Force10 Networks India Private Limited, CHENNAI V. ITO, CHENNAI

ITA 1119/CHNY/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96337 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2015
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 29-09-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 30-04-2014
• Court: TRIBUNAL
• Department Lawyers: MILIND MADHUKAR BHUSARI
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Business income; Transfer pricing; International transaction; Bad and doubtful debts
• Section: 92C

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , ! ' , # $% BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ./ ITA NO. 948/MDS/2014 / ASSESSMENT YEAR : 2009-10 THE INCOME-TAX OFFICER, COMPANY WARD-II(1), CHENNAI 34. ( /APPELLANT) VS M/S. FORCE 10 NETWORK INDIA (P) LTD., FORTIUS BLOCK, 7 TH & 8 TH FLOOR, OLYMPIA TECHNOLOGY PARK, PLOT NO.1, SIDCO INDUSTRIAL ESTATE, GUINDY, CHENNAI 600 032. PAN AAACF8609B ( /RESPONDENT) ./ ITA NO. 1119/MDS/2014 / ASSESSMENT YEAR : 2009-10 M/S. FORCE 10 NETWORK INDIA (P) LTD., CHENNAI 32. ( /APPELLANT) VS THE INCOME-TAX OFFICER, COMPANY WARD-II(1), CHENNAI 34. ( /RESPONDENT) DEPARTMENT BY : SHRI MILIND MADHUKAR BHUSARI, CIT ASSESSEE BY : SHRI K.R.VASUDEVAN, ADVOCATE / DATE OF HEARING : 29.09.2015 !' / DATE OF PRONOUNCEMENT: 06.11.2015 - - ITA 948/14 ETC . 2 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE CROSS APPEALS ARE FILED BY THE REVENUE AND BY THE ASSESSEE AGAINST THE DIRECTIONS OF THE DISPUTE RESO LUTION PANEL DATED 24.1.2013. 2. FIRST, WE TAKE UP THE ASSESSEES APPEAL. THE AS SESSEE HAS RAISED THE ISSUE RELATING TO TRANSFER PRICING I N THE FOLLOWING GROUNDS: 1. THE LEARNED ASSESSING OFFICER (LEARNED AO) A ND THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX (TRANSFER PRICING-IV), CHENNAI (TRANSFER PRICING OFFICER OR LEARNED TPO) GROSSLY ERRED IN DETERMIN ING AN ADJUSTMENT TO THE ARMS LENGTH PRICE (ALP) OF THE APPELLANTS INTERNATIONAL TRANSACTIONS WITH ASSOCIA TED ENTERPRISES AES) OF ` 1.27 CRORES WITH RESPECT TO THE INFORMATION TECHNOLOGY SERVICES (IT) RENDERED BY THE TAX PAYER U/S 92CA OF THE INCOME TAX ACT. 2. THE LEARNED AO/LEARNED TPO ERRED IN REJECTING T HE TRANSFER PRICING (TP) DOCUMENTATION MAINTAINED BY THE APPELLANT ON INVOKING PROVISIONS OF SUB-SEC.(3) OF SEC. 92C OF THE ACT CONTENDING THAT THE INFORMATION OR DATA USED IN THE COMPUTATION OF THE ARMS LENGTH PR ICE IS NOT RELIABLE OR CORRECT IN DOING SO. 2.A THE LEARNED AO/LEARNED TPO ERRED IN REJECTION O F COMPARABILITY ANALYSIS CARRIED IN THE TP DOCUMENTAT ION AND IN CONDUCTING A FRESH COMPARABILITY ANALYSIS BY INTRODUCING VARIOUS FILTERS IN DETERMINING THE ARM S LENGTH PRICE. - - ITA 948/14 ETC . 3 2.B THE LEARNED AO/LEARNED TPO ERRED IN REJECTING COMPANIES THAT ARE COMPARABLE TO THE APPELLANT WHIL E PERFORMING THE COMPARABILITY ANALYSIS SPECIFICALLY, THE APPELLANT BELIEVES THAT RS SOFTWARE LTD. SHOULD HAV E BEEN INCLUDED AS COMPARABLE. 3. THE LD. AR SUBMITTED THAT THE ASSESSEE IS NOT IN TERESTED TO PRESS THE ABOVE GROUNDS. ACCORDINGLY, THESE GRO UNDS ARE DISMISSED AS NOT PRESSED. 