Income Tax Appellate Tribunal, Hyderabad Bench 'A'
Saktijit Dey, Judicial Member
1. This appeal by assessee is directed against assessment order dated 23/06/14 passed u/s 143(3) read with section 144C of the Act in pursuance to the directions of the Dispute Resolution Panel (DRP) relating to AY 2009-10.
2. At the outset we need to clarify, the appeal was earlier heard on 06/01/2015. However, subsequently, assessee on 19/01/2015 submitted a letter stating therein that the directions given by the Tribunal in order dated 15/07/2011 passed in ITA No. 1129/Hyd/2005 has been modified by the Tribunal in order dated 09/01/2015 passed in M.A. No. 136/Hyd/2015. In view of such development, appeal was refixed for hearing on 29/01/2015.
3. Briefly the facts are, assessee an Indian company is engaged in software development. It is a wholly owned subsidiary of Trinity Corporation Inc., USA, which is owned by three shareholders, namely, Shri Srinath Alleppa, Mr. Jeff Slosar and Mr. Issa Elkhoury having equal shareholding. For the AY under consideration, assessee filed its return of income on 21/08/2002 declaring total income of Rs. 8,920 after claiming exemption u/s 10B. During the scrutiny assessment proceeding, AO noticing that assessee has entered into international transaction with its Associated Enterprises (AE) made a reference to the Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP). In course of proceeding before him, TPO noticed that assessee has entered into a master contract with its AE on 28/03/2000. As per clause 5 of the agreement, hourly rate has been agreed at USD 10 per man hour for design and development of product in E-commerce, maintenance services, support services, manpower and supported services including all site services. The total man hour billed was 120448.5 hours and the price charged was USD 1204485. Thus, as per the 3CEB report/TP document, revenue earned from international transactions with its AE converted to Indian currency was to the tune of Rs. 5,75,68,918. The TPO on examination of the facts and materials on record, noticed that during the year Wipro had rendered similar services to assessee's AE and had charged hourly rate of USD 22. He also noticed that in the following FYs i.e. FY 2002-03 and 2003-04, assessee has increased the rate per man hour to USD 18 and 29 respectively. Therefore, TPO considering the rate charged by Wipro and also rate adopted by assessee for subsequent years adopted rate of USD 18 after making adjustments under CUP towards the nature of services provided, turnover, number of employees, age of the company, geographical location, quality of manpower used vis--vis Wipro. As a result, the ALP of the service rendered was determined at USD 21,68,073, which resulted in determination of ALP of Rs. 10,40,67,504 as against Rs. 5,75,68,918 shown by assessee. The resultant shortfall was, therefore, treated as adjustment u/s 92CA(3) of the Act. In terms with the order passed by TPO, AO made addition of Rs. 4,64,98,586 while completing assessment u/s 143(3) of the Act. Being aggrieved of the assessment so made, assessee preferred appeal before ld. CIT(A). Though, ld. CIT(A) upheld the rate per man hour of USD 18 adopted by TPO to be appropriate, however, he held that further adjustment of 5% is to be allowed on account of material differences between assessee and Wipro. Still aggrieved with the order passed by ld. CIT(A), both assessee and the department preferred appeal before ITAT.
4. ITAT while disposing of the cross appeals registered as ITA No. 1129/Hyd/05 and 19/Hyd/06 dated 15/07/11 held that rate charged by Wipro cannot be considered to be comparable to assessee's case. The tribunal directed AO to bring on record comparable case to determine the price under CUP method. Further, the Tribunal observed that if AO is unable to bring comparable case, then, he may consider the rate adopted by assessee in the immediate next year and thereafter to discount the same after considering the inflationary rate. The Tribunal observed that once AO arrives at the discounted rate, there is no need to allow any further adjustment at 5% as directed by ld. CIT(A). Relevant observation of the ITAT is extracted hereunder for the sake of convenience:
"9. Firstly, in our opinion, comparison of assessee's price with the price of the M/s WIPRO is not at all feasible. As submitted by the assessee's counsel, the assessee is a new entrant in the field and came into business in March, 2000 and being so the assessee is not in a position to charge at 22 USD per man hour as that of M/s WIPRON is charging. M/s WIPRO is a large industrial giant undertaking working independently with principles to principle relationship. On the other hand, the assessee is dependent contractor. The assessee has also stated before us that the billing rate changes depending upon the various factors as enumerated in the report of NASCOM which has been filed by the assessee before the CIT(A) and not considered the same as being additional evidence. There is a force in the arguments of the assessee's counsel. As we have observed earlier, the rate chargeable by M/s WIPRO cannot be comparable to assessee's case. Being so, in our opinion, the Assessing Officer is required to bring on record the comparable case to determine the price. If the Assessing Officer is unable to bring on record the comparable case, the Assessing Officer is at liberty to consider the rate adopted by the assessee immediate next year and thereafter he is required to discount the same after considering the inflationary rate. Once he arrived at the discounted rate, there is no question of further giving any deduction towards any adjustments at 5%. Accordingly, we direct the Assessing Officer to follow the CUP method as adopted by the assessee itself in this assessment year. However, he has to re-determine the TPO as per the above directions."
