Cordys R&D (India) Private Limited, Hyderabad V. DCIT, Hyderabad

ITA 1092/HYD/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74443 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 04-07-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 17-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: RAVI BHARDWAJ
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1092/HYD/2010 ASSESSMENT YEAR 2004-05. CORDYS R & D (INDIA) PVT. -V- DCIT, C IR-1(2), AAYAKAR BHAVAN, LTD., MADHAPUR, HYDERABAD. HYDERABAD. PAN:AAACB8264E (APPELLANT) (RESPONDENT) APPELLANT BY SHRI RAVI BHARDWAJ RESPONDENT BY SHRI D. SUDHAKAR RAO DATE OF HEARING 06-11-2013 DATE OF PRONOUNCEMENT 03-O1-2014 ORDER PER SAKTIJIT DEY, J.M: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 15-6-2010 OF CIT (A)-III, HYDERABAD PERTAINING TO T HE ASSESSMENT YEAR 2004-05. 2. BRIEFLY THE FACTS ARE THE ASSESSEE FORMERLY KNO WN AS VANENBURG R & D (INDIA) PVT. LIMITED, A WHOLLY OWNE D SUBSIDIARY OF VANENBURG GROUP BV, NETHERLANDS WAS INCORPORATED O N 3 RD JULY, 1997. THE ASSESSEE HAS ITS REGISTERED OFFICE AT HY DERABAD. IT PROVIDES SOFTWARE DEVELOPMENT AND SUPPORT SERVICES TO ITS GROUP COMPANIES (ASSOCIATED ENTERPRISES (AE). FOR THE SE RVICES RENDERED 2 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. TO ITS AE, THE ASSESSEE IS REMUNERATED ON A COST PL US MARK-UP BASIS. THE ASSESSEE IS ALSO REGISTERED WITH SOFTWARE TECH NOLOGY PARKS OF INDIA (STPI) AS 100% EXPORT ORIENTED UNIT. FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE FILED ITS RETURN OF INC OME ON 1-11-2004 DECLARING TOTAL INCOME OF RS.15,27,145/- AFTER CLAI MING DEDUCTION U/S 10A OF THE ACT. DURING THE SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICING THAT THE INTERNATION AL TRANSACTIONS OF THE ASSESSEE WITH ITS AE EXCEEDED TURNOVER OF RS.5 CRORES REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER U/S 92CA OF THE ACT FOR DETERMINING THE ALP. THE TPO FROM THE TP STUDY SU BMITTED ALONG WITH RETURN FILED BY THE ASSESSEE NOTICED THAT THE ASSESSEE HAD SHOWN REPORTED REVENUE EARNED FROM INTERNATIONAL TR ANSACTION WITH ITS AE AS UNDER:- I) SOFTWARE DEVELOPMENT SERVICES RS.18,90,57,4 93/- II) SOFTWARE DEVELOPMENT SERVICES RS.13,26,28, 711 III) IMPORT OF SOFTWARE FOR DISTRIBUTION RS.18,74,557 3. ON EXAMINING THE TP STUDY, THE TPO NOTED THAT TH E ASSESSEE HAD ADOPTED TRANSACTIONS NET MARGIN (TNMM) AS MOST APPROPRIATE METHOD AND OPERATING PROFIT/TOTAL COST AS PROFIT L EVEL INDICATOR. HE FURTHER NOTICED THAT THE ASSESSEE ON THE BASIS OF I NFORMATION AVAILABLE IN PUBLIC DATA BASE HAS IDENTIFIED 24 CO MPARABLE COMPANIES IN THE AREA OF SOFTWARE DEVELOPMENT SERVI CES AND BY TAKING THE AVERAGE OF TWO YEARS DATA AS ON MARCH, 2 003 AND MARCH, 2004 ARRIVED AVERAGE OPERATING PROFIT MARGIN ON C OST AT 11.71% OF THE COMPARABLE COMPANIES AS AGAINST THE ASSESSEES OPERATING PROFIT MARGIN OF 6.83%. THE TPO HOWEVER DID NOT ACCEPT TH E TP DOCUMENTATION OF THE ASSESSEE ON THE GROUND THAT TH E ASSESSEE HAS 3 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. USED MULTIPLE DATA FOR SELECTING THE COMPARABLES. SO FAR AS SELECTION OF COMPARABLES ARE CONCERNED, OUT OF 24 C OMPARABLES SELECTED BY THE ASSESSEE, THE TPO FOUND 11 COMPARAB LES TO BE FUNCTIONALLY SIMILAR TO THE