Mphasis Ltd., Bangalore V. ACIT, Bangalore

ITA 1104/BANG/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5286 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 9 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-06-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 03-04-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 03-09-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 234B; 10B; 27

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE S HRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO , ACCOUNTANT MEMBER I.T . (T.P) A. NO. 1104 /BANG/20 12 (ASSESSMENT YEAR : 20 05 - 06 ) M/S. MPHASIS LIMITED, BAGMANE WORLD TECHNOL OGY CENTRE, K.R. PURAM, WTC 3, BLOCK B, 1 ST FLOOR, MARATHAHALLI, ORR, DODDENEKUNDI, B ANGALORE - 560 048 . . APPELLANT. PAN AACCB 6820C VS. ASST. COMMISSIONER OF INCOM E TAX, CIRCLE 12(1), BANGALORE. .. RESPONDENT. I.T. (T.P) A. NO.1258/BANG/2012 (ASSESSMENT YEAR : 20 05 - 06 ) (BY REVENUE) ASSESSEE BY : SHRI PADAMCHAND KHINCHA, C.A. R E SPONDENT BY : MS. NEERA MALHOTRA , CIT (DR) (ITAT) - 2, BENGALURU. DATE OF H EARING : 03.04.2017. DATE OF P RONOUNCEMENT : 07 .0 6 .201 7 . O R D E R PER SHRI VIJAY P AL RAO, J .M . : THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DT.02.07.2012 OF COMMISSIONER OF INCOME TAX (APPEALS) FOR THE ASSESSMENT YEAR 2005 - 06. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS : 2 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED GROUNDS RELATING TO LEGAL ISSUES 1. T H E ORDER OF THE LEARNED COMMISSIONER OF I NCOME TAX (APPEALS) - IV TO THE EXTENT PREJUDICIAL TO THE APPELLANT IS BAD IN LAW . 2. T HE LEARNED ASSESSING OFFICER HAS ERRED IN MAKING A REFERENCE TO TRANSFER PRICING OFFICER FOR DETERMINING ARM'S LENGTH PRICE WITHOU T APPRECIATING THAT UNDER SECTION 92CA(I), A REFERENCE COULD BE MADE TO THE TRANSFER PRICING OFFICER ONLY IN CIRCUMSTANCES WHERE THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EXPEDIENT SO TO DO AND ALSO WITHOUT SPECIFYING THE RELEVANT CLAUSE UNDER SECTIO N 92C(3) WHICH NECESSITATED THE REFERENCE. THE L EARNED COMMISSIONER OF INCOME TAX (APPEALS) - IV HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER . 3. T HE LEARNED ASSESSING OFFICER, LEARNED TRANSFER PRICING OFFICER AND COMMISSIONER OF LNCOME TAX ( APPEALS) - IV HAVE ERRED IN, A. P ASSING THE ORDER WITHOUT DEMONSTRATING THAT APPELLANT HAD MOTIVE OF SHIFTING PROFITS OUTSIDE INDIA BY MANIPULATING PRICES CHARGED IN ITS INTERNATIONAL TRANSACTIONS; AND B. N OT APPRECIATING THAT THE CHARGING OR COMPUTATION PROVI SION RELATING TO INCOME UNDER THE HEAD 'PROFITS & GAINS OF BUSINESS OR PROFESSION ' DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X AND THEREFORE THE ADDITION MADE UNDER CHAPTER X IS BAD IN LAW . GROUNDS ON COMPARABLES AND REJECTION OF TP A NALYSIS OF THE APPELLANT 4. T HE LEARNED ASSESSING OFFICER AND LEARNED TRANSFER PRICING OFFICER HAVE ERRED IN 3 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED A. R EJECTING THE TRANSFER PRICING ANALYSIS UNDERTAKEN BY THE APPELLANT WITHOUT SPECIFYING THE RELEVANT CLAUSE UNDER SECTION 92C(3) WHICH NECESSITATED S UCH REJECTION; AND B. R EJECTING THE COMPARABLE S SELECTED BY THE APPELLANT ON UNJUSTIFIABLE GROUNDS. GROUNDS RELATING TO TP ANALYSIS OF THE TPO: 5. T HE LEARNED ASSESSING OFFICER AND LEARNED TRANSFER PRICING OFFICER HAVE ERRED IN: A. P ERFORMING FRESH TRANSFER PRI CING ANALYSIS AND ADOPTING INAPPROPRIATE FILTERS IN DOING FRESH TRANSFER PRICING ANALYSIS; AND, B. A DOPTING COMPANIES AS