5. In pursuance to the directions of the Tribunal, the TPO took up the proceedings again for determination of ALP of the international transaction. In course of the proceeding, assessee submitted a quotation obtained from M/s Inspira Technologies P. Ltd., 144, 2nd Floor, Akash Ganga, Srinigar Colony, Hyderabad as a CUP. TPO observed that as per the said quotation the company had offered a rate of USD 10 per man hour initially and from the beginning of 7th month to USD 12 per man hour. TPO, however, did not accept the submissions of assessee by observing that as per rule 10B(1)(a) under the CUP actual happening of an event is considered. In other words, the comparable transaction is identified where a price has been actually charged or paid and suitable adjustment if required are to be made to arrive at the ALP. However, in a case where the price is chargeable or payable that cannot be done. TPO observed that quotation obtained by assessee cannot be a substitute for an event which has already occurred. TPO observed that assessee's claim could have been considered in terms of rule 10AB but since the same is effective from AY 2012-13, the quotation obtained by assessee cannot be considered as a valid CUP. After rejecting quotation of assessee and observing that no other comparable is available, TPO proceeded to compute ALP as per second option given by ITAT by considering the rate charged by assessee to its AE for FY 2002-03 at USD 18 per man hour. After giving a discount of 3.81% towards inflation rate in 2003, rate per man hour was worked out at USD 17.31 which resulted in determination of ALP at Rs. 10,00,78,250 and the resultant shortfall of Rs. 4,25,09,332 was treated as adjustment u/s 92CA of the Act. In terms with the order of TPO, AP passed the draft assessment order adding the amount of Rs. 4,25,09,332 towards TP adjustment.
6. Assessee objected to the TP adjustment before the DRP. DRP, however, sustained the order of TPO by observing as under:
"We find force in the arguments of TPO Rule 10AB has been inserted by the Income Tax (sixth amendment) Rules, 2012 w.e.f. 01/04/2012 and shall apply to AY 2012-13 and subsequent years. Therefore, the quotation as provided by the appellant cannot be treated as a valid CUP and accordingly the ground of appeal is rejected.
The evidence of quotation given by M/s Inspira Technologies P. Ltd. as comparable cannot be considered as valid comparable on the ground that it has not been materialized nor the said company has delivered services at such quoted prices to any company. Further, the quotation is submitted by the assessee appears to have been issued at the personal request and not quoted in regard to any public notice. Hence, the quotation is not reliable comparison by any stretch of imagination.
The appellant has also contended that the TPO ought to have used TNMM as an alternate method. However, we find from the directions of the ITAT that in case no comparable is available then next year's rate is to be taken and from that rate of inflation has to be reduced to arrive at the current year's price. The TPO has followed the directions of the ITAT. The TPO or the lower authority does not have any powers to deviate from the directions of the ITAT and, therefore, there is no infirmity in the order of the TPO. Accordingly, we decline to interfere with the order of the TPO and the ground of objection is rejected."
As a result of the order passed by the DRP rejecting assessee's objection, AO passed the impugned order confirming the addition of Rs. 4,25,09,332.
7. Being aggrieved of the orders of AO and DRP, assessee has preferred the present appeal raising the following grounds in the Memorandum of Appeal:
"1. In the facts and circumstances of the case, the order u/s 143(3) r.w.s 144C dt. 23/06/14 by the ITO is unjustified, incorrect and not as per law.
