IN THE ITAT HYDERABAD BENCH ‘B’
Infobahn Technologies Ltd.
versus
Deputy Commissioner of Income-tax
IT Appeal No. 962 (Hyd.) of 2003
[Assessment year 2002-03]
August 6, 2012
ORDER
Saktijit Dey, Judicial Member
This appeal filed by the assessee is directed against order dated 8-9-2006 of CIT (A)-III, Hyderabad passed in ITA No.15/DC2(1)/CIT(A)-III/05-06 and it pertains to the assessment year 2002-03.
2. Though the assessee has raised 9 grounds, learned AR for the assessee at the outset submitted he wants to argue on ground Nos. 6(a) and 6(b) only. Considering the submissions of the ld. AR the other grounds raised are dismissed as not pressed. For the sake of convenience, grounds Nos. 6(a) and 6(b) are quoted below:-
“6(a) The ld. CIT (A) erred in allocating 80% of unbilled hours to the Associated Enterprise and consequently erred in arriving at the ALP of Rs.12,57,28,362 by ignoring the fact that the appellant suffered losses in the aftermath of bomb attack on World Trade Centre on 9/11 in US.
6(b) The ld. CIT (A) erred in overlooking the basic facts that the appellant was obliged to take 25 persons on a monthly basis as per the contract between the appellant and its AE and due to 9/11 incident, there were personnel “sitting on the bench”, who could not be deputed to any client/customer of the appellant. Consequently, the ld. CIT (A) failed to appreciate the loss incurred, and erred in attributing such business loss as unbilled hours of the AE”
3. Brief facts of the issue are, the assessee is in the business of software development by resourcing qualified personnel for the purpose. The assessee during the relevant financial year had international transactions with its Associated Enterprise (AE) M/s Cypress Associates Inc. Of USA which is its 100% subsidiary. On a reference made by the AO u/s 92CA(1) of the Act the TPO issued notice u/s 92CA(2) to the assessee for fixation of Arm’s length Price (ALP) in respect of the international transaction entered into by the assessee with its AE in USA. In course of the proceeding the TPO found that the assessee had paid an amount of Rs.13,39,79,178 to its AE M/s Cypress Associates Inc. USA @ Rs.61.39 USD for a total of 45,662 man hors whereas it has received charges for the technical services provided to its clients for 41,921 man hours. Before the TPO the assessee explained that it has entered into an agreement with its AE for hiring technical personnel to be engaged in its overseas project. As per the terms of the agreement the assessee will hire minimum of 25 employees per month and will pay 9700 USD per month per employee. When the TPO asked the assessee about the huge gap between man hour utilisation, the assessee explained that the total man hours utilised after deducting holidays and others, it comes to 158 hours per month. The assessee submitted that the average rate charged as per invoice raised on AE by the assessee is Rs.66.40 per hour whereas it has paid @ 61.39 USD per hour to its AE. The assessee also explained the difference between man hours by submitting that in the month of November, even though it employed only 10 it had to pay the amount for 25 people to the AE as per the agreement. Due to recession in the aftermath of9/11 terrorist attack in USA man power could not be utilised properly and the assessee incurred losses, hence closed down its operations. The TPO found that while the AE has supplied its man power to independent parties on actual man hour utilisation basis, it has provided manpower utilisation to the assessee on monthly payment basis. The TPO found the terms and conditions mentioned in the agreement between the assessee with its AE has put the assessee in a disadvantageous position conceding undue benefits to the AE. The TPO also found that while raising bills on third parties in respect of onsite operations, the assessee has quoted rates as per the technical abilities and the nature of such services rendered by such employees ranging between 50 USD to 90 USD. Whereas the assessee paid 61.39 USD per man hour to the AE without considering the technical expertise and quality of service provided. This, according to the TPO was a benefit given to the AE which ultimately reflected on the poor financial result of the assessee compared to other similar industries. The TPO found the difference between the man hours paid to AE and man hours charged from clients by the assessee to be 3741 man hours. After giving benefit to the assessee of 240 man hours for demo purpose the TPO came to the conclusion that the assessee has paid the AE for 3500 man hours in excess. He accordingly calculated the ALP. The payment made to the AE by the assessee was found to be not within the +/- 5% range and therefore was not accepted. The calculation of ALP by the TPO is reproduced below for the sake of convenience.
