Infogain India Pvt Ltd Vs DCIT (ITAT Delhi)
Conclusion: Comparison of activities undertaken /functions performed was important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be opposite to ignore functional dissimilarity only for the reasons that its impact may be reduced on account of using arithmetical mean of the profit level indicator. The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted.
Held: Assessee-company was established as a back-end software services company and worked mainly for its parent Infogain, USA. During the year under consideration, it reported international transactions, as mentioned in the 92CE Report. Assessee-company selected a set of 44 comparables with an average profit margin @ 11.94% and since the margin shown by assessee-company was 13.77%, the international transactions were reported to be at arm’s length. TPO examined the TP report of assessee-company and found that assessee had not gone into the verticals/horizontals within the software industry in its comparability study. After rejecting the comparables of the assessee, 21 companies had been proposed as comparables by TPO. Assessee vehemently stated that the TPO had used the comparables which were either giant companies having high brand value or were functionally dissimilar and many comparables had extra ordinary items during the year in the form of merger and acquisition. Hence they should not be taken as good comparables. It was held that In so far as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction entity. Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by the transactional net margin method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable arm’s length price. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in profit level indicator must trigger further investigations/analysis. Consideration for a transaction would reflect the functions performed, the significant activities undertaken, the assets or resources used/consumed, the risks assumed. Thus, comparison of activities undertaken /functions performed was important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be opposite to ignore functional dissimilarity only for the reasons that its impact may be reduced on account of using arithmetical mean of the profit level indicator. The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted.·The usage of several terms such as debt syndication, debt financing, IPO advisory, corporate restructuring, mergers, acquisitions etc, appearing in the annual reports of the comparable to hold that assessee and the said comparables performed similar did not by itself make the functions similar in nature. There was a difference between giving advice on these matters and actually undertaking the said services. A similar illustration, in the context of litigation, would be the difference between giving advice on what to argue in Court and actually arguing the matter in the Court. This difference needs to be borne in mind and the mere appearance of similar sounding words does not by itself constitute similar functions. Thus, it required a deeper analysis to determine as to whether they were in fact comparables to be retained for the purpose of fixing the ALP. The matter was restored to CIT (A) in view of above principles.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is preferred against the order dated 31.10.2011 framed u/s 143(3) r.w.s 144C of the Income tax Act, 1961 [hereinafter referred to as ‘The Act’ for short] pertaining to assessment year 2007-08.
2. The grievance of the assessee is two fold :-
“1. TP adjustment of Rs. 5,92,11,870/-, and
2. Corporate tax adjustment pursuant to denial of deduction u/s 10B of the Act amounting to Rs. 7,54,85,392/-.
3. We will first address to the Corporate Tax Adjustment on account of denial of deduction u/s 10B of the Act.
4. The under lying facts in this issue are that the assessee had been claiming deduction u/s 80HHE of the Act upto to Assessment Year 1998-99 i.e. upto the 7th year from the establishment of the company. Sub-section 1B of the Act was introduced by the Finance Act, 2000 to section 80HHE of the Act w.e.f 1.4.2001 and simultaneously, provisions of section 10A of the Act were amended to the effect that deduction would be available for 10 Assessment Years. The new undertakings had an option not to claim deduction u/s 10A of the Act. Since the deduction was optional, the assessee claimed deduction u/s 80HHE of the Act and opted for not claiming deduction u/s 10A of the assessee Act. In view of the introduction of section (1B) to section 80HHE of the Act, the assessee switched over to deduction u/s 10B/10A of the Act.
5. The Assessing Officer was of the firm belief that the switch over of the assessee has been done with a specific motive to claim excess deduction and avoid payment of taxes. The Assessing Officer formed a belief that the claim of the assessee was not bonafide or genuine but had been made merely with an intention to defraud the revenue. The Assessing Officer found that for similar reasons, deduction had been disallowed in A.Ys 2005-06 and 2006-07 and taking a leaf out of the said A.Ys, the Assessing Officer disallowed the claim of deduction u/s 10B of the Act
6. The assessee raised objections before the DRP, but the same were dismissed.
7. While denying the claim of deduction, the DRP observed that the quarrel between the assessee and the Revenue was in the past also and in Y 2005-06, the Revenue is in appeal before the Tribunal and for A.Y 2006-07, the assessee is in appeal before the Tribunal.
8. Before us, the ld. counsel for the assessee drew our attention to the orders of the Tribunal for Assessment Year 2005-06 and 2006- 07 and pointed out that the Tribunal has allowed the claim of deduction to the assessee.