2. The AO/DRP is not justified in not perusing the valid third party quotation obtained by AE and filed by the appellant, without taking the same on record and examining the same in detail.
3. The AO/DRP ought to have appreciated the fact that ALP is defined exhaustively u/s 92F (ii) as ' a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions' and hence ought to have considered the third party quotation obtained by AE and filed by the assessee.
4. AO/DRP is incorrect in commenting that 'the quotation submitted by the assessee appears to have been issued at the personal request and not quoted in regard to any public notice' knowing well that AE and the assessee are closely held companies not obligated to float public tenders and further without examining and considering the third party quotation obtained by the AE.
5. AO/TPO/DRP is incorrect in not ascertain the ALP under CUP method by taking the quotation filed by assessee, failing to discharge the onus created by ITAT and by simply adopting the easier alternate method suggested by the ITAT.
6. AO/TPO/DRP is incorrect in not appreciating the fact AY 2002-03 is the first year of implementation of TP provisions and availability and collection of structured data is very difficult and hence ought to have taken the third party quotation obtained by AE on record and examined the same to determine the ALP."
8. As can be seen from the grounds raised, assessee is basically aggrieved with the decision of the TPO and DRP in rejecting quotation obtained by assessee and determination of ALP by adopting the rate charged by assessee in the subsequent FY.
9. The learned AR submitted before us that in order dated 09/01/2015 passed in M.A. No. 136/Hyd/2014, the Tribunal has modified its earlier order by deleting the alternative direction given to AO to consider the rate adopted by assessee in the immediate next year. Thus, after the order passed in M.A., the only option left to AO for determining the ALP is by applying the CUP method. In these circumstances, determination of ALP by TPO and confirmed by DRP on the basis of the price charged by assessee in the immediate next year is invalid.
10. Ld. DR, though, agreed that direction given by the ITAT stands modified, but, she submitted that both TPO and assessee having failed in their attempt to obtain comparable cases for determining ALP under CUP method, TPO had no other option but to compute ALP as per second option directed by ITAT. Ld. DR submitted that since the comparable case provided by assessee is only a quotation without any other authentic document to show that the price mentioned in the said quotation was actually charged by the said party, the same cannot be accepted. Thus, ld. DR submitted that in the given circumstances, TPO was correct in determining the ALP in compliance to the direction of the Tribunal.
11. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. This is second journey of assessee to the Tribunal. On the earlier occasion while disposing off the appeals of assessee as well as the department, the Tribunal has given a clear direction to TPO to determine the ALP under the CUP method by bringing comparable cases on record. Of course it directed the TPO, as a second option, to adopt the rate charged by assessee in the subsequent FY in case no comparable case is available under the CUP. However, the Tribunal while considering the Miscellaneous Application of assessee registered as M.A. No. 136/Hyd/2014 in order dated 09/01/2015 modified the appeal order by deleting direction given to TPO to consider the rate adopted by assessee in the immediate next year. Thus, after the order dated 09/01/2015 passed in M.A., the only option left to AO/TPO for determining ALP is by applying CUP method. As ALP determined by TPO and c
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onfirmed by DRP is not under CUP method, the same is invalid. Rule 10B(1)(a) of IT Rules prescribes the method for determination of ALP under CUP. As per the said provision, TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of such transactions and thereafter making necessary adjustments of such price on account of differences between the international transactions and comparable uncontrolled transactions or between the enterprises entering into such transactions which could materially affect the price in the open market, TPO will have to determine ALP. Therefore, unless, comparables are brought on to benchmark the price charged by a particular assessee, it cannot be said that the price charged by assessee is not within the arm's length. However, on a perusal of the order dated 23/05/2013 of the TPO passed in pursuance to the direction of the Tribunal, it is very much clear, TPO has expressed his inability in finding a comparable under CUP method. In these circumstances, there was no other choice left to TPO but to accept the price charged by assessee as ALP. In the aforesaid view of the matter, we hold that adjustment made to ALP is not justified. Accordingly, we delete the addition made on that account. 12. In view of our decision on the main ground, the additional ground raised by assessee has become infructuous and accordingly the same is dismissed. 13. In the result, assessee's appeal is allowed.