COMPARABLES EVEN THOUGH THEY ARE NOT COMPARABLE TO THE APPELLANT . GROUNDS RELATING TO DETERMINATION OF ARM'S LENGTH PRICE BY THE CIT (A) - IV: I. S E L ECTION OF TP ANALYSIS 6. T HE LEARNED COMMISSIONER OF LNCOME TAX (APPEALS) - IV HAS ERRED IN A. R EJECTING THE TP ANALYSIS OF BOTH THE APPELLANT AND TPO ON UNJUSTIFIABLE GROUNDS AND W I THOUT GIVING AN OPPORTUNITY OF BEING HEARD TO THE APPELLANT; B. R EJEC TING TNMM METHOD ADOPTED BY THE APPELLANT AND CONFIRMED BY THE TPO AS THE MOST APPROPRIATE METHOD; AND, C. D OING SEPARATE ANALYSIS OF COMMISSION PAID TO AE AND ONSITE SERVICES RENDERED BY AE BY UNILATERALLY ADOPTING CUP METHOD AND CPM AS THE MOST APPROPRIAT E METHOD RESPECTIVELY WITHOUT GIVING AN OPPORTUNITY OF BEING HEARD TO THE APPELLANT . 4 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED II. T P ANALYSIS OF SELLING COMMISSION PAID TO AE 7. T HE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - IV HAS ERRED IN: A. A DOPTING CUP AS THE MOST APPROPRIATE METHOD FOR EVALU ATING THE SELLING COMMISSION PAID TO AE WITHOUT JUSTIFYING HOW THE SAME WAS MOST APPROPRIATE METHOD; B. C ONCLUDING THAT ARM'S LENGTH PRICE OF SELLING COMMISSION IS NIL WITHOUT BRINGING ON RECORD ANY COMPARABLE; C. C ONCLUDING THAT ARM'S LENGTH PRICE OF SELLING COMMISS ION IS NIL WITHOUT APPRECIATING THAT THE SERVICES HAD BEEN ACTUALLY RENDERED BY THE ASSOCIATED ENTERPRISES AND THE EVIDENCES SUPPORTING THE SAME ARE ON RECORD; D. C ONCLUDING THAT THE AE HAS A MARK UP OF 27% ON COST WITHOUT APPRECIATING THE UNDERLYING FACTS AND REALITY. E. ONCLUDING THAT THE APPELLANT HAS NOT PRODUCED ANY EVIDENCE TO JUSTIFY COMMISSION PAID WITHOUT APPRECIATING THAT THE BASIS OF COMPUTATION OF COMMISSION IS EXPLAINED IN THE TP REPORT AND ALSO EXPLAINED AND SUBMITTED THE WORKINGS DURING T HE APPELLATE PROCEEDING. III. T P ANALYSIS OF ONSITE SERVICES RENDERED BY AE 8. T HE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - IV HAS ERRED IN A. A DOPTING CPM AS THE MOST APPROPRIATE METHOD FOR EVALUATING THE SOFTWARE DEVELOPMENT SERVICES RECEIVED BY THE APPEL LANT WITHOUT JUSTIFYING HOW THE SAME WAS MOST APPROPRIATE METHOD; B. A DOPTING INAPPROPRIATE METHODOLOGY AND PROCESS IN ARRIVING AT THE ARM'S LENGTH PRICE; 5 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED C. S ELECTING INDIAN COMPANIES HAVING ONSITE REVENUES AS COMPARABLE AFTER SELECTING AE (A COMPANY BASED IN USA) AS THE TESTED PARTY. WITHOUT PREJUDICE, CIT(A) HAS ERRED IN REJECTING SIMILARLY PLACED INDIAN COMPANIES AS COMPARABLE ON UNJUSTIFIABLE REASON; D. N OT APPRECIATING THAT APPELLANT HAS ONSITE REVENUE OF MORE THAN 75% OF TOTAL REVENUE AND OUGHT TO BE COMPA RED WITH OTHER INDIAN COMPANIES HAVING MORE THAN 75% ON SITE REVENUES. ON SUCH A COMPARISON, THE APPELLANT'S INTERNATIONAL TRANSACTION RELATING TO RECEIPT OF SERVICES FROM AE ARE AT ARM'S LENGTH; AND, E. ADOPTING NET MARGIN OF THE COMPARABLE IN COMPUTING TH E ARM'S LENGTH PRICE WITHOUT APPRECIATING THAT UNDER CPM GROSS MARGIN ARE TO BE CONSIDERED. GROUNDS ON ADJUSTMENT FOR DIFFERENCES 9. T HE LEARNED ASSESSING OFFICER, LEARNED TRANSFER PRICING OFF ICER AND COMMISSIONER OF INCOME TAX (APPEALS) - IV HAVE ERRED IN NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEVEL AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. GROUND RELATING TO RESTRICTING TP ADJUSTMENT TO AE TRANSACTIONS 10. W ITHOUT PREJUDICE TO ALL THE ABOVE , THE LEARNED ASSE SSING OFFICER AND LEARNED TRANSFER PRICING OFFICER HAVE ERRED IN NOT RESTRICTING THE TP ADJUSTMENT TO AE