ASSESSEE AND FULFILLING ALL THE SELECTION CRITERIA ADOPTED BY THE DEPARTMENT AS WELL AS BY TH E ASSESSEE. THE AVERAGE ARITHMETIC MEAN OF THE 11 COMPARABLE COMPAN IES SELECTED BY THE TPO IS 28.80%, AFTER ALLOWING ADJUSTMENT AT 2% TOWARDS WORKING CAPITAL THE ALP OF INTERNATIONAL TRANSACTIO N WAS DETERMINED AT RS.38,73,84,405/-. THE ASSESSEES OPERATING CO ST BEING RS.32,63,76,762/-, SHORTFALL OF RS.6,10,07,643/- WA S TREATED AS THE ADJUSTMENT U/S 92CA OF THE ACT. ON THE BASIS OF TH E ORDER PASSED BY THE TPO, THE ASSESSING OFFICER PASSED AN ASSESSM ENT ORDER MAKING ADDITION OF TP ADJUSTMENT WORKED OUT BY THE TPO. BEING AGGRIEVED OF THE ASSESSMENT ORDER PASSED, THE ASSES SEE CHALLENGED THE DETERMINATION OF THE ALP MADE BY THE TPO INTER ALIA ON THE GROUND THAT (I) SELECTION/REJECTION OF CERTAIN COMP ARABLES WERE NOT CORRECT (II) MARGIN OF COMPANIES HAS BEEN WRONGLY C OMPUTED BY THE TPO BECAUSE THE TPO HAS EXCLUDED BAD DEBTS WRITTEN OFF AND PROVISION OF BAD AND DOUBTFUL DEBTS/ADVANCES FOREIG N EXCHANGE GAIN/LOSS, DEFERRED REVENUE EXPENDITURE ETC., WHILE COMPUTING THE OPERATING COST. THE CIT (A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE EXCLUDED THREE COMPANIES I.E, M/S. I POWER SOLUTIONS INDIA LIMITED, SATYAM COMPUTER SERVICES LIMITED AND XCEL VISION TECHNOLOGIES LIMITED OUT OF 11 COMPARABLES SELECTED BY THE TPO. FURTHER, THE CIT (A) ALSO WORKED OUT THE NET MARGIN OF THREE COMPARABLES OUT OF THE REMAINING 8. AS A RESULT O F WHICH THE AVERAGE NET MARGIN OF 8 COMPARABLES FINALLY RETAINE D BY THE CIT (A) WORKED OUT TO 24.56% AND ACCORDINGLY THE CIT (A) AFTER ALLOWING DEDUCTION AT 2% TOWARDS WORKING CAPITAL ADJUSTMENT DETERMINED THE 4 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. ALP OF INTERNATIONAL TRANSACTION AT RS.37,44,30,857 /- AS AGAINST THE PRICE OF RS.32,63,76,762/- SHOWN BY THE ASSESSEE. T HIS RESULTED IN A SHORTFALL OF RS.4,80,54,095/- WHICH WAS DIRECTED TO BE TREATED AS THE INCOME OF THE ASSESSEE. BEING AGGRIEVED OF THE AFORESAID DIRECTION OF THE CIT (A), THE ASSESSEE IS IN APPEAL BEFORE US. 4. AT THE VERY OUTSET, THE LEARNED AR SUBMITTED THA T HE DOES NOT WANT TO PRESS GROUND NOS. 1,2,7,8 AND 9. IN VIEW O F SUCH SUBMISSION, THESE GROUNDS ARE DISMISSED AS NOT PRES SED. 5. GROUND NO.3 READS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING THE USE OF FOLLOWING FILTERS IN UNDERTAKING THE COMPARATIVE ANALYSIS: DIFFERENT YEAR ENDING FILTER; AND APPLICATION OF ONE SIDE TURNOVER FILTER. IN SO FAR AS THE AFORESAID GROUND IS CONCERNED, TH E LEARNED AR DID NOT PRESS THE ISSUE WITH REGARD TO THE APPLICATIO N OF DIFFERENT YEAR ENDING FILTER. SO FAR AS THE OTHER ISSUE OF APPLI CATION OF ONE SIDE TURNOVER FILER IS CONCERNED, THE LEARNED AR OBJECT ING TO THE SELECTION OF INFOSYS TECHNOLOGIES LIMITED AS A COM PARABLE, SUBMITTED THAT WHEN THE ASSESSING OFFICER HAS REJEC TED COMPANIES HAVING TURNOVER OF LESS THAN 1 CRORES AS COMPARABLE S, HE SHOULD ALSO HAVE FIXED AN UPPER LIMIT BY REJECTING THE COM PANIES HAVING EXTRAORDINARILY HIGH TURNOVER LIKE INFOSYS TECHNOLO GIES LIMITED. THE LEARNED AR SUBMITTED THAT WHILE ASSESSEES TURNOVER IS RS.32 CRORES, INFOSYSS TURNOVER DURING THE YEAR IS ABOUT RS.130 00 CRORES. HENCE, IT CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESS EE. IN SUPPORT 5 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. OF SUCH CONTENTION, THE LEARNED AR RELIED UPON VARI OUS DECISIONS OF DIFFERENT BENCHES OF THIS TRIBUNAL AND PLEADED FOR EXCLUDING THE SAID COMPANY FROM THE LIST OF COMPARABLES. 6. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED THA T THE ASSESSEE ITSELF IN TP DOCUMENTATION HAS SELECTED I NFOSYS LIMITED AS A COMPARABLE AND HENCE THE SAID COMPANY HAVING BEEN SELECTED BY THE ASSESSEE BEING FUNCTIONALLY SIMILAR, THERE IS N O MISTAKE COMMITTED BY THE TPO IN RETAINING THE SAME AS A COM PARABLE. 7. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIALS ON RECORD. THOUGH THE LEARNE D AR HAS CONTENDED BEFORE US THAT INFOSYS TECHNOLOGIES LIMIT ED CANNOT BE CONSIDERED AS COMPARABLE AS IT IS NOT ONLY FUNCTION ALLY DIFFERENT BUT IT IS A GIANT COMPANY HAVING A TURNOVER OF ABOUT RS .13000 CRORES BUT AS CAN BE SEEN FROM THE MATERIALS ON RECORD THE ASSESSEE IN ITS TP DOCUMENTATION HAS ITSELF SELECTED M/S. INFOSYS T ECHNOLOGIES LIMITED AS COMPARABLE COMPANY. THEREFORE, THE ASSE SSEES CONTENTION THAT IT IS FUNCTIONALLY DIFFERENT, CANNO T HOLD MUCH WATER. BE THAT AS IT MAY, FACT HOWEVER REMAINS THAT M/S IN FOSYS TECHNOLOGIES LIMITED IS A GIANT IN THE FIELD OF SOF TWARE DEVELOPMENT SERVICES HAVING CONSIDERABLE BRAND VALUE, IT ALSO A SSUMES ALL THE RISKS RELATED TO THE BUSINESS. FURTHER, THE TURNOV ER OF INFOSYS TECHNOLOGIES DURING THE YEAR IS ABOUT RS.13000 CROR ES AS AGAINST RS.32 CRORES OF THE ASSESSEE. THIS ITSELF MAKES IN FOSYS TECHNOLOGIES LIMITED UNCOMPARABLE TO THE ASSESSEE. WHEN THE ASSESSING OFFICER IS APPLYING THE TURNOVER FILTER B Y ADOPTING A LOWER LIMIT OF RS.1 CRORE, HE SHOULD ALSO HAVE FIXED AN U PPER LIMIT WHILE APPLYING THE TURNOVER FILTER. IN THAT VIEW OF THE MATTER, INFOSYS TECHNOLOGIES LIMITED CANNOT BE CONSIDERED TO BE A C OMPARABLE TO 6 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. THE ASSESSEE. DIFFERENT BENCHES OF THE TRIBUNAL HA VE ALSO EXPRESSED SIMILAR VIEW. IN FACT, THE HONBLE DELHI HIGH COUR T VIDE JUDGMENT DATED 10-7-2013 IN CASE OF CIT VS. AGNITY INDIA TE CHNOLOGIES PVT. LIMITED IN ITA 1204 OF 2011 UPHELD THE ORDER OF THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH HOLDING THAT BIG CO MPANIES LIKE INFOSYS CANNOT BE TREATED AS COMPARABLE TO SMALL CA PTIVE SERVICE PROVIDERS LIKE THE ASSESSEE. IN THE AFORESAID VIEW OF THE MATTER, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE M/S INF OSYS TECHNOLOGIES LIMITED FROM THE LIST OF COMPARABLES FOR DETERMININ G THE ALP. HENCE, THIS GROUND OF THE ASSESSEE IS PARTLY ALLOWE D. 8. IN GROUND NO.4, THE ASSESSEE HAS OBJECTED TO REJ ECTION OF THE FOLLOWING COMPANIES SELECTED AS COMPARABLE BY THE A SSESSEE. I) BANGALORE SOFTSELL LIMITED II) CHERRYSOFT TECHNOLOGIES LTD., III) FUTURE SOFTWARE LTD., AND IV) MAHINDRA CONSULTING LIMITED 9. BRIEFLY THE FACTS RELATING TO THE ISSUE ARE, TH E ASSESSEE IN ITS TP DOCUMENTATION HAD SELECTED THE AFORESAID FOUR CO MPANIES AS COMPARABLES CLAIMING THEM TO BE FUNCTIONALLY SIMILA R TO THE ASSESSEE AS THEY ARE IN THE SIMILAR LINE OF BUSINESS OF SOFT WARE DEVELOPMENT AND SERVICES. THE TPO HOWEVER REJECTED THEM TO BE TREATED AS COMPARABLES WHICH WAS ALSO SUSTAINED BY THE CIT (A) . THE TPO REJECTED BANGALORE SOFTSELL LIMITED