Kshema Technologies (since merged with Mphasis Ltd), Bangalore V. ACIT, Bangalore

ITA 1105/BANG/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0461 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 25-02-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 03-09-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 80HHC; 234B

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. 1105 /BANG/201 2 (ASSESSMENT YEAR : 200 5 - 06 ) M/S. KSHEMA TECHNOLOGIES LIMITED (MERGED WIT H MPHASIS LTD.), BAGMANE WORLD TECHNOLOGY CENTRE, K.R. PURAM, WTC 3, BLOCK B, 1 ST FLOOR, MARATHAHALLI, ORR, DODDENEKUNDI, BANGALORE - 560 048 . . APPELLANT. PAN AACCB 6820C VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE 12(1), BANGALORE. .. RESPONDENT. I.T.(T.P. ) A NO.1259/BANG/2012 (ASSESSMENT YEAR 2005 - 06) (BY REVENUE) APPELLANT BY : SHRI PADAMCHAND K HINCHA, C.A. R E SPONDENT BY : MRS. NEERA MALHOTRA, CIT - II (D.R) DATE OF H EARING : 25.02.2016. DATE OF P RONOUNCEMENT : 22.04. 201 6 . 2 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 O R D E R PER SHRI VIJAY P AL RAO, J .M . : THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DT.2.7.2012 OF COMMISSIONER OF INCOME TAX (APPEALS) - IV, BANGALORE FOR THE ASSESSMENT YEAR 2005 - 06. 2. FIRST WE TAKE UP THE ASSESSEE'S APPEAL WHEREIN TH E ASSESSEE HAS RAISED THE FOLLOWING GROUNDS : GROUNDS RELA TING TO LEGAL ISSUES 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 1 V TO THE EXTENT PREJUDICIAL TO THE APPELLANT IS BAD IN LAW. 2. THE LEARNED ASSESSING OFFICER HAS ERR ED IN MAKING A REFERENCE TO TRANSFER PRICING OFFICER FOR DETERMINING ARM'S LENGTH PRICE WITHOUT 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 SECTION 92C(3) WHICH NECESSITATED THE REFERENCE. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - IV ['CIT(A) - IV'] HAS FURTHER ERRED IN CONFIRMING THE ACTION OF T HE ASSESSING OFFICER. 3. THE LEARNED ASSESSING OFFICER, LEARNED TRANSFER PRICING OFFICER AND COMMISSIONER OF INCOME TAX (APPEALS) IV HAVE ERRED IN A. PASSING THE ORDER WITHOUT DEMONSTRATING THAT APPELLANT HAD THE MOTIVE OF SHIFTING PROFITS OUTSIDE INDIA BY MANIPULATING PRICES CHARGED IN ITS INTERNATIONAL TRANSACTIONS: AND, B. NOT APPRECIATING THAT THE CHARGING OR COMPUTATION PROVISION RELATING TO INCOME UNDER THE HEAD 'PROFITS & GAINS OF BUSINESS OR PROFESSION' DO NOT REFER TO OR INCLUDE THE AMOUNTS CO MPUTED UNDER CHAPTER X AND THEREFORE THE ADDITION MADE UNDER CHAPTER X IS BAD IN LAW. 3 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 GROUNDS ON COMPARABLES AND REJECTION OF TP ANALYSIS OF THE APPELLANT 4. THE LEARNED ASSESSING OFFICER AND LEARNED TRANSFER PRICING OFFICER HAVE ERRED IN A. REJECTING THE TRANSFER PRICING ANALYSIS UNDERTAKEN BY THE APPELLANT WITHOUT SPECIFYING THE RELEVANT - CLAUSE UNDER SECTION 92C(3) WHICH NECESSITATED SUCH REJECTION; AND B. REJECTING THE COMPARABLES SELECTED BY THE APPELLANT ON UNJUSTIFIABLE GROUNDS. GROUNDS RELATING TO TP ANALYSIS OF THE TPO: 5. THE LEARNED ASSESSING OFFICER AND LEARNED TRANSFER PRICING OFFICER HAVE ERRED IN: A. PERFORMING FRESH TRANSFER PRICING ANALYSIS AND ADOPTING INAPPROPRIATE FILTERS IN DOING FRESH TRANSFER PRICING ANALYSIS. B. ADOPTING COMPA NIES 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. REJECTION OF IT ANALYSIS 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - I V HAS ERRED IN A. R EJECTING THE TP ANALYSIS OF BOTH THE APPELLANT AND TPO ON UNJUSTIFIABLE GROUNDS AND WITHOUT GIVING AN OPPORTUNITY OF BEING HEARD TO THE APPELLANT: B. REJECTING TNMM METHOD ADOPTED BY THE APPELLANT AND CONFIRMED BY THE TPO AS THE MOST APPROPRIATE METHOD; C. DOING SEPARATE ANALYSIS OF SELLING COMMISSION PAID TO /,E AND ONSITE SERVICES RENDERED BY AE BY UNILATERALLY ADOPTING CUP METHOD AND CPM AS THE MOST APPROPRIATE METHOD RESPECTIVELY WITHOUT GIVING AN OPPORTUNITY OF BEING HEARD TO THE APPELLANT. II. T P ANALYSIS OF SELLING COMMISSION PAID TO AE 7. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - IV HAS ERRED IN: A. ADOPTING CUP AS THE MOST APPROPRIATE METHOD FOR EVALUATING THE SELLING COMMISSION PAID TO AE WITHOUT JUSTIFYING HOW THE SAME WAS MOST AP PROPRIATE METHOD; 4 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 B. CONCLUDING THAT ARM'S LENGTH PRICE OF SELLING COMMISSION IS NIL WITHOUT BRINGING ON RECORD ANY COMPARABLE; C. CONCLUDING THAT ARM'S LENGTH PRICE OF SELL ING COMMISSION IS NI L WITHOUT APPRECIATING THAT THE SERVICES HAD BEEN ACTUALLY RENDERED BY THE ASSOCIATED ENTERPRISES AND THE EVIDENCES SUPPORTING THE SAME ARE ON RECORD; D. CONCLUDING THAT THE AE HAS A MARKUP OF 45.91 ON COST WITHOUT APPRECIATING THE UNDERLYING FACTS AND REALITY; E. CONCLUDING THAT THE APPELLANT HAS NOT PRODUC ED 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 THE APPELLATE PROCEEDING; AND, F. COMBINING THE MARKETING EXPENS ES INCURRED BY APPELLANT AND COMMISSION PAID TO AE TO ARRIVE AT THE RATIO OF 10.59 OF SUCH EXPENSES ON SALES AND ACCORDINGLY CONCLUDING THAT IT IS VERY HIGH WITHOUT APPRECIATING THAT MARKETING EXPENSES OF INR 64,76,000 WERE INCURRED FOR NON - AE BUSINESS ONL Y. III. TP ANALYSIS OF ONSITE SERVICES RENDERED BY AE 8. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - IV HAS ERRED IN A. ADOPTING CPM AS THE MOST APPROPRIATE METHOD FOR EVALUATING THE SOFTWARE DEVELOPMENT SERVICES RECEIVED BY THE APPELLANT WITH OUT JUSTIFYING HOW THE SAME WAS MOST APPROPRIATE METHOD; B. ADOPTING INAPPROPRIATE METHODOLOGY AND PROCESS IN ARRIVING AT THE ARM'S LENGTH PRICE; C. SELECTING INDIAN COMPANIES HAVING ONSITE REVENUES AS COMPARABLE AFTER SELECTING AE (A COMPANY BASED IN US A) AS THE TESTED PARTY. WITHOUT PREJUDICE, CIT(A) HAS ERRED IN REJECTING SIMILARLY PLACED INDIAN COMPANIES AS COMPARABLE ON UNJUSTIFIABLE REASONS; AND. D. ADOPTING NET MARGIN OF THE COMPARABLE IN COMPUTING THE ARM'S LENGTH PRICE WITHOUT APPRECIATING THAT UNDER CPM GROSS MARGIN ARE TO BE CONSIDERED. GROUNDS ON ADJUSTMENT FOR DIFFERENCES 9. THE LEARNED ASSESSING OFFICER, LEARNED TRANSFER PRICING OFFICER AND COMMISSIONER OF INCOME TAX (APPEALS) - IV HAVE ERRED IN NOT MAKING PROPER ADJUSTMENT FOR ENTERPRI SE LEVEL AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. 5 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 10. THE LEARNED ASSESSING OFFICER, LEARNED TRANSFER PRICING OFFICER AND COMMISSIONER OF INCOME TAX (APPEALS) - IV: HAVE ERRED IN NOT APPROPRIATELY COMPUTING THE WORKING CAPITAL ADJUSTMENT WHILE COMPUTING THE ARM'S LENGTH PRICE. GROUND RELATING TO RESTRICTING TP ADJUSTMENT TO AE TRANSACTIONS 11. WITHOUT PREJUDICE TO ALL THE ABOVE, THE LEARNED ASSESSING OFFICER AND LEARNED TRANSFER PRICING OFFICER HAVE ERRED IN NOT RESTRICTING THE TP ADJUSTMENT TO A E TRANSACTIONS ONLY AND THEREBY MAKING AN ADJUSTMENT IN RESPECT OF TRANSACTIONS WITH NON - ASSOCIATED ENTERPRISE ALSO. GROUND ON BENEFIT OF 5 % RANGE 12. ASSUMING WITHOUT ADMITTING THAT THE ADJUSTMENT IS TO BE MADE . THE LEARNED ASSESSING OFFICER. LEARNED TRANSFER PRICING OFFICER AND COMMISSIONER OF INCOME TAX (APPEALS) - IV HAVE ERRED IN NOT ALLOWING THE BENEFIT OF THE +/ - 5% RANGE MENTIONED IN THE PROVISO TO SECTION 92C(2). 13. REDUCTION IN DEDUCTION UNDER SECTION L0A OF THE ACT IN RESPECT OF EXPENDITURE INCURRED IN FOREIGN CURRENCY ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER ('AO') TO REDUCE THE FOREIGN CURRENCY EXPENSES AMOUNTING TO RS. 108.4 20,465 FROM BOTH THE EXPORT TURNOVER AND THE TOTAL TURNOVER OF UNIT WHILE COMPUTING THE DEDUCTION UNDER SECTION L0A OF THE ACT. WITHOUT CONSIDERING THE APPLICANT'S SUBMISSION THAT IT IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND NOT IN RENDERING T ECHNICAL SERVICES. 14. DISALLOWANCE UNDER SECTION 40(A)(1) IN RESPECT OF COMMISSION PAYMENTS A. WITHOUT PREJUDICE TO GROUND NO. 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE SERVICES RENDERED BY MPHASIS CORPORATION OUTSIDE INDIA ARE IN THE NATURE OF MA NAGERIAL SERVICES AND COMMISSION PAID TO MPHASIS 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, B. THE LEARNED CIT(A) ERRED IN DISALLOWING THE C OMMISSION PAYMENT TO MPHASIS CORPORATION UNDER SECTION 40(A)(I) OF THE ACT IN THE ABSENCE OF TAX DEDUCTED AT SOURCE WITHOUT CONSIDERING THE CIRCULAR ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES. 6 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 15. FOREIGN TAX CREDIT NOT GRANTED A. THE LEARNED CIT(A ) HAS ERRED IN CONCLUDING THAT THE APPELLANT HAS FAILED TO SUBSTANTIATE ITS CLAIM FOR FOREIGN TAX CREDIT WITHOUT CONSIDERING THE SUBMISSION TILED BY THE APPELLANT. B. THE LEARNED CIT(A) HAS ERRED IN NOT DIRECTING THE AO TO GRANT APPROPRIATE CREDIT FOR FOR EIGN TAXES. 16. INTEREST UNDER SECTION 234B OF THE ACT THE LEARNED C IT(A) HAS ERRED IN CONFIRMING THE LEVY OF INTEREST UNDER SECTION 234B OF THE ACT AMOUNTING TO RS. 10,928,569. 17. INTEREST UNDER SECTION 234D OF THE ACT THE LEARNED CIT(A) HAS ERRE D IN CONFIRMING THE LEVY OF INTEREST UNDER SECTION 234D OF THE ACT AMOUNTING TO RS. 128.352. 18. PENALTY UNDER SECTION 271(1)(C) THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE AO TO RE - COMPUTE THE PENALTY IN VIEW OF THE ENHANCED TOTAL INCOME OF THE COMPA NY. 19. RELIEF A) THE APPELLANT PRAYS THAT DIRECTIONS BE GIVEN TO GRANT ALL SUCH RELIEF ARISING FROM THE ABOVE GROUNDS AND ALSO ALL RELIEF CONSEQUENTIAL THERETO. B) THE APPELLANT CRAVES LEAVE TO ADD TO OR ALTER, BY DELETION, SUBSTITUTION, MODIFICATION OR OTHERWISE, THE ABOVE GROUNDS OF APPEAL. EITHER BEFORE OR DURING THE HEARING OF THE APPEAL. C) FURTHER, THE APPELLANT PRAYS THAT ALL THE ABOVE ADJUSTMENTS / ADDITIONS / DISALLOWANCES MADE BY THE LEARNED AO / TPO AND UPHELD BY THE CIT(A) ARE BAD IN LAW AND LIABLE TO BE DELETED. 