TRANSACTIONS ONLY AND THE R EBY MAKING AN ADJUSTMENT IN RESPECT OF TRANSACTIONS WITH NON - ASSOCIATED ENTERPRISE ALSO. GROUND ON BENEFIT OF 5% RANGE 11. A SSU MING WITHOUT ADMITTING THAT THE ADJUSTMENT IS TO BE MADE , THE LEARNED ASSESSING OFFICER , LEARNED TRANSFER PR I CING OFFICER AND COMMISSIONER OF INCOME TAX (APPEALS) - 6 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED IV HAVE ERRED IN NOT ALLOWING THE BENEFIT OF THE + / - 5% RANGE MENTIONED IN THE PROVISO TO S ECTION 92C(2). REDUCTION IN DEDUCTION UNDER SECTION 10B OF THE ACT IN RESPECT OF EXPENDITURE INCURRED IN FOREIGN CURRENCY 12. I N THE FACTS AND IN THE CIRCUMSTANCES OFTHE CASE, THE LEARNED C IT(A) HAS ERRED IN REDUCING THE FOREIGN CURRENCY EXPENSES FROM BOTH T HE EXPORT TURNOVER AND TH E TOTAL TURNOVER OF UNITS WHILE COMPUTING THE DEDUCTION UNDER SECTION 10B OF THE ACT, WITHOUT CONSIDERING THE APPLICANT'S SUBMISSION THAT IT IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND NOT IN RENDERING TECHNICAL SERVICES . REDUCTION IN DEDUCTION UNDER SECTION LOB OF THE ACT IN RESPECT OF ON - SITE SOFTFWARE DEVELOPMENT WORK PERFORMED BY THE ASSOCIATED ENTERPRISES ('AE'S') OF THE APPELLANT OUTSIDE INDIA 13. T HE LEARNED CIT(A) HAS ERRED IN DISALLOWING THE DEDUCTION U NDER SECTION S 10B OF THE ACT IN RESPECT 0 F ON - SITE SOFTWARE DEVELOPMENT WORK BEING SUB - CONTRACTED TO AND PERFORMED BY THE ASSOCIATED ENTERPRISES CAE') OVERSEAS WITHOUT APPRECIATING THE FACT THAT: I. T HE ENTIRE RISK & REWARDS AND FUNCTIONS & RESPONSIBILITIES OF EXECUTING THE WORK LIES WITH THE APPELLANT ; AND, II. T HE ENTIRE ON - SITE SOFTWARE DEVELOPMENT WORK WAS PERFORMED UNDER THE CONTROL AND SUPERVISION OF THE APPELLANT . 14. T HE LEARNED CIT(A) HAS ERRED IN REDUCING THE INTEREST INCOME AN D PROFIT ON SALE OF ASSETS FROM THE PR OFITS OF THE BUSINESS WHILE COMPUTING THE DEDUCTION UN DER SECTION L0B OF THE ACT WITH RESPECT TO UNIT - 6 OF THE COMPANY WITHOUT CONSIDER ING THE PROVISIONS OF SECTION I0 B(4) OF THE ACT . 7 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 15. W ITHOUT PREJUDICE TO THE ABOVE , ON THE FACTS AND IN THE CIRCUMS TANC ES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN: I. C OMPUTING THE DISALLOWANCE IN RESPECT OF ON - SITE SOFTWARE DEVELOPMENT WORK BASED ON THE RATIO OF SOFTWARE DEVELOPMENT CHARGES PAID TO AES TO THE TOTAL SOFTWARE DEVELOPMENT EXPENSES; II. N OT CONSIDERING THE SU BMISSIONS OF THE APPELLANT WITH RESPECT TO THE RATIO TO BE ADOPTED FOR COMPUTING THE DISALLOWANCE, I.E . THE RATIO OF SOFTWARE DEVELOPMENT CHARGES PAID TO AES TO THE TOTAL EXPENSES INCURRED BY THE UNIT FOR DEVELOPING THE SOFTWARE; III. N OT APPRECIATING THE FAC T THAT THE AFORESAID RATIO HAS BEEN ACCEPTED BY THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS FOR AY 2008 - 09 ; AND , IV. T HE CIT(A) HAS ERRED IN REDUCIN G THE DEDUCTION UNDER SECTION L0 B OF THE ACT BY AN AMOUNT OF RS . 69 , 853 , 035. DISALLOWANCE UNDER SECTION 40(A)(L) IN RESPECT OF COMMISSION PAYMENTS 16. W ITHOUT PREJUDICE TO GROUND NO. I, THE LEARNED CIT(A) ERR ED IN HOLDING THAT THE SERVICES RENDERED BY MPHASI S CORPORATION OUTSIDE INDIA ARE IN THE NATURE OF MANAGERIAL SERVICES AND COMMISSION PAID TO MPH ASIS CORPORATION IN CONSIDERATION OF SUCH SERVICES IS CHARGEABLE TO TAX IN INDIA UNDER SECTION 9(I)(VII) OF THE ACT AND UNDER ARTICLE 12 OF THE INDIA - US TREATY . 