4. THE NEXT GROUND RAISED BY THE ASSESSEE READS AS FOLLOWS: 2.C THE LEARNED AO/LEARNED TPO ERRED IN INCLUDING COMPANIES THAT DO NOT SATISFY THE TEST OF COMPARABILITY. SPE CIALLY THE APPELLANT BELIEVES THAT THE FOLLOWING COMPANIES SEL ECTED AS COMPARABLE BY THE LEARNED AO/LEARNED TPO SHOULD BE REJECTED. BODHTREE LIMITED COMP-U-LEARN TECH INDIA LTD SYNETAIROS TECHNOLOGIES LTD. 5. ACCORDING TO THE LD. AR, BODHTREE LTD. CANNOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEES CASE AND IT SHOULD BE REJECTED DUE TO HIGHLY FLUCTUATING MARGIN S. FURTHER, IT WAS SUBMITTED THAT BODHTREE LTD. IS A G LOBAL IT CONSULTING AND PRODUCT ENGINEERING SERVICE PROVIDER , PROVIDING SERVICES LIKE ANALYTICS SERVICES, CLOUD S ERVICES - - ITA 948/14 ETC . 4 ETC. AND DISSIMILAR TO THE ASSESSEES CASE. THE AS SESSEE BEING A LIMITED RISK CAPTIVE SERVICE PROVIDER, REMU NERATED ON COST PLUS MARK UP ON A CONSISTENT BASIS AND BODH TREE LTD IS A COMPANY BEARING HIGHER RISK RESULTING IN ABNORMAL FLUCTUATING MARGINS AND HENCE, IT CANNOT BE COMPARE D TO THE ASSESSEES CASE. THE LD. AR, RELIED ON THE FOL LOWING CASE LAW TO SUPPORT HIS ARGUMENT: 1. M/S. CISCO SYSTEMS (INDIA) PVT. LTD. V. DCIT IN ITA NO.IT(TP)A NO.271/BANG/2014 DATED 14.8.2014. 2. CIENA INDIA PVT. LTD. V. ITO IN ITA NO.1453/DEL/ 2014 DATED 24.4.2015. 6. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT THE RE IS NO EVIDENCE TO SUPPORT THE LD. ARS ARGUMENT AND TH E ASSESSEE HAS NOT EXPLAINED WHY IN 2011 PROFIT MARGI N HAS ENTERED IN NEGATIVE TERRITORY. ACCORDING TO THE LD . DR, STUDY OF BODHTREE LTD. FROM 2005 TO 2012 WITHOUT ANY REFE RENCE TO CIRCUMSTANCES IN EACH FINANCIAL YEAR IS OF NO USE. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE IS ENGAGED IN REN DERING SOFTWARE DEVELOPMENT SERVICES (SOFTWARE DESIGNS AND DEVELOPMENT) AND ALSO RENDERING MARKET SUPPORTING - - ITA 948/14 ETC . 5 SERVICES TO THE AES ON COST PLUS MARK-UP BASIS. IT WAS NOTICED THAT BODHTREE LTD. IS ENGAGED IN THE BUSINE SS OF SOFTWARE PRODUCTS AND WAS ALSO ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOPMENT OF SOFTWARE USING LATEST TECHN OLOGY. IT WAS ALSO OBSERVED THAT BODHTREE LTD. DO NOT REPR ESENT FAIR PROFITABILITY ON YEAR TO YEAR BASIS, THIS COMP ANY LOSSES ITS TAG OF AN EFFECTIVE COMPARABLE. IT IS ALSO BROU GHT TO OUR NOTICE THAT FOR THE SAME ASSESSMENT YEAR, BODHTREE LTD. HAS NOT CONSIDERED AS A COMPARABLE CASE BY THE TRIB UNAL, BANGALORE BENCH IN THE CASE OF M/S. CISCO SYSTEMS (INDIA) PVT. LTD. IN ITA NO.271/BANG/2014 DATED 14. 8.2014 OBSERVED IN PARAGRAPH 26.1 AS UNDER : 26.1 BODHTREE CONSULTING LTD.:- AS FAR AS THIS COMPANY IS CONCERNED, IT IS NOT IN DISPUTE THAT IN THE LIST OF COMPARABLES CHOSEN BY THE ASSESSEE, THIS COMPANY WAS ALSO INCLUDED BY THE ASSESSEE. THE ASSESSEE, HOWEVER, SUBMITS BEFORE US THAT LATER ON IT CAME TO THE ASSESSEES NOTICE THAT THIS COMPANY IS NOT BEING CONSIDERED AS A COMPARABLE COMPANY IN THE CASE OF COMPANIES RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. V. ITO, ITA NO.7633/MUM/2012, ORDER DATED 6.11.2013. IN THIS CASE, THE TRIBUNAL FOLLOWED THE DECISION RENDERED BY THE MUMBAI BENCH - - ITA 948/14 ETC . 