3. THE ASSESSEE COMPANY WAS INCORPORATED IN THE YEAR 1997 TO PROVIDE SOFTWARE SOLUTIONS AND SERVICES TO DOMESTIC AND OVERSEAS CUSTOMERS. IT HAS PRESENCE IN THE FIELD OF INDUSTRIAL AUTOMATION AND EMBEDDED SOLUTION, HEALTH CARE AND LIFE SCIENCES, FINANCIAL SERVICES AND ENTERPRISE 7 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 ALLOCATION. WITH EFFECT FROM 1.6.2004 THE ASSESSEE WAS ACQUIRED BY MPHASIS BFL LIMITED VIDE PURCHASE AGREEMENT DT.2.4.2004. CONSEQUENTLY, THE ASSESSEE IS THE WHOLLY OWNED SUBSIDIARY OF MPHASIS BFL LIMITED. THE ASSESSEE PROVIDES SERVICES TO BOTH EXTERNAL CUSTOMERS AND ITS ASSOCIATED ENTERPRISES (AES). THE SERVICE CONTRACT WITH AE IS PRIMAR IL Y FOR PROVISION OF SERVICES TO CLIENTE S OF AE. THE ASSESSEE HAS ENTERED INTO SERVICE AGREEMENT WITH ITS AE TO PROVIDE SERVICES TO ITS CLIENTS. THE ASSESSEE HAS REPORTED THE FINANCIAL RESULTS AND INTERNATIONAL TRANSACTIONS FOR THE YEAR UNDER CONSIDERATION AS UNDER : FINANCIAL RESULTS OF KSHEMA INDIA, F.Y.2004 - 05 : THE FOLLOWING ARE THE BRIE F FINANCIALS OF THE TAX PAYER AS UNDER : OPERATING REVENUE 62,33,93,000/ - OPERATING EXPENSES 55,54,82,000/ - OPERATING PROFIT (PBIT) 6,79,11,000/ - OPERATING PROFIT TO REVENUE 10.89% INTERNATIONAL TRANSACTIONS (AS MENTIONED IN THE 92CE REPORT) THE FOLLO WING ARE THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE TAX PAYER WITH ITS ASSOCIATED ENTERPRISES (AS PER THE 3CEB REPORT AND AS PER THE REFERENCE RECEIVED BY THE TPO FROM THE ASSESSING OFFICER U/S.92CA. 8 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 RENDERING SOFTWARE DEVELOPMENT AND IT CONSULTANC Y SERVICES RS.27,44,255. RECEIPT OF SOFTWARE DEVELOPMENT, PROFESSIONAL AND IT CONSULTANCY SERVICES RS.7,84,23,892. REIMBURSEMENT OF EXPENSES TO AES RS.9,24,729. REIMBURSEMENT OF EXPENSES BY AES RS.2,67,631 PAYMENT OF SELLING COMMISSION. RS.2,37,45,35 5. THE ASSESSEE IS BASICALLY HAVING INTERNATIONAL TRANSACTIONS IN TWO SEGMENTS I.E. SOFTWARE DEVELOPMENT SERVICES PROVIDED TO AES AND PAYMENT OF SELLING COMMISSION TO AES. IN FACT THE ASSESSEE IS PROVIDING SOFTWARE DEVELOPMENT SERVICES TO OVERSE AS THIRD PARTY THROUGH ITS AE AND SOME PART OF THE SERVICES WERE ALSO SUB - CONTRACTED TO THE AE. ACCORDINGLY, THE ASSESSEE IS MAKING PAYMENT ON SELLING COMMISSION TO ITS AE ON COST PLUS 12%. SIMILARLY, THE ASSESSEE IS ALSO RECEIVING SUB - CONTRACTS WORK OF SOFTWARE DEVELOPMENT SERVICES FROM AE WHICH WAS ULTIMATELY MEANT FOR THE THIRD PARTY AS PER THE CONTRACT BETWEEN THE AE AND THE THIRD PARTY. HOWEVER, SINCE THE WORK IS SUB - CONTRACTED BY THE AE TO THE ASSESSEE THEREFORE THERE IS NO PRIVITY OF CONTRACT BETWEEN THE ASSESSEE AND THE ULTIMATE RECIPIENT OF THE SERVICE. THE ASSESSEE IS UNDERTAKING SOFTWARE DEVELOPMENT FROM ITS AE UNDER THE SUB - CONTRACT. 9 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 THE ASSESSEE BENCH MARKED ITS INTERNATIONAL TRANSACTIONS BY APPLYING TRANSACTIONAL NET MARGIN METHOD ( TNMM ) AS MOST APPROPRIATE METHOD ( MAM ) A T ENTITY LEVEL. THE ASSESSEE'S MARGIN A T ENTITY LEVEL IS 12.61%. THE ASSESSEE SELECTED 15 COMPARABLES FOR BENCH MARKING ITS TRANSACTIONS, THE DETAILS OF COMPARABLES ARE AS UNDER : - SL.NO. NAME OF THE COMPANY 1. AKSHAY SOFT WARE TECHNOLOGIES LTD. 2. AZTEC SOFTWARE AND TECHNOLOGIES SERVICES LTD. 3. GEOMETRIC SOFTWEARE SOLUTIONS COMPANY LTD. 4. IGATE GLOBAL SOLUTIONS LTD. 5. MAARS SOFTWARE INTERNATIONAL LTD. 6. MASCON GLOBAL LTD. 7. MELSTAR INFORMATIONTECHNOLOGIES LTD. 8. MPHASIS BFL LTD. 9. ORIENT INFORMATION TECHNOLOGIES LTD. 10. PSI DATA SYSTEMS LTD. 11. R S SOFTWARE (INDIA) LTD. 12. SASKEN COMMUNICATION TE CHNOLOGY LTD. 13. SONATA SOFTWARE LTD. 14. VISUALSOFT TECHNOLOGIES LTD. 15. VJIL CONSULTING LTD. THE MEA N MARGIN OF THE COMPARABLES SELECTED BY THE ASSESSEE IS ARRIVED AT 6.99% AND THEREFORE THE ASSESSEE CLAIMED ITS INTERNATIONAL TRANSACTIONS AT ARM S LENGTH. T HE TPO HAS REJECTED THE TRANSFER PRICING STUDY ANALYSIS OF THE ASSESSEE AND ALSO RECOMPUTED THE PR OFIT MARGIN OF 10 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 THE ASSESSEE AT 10.89%. THE TPO HAS CARRIED OUT A FRESH SEARCH AND SELECTED 17 COMPARABLES AS UNDER : S.NO. NAME OF THE COMPANY MARGINS (OP/OR) % WC ADJUSTED MARGINS (OP/OR) % 1. BODHTREE CONSULTING LTD. 19.91 19.31 2. LANCO GLOBAL SOLU TIONS LTD. 12.01 9.86 3. EXENSYS SOFTWRE SOLUTIONS LTD. 41.41 39.35 4. SANKYA INFOTECH LTD. 21.50 18.51 5. SASKEN NETWORK SYSTEMS LTD. 14.27 13.42 6. FOURSOFT LTD. 18.69 18.65 7. THIRDWARE SOLUTIONS LTD. 39.79 39.77 8. R S SOFTWARE (INDIA) LTD. 7.47 7.56 9. GEOMETRIC SOFTWARE SOLUTIONS LTD. 16.90 16.15 10. TATA ELXSI LTD. (SEG.) 19.58 19.59 11. VISUALSOFT TECHNOLOGIES LTD. (SEG.) 19.04 17.70 12. SASKEN COMMUNICATION LTD. (SEG.) 12.60 12.83 13. IGATE GLOBAL SOLUTIONS LTD. (SEG.) 4.14 3.13 14. FL EXTRONICS SOFTWARE SYSTEMS LTD. 24.35 23.81 15. L&T INFOTECH LTD. 9.37 9.07 16. SATYAM COMPUTER SERVICES LTD. 22.74 22.22 17. INFOSYS LTD. 29.99 29.95 AVERAGE 19.63 18.87 11 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 THUS THE TPO HAS WORKED OUT THE MEAN MARGIN AT 17.63% AND AFTER WORKING CAPIT AL ADJUSTMENT AT 18.77%. IT IS PERTINENT TO NOTE