17. T HE LEARNED CIT(A) ERRED IN DISALLOWING THE COMMISSION PAYMENT TO MPHASIS CORPORATION UNDER S ECTION 40( A)(I) OF THE ACT IN THE ABSENCE OF TAX DEDUCTE D AT SOURCE WITHOUT CONSIDERING THE CIRCULAR ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES. 8 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 18. I NTEREST UNDER SECTION 234B OF THE ACT THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE LEVY OF INTEREST UNDE R SECTION 234B OF THE ACT AMOUNTING TO RS. 59 , 554 , 625 . 19. I NTEREST UNDER SECTION 234C OF THE ACT THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE LEVY OF INTEREST UNDER SECTION 234C OF THE ACT AMOUNTING TO RS . 50,564 . 20. P ENALTY UNDER SECTION 27 I(J)(C) THE LE ARNED CIT(A) HAS ERRED IN DIRECTING THE AO TO RE - COMPUTE THE PENALTY IN VIEW OF THE ENHANCED TOTAL INCOME OF THE COMPANY . 21. R ELIEF A. THE APPELLANT PRAYS THAT DIRECTIONS BE GIVEN TO GRANT ALL SUC H RELIEF ARISING FROM THE ABOVE GROUNDS AND ALSO ALL RELIEF CONS EQUENTIAL THERETO . B. THE APPELLANT CRAVES LEAVE TO ADD TO OR ALTER , B Y DELETION , SUBSTITUTION , MODIFICATION OR OTHERWISE, THE ABOVE GROUNDS OF APPEAL, EITHER BEFORE OR DURING THE HEAR I NG OF THE APPEAL . C. FURTHER, THE APPELLANT PRAYS THAT ALL THE ABOVE ADJUSTME NTS / ADDITIONS / DISALLOWANCES MADE B Y THE LEARNED ASSESSING OFFICER / TPO AND UPHELD BY THE CIT(A) ARE BAD IN LAW AND LIABLE TO BE DELETED. 3. GROUND NO.1 IS GENERAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 4. GROUND NO. 2 IS REGARDING VALIDITY OF REFERENCE MADE BY THE ASSESSING OFFICER TO TRANSFER PRICING OFFICER (TPO). AT THE TIME OF 9 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED HEARING, THE LEARNED AUTHORISED REPRESENTATIVE HAS STATED AT BAR THAT THE ASSESSEE DOES NOT PRESS THIS GROUND OF APPEAL AND THE SAME MAY BE DISMISSED AS NOT PRESSED. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RAISED NO OBJECTION FOR THE SAME. ACCORDINGLY, WE DISMISS THIS GROUND AS NOT PRESSED. 5. GROUND NOS.3 TO 11 ARE REGARDING THE MOST APPROPRIATE METHOD FOR DETERMINATION OF ALP AND CONSEQUENTIAL TP ADJUSTMENT. 6 . THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE AND PROVIDING OTHER RELATED SERVICES. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS REPORTED ITS FINANCIAL RESULTS AS WEL L AS INTERNATIONAL TRANSACTIONS AS REPRODUCED BY THE TRANSFER PRICING OFFICER IN PARAS 2. 3 AND 2. 4 AS UNDER : 10 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 11 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED THUS IT IS CLEAR FROM THE INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE THAT THERE ARE DIVERSIFIED ACTIVITY CONSTITUTING TH E INTERNATIONAL TRANSACTIONS. TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS, THE ASSESSEE ADOPTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD (MAM) AND COMPARED ITS ENTITY LEVEL PLI WITH COMPARABLE PRICES. THE TPO ACCEPTED THE E NTIRE INTERNATIONAL TRANSACTIONS AT ARM S LENGTH HOWEVER THE CIT (APPEALS) HELD THAT COST PLUS METHOD IS MAM IN THE CASE OF THE ASSESSEE TO DETERMINE THE ALP 12 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED AND ACCORDINGLY ADOPTED THE COST PLUS METHOD. THE CIT (APPEALS) THEN COMPARED THE ASSESSEE PRICE WITH THE COMPARABLE COMPANIES AND DIRECTED THE TP ADJUSTMENT. AGGRIEVED BY THE ORDER OF THE CIT (APPEALS) THE ASSESSEE RAISED THIS ISSUE IN THIS APPEAL. 