9. Per contra, the ld. DR strongly supported the findings of the DRP.
10. We find force in the contentions of the ld. counsel for the assessee. The claim of deduction was considered by the Tribunal in ITA No. 2339/DEL/2010 for Assessment Year 2005-06. The relevant findings of the co-ordinate bench read as under:
“8. On careful consideration of rival contentions and careful perusal of record and citations submitted before us, we observe that the revenue has not disputed this point that the assessee got approval as 100% EOU as per approval dated 27.01.1997. We further observe that in the impugned order, the Commissioner of Income Tax(A) has held that the Assessing Officer was completely in error in holding that since the assessee started its business in AY 1992-93, then the prescribed period of 10 years for the purpose of exemption u/s 10B of the Act had come to an end by AY 2001-02. We also observe that the said section 10B envisages setting up of export oriented undertaking which is altogether different and distinct from setting up of a normal commercial activity unit. The Assessing Officer has not controverted the fact that the assessee company established 100% EOU in FY 1997-98 for exporting of computer software and this fact has found place in the assessment order para 4.1 and 4.2. In view of above and in the light of decisions of Hon’ble High Court of Delhi in the case of Legato Systems India Pvt. Ltd. and decisions of Hon’ble Punjab & Haryana High Court in the case of Excel Softech Ltd. (supra), we are of the firm opinion that the Commissioner of Income Tax(A) rightly granted relief to the assessee by directing the Assessing Officer to grant exemption u/s 10B of the Act for the assessee. We are unable to find any perversity, ambiguity, perversity or any other valid reason to interfere with the findings of the Commissioner of Income Tax(A). Per contra, we clearly observe that the Assessing Officer ignored this fact that the assessee’s 100% EOU was established in AY 1997- 98 related to AY 1998-99. The Assessing Officer denied exemption on surmises and conjectures by taking hyper technical approach. Since the assessee was entitled to exemption u/s 10B of the Act, then the period cannot be said to be exhausted in the year under consideration, hence we uphold the findings of the Commissioner of Income Tax(A) in the impugned order. Accordingly, ground no.2 of the revenue is dismissed.”
11. Similar issue was considered by the Tribunal in Assessment Year 2006-07 in ITA No. 5720/DEL/2010. The relevant findings of the Tribunal read as under:
“3. We have heard rival argument of both the parties and careful perused the record placed before us. At the outset Ld. Counsel of the Assessee filed a copy of decision of ITAT Delhi ‘C’ Bench in ITA No. 2339/Del/2010 for the Assessment Year 2005-06 dated 29/11/2013 and submitted that the issue of allowability of deduction u/s 10B of the Act has been decided in favour of the Assessee in Assessee’s own case for immediately preceding assessment year to the year under consideration in this appeal. The Ld. Counsel of the Assessee drawn our attention towards Paragraph No. 7 & 8 wherein the CIT(A) concluded its findings and observations by directing the Assessing Officer to grant exemption u/s 10B of the Act to the Assessee and ITAT ‘C’ Bench, Delhi upholded the findings of the CIT(A) by holding that the Assessee was entitled to exemption u/s 10B of the Act then the period of exemption started from Assessment Year 1998-99 and cannot be said to be exhausted in the year under consideration in the present appeal i.e 2006-07. The relevant paragraph of ITAT order read as under:-
“7. Further, the CIT(A) has concluded its findings and observations by directing the Assessing Officer to grant exemption u/s 10B of the Act to the assesssee with following operative para of the impugned order:-
“In the case of the assessee, neither the period of five years nor the block period of eight years expired when the amendment replacing the word ‘ten’ for ‘five’ was introduced by IT (Second amendment) Act, 1998 w.e.f 1/4/1999. Since the assessee was entitled to exemption in the year in which amendment became effective & operative, the assessee will be entitled to the extended period of exemption because the period of five years had not exhausted up to assessment year 1999-2000. Since the right of the assessee was continuing in the year of amendment and was not lost on the date when the amendment came into existence, the view taken by the Ld. CIT(A) cannot be upheld.
So far as the objections of the Ld. CIT(A) regarding conduct of the assessee firm in not claiming the exemption in earlier year is concerned, the approach of the Ld. CIT(A) raising this objection, cannot be legally justified because if the assessee is entitled to any benefit under any statutory provision then the past conduct cannot be relevant particularly when reference to such conduct is not made in the Act. The eligibility of the assessee has to be seen in the year in which the claim is preferred and if in earlier years the assessee waived his right then he cannot be stopped in claiming the benefit in the subsequent years.