THAT IN THE SET OF TPO S COMPARABLES, 5 COMPANIES ARE COMMON AS IT WAS ALSO PART OF THE ASSESSEE'S TP ANALYSIS WHICH ARE AT SL. NOS.8, 9, 11, 12 & 13 OF THE ABOVE TABLE. THUS THE TPO HAS PROPOSED AN ADJUS TMENT OF RS.4,97,23,259 UNDER SECTION 92CA OF THE ACT. THE ASSESSEE CHALLENGED THE ACTION OF THE TPO BEFORE THE LEARNED CIT (APPEALS). THE CIT (APPEALS) DID NOT AGREE WITH THE METHODOLOGY APPLIED BY THE ASSESSEE AS WELL AS BY THE TPO WHEREIN THE ENTITY LE VEL RESULT WAS TAKEN INTO CONSIDERATION FOR DETERMINING THE ALP. THE CIT (APPEALS) SELECTED COST PLUS METHOD ( CPM ) AS THE MAM INSTEAD OF TNMM. AS REGARDS THE SALES COMMISSION PAID BY THE ASSESSEE TO AE, THE CIT (APPEALS) HELD THAT IT WAS NOT JUSTIFIED AND ACCORDINGLY THE ALP OF THE COMMISSION PAID TO AE WAS CONSIDERED BY THE CIT (APPEALS) AT NIL. ACCORDINGLY, THE ENTIRE PAYMENT OF COMMISSION WAS DISALLOWED UNDER TP ADJUSTMENT. AS REGARDS THE OTHER INTERNATIONAL TRANSACTIONS WITH REGARD TO THE SOFTWARE DEVE LOPMENT CHARGES PAID TO THE AE , THE CIT (APPEALS) RECOMPUTED THE ALP BY TAKING THE AES OF THE ASSESSEE HAS TESTED PARTY THUS THE CIT (APPEALS) SELECTED MAARS 12 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 SOFTWARE INTERNATIONAL LTD., AN INDIAN COMPANY AS COMPARABLE TO TEST THE PRICE AT THE HAND OF THE VARIOUS AES OF THE ASSESSEE IN DIFFERENT COUNTRIES. THE OPERATING MARGIN OF THE MAARS WAS COMPUTED AT 9.61% WHEREAS THE OPERATING MARGIN OF THE AES OF THE ASSESSEE WAS RECOMPUTED BY THE CIT (APPEALS) BY DISALLOWING MARKETING / SELLING EXPENSES AND A CCORDINGLY THE CIT (APPEALS) MADE A TP ADJUSTMENT OF RS.2,54,18,865 ON THIS ACCOUNT. 4. BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE CIT (APPEALS) HAS ADOPTED A NEW METHOD WITHOUT GIVING ANY SHOW CAUSE NOT ICE TO THE ASSESSEE FOR THE SAME. FURTHER THE CIT (APPEALS) HAS COMMITTED AN ERROR BY CONSIDERING THE AES OF THE ASSESSEE AS TESTED PARTY AND FURTHER MARGINS OF THE AES HAVE BEEN COMPARED WITH A DOMESTIC COMPANY SELECTED AS COMPARABLE. THEREFORE THE CIT (APPEALS) HAS TAKEN COMPLETELY DIFFERENT APPROACH TO THE ISSUE WHICH IS NOT PERMISSIBLE. HE HAS FURTHER POINTED OUT THAT SINCE THERE WAS AN ACQUISITION OF THE ASSESSEE BY THE MPHASIS BFL LIMITED THEREFORE, DUE TO THIS EVENT OF ACQUISITION A PROPER REPRESEN TATION COULD NOT BE MADE BEFORE THE AUTHORITIES BELOW. NO NOTICE WAS GIVEN TO THE ASSESSEE BY THE 13 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 CIT (APPEALS) TO ADOPT A DIFFERENT METHOD AND AE AS A TESTED PARTY. EVEN OTHERWISE, THE PROFIT MARGIN OF THE AE HAS NOT BEEN PROPERLY COMPUTED BY THE CI T (A PPEALS) AS IT HAS EXCLUDED CERTAIN EXPENSES WHILE COMPUTING THE PROFIT MARGIN. THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE IMPUGNED ORDER OF THE CIT (APPEALS) IS NOT SUSTAINABLE AS THE SAME SUFFERS FROM ILLEGALITY BEING CONTRARY TO T HE PROVISIONS OF TRANSFER PRICING. EVEN OTHERWISE, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE COMPARABLE COMPANIES SELECTED BY THE TPO CANNOT BE CONSIDERED FOR THE PURPOSE OF DETERMINING THE ALP AS THE SAME ARE FUNCTIONAL LY DIFFERENT FROM THE ASSESSEE. THE ASSESSEE HAS RAISED THE OBJECTIONS AGAINST VARIOUS COMPANIES SELECTED BY THE TPO AND ONE COMPANY NAMELY GEOMETRIC SOFTWARE SOLUTIONS LTD. WHICH WAS THOUGH SELECTED BY THE ASSESSEE ALSO HOWEVER, AS IT IS FOUND TO BE NOT C O MPARABLE WITH THE ASSESSEE, THEREFORE THE ASSESSEE IS SEEKING EXCLUSION OF THE SAME FROM THE SET OF COMPARABLES. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE IS SEEKING THE EXCLUSION OF THE FOLLOWING COMPANIES : 14 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 (I) BODHTREE CONSULT ING LTD. (II) EXENSYS SOFTWARE SOLUTIONS LTD. (III) SASKEN NETWORK SYSTEM S LTD. (IV) FOUR S OFT LIMITED. (V) THIRDWARE SOLUTION LTD. (VI) TATA ELXSI LTD. (SEG.) (VII) FLEXTRONIC S (SEG.) AS REGARDS, BODHTREE CONSULT ING LTD. , THE LEARNED AU THORISED REPRESENTATIVE HAS SUBMITTED THAT THE COMPARABILITY OF THE COMPANY HAS BEEN EXAMINED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF KODIAK NETWORK INDIA LTD. IN ITA NO.532/BANG/2013 VIDE ORDER DT.30.7.2015 WHEREIN THE CO - ORDINATE BENCH F OUND THAT THE FUNCTIONAL COMPARABILITY OF THE COMPANY CANNOT BE CONSIDERED AS GOOD COMPARABLE. HE HAS FURTHER SUBMITTED THAT EVEN OTHERWISE THIS COMPANY IS HAVING ITS REVENUE FROM SALE OF PRODUCTS, SALE OF SERVICES TO SUBSIDIARIES AND THEREFORE IN THE ABSE NCE OF SEGMENTAL RESULTS, THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE FOR SOFTWARE DEVELOPMENT SERVICES OF THE ASSESSEE. 15 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 5. EXENSYS SOFTWARE SOLUTIONS LTD. : THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE COMPAR ABILITY OF THIS COMPANY HAS ALSO BEEN CONSIDERED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF KODIAK NETWORK INDIA LTD. (SUPRA) AS WELL AS ITO VS. VENDO TECHNOLOGY PVT. LTD. IN ITA NO.1374/BANG/2011 VIDE ORDER DT.19.9.2014. 