ON THE GROUND THAT IT FAILS RPT FILER OF MORE THAN 25% OF SALES. CHERRYSOFT TECHNO LOGIES LIMITED WAS REJECTED ON THE GROUND THAT COMPANYS DATA IS N OT AVAILABLE IN PUBLIC DATA BASE. THE TPO HAS ALSO REJECTED FUTURE SOFTWARE LIMITED 7 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. ON THE SAME GROUND. MAHINDRA CONSULTING LIMITED WA S REJECTED AS IT FAILED THE RPT FILTER OF MORE THAN 25% OF SALES. H EREINAFTER, WE WILL DEAL WITH THE ASSESSEES OBJECTION WITH REGARD TO THE FINDING OF THE TPO/CIT (A) IN RESPECT OF EACH OF COMPARABLE COMPA NIES AS UNDER:- I) BANGALORE SOFTSELL LIMITED - THE LEARNED AR SUBMITTED THAT THE TPO HAS ERRONEOUSLY EXCLUDED BANGALORE SOFTSELL LIM ITED BY WRONGLY APPLYING THE RPT FILTER OF MORE THAN 25% OF THE SAL ES. IT WAS SUBMITTED THAT WHILE APPLYING THE AFORESAID FILTER, THE TPO HAS INCLUDED THE REIMBURSEMENT TRANSACTIONS IN COMPUTI NG THE PERCENTAGE OF RPT TO TURNOVER. IT WAS SUBMITTED T HAT RECEIPTS ON ACCOUNT OF REIMBURSEMENT SHOULD NOT BE CONSIDERED W HILE COMPUTING THE PERCENTAGE OF RELATED PARTY TRANSACTIONS SINCE THEY ARE IN THE NATURE OF COST TO COST RECHARGE AND DO NOT HAVE IM PACT ON THE PROFITABILITY. THE LEARNED AR SUBMITTED THAT THE ASSESSEE HAS RAISED INVOICES ON COST TO COST BASIS AND THE REIMB URSEMENT OF EXPENDITURE INCURRED ON ACCOUNT OF RELATED PARTY T RANSACTIONS AND ACCOMMODATION ARE EXCLUDED FOR APPLYING THE RPT FIL TER. 10. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT TPO AS WELL AS THE CIT (A) AFTER PROPER ANALYSIS OF MATERIALS O N RECORD HAVE EXCLUDED THE AFORESAID COMPANIES FROM THE LIST OF C OMPARABLES, HENCE NO INTERFERENCE IS CALLED FOR. 11. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AN D PERUSED THE MATERIALS ON RECORD. IT IS THE CONTENTION OF THE L EARNED AR THAT THE TPO HAS INCLUDED THE REIMBURSEMENT TRANSACTION IN C OMPUTING THE PERCENTAGE OF RELATED PARTY TRANSACTION TO TURNOVER WHILE REJECTING THE AFORESAID COMPARABLES. WE FIND FORCE IN THE CO NTENTION OF THE LEARNED AR THAT REIMBURSEMENT OF COST ACTUALLY INCU RRED CANNOT BE 8 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. CONSIDERED TO BE PART OF THE TURNOVER WHILE COMPUTI NG THE PERCENTAGE OF RPT TO TURNOVER AND THEY ARE PURELY I N THE NATURE OF REIMBURSEMENT. HOWEVER, THE ASSESSEE IS REQUIRED T O ESTABLISH BY PRODUCING NECESSARY EVIDENCES THAT THEY ARE IN THE NATURE OF REIMBURSEMENTS ONLY. IN AFORESAID VIEW OF THE MATT ER, WE DIRECT THE TPO TO CONSIDER AFRESH AS TO WHETHER THE AFORESAID COMPANY CAN BE TREATED AS COMPARABLE TO THE ASSESSEE AFTER TAKING INTO CONSIDERATION ALL MATERIALS AND AFTER AFFORDING A D UE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. CHERRYSOFT TECHNOLOGIES LIMITED AND FUTURE SOFTWARE LIMITED - WITH REGARD TO THE AFORESAID TWO COMPANIES, THE LEA RNED AR SUBMITTED THAT THE ASSESSEE IN ITS TP DOCUMENTATION HAS SELECTED THE AFORESAID TWO COMPANIES AS COMPARABLES AS THEY SATISFY ALL THE FILTERS APPLIED BY THE TPO AND THE ANNUAL REPORTS A RE AVAILABLE IN PUBLIC DOMAIN WHICH WAS PROVIDED TO THE TPO AS WELL AS CIT (A) DURING THE PROCEEDINGS BEFORE THEM. THE LEARNED A R RELYING UPON THE DECISION OF SPECIAL BENCH OF THE INCOME-TAX APP ELLATE TRIBUNAL, CHANDIGARH IN CASE OF DCIT VS. M/S QUARK SYSTEMS PVT. LIMITED (ITA NO.100/CHD/2009) SUBMITTED THAT EVERY INFORMAT ION HAS TO BE CONSIDERED IN THE PROCESS OF DETERMINATION OF ALP S O THAT A FAIR VIEW IS ADOPTED. IT WAS THUS SUBMITTED BY THE LEARNED AR THAT THE TPO SHOULD NOT HAVE REJECTED THE AFORESAID COMPANIES AS COMPARABLES ON THE GROUND OF NON AVAILABILITY OF DATA IN PUBL IC DOMAIN WHEN THE ANNUAL REPORTS OF THE COMPARABLE COMPANIES WERE SUB MITTED BEFORE THE ASSESSING OFFICER/TPO. 12. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE REVENUE AUTHORITIES ON THE AFORESAID ISSUE. 9 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. 13. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIE S IN THE LIGHT OF THE MATERIALS ON RECORD, WE ARE OF THE VIEW THAT WHEN THE ASSESSEE HAS PLACED THE ANNUAL REPORTS OF THE AFOR ESAID TWO COMPANIES, THE TPO SHOULD HAVE CONSIDERED THE SAME AND SHOULD NOT HAVE REJECTED ON THE GROUND OF NON AVAILABILITY OF DATA IN PUBLIC DOMAIN. IF INFORMATION RELATING TO THE COMPANIES A RE AVAILABLE WITH THE TPO AND IF THE COMPANIES SATISFY THE FILTER APP LIED BY THE TPO THEN THERE IS NO JUSTIFICATION FOR REJECTING THE AF ORESAID TWO COMPANIES AS COMPARABLES. WE THEREFORE DIRECT THE TPO TO EXAMINE THIS ISSUE AFRESH AFTER CONSIDERING ALL THE INFORMA TION AVAILABLE WITH HIM AND AFTER AFFORDING DUE OPPORTUNITY OF BEING HE ARD TO THE ASSESSEE. MAHINDRA CONSULTING LIMITED :- THE LEARNED AR CONTENDED BEFORE US THAT AS PER THE ANNUAL REPORT THE COMPANY DOES NOT HAVE ANY RELATED PARTY TRANSACTION. IT WAS SUBMITTED THAT T HE CIT (A) ON THE BASIS OF THE ANNUAL REPORT OF THE SUBSIDIARY COMPAN Y OF THE ASSESSEE VIZ., MAHINDRA CONSULTING (SINGAPORE) PTE. LIMITED ASSUMED THAT THE ASSESSEE HAS GOT RELATED PARTY TRANSACTIONS IN EXCESS OF 25% OF TURNOVER. THE LEARNED AR REFERRING TO THE PROFIT A ND LOSS OF SUBSIDIARY COMPANY VIZ.,MAHINDRA CONSULTING (SINGA PORE) PTE. LIMITED, A COPY OF WHICH IS PLACED AT PAGES 265 AND 266 OF THE PAPER BOOK SUBMITTED THAT THE SUBSIDIARY COMPANYS ANNUAL REPORT DISCLOSED RPT WITH OTHER GROUP COMPANIES AND NOT WI TH THE ASSESSEE, HENCE THE ASSUMPTION MADE BY THE TPO AND CIT (A) WAS NOT CORRECT. THE LEARNED AR RELYING UPON A DECISIO N OF INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH IN CASE OF MENTOR GRAPHICS (NOIDA) PVT. LTD. VS. DCIT (2007) 109 ITD 101 SUBMITTED THA T THE TPO IS NOT AUTHORISED TO MAKE INFERENCES BY PRESUMPTIONS BY IG NORING THE 10 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. MATERIALS ON RECORD. THE LEARNED AR FURTHER SUBMIT TED THAT EVEN ASSUMING THAT ALL RELATED PARTY TRANSACTIONS MENTIO NED IN THE SUBSIDIARYS ANNUAL REPORT ARE WITH THE ASSESSEE, THE SAME ARE 1.81% OF THE COMPANYS TURNOVER WHICH IS LESS THAN 25% RPT TO TURNOVER FILTER ADOPTED BY THE TPO. 14. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E REASONING OF THE TPO AND CIT (A) IN THIS REGARD. 15. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AN D PERUSED THE MATERIALS ON RECORD. IT IS THE SPECIFIC CONTENTION OF THE LEARNED AR THAT AS PER THE ANNUAL REPORT OF THE ASSESSEE, THE RE IS NO RELATED PARTY TRANSACTIONS AND WHATEVER RELATED PARTY TRANS ACTIONS ARE THERE ARE BETWEEN THE SUBSIDIARY COMPANY AND OTHER COMP ANIES AND NOT WITH THE ASSESSEE COMPANY. THEREFORE, CONSIDERING THE AFORESAID SUBMISSIONS OF THE ASSESSEE, WE ARE OF THE VIEW THA T THE MATTER REQUIRES TO BE EXAMINED AFRESH BY THE TPO TO ASCERT AIN AS TO WHETHER ACTUALLY THERE IS ANY RELATED PARTY TRANSAC TION AND IF AT ALL THERE IS ANY RELATED PARTY TRANSACTION WHETHER THE Y EXCEEDED 25% THRESHOLD LIMIT OF RELATED PARTY TRANSACTION TO TUR NOVER FILTER ADOPTED BY THE TPO. THE ISSUE IS THEREFORE REMITTED TO THE FILE OF THE ASSESSING OFFICER/TPO FOR EXAMINING THE SAME AFRESH AFTER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE. HENCE, THIS GROUND IS TREATED AS ALLOWED FOR STATISTICAL P URPOSES. 16. GROUND NO.5 RAISED BY THE ASSESSEE READS AS FO LLOWS:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT (A) ERRED IN NOT ACCEPTING THE SUBMISSION OF THE APPELLANT AND THE REMAND REPORT O F THE 11 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. TPO ON THE INCLUSION OF BAD DEBTS IN OPERATING COST S FOR COMPUTATION OF MARGIN OF THE COMPANIES UNDER TNMM. 17 . THE LEARNED AR SUBMITTED BEFORE US THAT THE TPO AS WELL AS THE CIT (A) COMMITTED ERROR IN NOT ACCEPTING THE ASSES SEES CONTENTION FOR INCLUDING THE BAD DEBTS AND PROVISION OF BAD A ND DOUBTFUL DEBTS IN OPERATING COST FOR COMPUTATION OF MARGIN OF THE COMPARABLE COMPANIES. THE LEARNED AR SUBMITTED THAT BAD DEBTS ARE INCURRED IN THE NORMAL COURSE OF BUSINESS OPERATIONS AND IT WAS SUBMITTED THAT THE LOSS ON ACCOUNT OF AND ARE THEREFORE OPERA TING IN NATURE. IT IS IN CONNECTION WITH THE REVENUES NOT BEING REALIS ED BY THE COMPANY FROM THIRD PARTY CUSTOMERS AND TAKES ITS CO LOUR FROM SUCH REVENUES WHICH ARE CONSIDERED AS BEING OPERATING IN NATURE AND THE LOSS ON ACCOUNT OF BAD DEBTS IS NOT UNIQUE AND EXTR A ORDINARY IN NATURE. HE FURTHER SUBMITTED THAT IT IS A COMMON PHENOMENON FOR ANY INDEPENDENT SERVICE PROVIDER COMPANY WHO PROVID E SERVICES TO THIRD PARTY SERVICE RECIPIENTS ON A CREDIT BASIS AN D IN SOME CASES ARE UNABLE TO REALISE THE SAME FROM SUCH CUSTOMERS, WHICH RESULT IN HAVING SUCH UNREALISED AMOUNTS AS BAD DEBTS. THE REFORE, DISREGARDING SUCH BAD DEBTS WOULD NOT RESULT IN THE DISCLOSURE OF APPROPRIATE RESULTS AND WOULD TO A LARGE EXTENT DIS TORT THE MARGINS. IT WAS SUBMITTED THAT COMPARABLE COMPANIES HAVE INC URRED CERTAIN BAD DEBTS AND IT BEARS CREDIT AND COLLECTION RISK S WHICH ARE INHERENT FOR ANY COMPANY BEARING ENTREPRENEURIAL RI SKS AND IT WOULD BE INCORRECT TO DISREGARD SUCH EXPENSES IN COMPUTAT ION OF NET MARGIN. THE LEARNED AR FURTHER SUBMITTED THAT TPO IN FACT HAS ADMITTED THE ERROR COMMITTED BY HIM WHILE COMPUTING THE MARGIN OF VMF SOFTECH LIMITED DURING THE REMAND PROCEEDINGS A ND THEREFORE CORRECTLY COMPUTED THE MARGIN OF THE SAID COMPANY A T 4.37% IN THE 12 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. REMAND REPORT SUBMITTED BEFORE THE CIT (A). IT WAS SUBMITTED THAT THE CIT (A) WAS NOT CORRECT IN NOT ACCEPTING THE CO MPUTATION OF NET MARGIN OF VMF SOFTECH LIMITED IN THE REMAND REPORT. 18. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. THE ONLY GRIEVANC E OF THE ASSESSEE IN THE AFORESAID GROUND IS WITH REGARD TO THE CIT (A) ADOPTING THE NET PROFIT MARGIN OF THE COMPARABLE CO MPANY VMF SOFTECH LIMITED AT 71.99%. AS CAN BE SEEN IN THE T P REPORT, THE TPO HAD COMPUTED THE NET PROFIT MARGIN OF THE AFORE SAID COMPANY AT 72.38%. DURING THE APPEAL PROCEEDINGS BEFORE THE CIT (A), THE ASSESSEE SPECIFICALLY OBJECTED TO THE PROFIT MARGIN ADOPTED AT 72.38% OF VMF SOFTECH LIMITED BY CONTENDING THAT BA D DEBTS AND PROVISION FOR BAD DEBTS AND ADVANCES SHOULD BE CON SIDERED AS PART OF THE OPERATING COST. ON THE BASIS OF THE AFORESA ID CONTENTION OF THE ASSESSEE, THE CIT (A) CALLED FOR REMAND REPORT FROM THE ASSESSING OFFICER. AS CAN BE SEEN FROM PARA-6 OF T HE REMAND REPORT SUBMITTED BY THE TPO A COPY OF WHICH WAS PLACED BEF ORE US, THE TPO RE-COMPUTED THE NET PROFIT MARGIN OF VMF SOFTECH LI MITED ON THE BASIS OF ANNUAL REPORT WHICH WORKED OUT AT 4.37%. HOWEVER, THE CIT (A) IN THE ORDER PASSED BY HIM DID NOT ACCEPT T HE NET PROFIT MARGIN WORKED OUT TO 4.37% BY THE TPO BY OBSERVING THAT THE COMPUTATION MADE BY THE TPO IS ERRONEOUS AND HIMSEL F PROCEEDED TO COMPUTE THE NET PROFIT MARGIN AT 71.99%. HOWEV ER, THE CIT (A) HAS NOT GIVEN ANY REASON WHY THE COMPUTATION MADE B Y THE TPO IN THE REMAND REPORT IS ERRONEOUS. IN SUCH VIEW OF TH E MATTER, WE REMIT THE ISSUE BACK TO THE FILE OF THE TPO FOR FRE SH DETERMINATION AFTER AFFORDING A REASONABLE OPPORTUNITY OF BEING H EARD TO THE ASSESSEE. 13 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. 19. THE ISSUE IN GROUND NO.6 IS WITH REGARD TO EXCL USION OF FOREIGN EXCHANGE FLUCTUATIONS FROM OPERATING INCOME. THE L EARNED AR SUBMITTED BEFORE US THAT THE FOREIGN EXCHANGE FLUCT UATION IN GENERAL WOULD ARISE ON ACCOUNT OF NUMBER OF FACTORS WHICH A RE AS UNDER:- A) EXPORT PROCEEDS REALISED AT A RATE HIGHER/LOWER THAN THE RATE AT WHICH THEY WERE BOOKED B) IMPORT PAYABLES SETTLED AT A RATE LOWER/HIGHER T HAN THE RATE AT WHICH THEY WERE BOOKED C) ADJUSTMENT OF CUSTOMER ADVANCES (RECEIVED IN FOR EIGN CURRENCY) AGAINST EXPORT INVOICES D) RESTATEMENT IN THE FINANCIAL STATEMENTS OF EXPOR T RECEIVABLES/IMPORT PAYABLES AND ADVANCES RECEIVED F ROM CUSTOMERS IN FOREIGN CURRENCY AS ON THE LAST DAY OF THE FINANCIAL YEAR. 20. IT WAS SUBMITTED THAT EXCHANGE GAIN/LOSS ARISES IN THE NORMAL COURSE OF BUSINESS AND THEREFORE SHOULD BE CONSIDER ED IN COMPUTING THE NET MARGINS. IN SUPPORT OF SUCH CONTENTION, TH E LEARNED AR RELIED UPON THE FOLLOWING ORDERS OF CO-ORDINATE BEN CHES OF THE TRIBUNAL:- I) CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. VS. DCIT (ITA NO.1961/HYD/2011) II) FOUR SOFT LTD. VS. DCIT (ITA NO.1495/HYD/2010) III) SAP LABS INDIA PVT. LTD. VS. ACIT (6 ITR 81) IV) SUJATA GROVER (74 TTJ 347 (DEL) 14 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. V) DEUTSCHE BANK AG V. DCIT (86 ITD 431) VI) BESTOBELL (INDIA) LTD. VS. CIT (117 ITR 789 (CA L.) 21. THE LEARNED DR SUPPORTED THE ORDERS OF THE REVE NUE AUTHORITIES. 22. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AN D PERUSED MATERIALS ON RECORD. WE FIND THAT THE ISSUE AS RAI SED IN THE AFORESAID GROUND IS NO MORE RES INTEGRA AS THE CO-O RDINATE BENCH OF THIS TRIBUNAL IN CASE OF M/S CAPITAL IQ INFORMATIO N SYSTEMS (INDIA) PVT. LTD. VS. DCIT (SUPRA) WHERE BOTH PRESENT MEMBE RS ARE THE PARTIES HELD AS UNDER: - 27. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES IN THIS REGARD. THE BANGALORE BENCH OF THE TRIBUNAL IN TH E CASE OF SAP LABS INDIA P. LTD. (SUPRA), WHILE CONSIDERING A DISPUTE OF SIMILAR NATURE, OBSERVED AS FOLLOWS- THE FOREIGN EXCHANGE FLUCTUATION GAINS IS NOTHING BUT AN INTEGRAL PART OF THE SALES PROCEEDS OF AN ASSESSEE CARRYING ON EXPORT BUSINESS. THE COURTS AND TRIBUNALS HAVE HELD THAT FOREIGN EXC HANGE FLUCTUATION GAINS FORM PART OF THE SALE PROCEEDS OF EXPORTER-AS SESSEE. THE FOREIGN EXCHANGE FLUCTUATIONS INCOME CANNOT BE EXCL UDED FROM THE COMPUTATION OF THE OPERATING MARGIN OF THE ASSESSEE COMPANY. FOLLOWING THE AFORESAID DECISION OF THE BANGALORE B ENCH OF THE TRIBUNAL, THE HYDERABAD BENCH OF THE TRIBUNAL HELD IN THE CASE OF FOUR SOFT LTD. (SUPRA) IN THE FOLLOWING MANNER- 16. WITH REGARD TO THE EXCLUSION OF GAIN ON ACCOUN T OF FOREIGN EXCHANGE FLUCTUATION WHILE COMPUTING THE NE T MARGIN, AS CLAIMED BY THE ASSESSEE, WE FIND THAT THE EXCHANGE FLUCTUATION GAINS ARISE OUT OF SEVERAL FACTORS, FOR INSTANCE, REALISA TION OF EXPORT PROCEEDS AT HIGHER RATE, IMPORT DUES PAYABLE AT LOW ER RATE. SINCE THE 15 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. GAIN OR LOSS ON ACCOUNT OF EXCHANGE RATE FLUCTUATIO N ARISES IN THE NORMAL COURSE OF BUSINESS TRANSACTION, THE SAME SHO ULD BE CONSIDERED WHILE COMPUTING THE NET MARGIN FOR THE I NTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES OF THE ASSESSEE. OUR VIEW IN THIS BEHALF IS FORTIFIED BY THE DECISIONS O F THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SAP LABS INDIA LTD. SUPRA AND BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF DEUTSCHE BANK A.G. V/S. D. CIT REPORTED IN 86 ITD 431 RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS OF T HE TRIBUNAL, AND CONSIDERING THE CONTENTION OF THE ASSESSEE THAT FOR THE ASSESSMENT YEAR 2008-09 FOREIGN EXCHANGE FLUCTUATIO N GAIN/LOSS HAS BEEN CONSIDERED AS OPERATING MARGIN W HILE COMPUTING THE MARGIN OF COMPARABLE COMPANIES, WE HO LD THAT EVEN FOR THE YEAR UNDER APPEAL ALSO THE SAME PRINCI PLE SHOULD BE APPLIED, AND WHILE COMPUTING THE MARGIN FOR DETE RMINING THE ALP FOR THE ASSESSMENT YEAR UNDER APPEAL, THE F OREIGN EXCHANGE GAIN/LOSS HAS TO BE TAKEN AS PART OF THE O PERATING MARGIN. CONSEQUENTLY, WE ALLOW THE GROUND OF THE A SSESSEE ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO TREA T THE FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS PART OF THE OPERA TING MARGIN OF THE COMPARABLE COMPANY. RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF THE C O-ORDINATE BENCH OF THIS TRIBUNAL, WE DIRECT THE ASSESSING OFFICER/T PO TO TREAT THE FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS PART OF O PERATING INCOME OF THE COMPARABLE COMPANIES FOR COMPUTING THE NET M ARGIN. THE TPO SHALL DETERMINE THE ALP KEEPING IN VIEW OF OUR DIRECTION GIVEN HEREINABOVE. 16 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD. 23. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED IN PART. ORDER PRONOUNCED IN THE COURT ON 03-01-2014. SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER SD/ - (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 3 RD JANUARY, 2014. JMR* COPY TO:- 1) CORDYS R & D (INDIA) PRIVATE LIMITED, PLOT NO.17, SOFTWARE UNITS LAYOUT, MADHAPUR, HYDERABAD. 2) DCIT, CIR-1(2) AAYAKAR BHAVAN, HYDERABAD. 3) CIT (A)-III, HYDERABAD. 4) CIT-1, HYDERABAD. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABA D. 17 ITA NO.1092 OF 2010 CORDYS R & D (INDIA) PVT. LTD., HYD.