7 . BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT WHEN THE ASSESSEE IS ENGAGED IN THE DIVERSIFIED ACTIVITY OF INTERNATIONAL TRANSACTIONS THEN TNMM WOULD BE THE MAM FOR THE PURPOSE OF DETERMINING THE ALP. HE HAS FURTHER CONTENDED THAT THE CIT (APPEALS) NOT ONLY ADOPTED COST PLUS METHOD BUT ALSO TOOK THE ASSOCIATED ENTERPRISE (AE) OF THE ASSESSEE AS A TESTED PARTY. THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT A FOREIGN COMPANY WAS TAKEN BY THE CIT (APPEALS) AS TESTED PARTY INSTEAD OF THE ASSESSEE'S PRICE. THEREFORE IT WAS SUBMITTED THAT THE IMPUGN ED ORDER OF THE CIT (APPEALS) IS NOT SUSTAINABLE AND LIABLE TO BE SET ASIDE. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION DT.22.4.2016 OF THIS TRIBUNAL IN THE CASE OF M/S. KSHEMA TECHNOLOGIES LTD. VS. ACIT IN IT(TP)A NO.1105/BANG/2012. 8 . ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 13 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 9 . HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD, WE FIND THAT IN ORDER TO DETERMINE WHETHER THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE ARE AT ARM S LENGTH , THE PRICE/COST OF INTERNATIONAL TRANSACTIONS IS COMPARED WITH THE UNCONTROLLED INDEPENDENT PRICE AS PER THE METHOD AND PROCEDURE PRESCRIBED UNDER CHAPTER X OF THE INCOME TAX AC T, 1961 (IN SHORT 'THE ACT') . THEREFORE ONLY THE PRICE/THE PLI OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE HAS TO BE COMPARED WITH THE UNCONTROLLED COMPARABLE PRICE. THE ASSESSEE TOOK ITS ENTITY LEVEL MARGIN FOR THE PURPOSE OF BENCH MARKING ITS INTERNA TIONAL TRANSACTIONS WHICH IS NOT PERMISSIBLE UNDER THE T.P. PROVISIONS O F IT ACT AS ENVISAGED IN CHAPTER X OF THE ACT. WE FURTHER NOTE THAT THE CIT (APPEALS) REJECTED THE TNMM AS MAM AND ADOPTED COST PLUS METHOD AS MAM. HOWEVER, THE CIT (APPEALS) HAS PRO CEEDED TO CONSIDER THE AE OF THE ASSESSEE AS TESTED PARTY TO COMPARE THE MARGIN WITH THE COMPARABLE PRICE. WE FIND THAT THIS EXERCISE OF THE CIT (APPEALS) IS ALSO CONTRARY TO THE PROVISIONS OF TRANSFER PRICING. THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN T HE CASE OF M/S. KSHEMA TECHNOLOGIES LTD. VS. ACIT (SUPRA) WHILE DEALING WITH AN IDENTICAL ISSUE HAS HELD IN PARA 11.3 AS UNDER : 14 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 11.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE TO OK ITS OPERATING MARGIN AT ENTITY LEVEL AND THEN COMPARED THE SAME WITH THE MEAN MARGINS OF THE SELECTED COMPARABLES. THE TPO HAS NOT OBJECTED TO ITS METHODOLOGY OF THE ASSESSEE BUT REJECTED CERTAIN COMPARABLES SELECTED BY THE ASSESSEE AND INCLUDED THE SO ME MORE COMPARABLES IN THE SET OF COMPARABLES FOR DETERMINING THE ALP. IT IS PERTINENT TO NOTE THAT AS PER THE PROVISIONS OF TRANSFER PRICING, THE ENTITY LEVEL MARGIN OF THE ASSESSEE CANNOT BE CONSIDERED FOR THE PURPOSE OF BENCH MARKING THE INTERNATIONAL TRANSACTIONS WHEN THE ASSESSEE IS HAVING BOTH INTERNATIONAL AS WELL AS THIRD PARTY TRANSACTIONS. THOUGH THERE IS A STRENGTH IN THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT IN VIEW OF THE COMPLEXITY OF THE TRANSACTIONS BETWEEN THE ASSESS EE AND ITS AES AS WELL AS THE THIRD PARTY TRANSACTIONS IN WHICH THE ASSESSEE HAS TO PAY THE SELLING COMMISSION TO THE AE, THE ASSESSEE ADOPTED ENTITY LEVEL OPERATING MARGIN FOR THE PURPOSE OF BENCH MARKING ITS INTERNATIONAL TRANSACTIONS. HOWEVER, THIS ME THOD IS NOT PERMITTED AS PER THE PROVISIONS AND RULES OF THE TRANSFER PRICING UNDER INCOME TAX ACT AND I.T. RULES AND THEREFORE TO THAT EXTENT, WE FIND THAT THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN REJECTING THE METHODOLOGY APPLIED BY THE ASSESSEE AS WE LL AS BY THE TPO. ONCE THE CIT (APPEALS) HAS REJECTED THE ENTITY LEVEL PROFIT MARGIN OF THE ASSESSEE FOR THE PURPOSE OF BENCH MARKING THE INTERNATIONAL