6. SASKEN NETWO RK SYSTEMS LTD. : THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE COMPARABILITY OF THIS COMPANY HAS ALSO BEEN CONSIDERED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF KODIAK NETWORK INDIA LTD. (SUPRA) AS WELL AS I TO VS. VENDO TECHNOLOGY PVT. LTD. IN ITA NO.1374/BANG/2011 VIDE ORDER DT.19.9.2014. 7.1 FOURSOFT LIMITED & THIRDWARE SOLUTIONS LTD. : THE FUNCTIONAL COMPARABILITY OF THESE TWO COMPANIES ARE ALSO EXAMINED BY THE TRIBUNAL IN THE CASE OF KODIAK NETWO RK INDIA LTD. ( SUPRA). 7.2 THE LEARNED AUTHORISED REPRESENTATIVE HAS POINTED OUT THAT RELATED PARTY TRA NSACTIONS (RPT) IN THE CASE OF T HIRDWARE SOLUTIONS LTD. IS 19.89% AND THEREFORE IN VIEW OF THE CONSISTENT VIEW TAKEN BY THIS 16 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 TRIBUNAL REGARDING THE T HRESHOLD LIMIT OF THE RPT AT 15%, THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE. 8. TATA ELXSI LIMITED (SEG.) : THE FUNCTIONAL COMPARABILITY OF TH IS COMPANY IS EXAMINED BY THE TRIBUNAL IN THE CASE OF KODIAK NETWORK INDIA LTD. ( SUPRA) AND IT W AS FOUND THAT THIS COMPANY IS FUNCTIONALLY DIS - SIMILAR TO THE SOFTWARE DEVELOPMENT SERVICES PROVIDER. 9. FLEXTRONIC SOFTWARE SYSTEM LTD. : THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE C OMPARABILITY OF THIS COMPANY HAS BEEN EXAMINED BY THE CO - ORDINATE BENCH OF THIS COMPANY IN THE CASE OF ITO VS. SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. IN ITA NO.1302/BANG/2011 VIDE ORDER DT.11.6.2015. THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE. 10.1 GEOMETRIC SOFTWARE SOLUTI ONS LTD. : THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THOUGH THE COMPANY WAS SELECTED BY THE ASSESSEE, HOWEVER, IN VIEW OF THE RPT OF THIS COMPANY AT 22.52%, THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE. 10.2 ON THE OTHER H AND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT DESPITE SUFFICIENT OPPORTUNIT IES WERE GIVEN BY THE TPO AS WELL AS THE CIT (APPEALS) THE ASSESSEE DID NOT FILE THE RELEVANT DETAILS AND 17 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 THEREFORE THE ASSESSEE'S CON DUC T WAS COMPLETELY NON - CO - O PERATI VE DURING THE PROCEEDINGS BEFORE THE TPO AS WELL AS THE CIT (APPEALS). HE HAS REFERRED TO THE PARA NO.4.3.2 OF CIT (APPEALS) S ORDER AND SUBMITTED THAT THE CIT (APPEALS) HAS GIVEN DETAILS OF REPEATED NOT ICE S BUT THE ASSESSEE FAILED TO FURNISH THE R EQUISITE DETAILS AS WELL AS THE INFORMATION SO AS TO ARRIVE AT A PROPER DECISION. THUS THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE CIT (APPEALS) WAS COMPELL ED TO TAKE A DECISION ON ITS OWN AS THE ASSESSEE HAS FAILED TO FURNI SH THE RELEV ANT DETAILS. T HE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE ASSESSEE CANNOT TAKE THE ADVANTAGE OF ITS OWN WRONG. AS REGARDS THE FUNCTIONAL COMPARABILITY OF THE VARIOUS COMPANIES AS DESCRIBED BY THE ASSESSEE, THE LEARNED DEPARTMENTAL REP RESENTATIVE HAS SUBMITTED THAT THE GEOMETRIC SOFTWARE SOLUTIONS LTD. WAS SELECTED BY THE ASSESSEE AND THEREFORE THE ASSESSEE CANNOT S EEK THE EXCLUSION OF THE SAME. SH E HAS FURTHER CONTENDED THAT THE TPO HAS APPLIED RPT FILTER OF 25% WHICH IS ALSO UPHELD BY THIS TRIBUNAL IN VARIOUS DECISIONS. SHE HAS RELIED UPON THE DECISION OF T HE TRIBUNAL IN THE CASE OF CURAM SOFTWARE INTERNATIONAL LTD. VS. ITO 149 ITD 458 (ITA NO.1280/BANG/2012). THUS 18 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE T PO HAS APPLIED A FILTER OF 25% RPT WHICH IS ACCEPTABLE. 11.1 FLEXTRONICS SOFTWARE SYSTEM LTD. : THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE TRIBUNAL IN THE CASE OF SUNQUEST INFORMATION SYSTEM LTD. (SUPRA) HAS OBSERVED THAT THIS COMPANY IS ALSO IN THE SOFTWARE DEVELOPMENT PRODUCT SERVICE. HOWEVER, THERE WAS NO SALE OF SOFTWARE PRODUCT DURING THE YEAR. FURTHER, THE TPO HAS CONSIDERED THE SEGMENTAL DATA OF THIS COMPANY AS COMPUTED IN THE ANNEXURE B OF THE T P ORDER. WHEN THE TP O HAS CONSIDERED THE SEGMENTAL DATA, THEN, THIS COMPANY IS FUNCTIONALLY COMPARABLE. SIMILARLY IN THE CASE OF THIRDWARE SOLUTIONS LTD. , THE TPO HAS RECOMPUTED THE MARGINS OF THE SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE SAID COMPANY AND ONLY SEGMENTAL R ESULTS HAS BEEN TAKEN INTO CONSIDERATION FOR THE PURPOSE OF DETERMINATION OF ALP. 11.2 IN REBUTTAL, THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE TPO HAS RECOMPUTED THE PROFIT MARGINS OF TH E COMPARABLES ON ADHOC BASIS WITHOUT ALLOCATIO N OF CERTAIN EXPENSES. THEREFORE, THE RECOMPUTATION MADE BY THE TPO CANNOT BE RELIED UPON. 19 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 11.3 WE HAVE HEARD THE RIVAL SUBMISSIONS A ND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE TOOK 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 SOME MORE COMPARABLES IN THE SET OF COMPA RABLES 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 HAVI NG 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 ASSESSEE AND ITS AES AS WELL AS