Actiance India Private Limited, Bangalore V. ITO, Bangalore

CO 169/BANG/2015

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 8260 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 10 month(s) 13 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 17-07-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-07-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 04-09-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIKAS SURYAVAMSHI B ENGALURU
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 201; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER I T (TP) A NO. 847 /BANG/2013 ASSESSMENT YEAR : 2005 - 06 THE INCOME TAX OFFICER, WARD 11(2), BANGALORE. VS. SMARSH INDIA PRIVATE LIMITED (FORMERLY ACTIANCE INDIA PVT. LTD.), SALARPURIA CAMBRIDGE, 2 ND FLOOR, 9, CAMBRIDGE ROAD, ULSOOR, BANGALORE 560 008. PAN: AABCV 2926N APP EL L ANT RESPONDENT CO NO.169/BANG/2015 [IN I T (TP) A NO. 847 /BANG/2013 ] ASSES SMENT YEAR : 2005 - 06 SMARSH INDIA PRIVATE LIMITED (FORMERLY ACTIANCE INDIA PVT. LTD.), BANGALORE 560 008. PAN: AABCV 2926N VS. THE INCOME TAX OFFICER, WARD 11(2), BANGALORE. CROSS OBJECTOR RESPONDENT REVENUE BY : SHRI VIKAS SURYAVAMSHI, ADDL.CIT(DR)(ITAT), BENGALURU. A SSESSEE BY : SHRI CHAVALI NARAYAN, CA DATE OF HEARING : 10.07 . 201 9 DATE OF PRONOUNCEMENT : 17 . 0 7 . 201 9 IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 2 OF 13 O R D E R PER N V VASUDEVAN, VICE PRESIDENT IT(TP)A NO.847/BANG/2013 IS AN APPEAL BY THE REV ENUE AGAINST THE ORDER DATED 04.03.2013 OF THE CIT(APPEALS)-IV, BENGALURU IN RELATION TO THE ASST. YEAR 2005-06. THE ASSESSEE HAS ALSO FILE D CROSS-OBJECTION AGAINST THE VERY SAME ORDER OF THE CIT(A). 2. THE DISPUTE RAISED BY THE REVENUE IN ITS APPEAL AND THE DISPUTE RAISED IN THE CO ARE WITH REGARD TO DETERMINATION O F ARMS LENGTH PRICE (ALP) IN RESPECT OF A TRANSACTION OF RENDERING SOFT WARE DEVELOPMENT SERVICE BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE (AE). 3. FIRST WE SHALL CONSIDER THE APPEAL OF THE REVENU E. THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF RENDERI NG SOFTWARE DEVELOPMENT SERVICES (SWD SERVICES). FACETIME COMM UNICATIONS INDIA PVT. LTD., (FORMERLY TUMBLEWEED INDIA PVT.LTD., WAS INCORPORATED ON 21.12.2001. IT WAS A WHOLLY OWNED SUBSIDIARY OF TU MBLEWEED COMMUNICATION CORPN., USA. ON 9 TH JUNE, 2004 TUMBLEWEED COMMUNICATION CORPN., USA SOLD ITS SHARES TO FACETI ME COMMUNICATIONS INC., USA. THEREAFTER THE ASSESSEE BECAME SUBSIDIA RY OF FACETIME COMMUNICATIONS INC., USA. 4. DURING THE PREVIOUS YEAR, THE ASSESSEE PROVIDED SWD SERVICES TO M/S. TUMBLEWEED COMMUNICATIONS CORPN., USA FOR WHI CH THE ASSESSEE RECEIVED A SUM OF RS.1,94,69,571/- AND M/S. FACET IME COMMUNICATIONS INC., USA ALSO FOR