M/s Tally Solutions Private Limited, Bangalore V. DCIT, Bangalore

ITA 101/BANG/2013

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68295 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-05-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 31-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA I
• Assessee Lawyers: ARVIND SOMDE
• Keywords: Related party transaction; Transfer pricing
• Section: 92C; 143(3); 92A; 234B; 144; 92

Judgement Text

ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 1 OF 18 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE A BENCHES, BANGALORE BEFORE SHRI N. BARTHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K. JUDICIAL MEMBER IT(TP)A NO.101 /BANG/2013 (ASSESSMENT YEAR: 2006-07) TALLY SOLUTIONS PVT LTD., 331-336 RAHEJA ARCADE, KORAMANGALA, BANGALORE 560 095 PAN: AAACP 7879 D VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 12 (4) BANGALORE (APPELLANT) (RESPONDENT) S.P. NO.19/BANG/2013 (ARISING OUT OF IT(TP)A NO.101/BANG/2013) TALLY SOLUTIONS PVT LTD., 331-336 RAHEJA ARCADE, KORAMANGALA, BANGALORE 560 095 PAN: AAACP 7879 D VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 12 (4) BANGALORE (APPELLANT) (RESPONDENT) M.P. NO.3/BANG/2013 (ARISING OUT OF ITA 1235/BANG/2010) TALLY SOLUTIONS PVT LTD., 331-336 RAHEJA ARCADE, KORAMANGALA, BANGALORE 560 095 PAN: AAACP 7879 D VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 12 (4) BANGALORE (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI ARVIND SOMDE, ADV. DEPARTMENT BY: SHRI S.K.AMBASTHA, CIT(DR-I) DATE OF HEARING: 14/06/2013 DATE OF PRONOUNCEMENT: 02/08/2013 O R D E R PER GEORGE GEORGE K. J.M. THIS APPEAL OF THE ASSESSEE COMPANY IS DIRECTED A GAINST THE ORDER OF THE AO U/S 143(3) R.W.S. 92CA R.W.S 254 OF THE ACT DATED ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 2 OF 18 11.01.2013. THE AO INCORPORATED IN THE ASSESSMENT ORDER THE REVISED ADJUSTMENT MADE BY THE TPO U/S 92CA R.W.S. 254 OF THE ACT. THE TPOS ORDER U/S 92C R.W.S. 254 OF THE ACT DATED 7.11.2012 IS AN ORDER GIVING EFFECT TO THE TRIBUNALS ORDER I N ASSESSEES CASE IN ITA NO.1235/B/2010 DATED 26.9.2011. THE RELEVANT A SSESSMENT YEAR IS 2006-07. 2. TO A QUERY FROM THE BENCH AS TO THE MAINTAINABIL ITY OF THIS APPEAL BEFORE US, BOTH THE LEARNED A.R. AND THE LEA RNED D.R RELIED ON THE JUDGMENT OF THE HONBLE PUNJAB & HARYANA HIG H COURT IN THE CASE OF PARAS RICE MILL V. CIT & ANOTHER REPORTED I N (2009) 18 DTR (P & H) 149 DATED 19.9.2008 AND SUBMITTED THAT AS P ER THE RATIO LAID DOWN BY THE HONBLE HIGH COURT (SUPRA), THIS A PPEAL LIES BEFORE THE TRIBUNAL. 2.1. WE HAVE, WITH DUE REGARDS, PERUSED THE RULING OF THE HONBLE COURT (SUPRA) WHEREIN THE HONBLE COURT HAD CATEGORICALLY RULED THAT: 6.WE ARE OF THE OPINION THAT THE REASONING OF THE LEARNED TRIBUNAL THAT SINCE THE AO HAD MERELY G IVEN EFFECT TO THE ORDER OF THE TRIBUNAL, AN APPEAL AGAI NST THE SAID ORDER WOULD LIE ONLY BEFORE THE TRIBUNAL AND N OT BEFORE THE CIT (A) IS CORRECT.. 2.2. IN VIEW OF THE JUDGMENT OF THE HONBLE P & H H IGH COURT (SUPRA) AND THE SUBMISSIONS OF BOTH THE PARTIES, WE PROCEED TO DISPOSE OF THE APPEAL ON MERITS. 3. THE ASSESSEE HAS RAISED SEVEN GROUNDS IN ITS MEM ORANDUM OF APPEAL. THE RELEVANT ISSUES AGITATED BY THE ASS ESSEE ARE LISTED OUT AS BELOW: ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 3 OF 18 (1) THE LOWER AUTHORITIES HAVE ERRED IN (A) ADOPTING FLAWED METHODOLOGY IN COMPUTING THE VALUE OF THE IP; (B) ADOPTING A METHOD OF VALUATION DIFFERENT FROM T HAT FOLLOWED IN THE ORIGINAL ORDER WHILE COMPUTING FUTURE CASH FLOWS; (C) ESTIMATING FUTURE EXPENSES BY INTRODUCING A NEW CONCEPT CALLED CAGR OF COST WITHOUT APPRECIATING THAT THIS CONCEPT WAS NOT USED IN THE ORIGINAL ORDE R AND THEREBY EXCEEDING JURISDICTION; (D) REDUCING THE MARKETING EXPENSES FROM THE OPERATING COST WHILE DETERMINING THE CAGR OF COST AND THEREBY ARTIFICIALLY INCREASING THE ESTIMATED CASH FLOWS; (E) WITH PREJUDICE, INAPPROPRIATELY COMPUTING THE CAGR OF COST BY CONSIDERING COST OF ONLY 10 MONTH S FOR FY 2005-06 WHEREAS AS CONSIDERING REVENUE OF 12 MONTHS FOR FY 2005-06 WHILE COMPUTING CAGR OF REVENUE; (F) PASSING AN ORDER DEVIATING FROM THE METHOD ADOPTED FOR VALUATION OF IPR IN THE ORIGINAL ORDER APPROVED BY THE DRP AND THE TRIBUNAL; (G) PASSING AN ORDER U/S 143(3) RWS 92CA RWS 254 OF THE ACT WITHOUT GIVING AN OPPORTUNITY TO THE ASSESS EE TO APPEAL BEFORE THE DRP; (H) PASSING AN ORDER IGNORING THE FACT AS PER S. 14 4 C (10) OF THE ACT, THE DIRECTIONS OF THE DRP ARE BIND ING ON THE AO AND, THEREFORE, THERE COULD NOT HAVE ANY DEVIATION WHILE GIVING EFFECT TO THE ORDER OF THE TRIBUNAL BEYOND ITS DIRECTIONS; (I) NOT REDUCING THE SALE RETURN OF RS.111.04 CROR ES FROM THE TURNOVER OF FY 2004-05 WHILE CALCULATING ESTIMATED COST OF IMPROVEMENT, ESTIMATED RETURN O N FIXED ASSETS, ESTIMATED RETURN ON WORKING CAPITAL AND ESTIMATED RETURN ON HUMAN CAPITAL; AND (J) IN-APPROPRIATELY COMPUTING THE RETURN ON WORKIN G CAPITAL BY NOT INCLUDING THE INTER-CORPORATE DEPOSI TS ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 4 OF 18 AND DUES RECEIVABLE FROM SUBSIDIARY COMPANY IN CURRENT ASSETS; (2) LEVYING OF INTEREST U/S 234B, SECTION 234D AND S ECTION 220(2) OF THE ACT. 3.1. THE LEVY OF INTEREST OF INTEREST U/S 234D, U/S 234B AND SECTION 220(2) OF THE ACT ARE CONCERNED, THE CHARGI NG OF INTEREST IS MANDATORY AND CONSEQUENTIAL IN NATURE. HENCE THE GR OUNDS RELATING TO LEVY OF INTEREST U/S 234B, 234D AND 220(2) ARE D ISMISSED. 4. WE SHALL NOW PROCEED TO ADDRESS TO THE GRIEVANCE S OF THE ASSESSEE IN THE FOLLOWING PARAGRAPHS. 4.1. BRIEFLY STATED, THE SEQUENCE OF EVENTS WHICH TOOK PLACE IN THE INTERVENING PERIOD IS AS UNDER: 4.2. AGGRIEVED BY THE STAND OF THE AO IN HIS INITI AL ORDER U/S 143(3) R.W.S 144C OF THE ACT DATED 20.10.2010 IN MA KING AN ADJUSTMENT OF RS.222.13 CRORES [RS.260-63 CRORES ALP OF RS.38.5 CRORES) ON THE BASIS OF THE DIRECTIONS OF THE DRP D ATED 30.9.2010 IN RESPECT OF SALE OF IPR TO THE ASSESSEES AE AT DUBA I, THE ASSESSEE COMPANY HAD APPROACHED THE EARLIER BENCH OF THIS TR IBUNAL FOR RELIEF. AFTER DUE CONSIDERATION OF THE RIVAL SUBMI SSIONS AND FOR THE ELABORATE REASONS RECORDED IN ITS FINDINGS, THE EAR LIER BENCH IN ITS ORDER DATED 26.9.2011(SUPRA) HAD DIRECTED THE TPO T O RECALCULATE THE ALP, KEEPING IN VIEW, THE SPECIFIC DIRECTIONS CONTAINED IN ITS FINDINGS. ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 5 OF 18 4.3. THE TPO HAD, VIDE HER ORDER U/S 92A R.W.S. 25 4 OF THE ACT DATED 7.11.2012, WORKED OUT THE REVISED ADJUSTM ENT, CONSEQUENT TO THE DIRECTIONS OF THE EARLIER BENCH, AT RS.167.57,38,965/- FOR THE REASONS RECORDED IN THE SAID ORDER. BASED ON THE TPOS CONCLUSION OF THE REVISED ADJUST MENT U/S 92CA OF THE ACT, THE AO, IN HIS ORDER U/S 143(3) R.W.S. 92CA R.W.S. 254 OF THE ACT DATED 11.1.2013, REVISED THE ASSESSEES TOT AL INCOME AT RS.167.87 CRORES AS AGAINST THE ASSESSED INCOME OF RS.222.43 CRORES AS PER THE ORIGINAL ASSESSMENT ORDER DATED 2 0.10.2010. 4.4. AGGRIEVED WITH THE STAND OF THE AO, THE ASSES SEE COMPANY HAS COME UP BEFORE US WITH ITS PRESENT APPE AL. 4.4.1. DURING THE COURSE OF HEARING, THE SUBMISSIO NS MADE BY THE LEARNED A R ARE SUMMARIZED AS UNDER: - THAT IN PURSUANCE OF THE DIRECTIONS OF THE EARLI ER BENCH, THE ASSESSEE WAS CALLED UPON BY THE TPOS LETTER DATED 1.10.2012 TO FURNISH OBJECTION(S), IF ANY, TO THE PROPOSED DR AFT ASSESSMENT ORDER; - THAT DISREGARDING THE ASSESSEES STRONG OBJECTIONS/CONTENTIONS, THE TPO HAD PASSED THE IMPU GNED ORDER GIVING EFFECT TO THE TRIBUNALS ORDER; - THAT THE COMPARISON BETWEEN THE DIRECTIONS OF TH E EARLIER BENCH AND THE ORDER OF THE TPO ARE LISTED OUT AS UN DER: (RS. IN CRORES) STEP NO. DESCRIPTION VALUE AS PER TPO VALUE AS PER TRIBUNALS DIRECTION DIFF. REMARKS 2 ESTIMATION OF FUTURE CASH FLOWS 615.76 (85.01) 707.77 (I)A NEW METHOD HAS BEEN FOLL OWED IN THE ORDER; (II) A NEW CONCEPT CALLED CAGR OF COST HAS BEEN INTRODUCED TO ESTIMATE FUTURE EXPENSES; (III) MARKETING EXPENSES WHICH CONSTITUTE A SIGNIFICANT PORTION OF TOTAL EXPENSES HAVE BEEN IGNORED IN COMPUTING CAGR OF COST THEREBY ARTIFICIALLY INCREASING ESTIMATED CASH FLOWS; ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 6 OF 18 (IV) WHILE CALCULATING CAGR OF COST, THE COST OF FY 2005-06 IS CONSIDERED ONLY FOR 10 MONTHS WITHOUT APPRECIATING THAT FOR OTHER YEARS COST OF 12 MONTH S. ON A PARITY OF REASONING, FOR FY 05-06, COST OF 12 MONTHS SHOULD BE TAKEN; & (V) FOR MAKING CHANGES AS ABOVE, THE TPO HAS PLACED RELIANCE ON EXPOSURE DRAFT ISSUED BY INTERNATIONAL VALUATION STANDARDS COUNCIL PLACED IN PUBLIC DOMAIN IN JAN. 2009 FOR INVITING PUBLIC COMMENTS ON VALUATION OF INTANGIBLE ASSETS AND NOT FINALISED GUIDELINES ISSUED SUBSEQUENTLY IN 2010 4 ESTIMATING COST OF IMPROVEME NT 20.13. 09.52 10.61 SALES RETURN OF RS.111.04 CRORES HAS NOT BEEN REDUCED FROM THE TURNOVER OF FY 2004-05 FOR THE REASON THAT THE TPO WAS OF THE VIEW THAT THE ITAT DIRECTED TO REDUCE SALES RETURN ONLY WHILE CALCULATING CAGR AND DEBTORS WITHOUT APPRECIATING THAT ITAT HAD CLEARLY HELD THAT THESE SALES DID NOT MATERIALISE AND SHOULD BE REDUCED FROM SALES AND, THUS, THE SPIRIT OF THE ITATS DECISION IS DISREGARDED 5 ESTIMATION OF DISCOUNTED CASH FLOW 297.96 (127.82) 425.78 CUMULATIVE EFFECT OF MISTAKE S COMMITTED IN STEP NOS.2 AND 4 6 ESTIMATION OF RETURN ON FIXED ASSETS 27.25 72.13 (44.88) (I) ORIGINAL METHOD HAS BEEN ABANDONED; & (II) SALES RETURN OF RS.111.04 CRORES HAS NOT BEEN REDUCED FROM THE TURNOVER OF FY 04-05 FOR THE REASONS STATED IN 4 ABOVE 7 ESTIMATION OF RETURN ON WORKING CAPITAL 59.58 250.50 (190.92) (I) SALES RETURN OF RS.111.04 CRORES HAS NOT BEEN REDUCED FROM THE TURNOVER OF FY 04-05 FOR THE REASONS STATED IN 4 ABOVE; & (II) INTER-CORPORATE DEPOSITS AND DUES RECEIVABLE FROM SUBSIDIARY COMPANY HAVE NOT BEEN INCLUDED IN CURRENT ASSETS DESPITE THE DIRECTION OF ITAT. 8 ESTIMATION OF RETURN ON CAPITAL 05.05 06.88 (1.83) (I) SALES RETURN OF RS.111.04 CR ORES HAS NOT BEEN REDUCED FROM THE TURNOVER OF FY 2004-05 FOR THE REASONS STATED IN 4 ABOVE - THAT THE ABOVE CHART WOULD REVEAL THE FOLLOWING: (A) THE SALE CONSIDERATION RECEIVED BY THE ASSESSEE ON THE TRANSFER OF IPR WAS RS.38.5 CRORES; (B) THE FINAL ASSESSMENT ORDER OF THE TPO DATED 23 .9.2010 PURSUANT TO THE DIRECTIONS OF THE DRP ENHANCED THE VALUE OF IPR TO RS.260.64 CRORES; (C) THE DIRECTION OF THE ITAT, IF IMPLEMENTED, WOUL D RESULT IN A VALUE WHICH IS FAR LESS THAN THE CONSIDERATION ACTU ALLY RECEIVED BY THE ASSESSEE; ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 7 OF 18 (D) THAT THE PRESENT ORDER OF THE TPO HAS ENHANCED THE VALUE OF RS.38.5 CRORES TO RS.206.08 CRORES; AND THAT THI S ENHANCEMENT WAS BECAUSE OF FAILURE TO GIVE DEDUCTIO NS OF THE SALES RETURN OF RS.111.04 CRORES AT EVERY STEP, ABA NDONING THE METHODOLOGY ORIGINALLY RESORTED TO AND UPHELD BY TH E TRIBUNAL AND RESORTING TO AN ENTIRELY A NEW METHODOLOGY, INT RODUCING A NEW CONCEPT CALLED CAGR OF COST UNILATERALLY EXCL UDING MARKETING EXPENSES, THUS ARTIFICIALLY INCREASING T HE ESTIMATED CASH FLOWS, EXCLUSION OF INTER-CORPORATE DEPOSITS A ND DUES RECEIVABLE FROM SUBSIDIARY COMPANIES FROM THE CURRE NT ASSETS ETC., 4.4.2. IN CONCLUSION, IT WAS ARGUED THAT BASED ON THE CONCLUSION ARRIVED AT BY THE TPO IN HER ORDER U/S 9 2 CA R.W.S 254 OF THE ACT (SUPRA), THE AO HAD REVISED THE ASSESSEE S TOTAL INCOME AT RS.167.87 CRORES WHICH IS, ACCORDING TO THE LEARNED AR, AT VARIANCE FOR THE ABOVE REASONS. IN A NUT-SHELL, THE ESSENC E OF THE ARGUMENT OF THE LEARNED AR WAS THAT THE TPO/AO BE D IRECTED TO FOLLOW THE DIRECTIONS GIVEN BY THE EARLIER BENCH OF THIS TRIBUNAL IN ITS ORDER DATED 26.9.2011 (SUPRA) WITH LETTER AND S PIRIT. 4.4.3. ON THE OTHER HAND, THE SUBMISSIONS OF THE L EARNED DR ARE SUMMED UP AS UNDER: - THAT IN FY 2005-06 RELEVANT FOR THE AY 2006-07 U P-TO 31.1.2006 ONLY M/S. TALLY SOLUTION PVT. LTD [TSPL] WAS THE PROMINENT COMPANY WHICH DEVELOPED TALLY, ACCOUNTING SOFTWARE, LEGALLY OWNED THE BRAND NAME TALLY AND THE LOGO DID MARKETING ITSELF AND INCURRED LOT OF EXPENDITURE ON MARKETING, TRADED THE BUSINESS OF SALE OF LICENSES FOR THE RIG HT OF ITS SOFTWARE PRODUCES. ALL THESE FUNCTIONS TSPL PERFOR MED UNDER VARIOUS DIVISIONS WORKING UNDER IT. HOWEVER, ON 31 .1.2006, TSPL CARRIED OUT RESTRUCTURING AND FOLLOWING RESTRU CTURING THERE WAS CHANGE IN FUNCTION PERFORMED, ASSETS OWNE D AND RISKS ASSUMED BY TSPL. ON 31.1.2006, TSPL TRANSFER RED THE LEGAL OWNERSHIP IN INTELLECTUAL PROPERTY RIGHTS INC LUDING PATENT COPY RIGHTS AND TRADEMARKS TO TALLY DUBAI. LIKE-WISE TPPL TRANSFERRED THE SALES AND MARKETING FUNCTIONS TO TIPL [TALLY INDIA PVT. LIMITED]. TSPL ACCORDINGLY RETAI NED ONLY THE SOFTWARE DEVELOPMENT FUNCTION WHICH IT CARRIED OUT IN RESPECT ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 8 OF 18 TO IPRS LEGALLY OWNED AFTER RESTRUCTURING ON 31.1.2 006 BY TALLY DUBAI. THUS, AFTER RESTRUCTURING (I) TIPL PURCHASED LICENSES FROM TALLY DUBAI AND SO LD THEM TO CUSTOMER. TIPL ALSO DID MARKETING TO PROMOTE ITS S ALE OF TALLY LICENSES FOR CUSTOMERS; (II)TSPL ONLY PROVIDED SOFTWARE SERVICES TO TALLY D UBAI AND OTHER FUNCTIONS WERE PERFORMED EITHER BY TALLY DUBA I OR TIPL; (III)TALLY DUBAI LEGALLY OWNED THE IPRS WHICH ARE P URCHASED FROM TSPL. IT SOLD SOFTWARE LICENSES TO TIPL; - THAT WHEN RESTRUCTURING TOOK PLACE, TSPL TRANSFE RRED IPRS TO TALLY DUBAI. TSPL ALSO TRANSFERRED MARKETING DIVI SION TO TIPL. THEREFORE, WHILE MAKING PROJECTION OF FUTURE CASH FLOWS ON THE BASIS OF HISTORICAL DATA IN THE CASE OF TSPL , WE CANNOT MAKE PROJECTIONS MAKING NECESSARY ADJUSTMENT IN THI S REGARD. ADJUSTMENT IS REQUIRED DUE TO VERY IMPORTA NT EVENT THAT TOOK PLACE ON 30.1.2006 THAT HAS ITS BEARING O N FUTURE CASH FLOW. THIS EVENT IS TRANSFER OF MARKETING DIV ISION BY TSPL TO TIPL. DUE TO THIS TRANSFER ON 30.1.2006, I N PROJECTED CASH FLOWS, THERE SHOULD BE NO EXPENDITURE ON ACCOU NT OF MARKETING WHICH WAS EXISTING UP-TO 30.1.2006 WHEN MARKETING WAS THE DIVISION OF TSPL AND MARKETING EXPENDITURE WAS APPEARING AS PART OF COSTS IN HISTO RICAL DATA. THEREFORE, THE TPO ON PAGE 8 OF TP DRAFT ORDER DATE D 7.9.2012 HAS WRITTEN THAT SINCE THE MARKETING DIVISION HAS B EEN TRANSFERRED TO TIPL, IN PROJECTION OF FUTURE CASH F LOWS MARKETING DIVISION HAS NOT BEEN TAKEN INTO CONSIDER ATION AS IT HAS BEEN TRANSFERRED TO TIPL AND THIS EXPENDITURE D OES NOT EXIST ON THE DATE OF VALUATION. THE READING OF THE RELEVANT PARAGRAPHS OF THE ORDER WOULD MAKE IT CLEAR THAT ON CE MARKETING DIVISION IS OUT ON ITS TRANSFER TO TIPL, PROJECTED CASH FLOW WOULD INCREASE AS COMPARED TO HISTORICAL CASH FLOW. IN THIS PROCESS, DIRECTIONS OF THE TRIBUNAL HAVE BE EN FOLLOWED PROPERLY AND ALSO THERE IS NO VIOLATION AND IT HAS BEEN MENTIONED IN THE ORDER ON PAGE 9 THAT EXCESS EARNIN G METHOD (EEM) HAS BEEN APPLIED BY THE TPO ON THE BASIS OF G UIDANCE NOTE ISSUED BY THE INTERNATIONAL VALUATION STANDARD S BOARD. IN PARA 4.37 OF THE GUIDANCE NOTE, IT IS GIVEN THAT THE FORECAST CASH FLOWS ONE REFLECTED IN PROJECTION ONLY TO THE EXTENT THAT IT IS EXPECTED TO ARISE FROM THE ASSETS IN EXISTENCE A T THE VALUATIONS DATE. ON 31.1.2006 TSPL TRANSFERRED INT ANGIBLE PROPERTIES TO TSFP [TALLY DUBAI] AND ITS MARKETING DIVISION TO TPIL. THEREFORE, IN AY 2007-08 TO AY 2012-13, WHIL E MAKING PROJECTION OF NET CASH FLOW, EXPENDITURE ON ACCOUNT OF SALES AND MARKETING HAS NOT BEEN TAKEN INTO CONSIDERATION WHILE CALCULATING THE NET CASH FLOW AS THE MARKETING DIVI SION HAS ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 9 OF 18 BEEN TRANSFERRED W.E.F. 31.1.2006 TO TIPL AND IT IS NOT EXISTING ON THE DATE OF VALUATION; - THAT WHAT HAVE BEEN TRANSFERRED BY TSPL TO TIPL WERE THE IPRS. THE IPRS HAD ACQUIRED POTENTIAL DUE TO MARKE TING EFFORTS OF TSPL UP-TO 31.1.2006. DUE TO ACQUIRED P OTENTIAL, IPRS WOULD ENSURE SUPER PROFIT TO THE PURCHASES. TH AT IS WHY POTENTIAL OF IPRS TO EARN SUPER PROFIT HAS BEEN ASS UMED FOR FIVE YEARS IN ABSENCE OF MARKETING EFFORTS. MARKET ING EFFORTS WILL INCREASE THE SUSTAINABILITY OF IPRS TO EARNED SUPER PROFIT FOR A LONGER PERIOD. THEREFORE, FOR THE PURPOSE OF PROJECTED TOTAL NET CASH FLOW EXPENDITURE OF DEMERGED MARKETI NG DIVISION WILL NEITHER BE EXISTING FOR THE PURPOSE O F PROJECTED TOTAL NET CASH FLOW NOR FOR CALCULATING EXCESS EARN ING OF CASH DUE TO USE OF IPRS FOR THE PURPOSE OF CALCULATING N ET PRESENT VALUE OF THESE IPRS. IF THE TPO IN THE ABSENCE OF MARKETING DIVISION AFTER 31.1.2006 STILL CONSIDERS THE EXPEND ITURE RELATED TO MARKETING DIVISION IN CALCULATION OF PROJECTED C ASH FLOW, IT WILL BE ARTIFICIALLY SUPPRESSING THE NET CASH FLOW GENERATED BY VARIOUS ASSETS INCLUDING THE IPRS AT FIRST STAGE AN D NET CASH FLOW GENERATED BY IPRS CALCULATED BY DEDUCTING CASH FLOW DUE TO OTHER ASSETS AT SECOND STAGE; - THAT THE TPO HAD FOLLOWED ALL THE DIRECTIONS GIV EN BY THE HON. TRIBUNAL AND HAD NOT OVERSTEPPED IN ANY MANNER AS A LLEGED BY THE ASSESSEE WHILE GIVING EFFECT TO THE ORDER OF THE HONBLE TRIBUNAL; - THAT THE ALLEGATION OF THE ASSESSEE THAT THE TPO HAD ADOPTED OTHER METHOD IN HER ORDER DATED 7.11.2012 BY ABANDO NING THE METHOD ADOPTED IN THE ORIGINAL ORDER IS TOTAL WRONG . THE TPO HAD MADE GAGR OF REVENUES AND CAGR OF COSTS AND DIFFERENCE OF TWO REPRESENTS COMPOUNDED ANNUAL GROW TH OF NET CASH FLOW. THIS IS NOT A NEW CONCEPT. SEPARAT E CONSIDERATION OF GAGR OF REVENUE AND COST HAD BECOM E NECESSARY TO GIVE EFFECT TO THE DIRECTIONS OF THE T RIBUNAL. MARKETING EXPENSES HAVE NOT BEEN IGNORED. AS DISCU SSED IN DETAIL, MARKETING EXPENSES DID NOT EXIST AFTER 31.1 .2006 AS MARKETING DIVISION HAD BEEN DEMERGED AND TRANSFERRE D BY TSPL TO TIPL. THE TPO HAS NOT CONSIDERED MARKETING EXPENDITURE AFTER 31.1.2006 AS THEY DO NOT EXIST AN D NOT SIMPLY DUE TO RELIANCE PLACED ON DRAFT GUIDELINES I SSUED BY ISC. - THAT WITH REGARD TO THE ASSESSEES OBJECTION FOR EXCLUSION OF INTER-CORPORATE LOAN FROM CURRENT ASSETS WHILE CALC ULATING CONTRIBUTION OF NET WORKING CAPITAL IN CASH FLOW, I T WAS THE CASE OF THE REVENUE THAT THOUGH WORKING CAPITAL CON TRIBUTES TO THE GROWTH OF BUSINESS AND CONTRIBUTES IN CASH F LOW, BUT, INTER-CORPORATE LOAN TO RELATED PARTY AS THEY DO NO T CONTRIBUTE ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 10 OF 18 TO GROW OF BUSINESS AND CASH FLOW OF THE ASSESSEE; AND THAT USING EXCESS EARNING METHOD, THE TPO HAD REDUCED TH E CONTRIBUTION MADE BY DIFFERENT ASSETS OWNED BY THE ASSESSEE IN OVERALL CASH FLOW AND FIND OUT THE RESIDUAL CASH FLOW ATTRIBUTED TO IPRS. IT WAS THE OPINION OF THE RE VENUE THAT THE INTER-CORPORATE LOANS DO NOT FALL IN THIS CATEG ORY AND, HENCE, EXCLUDED. 4.5. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMIS SIONS, PERUSED THE SPECIFIC DIRECTIONS OF THE EARLIER BENC H IN ITS FINDINGS DATED 26.9.2011 WHICH ARE THE BONE OF CONTENTIONS O F THE ASSESSEE THAT THE TPO/AO HAVE NOT IMPLEMENTED THE SAME WITH LETTER AND SPIRIT IN THEIR ORDERS WHILE GIVING EFFECT TO THE T RIBUNALS EARLIER ORDER ETC., 4.5.1. FOR APPRECIATION OF FACTS AND FOR READY REF ERENCE, WE SHALL REPRODUCE HEREUNDER THE RELEVANT PORTIONS OF THE DIRECTIONS OF THE EARLIER BENCH TO THE TPO TO RECALCULATE THE ALP : 11 I. METHOD OF VALUATION OF ALP : (I)CONSIDERING THE NATURE OF TRANSACTION AND IN THE ABSENCE OF UNCONTROLLED INDEPENDENT COMPARABLE COMPANIES, WE ARE OF THE CONSIDERED VIEW THAT THE EXCESS EARNING METHOD [EEM] ADOPTED BY THE TPO IN THE PRESENT CIRCUMSTANCE IS REASONABLE AND, THEREFO RE, HE IS DIRECTED TO ADOPT THE SAME EEM WHILE RECALCULATING THE ALP; (II) THE REASON FOR ADOPTING EEM METHOD THAT IT IS ONLY AN INTERNAL CUP METHOD, WHEREIN, IT IS SEEN WHAT IS THE PRICE FOR WHICH THE SAME PRODUCT WOULD HAVE BEE N SOLD BY THE ASSESSEE TO AN INDEPENDENT ENTITY. THI S PRICE ALSO REFLECTS THE PRICE AT WHICH THE ASSESSEE WOULD HAVE SOLD IN AN UNCONTROLLED CONDITION, BUT, AS THERE WERE NO COMPARABLE PRICES AVAILABLE IN THE PUBLIC DOMAIN FOR SALE OF IPR PRODUCE SIMILAR TO TH AT OF THE ASSESSEE, THIS EEM IS USED TO DETERMINE THE PRI CE THAT WOULD HAVE BEEN ARRIVED AT, IF THE ASSESSEE SO LD THE IPR TO AN INDEPENDENT ENTITY. ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 11 OF 18 WHILE CALCULATING THE ALP UNDER EEM, THE TPO IS DIRECTED TO ADHERE THE FOLLOWING STEPS, NAMELY: II. ESTIMATING FUTURE TURNOVER BASED ON THE PAST PERFORMANCE : (I) WITH REFERENCE TO THE ACTUAL OPERATING REVENUE FROM THE AY 1999-2000 TO 2006-07, THE SALE RETURN OF RS.111.04 CRORES FOR THE AY 2005-06 HAS TO BE REDUCED FROM THE OPERATING REVENUE AND ONLY THE NET HAS TO BE TAKEN AS THIS IS THE CORRECT ACCOUNTING STANDARD TO BE FOLLOWED FOR ARRIVING AT CAGR. AS CAN BE SEEN FROM THE RECORDS, THE REVENUE FOR THE AY 2005-06 LOOKS ABNORMAL COMPARED TO OTHER AYS AND THERE WAS ALSO REVENUE TO THE EXTENT OF RS.111.04 CRORES WHICH DID NOT MATERIALIZE DUE TO DISTRIBUTORS BEING NOT ABLE TO SELL THE STOCKS WHICH WAS FORCED ON THEM IN A GREATER QUANTITY WITH AN ANTICIPATION OF GOOD REVENUES DUE TO INTRODUCTION OF VAT. IN THE SAME CALCULATION, THE REVENUE FOR THE YEAR 2006-07 HAS TO BE ADOPTED. AS THE DATE OF VALUATION OF IPR WAS ON 31.1.2006, THE ACTUAL REVENUES UPTO JANUARY, 2006 HAS TO BE TAKEN AND THE NEXT TWO MONTHS WILL HAVE TO BE PROJECTED BASED ON THE PERFORMANCE OF THE PREVIOUS TEN MONTHS. AS THE ASSESSEE HAD SOLD ONLY IPR AND THE CALCULATION OF REVENUES ARE FROM TALLY LICENSES WHICH WERE SOLD TO THIRD PARTIES, THE SALE OF IPR TO A RELATED PARTY TRANSACTION HAS NO RELEVANCE FOR THIS SALE OF TALLY LICENSE. HENCE, THE CURRENT YEAR DATA I.E., AY 2006-07 HAS TO BE INCLUDED AS THEY RELATE TO THIRD PARTY TRANSACTIONS AND THE PROJECTIONS HAVE TO BE MADE FOR THE FUTURE YEARS BASED ON THE REVENUES OF AY 2006-07 WHICH IS ALSO IN ACCORDANCE WITH THE PROVISIONS OF RULE 10B(IV) WHICH MANDATE THE USE OF CURRENT YEAR DATA. THE PROJECTION HAS TO BE MADE FOR NEXT SIX YEARS WHICH HAS RIGHTLY BEEN ADOPTED BY THE TPO. FURTHER, THE ASSESSEES CONTENTION TO ADOPT THE ACTUAL REVENUES FOR THE FUTURE YEARS WHICH ARE AVAILABLE NOW CANNOT BE ACCEPTED NOW FOR A SIMPLE REASON THAT THE ALP WAS CALCULATED ON THE DATE OF SALE WHICH WAS IN JANUARY, 2006 ITSELF AND ALSO UNDER EEM FUTURE REVENUES WILL BE PROJECTED BASED ON THE PREVIOUS YEAR DATA KEEPING THE CURRENT YEARS DATA AS THE BASE WHICH HAS GOT NO RELEVANCE ON THE ACTUAL REVENUES DURING THE FUTURE YEARS. WE ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 12 OF 18 ALSO MAKE IT CLEAR THAT THE ACTUAL CAGR SHALL BE ADOPTED BY THE TPO WITHOUT ANY DISCOUNT. (II) ESTIMATION OF FUTURE CASH FLOWS : WE ARE IN AGREEMENT WITH THE METHOD ADOPTED BY THE TPO IN ESTIMATING THE CASH FLOWS EXCEPT THAT THE REVENUES FOR THE AY 2006-07 HAS TO BE CONSIDERED AND IS TO BE TAKEN AS THE BASE YEAR FOR FUTURE PROJECTION OF REVENUE FOR THE REASONS RECORDED SUPRA [PARA (I)] (III) ESTIMATION OF DISCOUNTED FUTURE CASH FLOWS : WE ARE IN TOTAL AGREEMENT WITH THE TPO IN ESTIMATING THE DISCOUNTED FUTURE CASH FLOWS EXCEPT IN CALCULATION OF BETA WHERE THE TPO, EVEN AFTER HAVING CONSIDERED THREE COMPANIES AS COMPARABLE TO THE ASSESSEES SEGMENT OF DISTRIBUTION OF PRODUCTS, HAD WRONGLY TOOK ONLY ONE COMPANYS BETA WHICH, IN OUR CONSIDERED VIEW, WAS NOT REASONABLE. THEREFORE, AN AVERAGE OF THREE COMPANIES BETA HAS TO BE TAKEN FOR CALCULATION. (IV) PRESENT VALUE OF IMPROVEMENT : WE AGREE WITH THE TPO ON THIS SCORE. (V) FUTURE CASH FLOWS : WE AGREE WITH THE TPO ON THIS POINT. (VI) RETURN ON FIXED ASSETS: WE AGREE WITH THE STAND OF THE TPO ON THIS ISSUE. (VII) RETURN ON WORKING CAPITAL : WE DO AGREE WITH THE TPOS WORKING EXCEPT THAT THE SALE RETURN OF RS.111.04 CRORES HAS TO BE REDUCED FROM SUNDRY DEBTORS FOR THE AY 2005-06 AND THE CASH, BANK BALANCES AND OTHER CURRENT ASSETS HAVE TO BE CONSIDERED FOR CALCULATION OF CURRENT ASSETS FOR ALL THE YEARS. (VIII) RETURN ON HUMAN CAPITAL : WE ARE IN AGREEMENT WITH THE TPOS WORKING. AFTER FOLLOWING THE ABOVE FORMULAE, THE TPO SHOULD CALCULATE THE ALP ACCORDINGLY. IF THE AMOUNT SO ARRIVED AT WERE TO BE HIGHER THAN THE TOTAL ACTUAL CONSIDERATION (RS.38.50 CRORES) RECEIVED, THE TPO SHOULD ADOPT THE HIGHER PRICE ARRIVED AT. ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 13 OF 18 4.5.2. HOWEVER, ON A CAREFUL PERUSAL OF THE ORDER OF THE TPO GIVING EFFECT TO THE DIRECTIONS CONTAINED IN THE EA RLIER ORDER OF THIS BENCH, AS RIGHTLY HIGHLIGHTED BY THE LEARNED AR, I T IS OBSERVED THAT THERE WERE VARIATIONS AND TOTAL INCONSISTENCIES WHI LE IMPLEMENTING THE DIRECTIONS OF THE EARLIER BENCH. TO ILLUSTRATE FURTHER, FOR INSTANCE, THE FOLLOWING INCONSISTENCIES ARE OBSERVE D: (1) ESTIMATION OF FUTURE CASH FLOWS : (I) THE METHOD ADOPTED IN THE ORIGINAL ORDER HAS S INCE BEEN ABANDONED; INSTEAD, A NEW METHOD CALLED CAGR OF CO ST HAS BEEN ADOPTED TO ESTIMATE THE FUTURE EXPENSES; (II) MARKETING EXPENSES WHICH CONSTITUTE A SIGNIFI CANT PORTION OF TOTAL EXPENSES HAVE BEEN IGNORED WHILE COMPUTING C AGR OF COST WHICH CONTRIBUTED IN INCREASING ESTIMATED CAS H FLOWS; (III) WHILE CALCULATING CAGR OF COST, THE TPO HAD CONSIDERED THE COST OF FY 2005-06 ONLY FOR TEN MONTHS WITHOUT APPR ECIATING THAT FOR OTHER YEARS, THE COST OF TWELVE MONTHS WAS TAKEN. FOR UNIFORMITY FOR FY 2005-06 COSTS OF TWELVE MONTHS SH OULD HAVE BEEN ADOPTED. IT APPEARS THAT THE TPO HAD SWITCHED OVER TO THE NEW CONCEPT BY TAKING CUE FROM EXPOSURE DRAFT O F THE INTERNATIONAL VALUATION STANDARDS COUNCIL PLACED IN THE PUBLIC DOMAIN IN JANUARY, 2009 FOR INVITING PUBLIC SUGGESTION ON VALUATION OF INTANGIBLE ASSETS INSTEAD OF FINAL GUIDELINES WHICH WAS ISSUED ONLY IN 2010 . (2) ESTIMATING COST OF IMPROVEMENT : THE SALES RETURN OF RS.111.04 CRORES HAS NOT BEEN R EDUCED FROM THE TURNOVER OF FY 2004-05, APPARENTLY, THE TP O WAS IN PRESUMPTION THAT THE EARLIER BENCH HAD DIRECTED TO REDUCE SALE RETURN ONLY WHILE CALCULATING CAGR AND DEBTORS WITHOUT APPRECIATING THE FACT THAT THE EARLIER BENCH HAD CA TEGORICALLY HELD THAT THOSE SALES DID NOT MATERIALIZE AND, THUS , SHOULD BE REDUCED FROM SALES. (3) ESTIMATION OF DISCOUNTED CASH FLOW : CUMULATIVE EFFECT OF MISTAKES COMMITTED AS POINTED OUT ABOVE. ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 14 OF 18 (4) ESTIMATION OF RETURN ON FIXED ASSETS : THE METHOD ADOPTED IN THE ORIGINAL ORDER HAS SINCE BEEN ABANDONED AND SALES RETURN OF RS.111.04 CRORES HAS NOT BEEN REDUCED FROM THE TURNOVER OF FY 2004-05 FOR THE REA SONS RECORDED SUPRA; (5) ESTIMATION OF RETURN ON WORKING CAPITAL : SALES RETURN OF RS.111.04 CRORES HAS NOT BEEN REDUC ED FROM THE TURNOVER OF FY 2004-05 FOR THE REASONS POINTED OUT ABOVE AND THE INTER-CORPORATE DEPOSITS AND DUES RECEIVABL E FROM SUBSIDIARY COMPANY HAVE NOT BEEN INCLUDED IN CURREN T ASSETS IN SPITE OF CLEAR DIRECTIONS OF THE EARLIER BENCH; (6) ESTIMATION OF RETURN ON HUMAN CAPITAL : FOR THE REASONS RECORDED ABOVE, THE SALES RETURN OF RS.111.04 CRORES HAS NOT BEEN REDUCED FROM THE TURNOVER OF FY 2004-05. 4.5.3. TAKING INTO ACCOUNT ALL THE FACTS AND CIRCU MSTANCES OF THE ISSUE AS DELIBERATED UPON IN THE FORE-GOING PAR AGRAPHS, WE DEEM IT FIT TO ISSUE THE FRESH SET OF DIRECTIONS TO THE TPO TO RECALCULATE THE ALP AS UNDER: STEP 1 : NO COMMENTS. STATUS QUO REQUIRES TO BE MAINTAI NED. STEP 2 : ESTIMATION OF FUTURE CASH FLOWS: (I) THE TPO HAS ARRIVED AT THE OPERATING COSTS FOR THE PREVIOUS YEARS FOLLOWING A NEW METHOD WHICH, IN OUR VIEW, A CLEAR DEVIATION FROM THE ORIGINAL ORDER PASSED ON 30.10.2 009 AND HAS ADOPTED A TOTALLY A DIFFERENT METHOD OF CALCULA TION OF COST BY DEDUCTING THE MARKETING EXPENSES FROM THE TOTAL COST AS THE MARKETING DIVISION WAS TRANSFERRED TO TIPL AND IT DOES NOT EXIST ON THE DATE OF VALUATION. THE TPO HAS ALSO DI SCUSSED IN THE ORDER THAT THE ITAT HAS NOT GIVEN ANY SPECIFIC DIRECTIONS IN THIS REGARD. WE WOULD LIKE TO REPRODUCE STEP 2 I N OUR ORDER DATED 26-09-2011 THAT (ON PAGE 59) (II) ESTIMATION OF FUTURE CASH FLOWS : WE ARE IN AGREEMENT WITH THE METHOD ADOPTED BY THE TPO IN ESTIMATING THE CASH FLOWS EXCEPT THAT THE REVENUES FOR THE AY 2006-07 HAS TO BE CONSIDERED AND IS TO B E TAKEN AS THE BASE YEAR FOR FUTURE PROJECTION OF REVENUE FOR THE REASONS RECORDED SUPRA [PARA(1)] THIS CLEARLY VINDICATES THAT THE EARLIER BENCH, HAD, IN FACT, IN ITS ORIGINAL ORDER CONSIDERED THE ISSUE WHEREIN CALCULATION OF COSTS FOR THE PREV IOUS YEARS, ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 15 OF 18 THE MARKETING COSTS HAVE BEEN INCLUDED AND DID ACCE PT THE WORKING OF TPO FOR CALCULATION OF COSTS. SUITABLE D IRECTIONS HAVE BEEN ISSUED IN RESPECT OF REVENUES ONLY AND NO T FOR THE COSTS. THE TPO HAD, THUS, ERRED IN MENTIONING THAT THERE WERE NO SPECIFIC DIRECTIONS GIVEN WITH RESPECT TO THE CO STS OF THE PREVIOUS YEARS. IN THE EARLIER ORDER, THE BENCH WAS IN AGREEMENT WITH THE TPO THAT THE TOTAL COST HAS TO B E TAKEN WHILE ARRIVING AT CAGR FOR THE PREVIOUS YEARS. THE TPO HAS ALSO ERRED IN MENTIONING THAT CURRENT YEAR DATA HAS TO BE CONSIDERED FOR THE PROJECTION OF FUTURE EARNINGS. I N FACT, SPECIFIC DIRECTION WAS GIVEN, AS CAN BE SEEN FROM T HE EARLIER ORDER THAT REVENUES FOR THE CURRENT YEAR I.E., 200 6-07 HAS TO BE CONSIDERED AND IS TO BE TAKEN AS THE BASE YEAR F OR FUTURE PROJECTIONS. THE BENCH WAS IN AGREEMENT WITH THE ME THOD ADOPTED BY TPO IN THE EARLIER ORDER DATED 30-10-200 9 WHEREIN THE TOTAL COSTS WERE CONSIDERED FOR ARRIVIN G AT CAGR AND, THUS, THE TPO WAS INCORRECT, WHILE GIVING EFF ECT TO THE FINDINGS OF THE EARLIER BENCH, IN CHANGING THE METH OD OF CALCULATION AFTER CONSIDERING THE FACTS IN THE ORIG INAL ORDER. (II) FURTHER TPO HAS ERRED IN MENTIONING THAT THE M ARKETING DIVISION WAS NON-EXISTENCE ON THE DATE OF VALUATION . THE TPO HAS FAILED, PERHAPS, TO PROPERLY UNDERSTAND THAT TS PL TRANSFERRED INTANGIBLE PROPERTIES TSFL, DUBAI AND I TS MARKETING DIVISION TO TALLY INDIA PVT. LTD AND WHOL E SUBJECT MATTER OF THIS VALUATION IS THIS TRANSFER AND THE M ARKETING DIVISION WAS IN EXISTENCE BEFORE THE DATE OF TRANSF ER. THE TRANSFER OF ASSETS AND THE MARKETING DIVISION IS DO NE SIMULTANEOUSLY AND TOGETHER. THEREFORE AT THE TIME OF TRANSFER OF ASSET, THE MARKETING DIVISION WAS NOT TRANSFERRE D AND IT IS WRONG TO ASSUME THAT THE TRANSFER OF MARKETING DIVI SION HAS HAPPENED PRIOR TO THE SALE OF ASSETS. IN THE NOTE A LSO THE TPO IS MENTIONING THAT THE TRANSFER OF ASSETS AND THE M ARKETING DIVISION HAS HAPPENED SIMULTANEOUSLY ON THE SAME DA TE I.E., 31-01-2006. THESE FACTS HAVE BEEN CLEARLY CONSIDERE D BY THE TPO IN HIS ORIGINAL ORDER DATED 30-10-2009 IN WHICH THE EARLIER BENCH WAS IN AGREEMENT AS MENTIONED IN THE ORDER DATED 26-09-2011. THUS, THE TPO CANNOT CHANGE THE M ETHOD OF CALCULATION OF COST WHICH WAS ACCEPTED BY THE EA RLIER BENCH AS MENTIONED IN THE ORIGINAL ORDER AND ALSO AS DISC USSED ABOVE, THE ASSUMPTION OF TPO NOW AS DIFFERENT FROM THE ORIGINAL ORDER OF THE TPO THAT MARKETING DIVISION W AS TRANSFERRED PRIOR TO TRANSFER OF ASSETS AS THE FACT REMAINS THAT BOTH THE TRANSFERS HAVE TAKEN PLACE SIMULTANEOUSLY