2019 (11) TMI 1183 - AT - Income Tax

Tribunal remands issues for fresh adjudication, emphasizing fair representation and natural justice

M/s. Cognizant Technology Solutions India Pvt. Ltd., (as a successor of Cognizant India Pvt. Ltd.), formerly T-Systems India Pvt. Ltd., Versus Deputy Commissioner of Income Tax, Circle – 7, Pune And (Vice-Versa)

M/s. Cognizant Technology Solutions India Pvt. Ltd., (as a successor of Cognizant India Pvt. Ltd.), formerly T-Systems India Pvt. Ltd., Versus Deputy ... Issues Involved:1. Rejection of Comparable Uncontrolled Price (CUP) method for software development services.2. Inclusion/exclusion of comparables for determining Arm’s Length Price (ALP) under Application Lifestyle Management (ALM) services.3. Adjustment on account of travel cost and salary cost.4. Use of multiple year data.5. Initiation of penalty under section 271(1)(c) of the Income Tax Act.6. Charging of interest under section 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Rejection of Comparable Uncontrolled Price (CUP) method for software development services:The assessee company applied the CUP method to benchmark its international transactions under the software development segment. The Transfer Pricing Officer (TPO) rejected this method and adopted the Transactional Net Margin Method (TNMM) instead. The TPO's decision was based on information received from Syntel India, which was not shared with the assessee, violating principles of natural justice. The Tribunal found merit in the assessee's contention that the information used against it was not available in the public domain and thus restored the matter back to the Assessing Officer/TPO for fresh adjudication, emphasizing the need for a fair opportunity for the assessee to represent its case.2. Inclusion/exclusion of comparables for determining ALP under ALM services:The assessee selected 19 comparables, but the TPO accepted only two and added two more. The CIT(A) further included two additional comparables. The Tribunal dismissed the assessee's appeal regarding the inclusion/exclusion of comparables due to a lack of specific arguments. The Revenue's appeal against the inclusion of Lanco Global Systems Limited and Gebbs Infotech Limited was dismissed, as the Tribunal found no infirmity in the CIT(A)'s order. The inclusion of Asian CERC Information Technology Limited, selected by the TPO and accepted by the CIT(A), was also upheld.3. Adjustment on account of travel cost and salary cost:The assessee argued for adjustments due to substantial travel and salary costs in its first year of operation. The Tribunal noted that similar adjustments for low capacity utilization and high fixed operation costs in initial years were allowed in other cases. The Tribunal restored the issue to the Assessing Officer/TPO for recomputation of operating margin after allowing the necessary adjustments, directing the assessee to provide relevant documents to support its claim.4. Use of multiple year data:The assessee's appeal to consider multiple year data was dismissed. The Tribunal upheld the well-settled legal position that only data relevant to the corresponding single year should be considered.5. Initiation of penalty under section 271(1)(c) of the Income Tax Act:The assessee's challenge to the initiation of penalty proceedings under section 271(1)(c) was dismissed as premature.6. Charging of interest under section 234B of the Income Tax Act:The assessee's appeal against the charging of interest under section 234B was dismissed as it is consequential and mandatory.Conclusion:The assessee's appeal was partly allowed for statistical purposes, with specific issues remanded for fresh adjudication. The Revenue's appeal was dismissed. The Tribunal emphasized the need for fair representation and proper opportunity for the assessee in line with the principles of natural justice.