WHICH THE ASSESSEE RECEIVED A CO NSIDERATION OF RS.6,36,70,924/-. THE DISPUTE IN THIS APPEAL IS ON LY WITH REGARD TO ALP OF SUM RECEIVED FROM M/S. FACETIME COMMUNICATIONS INC ., USA. IT IS NOT IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 3 OF 13 DISPUTED THAT THE ASSESSEE RENDERED SWD SERVICES TO ITS ASSOCIATED ENTERPRISES AND THEREFORE WAS AN INTERNATIONAL TRAN SACTIONS WITHIN THE MEANING OF SEC.92 OF THE ACT AND THEREFORE, INCOME ARISING FROM THE SAID INTERNATIONAL TRANSACTION HAS TO BE DETERMINED HAVI NG REGARD TO ARMS LENGTH PRICE (ALP) AS LAID DOWN U/S 92 OF THE ACT. AN ADJU STMENT (HIGHER PRICE WAS DETERMINED AS RECEIVABLE BY THE ASSESSEE FROM THE A E) WAS DONE BY THE TPO TO THE PRICE CHARGED IN THE INTERNATIONAL TRANS ACTION AND THE SUM SUGGESTED AS ADJUSTMENT BY TPO WAS ADDED TO THE TOT AL INCOME OF THE ASSESSEE IN SWD SERVICES SEGMENT. THE AFORESAID AD DITION WAS CHALLENGED BY THE ASSESSEE BEFORE THE CIT(A). THE CIT(A) GAVE SOME RELIEF TO THE ASSESSEE AGAINST WHICH REVENUE HAS FI LED APPEAL TO THE TRIBUNAL. THE ASSESSEE IS AGGRIEVED BY NON-EXCLUSI ON OF CERTAIN COMPANIES THAT ARE NOT COMPARABLE AND HAS FILED CRO SS OBJECTION. 5. AS FAR AS SWD SERVICES SEGMENT IS CONCERNED, IT IS NOT IN DISPUTE THAT THE MOST APPROPRIATE METHOD CHOSEN BY THE ASSE SSEE IN ITS TRANSFER PRICING ANALYSIS (TP ANALYSIS) WAS TRANSACTION NET MARGIN METHOD (TNMM) AND THAT WAS ACCEPTED BY THE TPO AS THE MOST APPROPRIATE METHOD (MAM). THE PROFIT LEVEL INDICATOR (PLI) CHO SEN FOR THE PURPOSE OF COMPARISON WAS OPERATING PROFIT TO OPERATING COST. THE OPERATING INCOME/OPERATING COST/OPERATING PROFIT AND OPERATIN G PROFIT/OPERATING COST PERCENTAGE ACCORDING TO THE ASSESSEE AND AS DR AWN BY THE TPO WERE AS FOLLOWS: OPERATING INCOME RS.8,32,56,664 6,36,70,924 OPERATING COST RS.6,91,02,400 5,78,81,989 OPERATING PROFIT RS.1,41,54,264 57,88,935 OPERATING PROFIT/ 20.48% ` 10% OPERATING COST OP/OC (AS PERCENTAGE) IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 4 OF 13 6. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE A O MADE A REFERENCE FOR DETERMINATION OF ALP U/S 92CA OF THE ACT HAD CHOSEN 17 COMPARABLE COMPANIES. THE ARITHMETIC PROFIT MARGIN (APM) OF THESE COMPANIES WERE 26.59 BEFORE WORKING CAPITAL ADJUSTM ENT AND 24.99 AFTER WORKING CAPITAL ADJUSTMENT AS PER THE FOLLOWING CHA RT:- SI NO. PARTICULARS UNADJUSTED MARGIN (%) ADJUSTED MARGIN (%) 1. BODHTREE CONSULTING LIMITED 24.85% 23.57% 2. IGATE GLOBAL SOLUTIONS LIMITED 4.32% 2.65% 3. INFOSYS TECHNOLOGIES INDIA LIMITED 42.83% 42.59% 4. LANCO GLOBAL SYSTEMS LIMITED 13.65% 10.44% 5. LARSEN & TOUBRO INFOTECH LIMITED 10.33% 9.47% 6. R S SOFTWARE (INDIA) LIMITED 8.07% 7.66% 7. SASKEN COMMUNICATIONS TECHNOLOGIES LIMITED 14.42% 14.26% 8. SASKEN NETWORK SYSTEMS LIMITED 16.64% 15.05% 9. SATYAM COMPUTERS SERVICES LIMITED 29.44% 28.26% 10. VISUALSOFT TECHNOLOGIES LIMITED 23.52% 21.26% 11. EXENSYS SOFTWARE SOLUTIONS LIMITED 70.68% 64.95% 12. SANKHYA INFOTECH LIMITED 27.39% 22.34% 13. FOUR SOFT LIMITED 22.98% 22.55% 14. THIRDWARE SOLUTION LIMITED 66.09% 66.10% 15. GEOMETRIC SOFTWARE SOLUTIONS CO. LIMITED 20.34% 18.86% 16. TATA ELXSI LIMITED (SEG) 24.35% 24.00% 17. FLEXTRONICS (SEG) 32.19% 30.80% ARITHMETIC MEAN 26.59% 24.99% IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 5 OF 13 7. THE TPO DETERMINED THE ADDITION TO BE MADE TO TH E TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF ADJUSTMENT IN ALP AT A S UM OF RS.2,66,33,145/-. AGAINST THE AFORESAID PROPOSAL O F THE TPO, WHICH WAS INCORPORATED IN THE FAIR ORDER OF ASSESSMENT BY THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). THE CIT(A) ACC EPTED THE CLAIM OF THE ASSESSEE FOR EXCLUSION OF CERTAIN COMPARABLE COMPAN IES AND ALSO FOR INCLUSION SOME OF THE COMPARABLE COMPANIES THAT WER E EXCLUDED BY THE TPO. AGAINST WHICH THE REVENUE HAS PREFERRED PRESE NT APPEAL BEFORE THE TRIBUNAL. THE ASSESSEE HAS FILED CROSS OBJECTION S EEKING TO EXCLUDE 2 COMPARABLE COMPANIES THAT WERE NOT EXCLUDED BY THE CIT(A) VIZ., SANKHYA INFOTECH LTD., AND THIRDWARE SOLUTIONS LTD. THIRDW ARE SOLUTIONS WAS EXCLUDED BY CIT(A) ON THE GROUND THAT ITS PROFITS W ERE ABNORMAL. THE ASSESSEE HAD PLEADED FOR ITS EXCLUSION ON THE BASIS THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE WHICH IS A SWD SERVICE PROVIDER. EXCEPT THESE TWO GROUNDS NO OTHER GROUND S RAISED IN THE CROSS OBJECTION WERE PRESSED FOR ADJUDICATION. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS ON THE SWD S ERVICES SEGMENT. THE GROUNDS OF APPEAL RAISED BY THE REVEN UE READS AS FOLLOWS:- 1 . THE ORDER OF THE LEARNED CIT (APPEALS), IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE, IS OPPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT (A) ERRED IN HOLDING THAT THE SIZE AND T URNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TREATING A COM PANY AS A COMPARABLE AND CONSEQUENTLY ERRED IN EXCLUDING M/ S. FLEXTRONICS SOFTWARE SERVICES LTD., IGATE GLOBAL SO LUTIONS LTD , M/S INFOSYS TECHNOLOGIES LTD, L&T INFOTECH LT D., SATYAM COMPUTERS SERVICES LTD AS COMPARABLES IN THE CASE OF THE TAXPAYER. IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 6 OF 13 3. THE LD. CIT(A) ERRED IN REJECTING COMPANIES ON T HE BASIS OF ABNORMAL PROFIT WITHOUT DEFINING WHAT CONSTITUTES A BNORMAL PROFIT FILTER AND HOW THE SAME IS DETERMINED AND CONSEQUENTLY ERRED IN EXCLUDING M/S EXENSYS SOFTWAR E SOLUTIONS LTD AND THIRDWARE SOLUTIONS LTD. AS COMPA RABLES IN THE CASE OF THE TAXPAYER. 4. THE LD. CIT(A) ERRED IN REJECTING THE DIMINISHIN G REVENUE FILTER USED BY THE TPO TO EXCLUDE COMPANIES THAT DO NOT REFLECT THE NORMAL INDUSTRY TREND. 5. THE LD.CIT(A) ERRED IN DIRECTING THE AO TO INCLU DE M/S. QUINTEGRA SOLUTIONS LTD. AS A COMPARABLE IN THE CAS E OF THE TAXPAYER WITHOUT APPRECIATING THE FACT THAT THE DIF FERENT YEAR ENDING FILTER APPLIED BY THE TPO IS NECESSARY TO EX CLUDE COMPANIES WHICH DO NOT HAVE THE SAME OR COMPARABLE FINANCIAL CYCLE AS THE TESTED PARTY. 6. THE CIT (A) ERRED, ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE, IN DIRECTING THE AO TO EXCLUDE BODHTREE CONSULTING LTD, GEOMETRIC SOFTWARE SOLUTIONS CO AND TATA ELXSI LTD FROM THE FINAL SET OF COMPARABLES. 7. THE LEARNED CIT (A) ERRED IN DIRECTING INCLUSION OF M/S VJIL CONSULTING LTD AS A COMPARABLE. 7. THE CIT (A), ON THE FACTS AND CIRCUMSTANCES OF THE CASE. ERRED IN DIRECTING THE AO TO ALLOW AN APPROPRIATE W ORKING CAPITAL ADJUSTMENT TO THE MEAN MARGIN TO THE SELECT ED SET OF 9 COMPARABLES. 8. THE CIT (A) ERRED IN DIRECTING THE AO TO RECOMPU TE THE DEDUCTION ALLOWABLE U/S 10A OF THE I.T.ACT AFTER RE DUCING THE TELECOMMUNICATION CHARGES OF RS. 23,91,701/- FR OM THE TOTAL TURNOVER ALSO. 9. THE LD. CIT(A) ERRED IN NOT APPRECIATING THE FAC T THAT THERE IS NO PROVISION IN SECTION 10A WHICH REQUIRES THE C ONCERNED EXPENSES, WHICH ARE REQUIRED TO BE REDUCED FROM THE EXPORT TURNOVER AS PER CLAUSE (IV) OF THE EXPLANATION TO S ECTION 10A TO BE REDUCED FROM THE TOTAL TURNOVER ALSO. IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 7 OF 13 10. THE LD. CIT(A) ERRED IN NOT APPRECIATING THE FA CT THAT THE JURISDICTIONAL HIGH COURT'S DECISION RELIED UPON BY HIM HAS NOT BEEN ACCEPTED BY THE DEPARTMENTAL AND AN APPEAL HAS BEEN FILED BEFORE THE HON'BLE SUPREME COURT 11. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE UR GED AT THE TIME OF HEARING. IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT(A) BE REVERSED AND THAT OF THE ASSESSING OFFICE R BE RESTORED. 12. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 9. GROUND NOS.1, 11 AND 12 RAISED BY THE REVENUE AR E GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 10. GROUND NO.2 RAISED BY THE REVENUE IS WITH REGAR D TO THE ACTION OF THE CIT(A) IN EXCLUDING M/S. FLEXTRONICS SOFTWARE SERV ICES LTD., IGATE GLOBAL SOLUTION, M/S. INFOSYS TECHNOLOGIES LTD., SATYAM C OMPUTERS SERVICES LTD., AND L&T INFOTECH LTD., ON THE GROUND THAT THE TURNO VER OF THESE COMPANIES WAS ABOVE RS.200 CRORES AND THEREFORE THE ASSESSEE WHOSE TURNOVER IS ONLY RS.6.36 CRORES CANNOT BE COMPARED WITH THOSE C OMPANIES. THE ADMITTED FACTUAL POSITION IS THAT THESE COMPANIES H AVE TURNOVER OF OVER RS.200 CRORES IN THE RELEVANT ASST. YEAR WHEREAS TH E ASSESSEES TURNOVER IS ONLY 6.36 CRORES. IT HAS BEEN HELD BY THE BANGALOR E BENCH OF ITAT THAT TURNOVER FILTER IS A VALID FILTER IN THE MATTER OF EXCLUSION OF COMPARABLES THAT COMPANIES WITH TURNOVER BELOW 200 CRORES CANNOT BE COMPARED WITH THE COMPANIES ABOVE 200 CRORES. IN THIS REGARD, BANGAL ORE BENCH OF THE TRIBUNAL IN THE CASE OF AUTO DESK INDIA PVT. LTD. VS. ACIT IN IT(TP)A NO. 220/BANG/2016 HAS TAKEN THE AFORESAID VIEW AFTER CONSIDERING SEVE RAL DECISIONS ON THE ISSUE. IN VIEW OF THE ABOVE, WE F IND NO GROUNDS TO INTERFERE WITH THE EXCLUSION OF THE AFORESAID 5 COM PANIES BY THE CIT(A). IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 8 OF 13 11. AS FAR AS GROUND NO.3 RAISED BY THE REVENUE IS CONCERNED, THE SAME RELATES TO EXCLUSION OF M/S. EXENSYS SOFTWARE SOLU TIONS LTD., AND THIRDWARE SOLUTIONS LTD., AS NOT COMPARABLE COMPANI ES BY THE CIT(A) ON THE GROUND THAT THESE COMPANIES SHOWED ABNORMAL PRO FITS. ON THE ISSUE OF EXCLUSION OF COMPANIES ON ACCOUNT OF ABNORMAL PROFI TS, THE LAW IS WELL SETTLED THAT ABNORMAL PROFITS BY ITSELF IS NOT A GR OUND TO EXCLUDE A COMPANY WHICH IS OTHERWISE COMPARABLE, BUT IF THE ABNORMAL PROFITS ARE OWING TO SOME UNUSUAL CIRCUMSTANCES, THEN THOSE COMPANIES CA N BE EXCLUDED. AS FAR AS EXCLUSION OF M/S. EXENSYS SOFTWARE SOLUTION S LTD., IS CONCERNED, THE SAME IS DUE TO AMALGAMATION THAT HAPPENED BETWEEN T HIS COMPANY AND SOME OTHER COMPANY DURING THE RELEVANT PREVIOUS YEA R AND THEREFORE THE CIT(A) WAS JUSTIFIED IN EXCLUDING THIS COMPANY. AS FAR AS THIRDWARE SOLUTIONS LTD. IS CONCERNED, THERE HAS BEEN NO SPEC IFIC REASON FOR ABNORMAL PROFITS AND THEREFORE THE EXCLUSION OF THI S COMPANY ON THE GROUND OF ABNORMAL PROFITS BY THE CIT(A) CANNOT BE SUSTAIN ED. HOWEVER, THE ASSESSEE IN GROUND NO.6(B) HAS PRAYED THAT THE FUNC TIONAL COMPARABILITY OF THIS COMPANY WAS CHALLENGED BY THE ASSESSEE BEFORE CIT(A) BUT THE CIT(A) HAS NOT GIVEN ANY DECISION ON THE SAME. HE ALSO BROUGHT TO OUR NOTICE THAT THE ITAT BANGALORE BENCH IN THE CASE OF M/S. SHARP SOFTWARE DEVELOPMENT (INDIA) PVT.LTD. VS. DCIT IT(TP) A.NO.1 109/BANG/2011 ORDER DATED 25.1.2017 VIDE PARAGRAPH 25 & 26 OF ITS ORDER HELD THAT THI S COMPANY WAS A PRODUCT COMPANY AND NOT A SWD SERVICE PROVIDER SUCH AS THE ASSESSEE AND THIS COMPANY WAS EXCLUDED. WE ARE OF THE VIEW THAT IN VIEW OF THE AFORESAID ORDER OF THE TRIBUNAL, WE SUS TAIN THE ORDER OF CIT(A) ON THE BASIS THAT THIS COMPANY NEEDS TO BE EXCLUDED AS FUNCTIONALLY NOT COMPARABLE. IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 9 OF 13 12. AS FAR AS GROUND NO.4 IS CONCERNED, IT IS UNDIS PUTED THAT NO COMPANY WAS EXCLUDED OR INCLUDED BY APPLYING THE FI LTER OF DIMINISHING REVENUE AND THEREFORE THIS GROUND OF APPEAL RAISED BY THE REVENUE IS PURELY ACADEMIC AND HENCE DISMISSED. 13. AS FAR AS GROUND NO.5 RAISED BY THE REVENUE IS CONCERNED, M/S. QUINTEGRA SOLUTIONS LTD., HAD A DIFFERENT ACCOUNTIN G YEAR THAN THAT OF THE ASSESSEE AND THEREFORE THIS COMPANY OUGHT TO HAVE B EEN EXCLUDED BY THE CIT(A) AND THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT OBJECT TO ITS EXCLUSION FROM THE LIST OF COMPARABLE COMPANIES . THEREFORE GROUND NO.5 RAISED BY THE REVENUE IS ALLOWED. 14. AS FAR AS GROUND NO.6 RAISED BY THE REVENUE IS CONCERNED, THE SAME RELATES TO EXCLUSION OF THE FOLLOWING COMPANIES BOD HTREE CONSULTING LTD., GEOMETRIC SOFTWARE SOLUTIONS CO. LTD., AND TATA ELX SI LTD., FROM THE LIST OF COMPARABLE COMPANIES. THESE COMPANIES WERE EXCLUDE D BY THE CIT(A) ON THE GROUND THAT THESE COMPANIES WERE FUNCTIONALLY D IFFERENT AND NOT COMPARABLE WITH THE ASSESSEE. THE ASSESSEE IS PURE SOFTWARE SWD SERVICE PROVIDER, WHEREAS THESE COMPANIES WERE SOFT WARE PRODUCT COMPANIES. THE EXCLUSION OF THESE COMPANIES IN THE CASE OF PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE W AS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF KODIAK NETWORK INDIA PVT. LTD. [TS 378 ITAT 2015 (BANG-TRIB) AND M/S. SHARP SOFTWARE DEVELOPMENT (I) PVT.LTD. (SUPR A) . B OTH THESE CASES RELATE TO ASST. YEAR 2005-06 AND IN TH ESE CASES IT WAS HELD IN THAT CASE THAT THE AFORESAID COMPANIES WERE SOFTWARE PRODUCT COMPANIES AND NOT SOFTWARE DEVELOPMENT SERVICE PROV IDER SUCH AS THE ASSESSEE AND THE SEGMENTAL DETAILS OF SWD SERVICES AND SW PRODUCTS WERE NOT AVAILABLE AND THEREFORE THE PROFIT MARGIN IN THE SWD SERVICES IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 10 OF 13 SEGMENT OF THESE COMPANIES WERE NOT AVAILABLE FOR C OMPARISON. IN THE LIGHT OF THE AFORESAID DECISION OF THE TRIBUNAL, WE ARE OF THE VIEW THAT THE EXCLUSION OF THE AFORESAID COMPANIES BY THE CIT(A) WAS JUSTIFIED AND CALLS FOR NO INFERENCE. HENCE, WE FIND NO MERIT IN GROUN DNO.6 RAISED BY THE REVENUE. 15. AS FAR AS GROUND NO.7 RAISED BY THE REVENUE IS CONCERNED, THE SAME RELATES TO INCLUSION OF M/S. VJIL CONSULTING LTD., AS NOT COMPARABLE. IT WAS AGREED BY THE PARTIES THAT THIS COMPANY CAN BE TREA TED AS A COMPARABLE COMPANY AND HENCE GROUND NO.7 RAISED BY THE REVENUE IS ALLOWED. 16. THE NEXT GROUND WHICH IS AGAIN NUMBERED AS GROU ND NO.7 IS WITH REFERENCE TO DIRECTING WORKING CAPITAL ADJUSTMENT T O BE ALLOWED. EVEN THE TPO IN HIS ORDER HAS ALLOWED WORKING CAPITAL ADJUST MENT. IN TRANSFER PRICING ANALYSIS ALLOWING WORKING CAPITAL ADJUSTMEN T IS NECESSARY AND IT IS SETTLED LAW THAT SUCH ADJUSTMENT SHOULD BE MADE FOR PROPER COMPARISON OF PROFIT MARGIN OF ASSESSEE AND THE COMPARABLE COMPAN IES. WE FIND NO MERIT IN THIS GROUND OF APPEAL RAISED BY THE REVENU E. 17. THE REVENUE IN GROUNDS NO.8 TO 10 HAS PROJECTED ITS GRIEVANCE REGARDING THE ACTION OF THE LEARNED CIT(A) IN EXCLU DING, WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT, INTERNET ACCESS CHARG ES OF RS.23,91,701/- FROM THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNO VER WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT. THE ASSESSEE WAS ENT ITLED TO CLAIM DEDUCTION U/S.10A OF THE ACT ON THE PROFITS DERIVED FROM ITS SOFTWARE TECHNOLOGY PARKS OF INDIA (STPI) REGISTERED UNIT. SEC.10A(4) PROVIDES THE METHODOLOGY OF COMPUTATION OF DEDUCTION U/S.10A OF THE ACT AND IT LAYS DOWN THAT THE PROFITS DERIVED FROM EXPORT OF ARTICL ES OR THINGS OR COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PRO FITS OF THE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 11 OF 13 SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. EXPORT TURNOVER HAS BEEN DEFINED UNDER EXPLANATION 2 (IV) TO SEC.10A AS:- 'EXPORT TURNOVER' MEANS THE CONSIDERATION IN RESPEC T OF EXPORT BY THE UNDERTAKING OF ARTICLES OR THINGS OR COMPUTER S OFTWARE RECEIVED IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB-SECTION (3) , BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSUR ANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THI NGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRE D IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSID E INDIA. 18. WHILE COMPUTING THE DEDUCTION U/S.10A OF THE AC T, THE AO NOTICED THAT DURING THE RELEVANT ASSESSMENT YEAR, THE ASSES SEE HAD INCURRED TELECOMMUNICATION CHARGES (INTERNET ACCESS CHARGES) AMOUNTING TO RS.23,91,701 IN RESPECT OF STPI UNIT WHICH WAS NOT REDUCED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SEC TION 10A OF THE INCOME TAX ACT, 1961. THE AO THEREFORE EXCLUDED TH E AFORESAID SUM FROM THE EXPORT TURNOVER WITHOUT EXCLUDING THEM FROM THE TOTAL TURNOVER. AS A RESULT, THE DEDUCTION CLAIMED U/S.10A OF THE ACT BY THE ASSESSEE WAS ALLOWED AT A LESSER SUM THAN WHAT WAS CLAIMED BY TH E ASSESSEE. IT WAS THE PLEA OF THE ASSESSEE IN THE APPEAL AGAINST THE ASSESSMENT ORDER BEFORE THE CIT(A) THAT AT ALL TIMES DURING THE RELE VANT PREVIOUS YEAR, IT WAS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND NOT IN RENDERING ANY TECHNICAL SERVICES. COMMUNICATION EXPENSES WERE IN CURRED NOT FOR EXPORT OF COMPUTER SOFTWARE OUTSIDE INDIA AND THEREFORE TH E EXCLUSION FROM EXPORT TURNOVER AS DONE BY THE AO WAS NOT CORRECT. WITHOU T PREJUDICE TO ITS CONTENTION THAT THE AFORESAID SUMS SHOULD NOT BE EX CLUDED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S.10A OF THE A CT, THE ASSESSEE HAS ALSO MADE AN ALTERNATE PRAYER THAT EXPENSES THAT AR E REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOT AL TURNOVER AND IN THIS IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 12 OF 13 REGARD HAS PLACED RELIANCE ON THE DECISION OF THE H ONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) WHEREIN IT WAS HELD THAT WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT EXPENSES THAT ARE REDUCED FROM THE EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER. THE CIT(A) HOWEVER AGREED WITH THE ALTER NATIVE PRAYER OF THE AO AND REDUCED THE SUM IN QUESTION BOTH FROM THE EXPOR T TURNOVER AND THE TOTAL TURNOVER. 19. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE H AS RAISED GROUNDS NO.8 TO 10 BEFORE THE TRIBUNAL. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. TAKING INTO CONSIDERATION THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT COMMUNICATION CHARGES SHOUL D BE EXCLUDED BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER. WE ARE OF THE VIEW THAT AS OF TODAY, LAW DECLARED BY THE HON'BLE HIGH COURT OF KA RNATAKA WHICH IS THE JURISDICTIONAL HIGH COURT IS BINDING ON US. MOREOV ER, THE ORDER OF THE HONBLE KARNATAKA HIGH COURT HAS BEEN UPHELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V. HCL TECHNOLOGIES LTD. IN CIVIL APPEAL NO.848 9- 98490 OF 2013 & ORS. DATED 24.04.2018 . WE THEREFORE FIND NO MERIT IN GROUND NO.8 TO 10 RAISED BY THE REVENUE. 20. AS FAR AS CO NO.162/BANG/2015 IS CONCERNED, THE LD. COUNSEL FOR THE ASSESSEE PRAYED ONLY FOR EXCLUSION OF THE FOLLOWING 2 COMPANIES FROM THE LIST OF COMPARABLE COMPANIES VIZ., SANKYA INFOTECH LTD., AND FOUR SOFT LTD. AS FAR AS SANKHYA LTD, IS CONCERNED, THE STAND OF T HE ASSESSEE IS THAT THIS COMPANY IS ENGAGED IN SOFTWARE PRODUCTS DEVELOPMENT ALSO AND THAT THE EMPLOYEE COST OF THIS COMPANY IS ONLY 23% AND, THER EFORE, FAILS THE EMPLOY COST FILTER. BESIDES THE ABOVE, THE CONTENTION OF THE ASSESSEE IS THAT THIS COMPANY HAS IN HOUSE R&D DIVISION WHICH DEVELOPS SO FTWARE PRODUCTS. ON THIS CONTENTION, WE FIND THAT SIMILAR CONTENTION S WERE ACCEPTED BY THE IT(TP)A NO.847/BANG/2013 & CO 169/BANG/2015 PAGE 13 OF 13 ITAT BANGALORE BENCH IN EXCLUDING AFORESAID COMPANY FROM THE LIST OF COMPARABLE COMPANIES IN THE CASE OF DCIT VS. M/S. SHARP SOFTWARE DEVELOPMENT (INDIA) PVT.LTD. IT(TP)ANO.1109/BANG/20 11 ORDER DATED 25.1.2017 . FOLLOWING THE AFORESAID DECISION, WE DIRECT EXCL USION OF THIS COMPANY FROM THE LIST OF COMPARABLES. 21. IN THE RESULT, IT(TP)A NO.847/BANG/2013 IS PART LY ALLOWED AND CO NO.169/BANG/2015 IS ALSO PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DAY OF JULY, 2019. SD/- SD/- ( JASON P. BOAZ ) ( N.V . VASU DEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 17 TH JULY, 2019. / D ESAI S MURTHY / COPY TO: 1. THE APP ELLANT 2. THE R ESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUA R D F ILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.