THE THIRD PA RTY TRANSACTIONS IN WHICH THE ASSESSEE HAS TO PAY THE SELLING COMMISSION TO THE AE, T HE ASSESSEE ADOPTED ENTITY LEVEL OPERATING MARGIN FOR THE PURPOSE OF BENCH MARKING ITS INTERNATIONAL TRANSACTIONS. HOWEVER, THIS METHOD IS NOT PERMITTED A S PER THE PROVI SIONS AND RULES OF THE TRANSFER PRICING UNDER INCOME TAX ACT AND I.T. RULES AND THEREFORE TO 20 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 THAT EXTENT, WE FIND THAT THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN REJECTING THE METHODOLOGY APPLIED BY THE ASSESSEE AS WELL AS BY THE TPO. ONCE THE CIT (APPEA LS) 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. IN STEAD 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 RECOMPUTED THEIR PROFIT MARGIN BY EXCLUDING CER TAIN 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 COMPARABLE TO THE AE OF THE ASSESSEE. THERE FORE THE ENTIRE EXERCISE OF DETERMINING THE ALP BY THE CIT (APPEALS) IS CONTRARY 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 IMPUGNED ORDER OF THE AUTHORITIES BELOW AND REMIT THE ISSUE TO THE RECORD OF THE ASSESSING OFFICER / TPO FOR DECIDING THE MATTER AFRESH BY 21 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 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 TH E 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 SELECTING THE COMPARABLE COMPANIES. THEREFO RE 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 THE 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. 12.1 GROUND NO.13 REGARDING THE REDUCTION OF FOREIGN CURRENCY EXPENSES FROM THE EXPORT TURNOVER. 12.2 WE HAVE HEARD THE RIVAL SUBMISSIONS A ND CONSIDERED THE RELEVANT MATERIAL ON REC ORD. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED 22 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 BY THE HON'BLE JURISDICTIONAL HIGH COURT IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2004 - 05 V IDE DECISION DT.8.1.2016 IN ITA NO.703 OF 2009 IN PARAS 11 TO 13 AS UNDER : 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY THE PARTIES AND PERUSED THE MATERIAL ON RECORD. 12. ON SUBSTANTIAL QUESTION NO.1, THE ASSESSING AUTHORITY HAS EXTENSIVELY CONSIDERED WHETHER THE ACTIVITY CARRIED ON BY THE ASSESSEE IS SOFTWARE DEVELOPMENT OR TECHNICAL SERVIC E. IT IS AN ADMITTED FACT, AS PER THE ASSESSMENT ORDER, THE ROLE OF THE ASSESSEE IS OF DEVELOPER OF SOFTWARE AND NOT A CONSULTANT TO ANY PROJECT. IT IS ALSO CATEGORICALLY HELD BY THE ASSESSING AUTHORITY THAT THE PURPOSE OF BUSINESS OF THE ASSESSEE IS TO DEVELOP THE SOFTWARE AND IN SUCH PROCESS, EXPENDITURE IS INCURRED IN FOREIGN CURRENCY TO PROVIDE TECHNICAL SERVICES OUTSIDE INDIA. HAVING HELD SO, THE ASSESSING AUTHORITY PROCEEDED TO CONCLUDE THAT THE NATURE OF EXPENDITURE AND THE NATURE OF BUSINESS ARE T WO DIFFERENT AND DISTINCT CONCEPTS AND AS PER THE STATUTE, WHAT IS TO BE EXCLUDED IS THE EXPENSES IN FOREIGN EXCHANGE FOR RENDERING TECHNICAL SERVICES, THOUGH THE SAME IS FORMING AN INTEGRAL PART AS EMBEDDED IN THE PROCESS OF ON SITE DEVELOPMENT OF SOFTWAR E. THIS VIEW IS UPHELD BY THE APPELLATE COMMISSIONER. 13. WE HAVE PERUSED THE RELEVANT PROVISIONS OF THE ACT I.E., EXPORT TURNOVER AS DEFINED UNDER EXPLANATION (2)(IV) TO SECTION 10A OF THE ACT. THE SAID EXPORT TURNOVER AS PER EXPLANATION (2)(IV) TO SECTION 10A OF THE ACT MEANS THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES OR THINGS OR COMPUTER SOFTWARE RECEIVED IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB - SECTION (3), BUT DO ES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. W HAT IS RELEVANT TO BE NOTICED AS PER THIS PROVISION IS THAT THE CONSIDERATION IN RESPECT OF EXPORT OF COMPUTER SOFTWARE RECEIVED IN OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IS AN EXPORT TURNOVER AND WHAT IS EXCLUDED FROM THIS CLAUSE IS (A) FREIGHT, (B) TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA (C) EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA . EXPLANATION (3) INSERTED BY FINANCE ACT, 2001 WITH EFFECT FROM 1.4.2001 EXPLAINS THAT THE PROFITS AND GAINS DERIVED FROM ON SITE DEVELOPMENT OF COMPUTER SOFTWARE INCLUDING SERVICES FOR DEVELOPMENT OF SOFTWARE, OUTSIDE INDIA SHALL BE DEEMED TO BE THE P ROFITS AND GAINS DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE OUTSIDE INDIA. THUS, IT IS CLARIFIED BY THE LEGISLATURE BY INSERTING EXPLANATION (3) TO SECTION 10A THAT THE PROFITS AND GAINS DERIVED FROM ON SITE DEVELOPMENT OF COMPUTER SOFTWARE INCLUDING SE RVICES FOR THE DEVELOPMENT OF SUCH SOFTWARE OUTSIDE INDIA IS 23 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 DEEMED TO BE THE PROFITS AND GAINS DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE OUTSIDE INDIA. IN OTHER WORDS, THE SERVICES RENDERED BY THE ASSESSEE RELATING TO THE DEVELOPMENT OF COMPUTER SOFTW ARE IS DEEMED TO BE PART OF EXPORT TURNOVER OF COMPUTER SOFTWARE OUTSIDE INDIA. RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN ASSESSEE'S OWN CASE, WE DIRECT THE ASSESSING OFFICER/TPO NOT TO REDUCE THE EXPENSES FROM TH E EXPORT TURNOVER FOR COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT. 13.1 GROUND NO.15 IS REGARDING FOREIGN TAX CREDIT. 