The Ld. CIT(A) has also observed that the assessee did not file declaration exercising option prior to the due date for filing of return but filed it along with the return and, therefore, the assessee is disqualified from claiming exemption on this ground also. We do not find any force in such objection because this objection is merely of super technical nature. In view of the above, we are liable to concur with the fining of the Ld. CIT(A) and set aside the same. Consequently, we allow the ground of appeal taken by the assessee and direct that the assessee shall be entitled to claim exemption u/s 10B in the assessment year under consideration.”
8. On careful consideration of rival contentions and careful perusal of record and citations submitted before us, we observe that the revenue has not disputed this point that the assesssee got approval as 100% EOU as per approval dated 27/1/1997. We further observe that in the impugned order, the Commissioner of Income Tax (A) has held that the Assessing Officer was completely in error in holding that since the assessee started its business in A.Y 1992-93 then the prescribed period of 10 years for the purpose of exemption u/s 10B of the Act had come to an end by A.Y 2001-02. We also observe that the said Section 10B of the Act had come to an end by A.Y 2001-02. We also observe that the said Section 10B envisages setting up of export oriented undertaking which is altogether different and distinct from setting up of a normal commercial activity unit. The Assessing Officer has not controverted the fact that the assessee company established 100% EOU in F.Y 1997-98 for exporting of computer software and this fact has found place in the assessment order para 4.1 and 4.2. In view of above and in the light of decisions of Hon’ble High Court of Delhi in the case of Legato Systems India Pvt. Ltd and decisions of Hon’ble Punjab & Haryana High Court in the case of Excel Softech Ltd, (supra), we are of the firm opinion that the Commissioner of Income Tax (A) rightly granted relief to the assessee by directing the Assessing Officer to grant exemption u/s 10B of the Act for the assessee. We are unable to find any perversity, ambiguity, perversity or any other valid reason o interfere with the findings of the Commissioner of Income Tax (A). Per contra, we clearly observe that the Assessing Officer ignored this fact that the assessee’s 100% EOU was established in A.Y 1997-98 related to A.Y 1998-99. The Assessing Officer denied exemption on surmises and conjectures by taking hyper technical approach. Since the assessee was entitled to exemption u/s 10B of the Act, then the period cannot be said to be exhausted in the year under consideration, hence we uphold that the findings of the Commissioner of Income Tax (A) in the impugned order. Accordingly, Ground No. 2 of the Revenue is dismissed.”
4. Respectfully following the above judgment of ITAT ‘C’ Bench, Delhi in Assessee’s own case for the immediate preceding year to the year under consideration in this appeal, we hold that the issue is squarely covered in favour of the Assessee by this order. Hence, we hold that the authorities below were not justified in rejecting the claim of the Assessee for deduction u/s 10B of the Act. For the year under consideration i.e Assessment Year 2006-07. In view of above main Ground No. 1 to 1.6 of the Assessee are allowed.”
12. We further find that the quarrel travelled upto the Hon’ble High Court of Delhi and the Hon’ble High Court in ITA No. 488/2014 and 487/2014 dismissed the appeal of the Revenue. The relevant findings of the Hon’ble High Court read as under:
“3. It is not disputed that the above issue stands covered in favour of the Assessee and against the Revenue by the decisions of this Court in Commissioner of Income Tax v. Infra Soft Technologies Limited (decision dated 21st October 2010 in ITA No. 708 of 2008) and Commissioner of Income Tax v. Interra Software India Limited (2011) 238 CTR (Del) 23. In both decisions the deduction claimed was under Section 10A of the Act which is in pari materia Section 10B of the Act.
4. These appeals are accordingly dismissed.”
13. As no distinguishing decision has been brought to our notice by the Revenue, respectfully following the findings of the co-ordinate bench and Hon’ble High Court, we direct the Assessing Officer to allow the claim of deduction u/s 10B of the Act. Addition of Rs. 7,54,85,392/- is directed to be deleted. Ground No. 2 with all its sub grounds is allowed.
14. We will now address to the Transfer Pricing adjustments.
15. The underlying facts in issue are that the appellant company was established as a back-end software services company and works mainly for its parent Infogain, USA. The appellant company is also registered under the STP Scheme and has been claiming tax u/s 10B of the Act.
16. During the year under consideration, international transactions, as mentioned in the 92CE Report are as under:
