Case Law Details
ACIT v Birla Soft Ltd.
ITAT, Delhi
ITA No. 4001 (Delhi) of 2009
Assessment Year: 2004-05
Decided on: 17 June 2011
Order
Rajpal Yadav, JM
1. The revenue is in appeal before us against the order of Learned CIT (Appeals) dated 28-7-2009 passed for the assessment year 2004-05. In the first ground of appeal, revenue has pleaded that Learned CIT (Appeals) has erred in deleting the additions made by the Assessing Officer on the recommendations made by the learned TPO for adjustment in arm’s length price on the international transactions carried out by the assessee with its associate enterprises.
2. The brief facts of the case are that the assessee is a 100 per cent subsidiary of Birla Soft Enterprises, which is a 100 per cent subsidiary of Birla Soft Inc. US. It is engaged in the business of software development and related services. It has filed its return of income on 1-11-2004 declaring an income of Rs.7,82,54,384. The software related business was being carried out by the assessee from Software Technological Park (STP), Scheme notified by the Government of India in the Ministry of Commerce and Industries. The undertakings were operational at three different address, namely,
(i) Birlasoft
Software Technology Park
Block-III, 2nd Floor
Ganga Shopping Complex,
Sector-29, NOIDA-201303
(ii) Birlasoft (GE-GDC)
Software Technology Park
Block-III, 3rd Floor,
Ganga Shopping Complex,
Sector 29, Noida-201303
(iii) Birlasoft
36, Vijayaraghava Road, 3
T. Nagar, Chennai.
The assessee had a branch office in Australia and Singapore which were also engaged in the business of developing and supplying customized computer software and related software services to both associated enterprises and other unrelated enterprises outside India. On scrutiny of the accounts, Assessing Officer found three international transactions undertaken by the assessee with its associated enterprises during the accounting year relevant for the present assessment year. The Learned CIT (Appeals) has noticed the transactions as well as value of transaction and the method used by the assessee for determining the ALP in respect of those transactions. They read as under:
| Sl. No. | Nature of Transactions | Value of transactions (Rs.) | Method Used |
1.Software development services1,53,16,98,060TNMM2.Chargeback of expenses by AEs3,31,30,369No Benchmarking required
3.Chargeback of expenses from AEs4,01,580
No Benchmarking Required
3. Assessing Officer has made a reference to the TPO for verification and determination of ALP in respect of international transaction entered with associate enterprises. Learned TPO did not accept the transfer pricing report submitted by the assessee in Form No. 3 CEB. He has recommended the adjustment of Rs.4,95,51,723. This has been noticed by the Learned CIT (Appeals) in paragraph No. 4.2.3 and it reads as under:
| STP Units | Aggregate Margin of |
STP unit
Arm’s length margin (as
computed by TPO)
Addition made by the
TPO/AO
Noida STP
Unit
12.11%14.01%2,27,05,996
Noida STP
Unit
217.11%14.01%Nil
Chennai STP-21.98%14.01%2,68,45,727
Total
4,95,51,723
4. On appeal, Learned CIT (Appeals) has reappreciated the controversy and arrived at a conclusion that arithmetic mean of profit level indicator of the comparable selected by the Assessing Officer is 14.01 per cent whereas assessee has disclosed arithmetic mean of its international transaction with associate enterprises carried out in all the three STP units at 10.91 per cent. This operating profit disclosed by the assessee is within the tolerable band provided in the proviso appended to section 92C(2) and, therefore, no adjustment is required.
5. With the assistance of learned representatives, we have gone through the record carefully. The dispute between the parties for determination of ALP with respect to international transaction is in a very narrow compass. In order to examine the issue, whether any adjustment is required to be made in the ALP disclosed by the assessee relating to its international transaction with its associate enterprises, the first area of dispute which could arise between the parties is in respect of most appropriate method required to be adopted for determination of ALP as provided in section 92C of the Income-tax Act, 1961 read with rule 10B of the IT Rules. Section 92C provides five main methods and one residuary method. These are (a) comparable controlled price method; (b) resale price method; (c) cost plusmethod; (d) profits split method; and (e) transactional net margin method and the residuary method is; such other method as may be prescribed by the board. In the present year, on an analysis of the international transaction with the associate parties and data of comparables, assessee has selected TNMM, using net profit margin based on cost as PLI. This method is not disputed by the TPO hence we can say that both sides are in agreement on the method.
6. The next area of dispute is use of current year data versus multiple year data. The assessee has used multiple year data but TPO has used current year data. This controversy has been sliced in a number of judgments, namely, Aztec Software and Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141 (Bang.) (SB) and Mentor Graphic (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 (Delhi) etc.
7. We have duly considered the rival contention and gone through the record carefully. Rule 10B(4) of the Income-tax Rules has a direct bearing on the controversy. Therefore, it is salutary upon us to take note of this rule it read as under:-
“10(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into:
Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.”
8. A bare perusal of this rule would reveal that expression “shall” has been employed in this rule which make it abundantly clear that current year data of an uncontrolled transaction is to be used for the purpose of comparability, while examining the international transactions with associate enterprises. The proviso appended to the section carves out an exception that the data relating to the period of being more than two years prior to such financial year may also be considered, if such data reveals facts which could have an influence on the determination of transfer price in relation to transaction of comparison. Thus the main section used the expression “shall” which make it mandatory to first use the current year data. If certain other circumstances reveals an influence on the determination of transfer pricing in relation to the transaction being compared than other datas for period not more than two years prior to such financial year may be used. Thus ld. CIT(A) has rightly upheld the view point of TPO for using current year data.
9. The next area of dispute relates to selection of comparables who have uncontrolled transactions of similar nature. The assessee has selected 24 companies in its TP study report. Learned TPO has rejected 9 comparables from the list. Learned representatives have not advanced detailed argument on selection of comparables. The dispute raised before us at the time of hearing was whether Assessing Officer is justified in considering the each STP Unit as a stand alone unit for computing the ALP. In other words, whether result of all the STP units has to be considered for working out the operating profit. The learned counsel for the assessee submitted that assessee has transaction with unrelated parties also, therefore, for the purpose of benchmarking its internal comparables are one of the best comparables. He pointed out that this issue has arisen in assessment year 2006-07 also where Hon’ble Bench has upheld the internal benchmarking analysis undertaken by the assessee while justifying the ALP of international transaction for software development services. Learned DR at the time of hearing pointed out that internal comparison needs to be refined to account for geographical differences between internal and external segments. According to him, there can be various reasons for requiring adjustment and these factors are strength of currency, labour cost etc. in different geographical conditions. He pointed out that a service sold in India for some price the same service would fetch different price in Europe and America etc. Therefore, for taking up the internal benchmarking, an adjustment be made for eliminating the geographic condition effecting the value of such services.
10. Before adverting to the facts whether as a stand alone, unit for the purpose of determining the ALP relating to international transaction is right or wrong, we have a glance over the details placed on record by the learned counsel for the assessee in a tabular form at page 158 of the paper book exhibiting the transaction of each unit with related parties and unrelated parties. The first STP unit is Noida Unit. It has shown OP over TC with respect to related parties at 8.42 per cent. In the case of unrelated parties, it has shown OP over TC at -30.57 per cent. The total result is 2.11 per cent. Similarly at Noida-2, the operating profit is 26.17 per cent in the case of related parties, it -25.82 per cent in the case of unrelated parties and 17.11 per cent is the overall result. At Chennai, it is -20.12 per cent for relates parties, -26.97 per cent for unrelated parties and overall result is minus 21.98 per cent. With respect to non-STP Unit, the operating profit is 11.97 per cent in respect of related parties and 14.79 per cent in respect of unrelated parties. The overall result of the company is 14.33 per cent in the case of related parties -14.10 per cent in respect of unrelated parties. The overall operating profit margin of international transaction is 10.91 per cent. This result is within the tolerance band provided in the proviso to section 92C(2) of the Act and, therefore, no adjustment is required. Learned TPO has recommended the adjustment by ignoring the result of Noida STP Unit 2. We have noticed this working in paragraph No. 3 extracted supra.
11. Learned First Appellate Authority did not accept the approach of TPO for segregating the margin earned by the assessee in its various STP units. The reasons for not concurring with the TPO are that the assessee had provided software development services, such as, software development services, software maintenance and repair services, quality testing services from its three units. It is an identical services.
12. There is no significant functional difference in the software development and maintenance services to related and unrelated values. The services rendered by the STP Unit were rendered to the same AEs of the assessee, namely, Birla Soft Inc. US and Birla Soft UK on continuing basis.