ON 31-01- 2006. (III) THE TPO HAS ALSO ERRED IN TAKING THE COSTS FO R ONLY 10 MONTHS WHEREAS THE REVENUES HAVE BEEN FOR 12 MONTHS. WHEN THE REVENUES ARE TAKEN FOR 12 MONTHS, THE COSTS HAVE AL SO TO BE TAKEN FOR 12 MONTHS AND NOT FOR 10 MONTHS. THEREFOR E, THE ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 16 OF 18 TPO IS DIRECTED TO ADOPT THE COSTS FOR 12 MONTHS FO R ARRIVING AT CAGR OF THE COST FOR THE YEAR 2005-06. STEP 3 : CALCULATION OF DISCOUNT FACTOR : STATUS QUO NEEDS TO BE MAINTAINED. STEP 4 : COST OF IMPROVEMENT: THE TPO HAS CLEARLY ERRED IN ARRIVING AT THE REVENU ES FOR THE FY 2004-05 RELATES TO AY 2005-06. AS PER STEP 1, TH E TURNOVER FOR THE FY 2004-05 RELATING TO FY 2005-06 IS RS 72,20,84,213/- WHEREAS THE TPO HAS ARRIVED AT THE TURNOVER AT RS 198,15,17,988/- WHICH IS TOTALLY WRONG. IN TH E ORIGINAL ORDER PASSED BY TPO, THE TURNOVER ARRIVED AT STEP 1 HAS BEEN TAKEN IN STEP 4 ALSO AND NO SPECIFIC DIRECTIONS WER E GIVEN BY THE EARLIER BENCH FOR ARRIVING AT THESE REVENUES IN THIS STEP. THE TPO HAS TO REDUCE SALES RETURNS AGAINST SALES I N ALL THE STEPS AND CANNOT ARBITRARILY INCLUDE IN SOME STEPS. IN THE EARLIER ORDER, WE HAD NOT GIVEN SPECIFIC DIRECTIONS AS WE FOUND THAT IN THE ORIGINAL TP ORDER THE REVENUE ARE SAME IN STEP I AND STEP 4. IN OTHER WORDS, THE REVENUE IS ARRIVED IN STEP 1 HAS TO REMAINS CONSTANT IN ALL OTHER STEPS BECAUSE REVENUE DETERMINATION IS ONLY IN STEP 1. STEP 5 : DISCOUNTED CASH FLOWS : THE TPO IS DIRECTED TO REWORK THE CALCULATIONS IN T HIS STEP AFTER RECTIFYING THE MISTAKES COMMITTED IN STEP 2 A ND STEP 4 OF THE ORDER STEP 6 : RETURN ON FIXED ASSETS : THE TPO HAS AGAIN ERRED IN TAKING THE REVENUES WHIC H IS DIFFERENT FROM THE REVENUES ARRIVED AT STEP 1 AND A GAIN WE WOULD LIKE TO REITERATE THAT IN THE ORIGINAL ORDER THE REVENUES WERE THE SAME IN ALL THE STEPS AND THE TPOS CONTEN TION WAS ACCEPTED ABOUT THE REVENUES AND, HENCE, AGREED WITH THE ORIGINAL ORDER OF TPO. NOW IN THE REVISED ORDER, TH E TPO CANNOT TAKE A DIFFERENT VIEW ON THE REVENUES WHICH IS TOTALLY INCORRECT AS THE SALES RETURNS HAS TO BE REDUCED IN ALL THE STEPS NOT RESTRICTING TO ONLY IN STEP 1. STEP 7 : RETURN ON WORKING CAPITAL : (I)SALES RETURN OF RS.111.04 CRORES HAS TO BE REDUC ED FROM THE TURNOVER (I) FOR AY 2005-06 FOR THE REASONS STATED IN STEP 4. ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 17 OF 18 STEP 8 : RETURN ON HUMAN CAPITAL : SALES RETURNS FOR THE AY 2005-06 HAS TO BE REDUCED FOR THE REASONS STATED IN STEP 4. 4.5.4. IN SUBSTANCE, THE AO IS DIRECTED TO ADOPT T HE REVISED/MODIFIED TRANSFER PRICING ADJUSTMENT WHICH WILL BE WORKED OUT BY THE TPO BASED ON THE ABOVE DIRECTIONS. IT I S ORDERED ACCORDINGLY. 4.5.5. BEFORE PARTING WITH, WE WOULD LIKE TO RECOR D THAT DURING THE COURSE OF HEARING OF THIS APPEAL, OUR ATTENTION WAS DRAWN TO THE EFFECT THAT THE ASSESSEE HAD, SIMULTANEOUSLY FILED (I) MISC. PETITION IN M.P. NO.3/B/13 DATED 13.11.2012 AGAINST THE ORDER O F THE TPO U/S 92CA R.W.S. 254 OF THE ACT 7.11.2012 GIVING EFFECT TO THE ORDER OF THE EARLIER BENCH IN THE ASSESSEES OWN CASE; AND (II) STAY PETITION IN SP NO.19/B/23 DATED 13.1.2013 WITH A PRAYER, IN ESSENC E, TO GRANT STAY FOR PAYMENT OF THE ENTIRE OUT-STANDING DEMAND OF RS.108.86 CRORES TILL THE DISPOSAL OF THE ASSESSEES APPEAL A GAINST THE AOS ORDER DATED 11/01/2013 UNDER DISPUTE. 4.6. AT THE OUTSET, WE WOULD LIKE TO REITERATE THA T THE ASSESSEES MAIN APPEAL [IN IT(TP) 101/B/13] HAS SIN CE BEEN DISPOSED OF (SUPRA), THE ASSESSEES MISC. PETITION, IN OUR VIEW, BECOMES INFRUCTUOUS AND, ACCORDINGLY, THE SAME IS D ISMISSED AS SUPERFLUOUS WITHOUT GOING INTO THE MAINTAINABILITY OR OTHERWISE OF IT. LIKEWISE, THE ASSESSEES STAY PETITION IS ALSO DISM ISSED, SINCE THE ASSESSEES MAIN APPEAL IS ALREADY DISPOSED OF. ITA NO.101 OF 2013 TALLY SOLUTIONS PVT LTD BANGALOR E. PAGE 18 OF 18 5. IN THE RESULT: (I) THE ASSESSEES APPEAL IN IT(TP)A NO.101/B/13 IS PARTLY ALLOWED; (II) THE ASSESSEES MISC. PETITION NO.3/B/13 IS DISMISSED AS INFRUCTUOUS & (III) THE STAY PETITION OF THE ASSESSEE IN SP NO. 19/B/13 IS DISMISSED. ORDER PRONOUNCED AT THE END OF THE HEARING ON 2 ND AUGUST, 2013. SD/- SD/- (N. BARTHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER BANGALORE, DATED 2 ND AUGUST, 2013. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, ITAT, BANGALORE BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCHES, BANGALORE