot be considered as
comparable. But in the present case, though the CIT(A) adopted the same parity
of reasoning while deleting the two comparables chosen by TPO, he had not
referred to any evidence on the record in support of the conclusion drawn that
these comparables had related party transactions exceeding 15%, nor the
Authorized Representative of the respondent assessee company could establish
this fact conclusively before us. No relief can be granted based on mere reliance
on the legal proposition without supporting evidence on record. Therefore, we
are of the considered opinion that the interest of justice would be met, if the
matter is restored to the file of the Assessing Officer for the verification of this
issue, after affording reasonable opportunity of being heard to the assessee-
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company. If it is found on verification that the ratio of related party transactions
is more than 15%, these companies may be excluded as comparables.
13. In the result, the appeal filed by the Revenue is partly allowed for
statistical purposes.
Order pronounced in the open court on 9th September, 2015
Sd/- Sd/-
(DIVA SINGH) (INTURI RAMA RAO)
JUDICIAL MEMBER ACCOUNTANT MEMBE
Dated: 9th September, 2015
`RK'(D.COM)
Copy of the Order forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
6. Guard File By order
Dy. Registrar, ITAT, New Delhi
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