6 OF THE TRIBUNAL IN THE CASE OF WILLS PROCESSING SERVICES (I) P. LTD., ITA NO.4547/MUM/2012. IN THE AFORESAID DECISIONS, THE TRIBUNAL HAS TAKEN THE VIE W THAT BODHTREE CONSULTING LTD. IS IN THE BUSINESS OF SOFTWARE PRODUCTS AND WAS ENGAGED IN PROVIDING OPEN & END TO END WEB SOLUTIONS SOFTWARE CONSULTANCY AND DESIGN & DEVELOPMENT OF SOFTWARE USING LATEST TECHNOLOGY. THE DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF NETHAWK NETWORKS PVT. LTD. (SUPRA) IS IN RELATION TO A.Y. 2 008- 09. IT WAS AFFIRMED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FACTS AND CIRCUMSTANCES IN THE PRESENT YEAR ALSO REMAINS IDENTICAL TO THE FACTS AN D CIRCUMSTANCES AS IT PREVAILED IN AY 08-09 AS FAR AS THIS COMPARABLE COMPANY IS CONCERNED. FOLLOWING THE AFORESAID DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HOLD THAT BODHTREE CONSULTING LTD. CAN NOT BE REGARDED AS A COMPARABLE. IN THIS REGARDS, THE F ACT THAT THE ASSESSEE HAD ITSELF PROPOSED THIS COMPANY AS COMPARABLE, IN OUR OPINION, SHOULD NOT BE THE BASIS ON WHICH THE SAID COMPANY SHOULD BE RETAINED AS A COMPARABLE, WHEN FACTUALLY IT IS SHOWN THAT THE SAI D COMPANY IS A SOFTWARE PRODUCT COMPANY AND NOT A SOFTWARE DEVELOPMENT SERVICES. THE SAME VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF CIENA INDIA PVT. LTD. (SUPR A), WHEREIN IT WAS OBSERVED THAT THE PROFITS OF BODHTREE CONSULTIN G LTD. DO NOT REPRESENT FAIR PROFITABILITY ON YEAR TO YEAR BASIS, THIS COMPANY LOSSES ITS TAG OF AN EFFECTIVE COMPARABLE. BEING S O, IN OUR OPINION, IN THE CASE OF THE ASSESSEE ALSO BUDHTREE CANNOT BE CONSIDERED AS COMPARABLE AND IT IS TO BE EXCLUDED F ROM THE LIST OF COMPARABLES FOR DETERMINING ALP. THIS GROUND IS AL LOWED. - - ITA 948/14 ETC . 7 8. REGARDING COMP-U-LEARN TECH INDIA LTD. IS CONCER NED, IT WAS SUBMITTED THAT THIS COMPANY IS ENGAGED IN DEVEL OPMENT AND SALE OF SOFTWARE PRODUCTS AND ITS INCOME FROM DIFFE RENT SEGMENTS AND DATA ALSO NOT AVAILABLE IN PUBLIC DOMAIN. TPO SHOULD HAVE CALLED FOR INFORMATION OF THAT COMPANY U/S.133(6) R EGARDING THE SEGMENTAL INCOME. WITHOUT CALLING FOR THE REPORTS , THE TPO CONSIDERED THE DATA OF THIS COMPANY AS A COMPARABLE CASE WHILE DETERMINING ALP. THE LD. DR RELIED ON THE ORDER OF DRP. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. ADMITTEDLY, THE ASSESSEE HAS NOT PRODUC ED FINANCIAL DATA BEFORE THE TPO AS IT IS SAID TO BE NOT AVAILAB LE IN PUBLIC DOMAIN. THE TPO COULD HAVE EXERCISED POWER U/S.133 (6) TO AVAIL REQUISITE DATA. THE PROPOSITION OF THE AR IS THAT BEFORE CONSIDERING IT AS COMPARABLE SEGMENTS, DATA TO BE O BTAINED. ACCORDINGLY, WE DIRECT THE TPO TO CALL FOR DATA FRO M THE CONCERNED PARTY BY EXERCISING POWER U/S.133(6) AND DECIDE THE ISSUE ACCORDINGLY. 10. WITH REGARD TO SYNETAIROS TECHNOLOGIES LTD., TH E CONTENTION OF THE LD. AR IS THAT FOREIGN EXCHANGE I NCOME OF THIS COMPANY TO TOTAL SALES IS NIL. HENCE, IT IS NOT CO NSIDERED AS - - ITA 948/14 ETC . 8 COMPARABLE TO THE ASSESSEE COMPANY. THE LD. DR SUB MITTED THAT SO LONG THIS COMPANY IS SELECTED ON THE BASIS OF FILTERS IDENTIFIED BY THE TPO, IT CANNOT BE EXCLUDED FROM T HE SET OF COMPARABLES ON THE BASIS THAT AS THIS COMPANY DOES NOT HAVE FOREX INCOME. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IT IS NOT DISPUTED THAT SYNETAIROS TECH NOLOGIES LTD. HAVE NO FOREIGN EXCHANGE INCOME. BEING SO, IT IS N OT APPROPRIATE TO CONSIDER IT AS COMPARABLE TO DETERMINE THE ALP. 12. THE LD. AR SUBMITTED THAT THE ASSESSEE IS NOT I NTERESTED TO PRESS GROUND NOS.3, 4, 5 AND 7. THEREFORE, THES E GROUNDS ARE DISMISSED AS NOT PRESSED. 