TRANSACTIONS WITH ALP, THE CIT (APPEALS) WAS REQUIRED TO REDO EXERCISE OF DETERMINATION OF ALP AS PER THE PROVISIONS OF TRANSFER PRICING. INSTEAD OF FOLLOWING THE PROPER PROCEDURE STIPULATED UNDER CHAPTER X OF THE I.T. ACT AS WELL AS RULE 10 OF I.T. RULES, THE CIT (APPEALS) HAS PROCEEDED TO TAKE THE AES OF THE ASSESSEE AS TESTED PARTY AND FURTHER RECOMPUT ED THEIR PROFIT MARGIN BY EXCLUDING CERTAIN EXPENSES WHICH WE FIND IS NOT PERMITTED UNDER THE PROVISIONS OF TRANSFER PRICING. NOT ONLY CHANGING THE TESTED PARTY FROM THE ASSESSEE TO ITS AE, THE CIT (APPEALS) HAS ALSO SELECTED A DOMESTIC COMPANY AS A COMPA RABLE TO THE AE OF THE ASSESSEE. THEREFORE THE ENTIRE EXERCISE OF DETERMINING THE ALP BY THE CIT (APPEALS) IS CONTRARY 15 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED TO THE PROVISIONS OF TRANSFER PRICING UNDER THE I.T. ACT. HENCE IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE SET ASIDE THE IM PUGNED ORDER OF THE AUTHORITIES BELOW AND REMIT THE ISSUE TO THE RECORD OF THE ASSESSING OFFICER / TPO FOR DECIDING THE MATTER AFRESH BY CONSIDERING THE SEGMENT - WISE DATA OF THE ASSESSEE AND THEN COMPARE THE SAME WITH THE COMPARABLE COMPANIES IN THE LIGHT OF VARIOUS DECISIONS RELIED UPON BY THE ASSESSEE. WE FIND THAT IN THE SERIES OF DECISIONS, THIS TRIBUNAL HAS COME TO A CONCLUSION THAT THE THRESHOLD LIMIT OF THE RPT SHOULD NOT BE MORE THAN 15% IN NORMAL CIRCUMSTANCES WHERE THERE IS NO DIFFICULTY IN SELE CTING THE COMPARABLE COMPANIES. THEREFORE WE DIRECT THE TPO TO APPLY THE RPT FILTER AT 15% INSTEAD OF 25% AND THEN CONSIDER THE COMPARABILITY OF THE COMPANIES. SINCE THE ASSESSEE DID NOT FULLY CO - OPERATE WITH THE AUTHORITIES BELOW IN THE FIRST ROUND OF T HE PROCEEDINGS THEREFORE WE DIRECT THE ASSESSEE TO CO - OPERATE IN THE PROCEEDINGS BEFORE THE A.O./TPO AND FURNISH THE RELEVANT AND REQUISITE DETAILS IN ORDER DETERMINING THE ALP. NEEDLESS TO SAY THAT THE ASSESSING OFFICER/TPO ALSO CONSIDER THE BENEFIT OF TOLERANCE RANGE OF + / - 5% AS PER THE PROVISO TO SECTION 92C(2) AS WELL AS WORKING CAPITAL ADJUSTMENT. ACCORDINGLY, THE TP ANALYSIS OF THE ASSESSEE AS WELL AS THE CIT (APPEALS) ARE NOT IN ACCORDANCE WITH THE PROVISIONS OF TRANSFER PRICING AND THEREFORE, THE IMPUGNED ORDER OF THE CIT (APPEALS) IS SET ASIDE AND THE TP ISSUE IS REMITTED TO THE RECORD OF THE TPO FOR DECIDING THE MATTER AFRESH BY COMPARING THE MARGINS OF THE INTERNATIONAL TRANSACTIONS WITH THE UNCONTROLLED COMPARABLE PRICE. NEEDLESS TO SAY T HE ASSESSEE BE GIVEN AN APPROPRIATE OPPORTUNITY OF HEARING. 16 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 10 . GROUND NO.12 IS REGARDING REDUCTION OF DEDUCTION UNDER SECTION 10B IN RESPECT OF EXPENDITURE INCURRED IN FOREIGN CURRENCY. 1 1 . WE HAVE HEARD THE LEARNED AUTHORISED REPRESENTATIVE AS WELL AS LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFICER WHILE WORKING OUT DEDUCTION UNDER SECTION 10B HAS REDUCED THE EXPENDITURE INCURRED IN FOREIGN CURRENCY FROM THE EXPORT TURNOVER. THE LEAR NED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT EXPENDITURE IN QUESTION THOUGH INCURRED IN FOREIGN CURRENCY BUT IT WAS NOT IN RESPECT OF PROVIDING TECHNICAL SERVICES. HE HAS FURTHER CONTENDED THAT THIS EXPENDITURE WAS INCURRED REGARDING WORK DONE BY THE AE AND THEREFORE IT IS NOT AN EXPENDITURE INCURRED BY THE ASSESSEE FOR PROVIDING TECHNICAL SERVICES. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN ASSESSEE'S OWN CASE FOR THE ASSE SSMENT YEAR 2003 - 04 AND SUBMITTED THAT VIDE ORDER DT.1.8.2014 IN ITA NO.1075 OF 200 8 AND 196 OF 2009 THE HON'BLE HIGH COURT HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE. 1 2 . ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPO N THE ORDERS OF THE AUTHORITIES BELOW. 17 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 1 3 . HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD, AT THE OUTSET WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN ASSESSEE'S OWN CA SE FOR THE ASSESSMENT YEAR 2003 - 04 (SUPRA) IN PARAS 2 & 3 AS UNDER : 18 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 19 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 20 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 21 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED IN VIEW OF TH E DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN ASSESSEE'S OWN CASE, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. 1 4 . GROUND NOS.13 & 15 ARE REGARDI NG DISALLOWANCE OF DEDUCTION UNDER SECTION 10B IN RESPECT OF ON SITE DEVELOPMENT WORK SUB - CONTRACTED TO AND INCOME DERIVED BY THE AE. 1 5 . WE HAVE HEARD THE LEARNED AUTHORISED REPRESENTATIVE AS WELL AS LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2002 - 03 VIDE ORDER DT.29.7.2015 IN ITA NOS.263 & 264 OF 2014 AS UN DER : FROM THE RECORD IT IS NOT BORNE OUT THAT THE ENTIRE ON - SITE WORK HAS BEEN SUB - CONTRACTED TO THE AE. THE MSA PROVIDES FOR THE AE TO WORK UNDER TOTAL SUPERVISION AND CONTROL OF THE ASSESSEE. THE SOFTWARE TO BE PRODUCED BY THE ASSESSEE DURING IT S ON - SITE DEVELOPMENT HAS TO BE AS PER THE SPECIFICATIONS GIVEN BY THE ASSESSEE. THE AE HAS NO CONCERN OR DIRECT DEALING WITH THE END CUSTOMER. THE ASSESSEE PROVIDES ALL RELEVANT INFORMATION AND INPUTS TO THE AE ON BEHALF OF THE END CUSTOMER. THE AE IS ADMITTEDLY ANSWERABLE TO THE ASSESSEE AND NOT THE END CUSTOMER. IN SUCH NATURE OF THE WORK WHICH IS 22 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED CARRIED ON BY THE AE ON BEHALF OF THE ASSESSEE, IT CANNOT BE SAID THAT THERE IS NO NEXUS BETWEEN OFF - SHORE DEVELOPMENT AND ON - SITE DEVELOPMENT. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE OPINION THAT IN THE FACTS OF THE PRESENT CASE, THE INCOME EARNED BY THE ASSESSEE THROUGH ON - SITE DEVELOPMENT OF SOFTWARE BY THE AE ON BEHALF OF THE ASSESSEE WOULD BE ELIGIBLE FOR DEDUCTION UNDER SECTION 1 0A OF THE ACT. THEREFORE PRIMA FACIE THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE HOWEVER , TO VERIFY CERTAIN FACTS REGARDING QUANTUM OF WORK SUB - CONTRACTED TO THE AE AND WHETHER THE ASSESSEE WAS HAVING TOTAL SUPERVISION AND CONTROL OVER THE WORK EX ECUTED BY THE AE THIS ISSUE IS REMITTED TO THE RECORD OF TPO / A.O. THE ASSESSING OFFICER IS DIRECTED TO EXAMINE THE RELEVANT FACT AND THEN DECIDE THIS ISSUE IN THE LIGHT OF DECISION OF HON'BLE JURISDICTIONAL HIGH COURT (SUPRA). 1 6 . GROUND NO.14 IS R EGARDING DISALLOWANCE OF DEDUCTION UNDER SECTION 10B IN RESPECT OF INTEREST INCOME AND PROFIT ON SALE OF ASSETS. 1 7 . WE HAVE HEARD THE LEARNED AUTHORISED REPRESENTATIVE AS WELL AS LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIA L ON RECORD. WE FIND THAT THE INTEREST INCOME FROM THE DEPOSITS IN THE BANK HAS NO DIRECT FIRST DEGREE NEXUS WITH THE BUSINESS ACTIVITY OF THE UNDERTAKING THEREFORE THE SAME IS NOT ELIGIBLE FOR DEDUCTION UNDER 23 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED SECTION 10B OF THE ACT. SIMILARLY THE PROFIT ON SALE OF ASSET IS NOT AN INCOME DERIVED FROM THE BUSINESS ACTIVITY OF THE ASSESSEE - UNDERTAKING. HENCE WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE ORDER OF THE ASSESSING OFFICER IN DENYING THE CLAIM OF DEDUCTION UNDER SECTION 10B IN RESPECT OF INTERE ST INCOME AND PROFIT O SALE OF ASSET. 