13.2 WE HAVE HEARD THE RIVAL SUBMISSIONS A ND CONSIDERED THE RELEVANT MATERIAL ON RECORD. IN THE OUTCOME OF THE REMAND PROCEEDINGS IF ANY TAX LIABILITY IS DETERMINED BY THE ASSESSING OFFICER, THEN THE TAX CREDIT IN RESPECT OF THE FOREIGN TAX PAID BY THE ASSESSEE IS ALSO REQUIRED TO BE CONSIDERED. WE ACCORDINGLY DIRECT THE ASSESSING OFFICER TO CONSIDER THE APPROPRIATE CRE DIT FOR FOREIGN TAX PAID. 14. GROUND NOS.16 & 17, INTEREST UNDER SECTIONS 234B & 234D IS CONSEQUENTIAL IN NATURE. 15. GROUND NO.18 IS REGARDING PENALTY UNDER SECTION 271(1)(C) OF THE ACT IS PREMATURE TO DEAL WITH THE ISSUE. 24 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 REVENUE S APPEAL 16. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : 1. THE ORDER OF THE LEARNED CIT (APPEALS) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT (APPEALS) ERRED IN HOLDING THE TELECOMMUNICATION EXPENSES AMOUNTING TO RS.38,63,601 AND FOREIGN CURRENCY EXPENSES INCURRED FOR PROVIDING SOFTWARE DEVELOPMENT OUTSIDE INDIA AMOUNTING TO RS.10,84,20,751 ARE TO BE EXCLUDED FROM THE TOTAL TURNOVER AS WELL, FOR COMPUTATION OF DEDUCTION UNDER SECTION 10A OF T HE IT ACT WHEREAS SUCH EXCLUSION IS PERMITTED TO ARRIVE AT THE EXPORT TURNOVER ONLY AS PER THE DEFINITIONS GIVEN IN SECTION 10A OF THE IT ACT AND TOTAL TURNOVER HAS NOT BEEN DEFINED IN SECTION 10A OF THE ACT. 3. THE CIT (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE DECISIONOF HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF M/S. TATA ELXSI LTD. ON THE ISSUE OF COMPUTING DEDUCTION UNDER SECTION 10A BY EXCLUDING THE ABOVE EXPENSES FROM EXPORT TURNOVER AND TOTAL TURNOVER AS WELL, HAS NOT REACHED FINALITY IN VIEW OF THE PENDING DEPARTMENT S SLP BEFORE THE HON'BLE SUPREME COURT. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT (APPEALS) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND T HAT OF THE ASSESSING OFFICER MAY BE RESTORED. 5. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND/OR DELETE ANY OF THE GROUND MENTIONED ABOVE. 16. 1 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD. THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CIT V M/S TATA ELXSI LTD. & OTHERS HAD HELD THAT WHILE COMPUTING THE EXEMPTION U/S 10A, IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE 25 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 EXCLUDED FROM THE TOTAL TURN OVER IN THE DENOMINATOR. THE RELEVANT FINDING OF THE HON BLE JURISDICTIONAL HIGH COURT READS AS FOLLOWS: - ..SECTION 10A IS ENACTED AS AN INCENTIVE TO EXPORTERS TO ENABLE THEIR PRODUCTS TO BE COMPETITIVE IN THE GLOBAL MARKET AND CONSEQUENTLY EARN PRECIO US FOREIGN EXCHANGE FOR THE COUNTRY. THIS ASPECT HAS TO BE BORNE IN MIND. WHILE COMPUTING THE CONSIDERATION RECEIVED FROM SUCH EXPORT TURNOVER, THE EXPENSES INCURRED TOWARDS FREIGHT, TELECOMMUNICATION CHARGES, OR INSURANCE ATTRIBUTABLE TO THE DELIVERY O F THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA, OR EXPENSES IF ANY INCURRED IN FOREIGN EXCHANGE, IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA SHOULD NOT BE INCLUDED. HOWEVER, THE WORD TOTAL TURNOVER IS NOT DEFINED FOR THE PURPOSE OF THIS SECTION. IT IS BECAUSE OF THIS OMISSION TO DEFINE TOTAL TURNOVER , THE WORD TOTAL TURNOVER FALLS FOR INTERPRETATION BY THIS COURT; ..IN SECTION 10A, NOT ONLY THE WORD TOTAL TURNOVER IS NOT DEFINED, THERE IS NO CLUE REGARDING WHAT IS TO BE EXCLUDE D WHILE ARRIVING AT THE TOTAL TURNOVER. HOWEVER, WHILE INTERPRETING THE PROVISIONS OF SECTION 80HHC, THE COURTS HAVE LAID DOWN VARIOUS PRINCIPLES, WHICH ARE INDEPENDENT OF THE STATUTORY PROVISIONS. THERE SHOULD BE UNIFORMITY IN THE INGREDIENTS OF BOTH TH E NUMERATOR AND THE DENOMINATOR OF THE FORMULA, SINCE OTHERWISE IT WOULD PRODUCE ANOMALIES OR ABSURD RESULTS. SECTION 10A IS A BENEFICIAL SECTION WHICH INTENDS TO PROVIDE INCENTIVES TO PROMOTE EXPORTS. IN THE CASE OF COMBINED BUSINESS OF AN ASSESSEE, HAV ING EXPORT BUSINESS AND DOMESTIC BUSINESS, THE LEGISLATURE INTENDED TO HAVE A FORMULA TO ASCERTAIN THE PROFITS FROM EXPORT BUSINESS BY APPORTIONING THE TOTAL PROFITS OF THE BUSINESS ON THE BASIS OF TURNOVERS. APPORTIONMENT OF PROFITS ON THE BASIS OF TURNO VER WAS ACCEPTED AS A METHOD OF ARRIVING AT EXPORT PROFITS. IN THE CASE OF SECTION 80HHC, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS INCOME OF THE ASSXCESSEE, WHEREAS IN 26 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 SECTION 10 - A, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSIN ESS OF THE UNDERTAKING. EVEN IN THE CASE OF BUSINESS OF AN UNDERTAKING, IT MAY INCLUDE EXPORT BUSINESS AND DOMESTIC BUSINESS, IN OTHER WORDS, EXPORT TURNOVER AND DOMESTIC TURNOVER. TO THE EXTENT OF EXPORT TURNOVER, THERE WOULD BE A COMMONALITY BETWEEN TH E NUMERATOR