13. THE NEXT GROUNDS IN THE ASSESSEES APPEAL IS TH AT THE LEARNED AO/TPO ERRED IN IGNORING THE LIMITED RISK N ATURE OF THE CONTRACTUAL SERVICES PROVIDED BY THE ASSESSEE AND I N NOT PROVIDING AN APPROPRIATE ADJUSTMENT TOWARDS THE RIS K DIFFERENTIAL, EVEN WHEN THE FULL-FLEDGED ENTREPRENEURIAL COMPANIE S ARE SELECTED AS COMPARABLE COMPANIES. 14. THE LD. AR SUBMITTED THAT NO RISK ADJUSTMENT WA S PROVIDED BY THE TPO, AS THE MARGINS OF THE COMPARAB LE - - ITA 948/14 ETC . 9 COMPANIES SELECTED IN THE TP REPORT WAS IN LINE WIT H THE ASSESSEES MARGIN. HE RELIED ON THE FOLLOWING DECI SIONS OF THE TRIBUNAL, BANGALORE BENCH : 1. M/S. INTELLINET TECHNOLOGIES INDIA PVT. LTD. VS. ITO IN ITA NO.1237/BANG/2010 DATED 30.3.2012. 2. M/S. BEARING PAINT BUSINESS CONSULTING PVT. LTD. V. DCIT IN ITA NO.1124/BANG/2011 DATED 21.12.2012. 14.1 FURTHER, THE LD. AR SUBMITTED THAT THE AE OF T HE ASSESSEE IS THE ENTREPRENEURIAL RISK BEARING ENTITY THAT FAC ES THE MARKET AND OTHER RELATED RISKS PERTAINING TO ITS BUSINESS AND DOES NOT DISTRIBUTE THE RISKS. THIS HAS CLEARLY BEEN DOCUME NTED IN THE TRANSFER PRICING DOCUMENTATION THAT THE ASSESSEE DO ES NOT UNDERTAKE ANY MARKET RISK AND IS OPERATING AS A CON TRACT SERVICE PROVIDES WITH AN ASSURED RETURN ON COSTS. THEREFOR E, CONSIDERING THAT THERE IS NO DISTRIBUTION OF RISKS BY THE AE TO THE ASSESSEE, A RISK ADJUSTMENT IS NECESSARY TO THE PERFORMED SO AS TO EVEN OUT THE DIFFERENCE IN THE RISK LEVEL OF THE ASSESSEE AN D THE COMPARABLE COMPANIES. 15. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT TH E ASSESSEE WAS NOT ABLE TO DEMONSTRATE THAT THE COMPA RABLE COMPANIES HAD ACTUALLY UNDERTAKEN SUCH RISK, THE SA ME - - ITA 948/14 ETC . 10 MATERIALLY AFFECTED THEIR MARGIN AND THAT AN ADJUST MENT WOULD IMPROVE THE COMPARABILITY. BEING SO, NO MARKET RIS K ADJUSTMENT TO BE GIVEN TO THE ASSESSEE. 16. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MA TERIAL ON RECORD. IT IS PERTINENT TO NOTE THAT UNDER RULE 10B(3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANS ACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM , SUCH TRANSACTIONS IN THE OPEN MARKET; OR REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. THE OECD GUIDELINES STATE: IN THE OPEN MARKET, TH E ASSUMPTION OF INCREASED RISK WILL ALSO BE COMPENSAT ED BY AN INCREASE IN THE EXPECTED RETURN. THE GUIDELINE S PROVIDE AN EXAMPLE WHERE A CONTRACT MANUFACTURER O R CONTRACT RESEARCHER THAT TAKES ON NO MEANINGFUL RIS K WOULD BE ENTITLED TO ONLY A LIMITED RETURN. - - ITA 948/14 ETC . 11 THE U.S. TRANSFER PRICING REGULATIONS ALSO SPECIFY RISK ADJUSTMENTS IN REGS. 1.482-1(D). SEC.482 SANCTIO NS THE USE OF FINANCIAL ADJUSTMENTS TO CORRECT FOR DIFFERE NCES BETWEEN THE TESTED PARTY AND UNCONTROLLED COMPARABL ES THAT WOULD MATERIALLY AFFECT THE PROFITS DETERMINE D UNDER THE RELEVANT PROFIT LEVEL INDICATOR. CONSIDERING THE ABOVE POSITION, IT IS APPROPRIATE T O CONSIDER THE RISK ADJUSTMENT WHILE DETERMINING THE ALP. THEREFO RE, WE DIRECT THE TPO TO CONSIDER THE CONTENTION OF THE ASSESSEE AS PER THE MATERIAL BROUGHT ON RECORD AND DECIDE THE ISSUE AFR ESH AFTER GIVING OPPORTUNITY OF HEARING TO THE ASSESSEE. 17. THE NEXT GROUND RAISED BY THE ASSESSEE RELATING TO CORPORATE TAX READS AS FOLLOWS: 1.1 THE LEARNED AO HAS ERRED IN CONSIDERING AN INCORRECT EXPORT TURNOVER ELIGIBLE FOR DEDUCTION UN DER SECTION 10A AT ` 21,341,669 INSTEAD OF ` 219,508,455. 18. ACCORDING TO THE LD. AR, THE AO WRONGLY APPLIED EXCHANGE RATE DIFFERENCE FROM THE RATE APPLIED BY THE ASSESS EE AND THEREBY REDUCED THE EXPORT TURNOVER FROM ` 21,95,08,455/- TO ` 20,23,14,740/-. - - ITA 948/14 ETC . 12 19. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE DRP HAS DIR ECTED THE AO TO LOOK INTO THE MATTER AND AFTER VERIFYING THE CLA IM OF THE ASSESSEE REGARDING THE CORRECTNESS, DECIDE ACCORDIN GLY. BEING SO, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF TH E DRP. HOWEVER, WE MAKE IT CLEAR THAT THE AO HAS TO CONSID ER THE PROVISIONS OF EXPLANATION 1 TO SEC.10A(2) OF THE AC T. 20. NEXT GROUND RAISED BY THE ASSESSEE IS AS UNDER : 1.2. FURTHER, WITHOUT APPRECIATING THE TACT THAT THE COMPANY HAS ARRIVED AT THE EXPORT TURNOVER ELIGIBLE FOR SECTION 10A DEDUCTION AFTER REDUCING THE MARKETING SUPPORT SERVICES INCOME OF ` 16,618,004, THE LEARNED AO HAS ERRED IN REDUCING THE SAME AMOUNT AGAIN FROM THE INCORRECT EXPORT TURNOVER CONSIDERED BY HIM. 21. THE LD. AR SUBMITTED THAT THE TOTAL TURNOVER OF THE COMPANY AS PER THE FINANCIALS IS ` 236,127,329/-. THE EXPORT TURNOVER AS MENTIONED ABOVE OF ` 219,508,455 IS ARRIVED AS UNDER: PARTICULARS AMOUNT (IN ` .) TOTAL TURNOVER OF THE UNDERTAKING 236,127,329 LESS: MARKETING SUPPORT SERVICES 16,618,874 EXPORT TURNOVER OF THE UNDERTAKING 219,508,455 THE LD. AR, FURTHER SUBMITTED THAT THE AO HAS AGAIN REDUCED THE SAID MARKETING SUPPORT SERVICE INCOME OF ` 16,618,874 FROM THE - - ITA 948/14 ETC . 13 EXPORT TURNOVER OF ` 221,341,699 WHILE COMPUTING THE AMOUNT ELIGIBLE FOR DEDUCTION U/S.10A IN THE ASSESSMENT OR DER. ACCORDING TO LD. AR, AS THE COMPANY HAD SUO-MOTO RE DUCED THE SAID MARKETING SUPPORT SERVICES FROM TOTAL TURNOVER , THE SAID ADJUSTMENT MADE BY THE AO HAS RESULTED IN A DUAL RE DUCTION OF THE SAME AMOUNT WHICH HAS RESULTED IN DILUTION OF T AX HOLIDAY CLAIM MADE BY THE COMPANY. 22. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE DRP HAS ALREADY GIVEN THE DIRECTIO N TO CLARIFY THE CLAIM OF THE ASSESSEE AND IF IT IS FOUND THAT T HE COMPANY SUO- MOTO REDUCED THE MARKETING SUPPORT SERVICES OF ` 16,618,004/- FROM THE EXPORT TURNOVER, THE AO IS DIRECTED TO ADD BACK THE SAID AMOUNT TO THE EXPORT TURNOVER. BEING SO, WE DO NOT FIND ANY INFIRMITY IN THE DIRECTION THE DRP. ACCORDINGLY, T HIS GROUND IS DISMISSED. 23. THE NEXT GROUND RELATING TO INCORRECT TOTAL TUR NOVER CONSIDERED READS AS UNDER: 2.1 THE LEARNED AO HAS ERRED IN CONSIDERING MISCELLANEOUS INCOME OF ` 164,448 AND INTEREST INCOME OF ` 110,424 AS PART OF TOTAL TURNOVER OF STPI UNIT WITHOUT APPRECIATING THAT THE TERM TURNOVER FOR T HE PURPOSE OF SECTION 10A SIGNIFIES THE CONSIDERATION - - ITA 948/14 ETC . 14 RECEIVED FOR SALES MADE OR SERVICES RENDERED BY THE UNIT. 24. THE LD. AR SUBMITTED THAT INTEREST INCOME OF ` 110,424 AND MISCELLANEOUS OF ` 164,448 (MAJORLY CONSISTING OF PROVISION NO LONGER REQUIRED WRITTEN BACK) REPRESENT INCIDENT AL BUSINESS INCOME OF THE COMPANY AND DOES NOT HAVE ANY ELEMENT OF TURNOVER. THE LD. AR FURTHER SUBMITTED THAT THE TE RM TURNOVER FOR THE PURPOSE OF SEC.10A SIGNIFIES THE CONSIDERATION RECEIVED FOR SALES MADE OR SERVICES RENDERED AND NOT ANY INCIDEN TAL BUSINESS INCOME. IN THIS CONNECTION, THE LD. AR PLACED RELI ANCE ON THE DECISION OF CHENNAI BENCH OF THE TRIBUNAL IN THE CA SE OF CHANGE POND TECHNOLOGIES (P) LTD. (22 SOT 220), WHEREIN IT WAS HELD THAT INTEREST ON DEPOSITS IS NOT CONNECTED WITH THE BUSINESS OF THE UNDERTAKING AND ACCORDINGLY, THE SAME SHALL NOT FORM PART OF TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT. ACCORDING TO THE LD. AR, MISCELLANEOUS INCOME AND I NTEREST INCOME NOT TO BE INCLUDED IN THE TOTAL TURNOVER OF THE UNDERTAKING. 25. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE M ATERIAL ON RECORD. WE FIND FORCE IN THE CONTENTION OF THE L D. AR, AS SIMILAR ISSUE HAS BEEN CONSIDERED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF CHANGE POND TECHNOLOGIES (P ) - - ITA 948/14 ETC . 15 LTD.(SUPRA), WHEREIN IT WAS HELD THAT SINCE INTERES T ON FIXED DEPOSITS WAS NOT CONNECTED WITH THE BUSINESS ACTIVI TY OF THE ASSESSEE, SAME WAS TO BE EXCLUDED FROM TOTAL TURNOV ER OF ASSESSEE WHILE COMPUTING DEDUCTION U/S.10A OF THE A CT. ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE MISCELLANE OUS INCOME AND INTEREST INCOME FROM THE TOTAL TURNOVER OF THE ASSESSEE. 26. REGARDING CONSIDERATION OF MISCELLANEOUS INCOM E AS INCOME FROM OTHER SOURCES INSTEAD OF BUSINESS PROFI TS, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS : 3.1 THE LEARNED AO AND THE HONORABLE DRP HAS ERRED IN RECLASSIFYING MISCELLANEOUS INCOME OF ` 164,448 FROM BUSINESS INCOME TO INCOME FROM OTHER SOURCES. 3.2 THE LEARNED AO HAS FAILED TO APPRECIATE THAT TH E MISCELLANEOUS INCOME HAS A DIRECT NEXUS WITH THE BUSINESS OF THE APPELLANT. 27. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THIS ISSUE IS COVERED BY T HE DECISIONS OF THE TRIBUNAL IN THE CASES OF LIVINGSTONES JEWELLERY (P) LTD. V. DCIT [2009] (22 SOT 323-MUMBAI), RAJESH EXPORTS LTD . V. ACIT (2008) TAX CORP (AT) 17925-BANGALORE], ACIT V. MOTO ROLA INDIA ELECTRONICS (P) LTD. (2008) [114 ITD 387-BANGALORE] AND THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE OF C IT V. - - ITA 948/14 ETC . 16 PANDIAN CHEMICALS LTD. [1998] (233 ITR 497), WHEREI N IT WAS HELD THAT ANY INCOME HAVING NEXUS WITH THE BUSINESS OF UNDERTAKING WOULD BE ELIGIBLE FOR DEDUCTION U/S.10A OF THE ACT. BASED ON THE ABOVE, INCOME WHICH IS ON ACCOUNT OF W RITE OFF OF EARLIER PROVISION TO BE CONSIDERED AS BUSINESS INCO ME SO AS TO ALLOW DEDUCTION U/S.10A OF THE ACT. ACCORDINGLY, T HIS GROUND IS ALLOWED. 28. THE NEXT GROUND IS WITH REGARD TO SHORT CREDIT FOR TAX DEDUCTED AT SOURCE. 29. AFTER HEARING BOTH THE PARTIES, WE DIRECT THAT THE AO SHALL VERIFY THE RECORDS AND GRANT CORRECT CREDIT FOR TAX DEDUCTED AT SOURCE WHILE DECIDING THE ISSUE. 30. REGARDING THE ISSUE OF INTEREST U/S.234B IS CON CERNED, IT IS CONSEQUENTIAL AND MANDATORY IN NATURE AND TO BE COMPUTED ACCORDINGLY. 31. NOW, WE TAKE UP THE REVENUES APPEAL. THE FIRS T GROUND TAKEN BY THE REVENUE IN THIS APPEAL IS THAT THE DRP ERRED IN GIVING DIRECTIONS TO TPO TO TAKE ONLY SOFTWARE DEVE LOPMENT SERVICE SEGMENT AS COMPARABLE AND TO EXCLUDE M/S. C AT - - ITA 948/14 ETC . 17 TECHNOLOGIES LIMITED, FROM THE LIST OF COMPARABLE S INCE IT HAS SOFTWARE DEVELOPMENT SERVICE SEGMENT AND IT ENABLED SEGMENT. 32. IN THE CASE OF CAT TECHNOLOGIES LTD., THE DRP O BSERVED THAT IT HAS BOTH SOFTWARE DEVELOPMENT SERVICE AND I TES SEGMENTS. BOTH THE SEGMENTS ARE DIFFERENT AND HAVI NG DIFFERENT FAR. THEREFORE, IT WAS DIRECTED BY THE DRP THAT TH E TPO SHOULD TAKE ONLY SOFTWARE DEVELOPMENT SERVICE SEGMENT. FU RTHER, IT WAS STATED THAT IF IT IS NOT POSSIBLE, THE TPO IS DIREC TED TO EXCLUDE THIS UNCONTROLLED COMPARABLE. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 33. THE LD. DR ARGUED THAT AS FAR AS THE ABOVE COMP ARABLE IS CONCERNED, MORE THAN 90% OF ITS INCOME IS FROM PROV IDING SOFTWARE SERVICES AND HENCE THE ACTION OF THE TPO I N INCLUDING M/S. CAT TECHNOLOGIES LTD. AS COMPARABLE OUGHT TO H AVE BEEN UPHELD. FURTHER, THE LD. DR SUBMITTED THAT THE DRP OUGHT TO HAVE APPRECIATED THE FACT THAT THE PROFIT MARGIN IN RESPECT OF SOFTWARE DEVELOPMENT SERVICE WAS CONSIDERED BY THE TPO FOR THE PURPOSE OF COMPARABLES THOUGH THERE WERE TWO SE GMENTS. 34. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MA TERIAL ON RECORD. WE FIND FORCE IN THE ARGUMENT OF THE LD . DR THAT PROFIT - - ITA 948/14 ETC . 18 MARGIN IN RESPECT OF SOFTWARE DEVELOPMENT SERVICE W AS TO BE CONSIDERED FOR THE PURPOSE OF COMPARABLES, WHICH SE GMENT DATA IS AVAILABLE AND THE AO SHALL CONSIDER SEGMENT DATA AND RECOMPUTE ALP. ACCORDINGLY, THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 35. THE NEXT GROUND RAISED BY THE REVENUE IS THAT T HE DRP ERRED IN DIRECTING THE TPO TO EXCLUDE THE FOREX LOS S ON ACCOUNT OF RESTATEMENT OF LOANS ETC., FROM THE OPERATING COST OF THE ASSESSEE. 36. THE LD. DR SUBMITTED THAT THE DRP OUGHT TO HAVE NOTED THAT THE LOSS ARISES ONLY DUE TO SALES OR PURCHASE ACTIVITIES WHICH ARE REVENUE IN NATURE AND THE LOSS HAS TO BE PART O F OPERATING COST. FURTHER, IT WAS SUBMITTED THAT THE DRP FAILE D TO NOTE THAT AS PER THE OECD GUIDELINES, THE FOREX LOSSES OR GAI NS ARISING DUE TO REVENUE TRANSACTIONS SHALL FORM PART OF THE OPERATING ITEM. THE LD. DR, FURTHER SUBMITTED THAT THE DRP ERRED IN NOT CONSIDERING THE DECISION OF THE TRIBUNAL IN THE CAS E OF M/S. ZENTA KNOWLEDGE SERVICE PRIVATE LIMITED AND M/S. MERCEDES BENZ R & D INDIA PRIVATE LIMITED, WHEREIN THE TRIBUNAL HAS L AID DOWN THE - - ITA 948/14 ETC . 19 PRINCIPLE THAT THE FOREX GAIN/LOSS SHOULD BE CONSID ERED AS AN OPERATING ITEM. 37. THE LD. AR SUBMITTED THAT THE LOSSES/GAINS ARE A DIRECT MANIFESTATION OF THE UNDERLYING RISK EMBEDDED IN A BUSINESS ARISING FROM UNCERTAINTIES IN THE SPORT MARKET PRIC E OF THE NOMINAL EXCHANGE RATE. IT IS RELEVANT FOR THOSE COMPANIES WHO HAVE THEIR NOMINAL EXCHANGE RATE. IT IS RELEVANT FOR THOSE CO MPANIES WHO HAVE EITHER THEIR REVENUES OR COSTS DENOMINATED IN ANOTHER CURRENCY OTHER THAN THE CURRENCY OF THE COUNTRY WHE RE THE COMPANY IS LOCATED. WHEN AN ENTITY EARNS ITS REVEN UE (OR INCURS ITS COSTS IN US DOLLARS AND ITS COSTS (OR EARNS ITS REVENUE) IN INDIAN RUPEES, THERE MAY BE SOME ACCOUNTING DIFFERE NCES ARISING FROM THE TIME LAG INVOLVED IN INCURRENCE AND BILLIN G. 37.1 THE LD. AR, FURTHER SUBMITTED THAT THE ESSENCE OF TRANSFER PRICING IS THE ARMS LENGTH PRINCIPLE WHICH REQUIRE S THE DETERMINATION OF TRANSFER PRICES BETWEEN ASSOCIATED ENTERPRISES TO REFLECT TERMS IN A HYPOTHETICAL SCENARIO WHERE W E ARE REQUIRED TO ASSUME AS IF THE TRANSACTION TAKES PLACE BETWE EN TWO UNRELATED PARTIES. UNDER THE BASIC PRINCIPLES OF C ONTRACTING THE COSTS WHICH WOULD BE REIMBURSED WITH A MARK-UP SHOU LD BE ONES - - ITA 948/14 ETC . 