1 8 . GROUND NOS.16 & 17 ARE REGARDING DISALLOWANCE MADE UNDER SECTION 40(A)(I) OF THE ACT. 1 9 . THE ASSESSING OFFICER HAS DISALLOWED COMMISSION PAYMENT UNDER SECTION 40(A)(I) OF THE ACT BY HOLDING THAT THE SAME IS FEES FOR TECHNICAL SERVICES AND THEREFORE IN THE ABSENCE OF DEDUCTION OF TAX AT SOURCE IT IS NOT ALLOWABLE. 20 . ON APPEAL, THE CIT (APPEALS) THOUGH UPHELD THE ORDERS OF THE ASSESSING OFFICER THAT THE PAYMENT IN QUESTION IS IN THE NATURE OF FEES FOR TECHNICAL SERVICES HOWEVER IT WAS ALSO HELD BY THE CIT (APPEALS) THAT NO SERVICE HAS BEEN RENDERED BY THE AE FOR WHICH THE ALLEGED PAYMENT HAS BEEN MADE. 21 . BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT EVEN IF THIS PAYMENT OF COMMISSION IS DISALLOWED UNDER SECTION 40(A)(I), IT WILL ENHANCE THE INCOME OF THE UNDERTAKING 24 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED WHICH IS ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT. THUS HE HAS SUBMITTED THAT THE DEDUCTION UNDER SECTION 10B HAS TO BE ALLOWED ON THIS AMOUNT. 2 2 . ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 2 3 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. WE ARE OF THE VIEW THAT T HE DISALLOWANCE OF EXPENDITURE UNDER SECTION 40(A)(I) WOULD RESULT ENHANCEMENT OF THE INCOME OF THE ASSESSEE . S INCE THE INCOME OF THE ASSESSEE IS ELIGIBLE FOR DEDUCTION UNDER SECTION 10B THEREFORE , THE SAID DISALLOWANC E MADE UNDER SECTION 40(A) (I) IS ALSO ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT. ACCORDINGLY, THE ALTERNATE PLEA OF THE ASSESSEE IS ALLOWED. 2 4 . GROUND NOS.18 & 19 ARE REGARDING LEVY OF INTEREST UNDER SECTIONS 234B & 234C OF THE ACT WHICH IS MANDATORY AND CONSEQUENTIAL IN NATU RE. REVENUE S APPEAL (ITA NO.1258/BANG/2012 ) 2 5 . THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : 25 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED 26 . THE ONLY ISSUE ARISES IN THE APPEAL OF THE REVENUE IS REGARDING REDUCTION OF THE EXPENDITURE INCURRED IN FOREIGN CURRENCY FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION UNDER SECTION 10B OF THE ACT. 2 7 . HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE MATERIAL ON RECORD , WE FIND THAT THE ISSUE OF EXPENDITURE INCURRED TOWARDS TELECOMMUNICATION CHARGES IN FO REIGN CURRENCY ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE ABROAD IS REDUCED FROM EXPORT TURNOVER 26 IT (TP) A NO S . 1104 & 1258 /BANG/201 2 MPHASIS LIMITED AN EQUAL AMOUNT SHOULD ALSO BE REDUCED FROM TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION UNDER SECTION 10B OF THE ACT, IS COVERED IN FAVOUR OF THE ASSES SEE BY THE DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. 349 ITR 98 (KAR) . THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT HAS BEEN FOLLOWED IN A NUMBER OF CASES IN CO - ORDINATE BENCHES OF ITAT. HENCE, THIS ISSUE IS DECIDED AGAINST THE REVENUE AND IN FAVOUR OF ASSESSEE. 2 8 . IN THE RESULT THE ASSESSEE'S APPEAL IS PARTLY ALLOWED AND THE REVENUE S APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 7TH DAY OF JUNE , 201 7 . SD/ - ( INTURI RAMA RAO ) ACCOUNTANT MEMBER SD/ - ( VIJAY PAL RAO ) JUDICIAL MEMBER BANGALORE, DT. 07 .0 6 .2017. *REDDY GP COPY TO : 1 APPELLANT 4 CIT(A) 2 RE SPONDENT 5 DR. ITAT, BANGALORE 3 CIT 6 GUARD FILE ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL BANGALORE.