13. The terms and conditions for rendering such services by each of STP Unit was governed by one single agreement entered into between Birla Soft India and Birla Soft Inc. US. The learned TPO has assumed that functions, assets and risk undertaken by each of the STP Unit are distinct from each other and is comparable with the function, assets and risk undertaken by existing comparables. In other words, learned TPO has totally ignored the unity of the business, administrative control and unity of funds etc. The independent FAR analysis of each unit with existing comparables is practically not possible because there is a common management, interlacing of the funds etc.
14. Thus, on due consideration of the order of the Learned CIT (Appeals), we are satisfied that Learned First Appellate Authority rightly did not concur with the conclusion of the TPO for segregating the each STP Unit and considering the result of each STP Unit as a stand alone for the purpose of determining the ALP relating to international transaction.
15. In assessment year 2006-07, ITAT has upheld the benchmarking of internal international transactions with unrelated parties for testing the ALP of assessee with its related parties. We have a glance over such result compiled at page 158 of the paper book, the operating profit margin with respect to unrelated transaction is minus 14.10 per cent whereas the assessee is showing operating profit with related parties at 14.33 per cent. The overall result shown by the assessee is 10.91 per cent. Even if we examine this result within the right of the ITAT’s order for assessment year 2006-07, then also no adjustment is required in the result of international transaction shown by the assessee. Learned First Appellate Authority has taken into consideration all these aspects elaborately and we do not see any reason to interfere in his findings. In view of the above, ground No. 1 is rejected.
16. In ground No. 2, grievance of the revenue is that Learned CIT (Appeals) has erred in allowing exemption under section 10A of the Act. Assessing Officer has denied the exemption under section 10A with reference to the STP Unit on the third floor at STP Complex, Sector 29, Noida, on the ground that it was an extension of the existing unit. Learned CIT (Appeals) deleted the denial of exemption on the ground that exemption under section 10A has been allowed to the assessee by the ITAT on this new unit in assessment year 2003-04. The ITAT has held that it is not an extension of the existing unit. The learned counsel for the assessee placed on record copy of the ITAT’s order in ITA No. 3821/Delhi/06 and 3919/Delhi/06. Taking into consideration the order of the ITAT, in assessment year 2003-04, we do not see any reason to interfere in the order of the Learned CIT (Appeals).
17. In ground No. 3, grievance of the revenue is that Learned CIT (Appeals) has erred in deleting the addition of Rs.19,26,120. The brief facts of the case are that on perusal of the tax audit report, Assessing Officer found that at Clause No. 22B, the auditor has stated that assessee has made prior period expenses of Rs.19,26,120. It claims the deduction of this amount in the present assessment year. He directed the assessee to explain as to why these amounts be not disallowed. In response to the query of the Assessing Officer, assessee has made the submissions vide letter dated 15-12-2006. It reads as under:
“Every employer is obligated to pay the payroll taxes on monthly basis which is calculated as a per cent on the monthly wages. Birlasoft Australia branch has complied with this provision and has paid the same on monthly basis. On an annual basis, the Branch is further obligated to reconcile the annual wages and pay the differential or is entitled to receive the tax back if paid extra. The accounting period for this activity is July 1st through June 30th. Based on the reconciliation, Australia branch was obligated to pay Rs.19,26,120 and this was paid within the permissible period in July 2003″.
18. The Assessing Officer did not accept the contention of the assessee. He recorded a finding that these amounts cannot be said to be accrued and crystallized during the accounting year, hence he made the addition. On appeal, Learned CIT (Appeals) deleted the addition by following the decision of Hon’ble Gujarat High Court in the case of Sourasthra Cement and Chemical Industries Ltd. v. CIT [1980] 123 ITR 669/[1979] 2 Taxman 22.
19. With the assistance of learned representatives, we have gone through the record carefully. The actual liability to pay to reconciled pay roll taxes has actually accrued and crystallized on 30-6-2003. When the reconciliation of Australian pay roll tax was done, pursuant to the closure of Australian tax year. Learned CIT (Appeals) has appreciated the facts and circumstances in right perspective. We do not see any reason to interfere in his findings.
20. In view of the above, we do not find any merit in this appeal, it is dismissed.