20 WHICH ARE CONTROLLABLE AND CAN BE MONITORED EX-ANTE , I.E. AT THE TIME OF ENTERING INTO THE AGREEMENT. ANY COST THAT MAY ARISE OUT OF THE FUTURE UNCERTAIN MOVEMENT OF THE NOMINAL EXC HANGE RATE IS NOT PREDICTABLE AND HENCE NON-CONTRACTIBLE EX-ANTE. FURTHER, IT WAS SUBMITTED THAT THE QUANTUM OF THE DERIVATIVE LO SS/GAIN IS INDEPENDENT OF THE EXTENT OF THE SERVICES RENDERED AND IS DETERMINED ENTIRELY OUTSIDE THE PARAMETERS OF THE S ERVICE PROVIDERS ACTUAL BUSINESS. 37.2 ACCORDING TO THE LD. AR, FOR ALL THE ABOVE REASONS, THE EXCHANGE LOSSES/GAINS DO NOT FIT THE DESCRIPTION OF OPERATING ITEMS ASSOCIATED WITH THE RENDERING OF SERVICES AN D ARE NON- CONTRACTIBLE BETWEEN UNRELATED PARTIES AND SHOULD T HEREFORE NOT BE A PART OF THE COSTS THAT ARE SUBJECT TO THE MARK -UP. ACCORDING TO THE LD. AR, SINCE THE DRP HAS NOT CONSIDERED IT OPERATIVE IN NATURE, DIRECTED THE TPO TO EXCLUDE FOREIGN EXCHANG E LOSS/GAIN WHILE COMPUTING THE PROFIT MARGIN OF THE ASSESSEE. FURTHER, IT WAS SUBMITTED BY THE LD. AR THAT TO MAINTAIN PARITY IN TREATMENT, THE TPO IS ALSO DIRECTED THAT WHILE COMPUTING THE P LI FOREIGN EXCHANGE GAIN/LOSS SHOULD BE EXCLUDED IN CASE OF UN CONTROLLED COMPARABLES ALSO. - - ITA 948/14 ETC . 21 38. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. FOREIGN EXCHANGE LOSS/GAIN IS HAVING DI RECT NEXUS WITH THE OPERATING INCOME OF THE BUSINESS OF THE AS SESSEE, IT IS TO BE CONSIDERED AS PART OF THE OPERATING COST OF THE BUSINESS OF THE ASSESSEE. WE DO NOT FIND ANY FORCE IN THE ARGUMENT OF THE LD. AR AND ACCORDINGLY, ALLOW THE GROUND RAISED BY THE REVENUE. 39. THE NEXT GROUND IS WITH REGARD TO DIRECTION TO THE TPO TO EXCLUDE DOUBTFUL DEBTS IN THE P & L ACCOUNT OF THE ASSESSEE WHILE COMPUTING THE PROFIT MARGIN. 40. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE LD. DR SUBMITTED THAT THE DRP DIREC TED THE TPO TO EXCLUDE THE PROVISION FOR DOUBTFUL DEBTS IN THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE WHILE DETERMINING THE PROFI T MARGIN. HOWEVER, WE FIND THAT THE TPO HAS CORRECTLY BEEN EX CLUDED DOUBTFUL DEBT WHILE COMPUTING THE PROFIT MARGINS OF THE UNCONTROLLED COMPARABLES. IN VIEW OF THIS, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE TPO AND THE SAME IS C ONFIRMED. 41. THE LAST GROUND TAKEN BY THE REVENUE IS WITH RE GARD TO INTERNET CHARGE OF ` 33.72 LAKHS ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE IND IA ARE TO BE - - ITA 948/14 ETC . 22 REDUCED FROM TOTAL TURNOVER ALSO FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S.10A OF THE ACT. 42. AFTER HEARING BOTH THE SIDES, WE FIND THAT THIS ISSUE IS COVERED BY THE SPECIAL BENCH DECISION OF THE TRIBUN AL IN THE CASE OF SOFT SAK LTD. 313 ITR(TRIB) 353, WHEREIN IT WAS HELD THAT COMMUNICATION CHARGES HAVE TO BE EXCLUDED BOTH FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER FOR COMPUTING DE DUCTION . IN VIEW OF THIS, THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 43. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED AND THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FO R STATISTICAL PURPOSES. ORDER PRONOUNCED ON FRIDAY, THE 06 TH OF NOVEMBER, 2015 AT CHENNAI. SD/- SD/- ( # . . # . $%& ) ( ' ( ) * ) ( N.R.S.GANESAN ) (CHANDRA POOJARI) 7 89 /JUDICIAL MEMBER % 89/ACCOUNTANT MEMBER '%7 /CHENNAI, A8 /DATED, THE 06 TH NOVEMBER, 2015. MPO* 8%& BC D%C /COPY TO: /APPELLANT / /RESPONDENT / E () /CIT(A) / E /CIT / CF$ G /DR / $H I /GF.