AND THE DENOMINATOR OF THE FORMULA. IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPUTING THE EXPORT TURNOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DENOMIN ATOR. THE REASON BEING THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER. THE COMPONENTS OF THE EXPORT TURNOVER IN THE NUMERATOR AND THE DENOMINATOR CANNOT BE DIFFERENT. THEREFORE, THOUGH THERE IS NO DEFINITION OF THE TERM TOTAL TURNOVER IN SECTION 10A, THE RE IS NOTHING IN THE SAID SECTION TO MANDATE THAT, WHAT IS EXCLUDED FROM THE NUMERATOR THAT IS EXPORT TURNOVER WOULD NEVERTHELESS FORM PART OF THE DENOMINATOR. WHEN THE STATUTE PRESCRIBED A FORMULA AND IN THE SAID FORMULA, EXPORT TURNOVER IS DEFINED, AN D WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER, THE VERY SAME MEANING GIVEN TO THE EXPORT TURNOVER BY THE LEGISLATURE IS TO BE ADOPTED WHILE UNDERSTANDING THE MEANING OF THE TOTAL TURNOVER, WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER. IF WHAT I S EXCLUDED IN COMPUTING THE EXPORT TURNOVER IS INCLUDED WHILE ARRIVING AT THE TOTAL TURNOVER, WHEN THE EXPORT TURNOVER IS A COMPONENT OF TOTAL TURNOVER, SUCH AN INTERPRETATION WOULD RUN COUNTER TO THE LEGISLATIVE INTENT AND IMPERMISSIBLE. THUS, THERE IS N O ERROR COMMITTED BY THE TRIBUNAL IN FOLLOWING THE JUDGEMENTS RENDERED IN THE CONTEXT OF SECTION 80HHC IN INTERPRETING SECTION 10A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE AND THE SAME . 16 .2 THE HON BLE MUMBAI HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. (SUPRA), IN IDENTICAL CIRCUMSTANCES, HELD THAT SINCE THE 27 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 EXPORT TURNOVER FORMS PART OF THE TOTAL TURNOVER, IF AN ITEM IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER TO MAINTAIN P ARITY BETWEEN NUMERATOR AND DENOMINATOR WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HON BLE MUMBAI HIGH COURT READS AS FOLLOWS: - THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING WOULD CONSIST OF THE TURNOVE R FROM EXPORT AND THE TURNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB - SECTION (4). EXPORT TURNOVER ALSO FORMS A CONSTITUENT ELEMENT OF THE DENOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART O F THE TOTAL TURNOVER. THE EXPORT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANING AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESSION EXPORT TURNO VER IN EXPLN.2 TO S.10A WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED IN OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGISLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT A ND INSURANCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES ARE LIABLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POINT THAT THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN DEFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF S.10A. HOWEVER, THE EXPRESSION EXPORT TURNOVER HAS 28 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 BEEN DEFINED. THE DEFINITION OF EXPORT TURNO VER EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PREVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTHER INTERPRETATION WOULD L EAD TO AN ABSURDITY. IF THE CONTENTION OF THE REVENUE WERE TO BE ACCEPTED, THE SAME EXPRESSION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNOTATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE BEEN SPECIFICALLY EXCLUDED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PART OF THE EXPORT TURNOVER WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMINATOR IN THE FORMUL A. A CONSTRUCTION OF A STATUTORY PROVISION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVER, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NOT HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL TURNOVER. FREIGHT AND INSURANCE CHAR GES DO NOT HAVE ANY ELEMENT OF TURNOVER. FOR THIS REASON IN ADDITION, THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURNOVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRIPTION TO THE CONTRARY CIT V SUDARSHAN CHEMICALS INDUSTRIES LTD. ( 2000) 163 CTR (BOM) 596: (2000) 245 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) AND CIT V CATAPHARMA (INDIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON 16. 3 IN THE LIGHT OF THE ABOVE BINDING PRECEDENTS, WE ARE OF THE VIEW THAT THE ORDERS OF THE CIT(A) IS CORRECT AND IN ACCORDANCE WITH LAW 29 IT (T.P) A NO. 1105 & 1259 /BANG/201 2 AND HE IS JUSTIFIED IN DIRECTING THE AO TO EXCLUDE THE ABOVE MENTIONED EXPENSES BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOV ER WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. 17. IN THE RESULT, THE ASSESSEE'S APPEAL IS ALLOWED FOR STATISTICAL PURPOSES AND REVENUE S APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 22ND DAY OF APRIL, 201 6 . SD/ - ( INTURI RAMA RAO ) ACCOUNTANT MEMBER SD/ - ( VIJAY PAL RAO ) JUDICIAL MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE. (TRUE COPY) BY ORDER ASST. REGISTRAR, ITAT , BANGALORE