M/s. Electronics for Imaging India Private Ltd, Bangalore V. DCIT, Bangalore

ITA 1171/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57446 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 07-12-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 25-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Principle of natural justice; International transaction
• Section: 143(3); 80HHC; 234B; 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI N. BARAT H VAJA SANKAR, VICE - PRESIDENT A ND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.1171(BANG)/2010 (ASSESSMENT YEAR: 2006-07) M/S. ELECTRONICS FOR IMAGING INDIA PVT. LTD. NO.133, SALARPURIA HALLMARK, KADUBEESANAHALLI, BANGALORE-560 076. APPELLANT PAN:AAACG6053E VS. DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 11(3), BANGALORE. RESPONDENT A P PELLANT BY: SHRI PADAMCHAND KHINCHA. RESPONDENT BY : SHRI ETWA MUNDA. DATE OF HEARING: 0 7 - 12 - 201 1 DATE OF PRONOUNCEMENT: 31 - 01 - 2012 O R D E R PER N. BARATHVAJA SANKAR, VP: THIS IS AN APPEAL PREFERRED BY THE ASSESSEE-M/S.ELE CTRONICS FOR IMAGING INDIA PVT. LTD., AGAINST THE ASSESSMENT ORDER MADE U/S 143(3) READ WITH SEC.144C OF THE INCOME-TAX ACT , 1961 [HEREINAFTER REFERRED TO AS 'THE ACT'] FOR THE ASSE SSMENT YEAR 2006-07. ITA 1171/BANG/2011 PAGE 2 OF 18 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-CO MPANY IS ENGAGED IN THE BUSINESS OF DEVELOPING SOFTWARE SOLU TIONS FOR COMMERCIAL PRINTING AND ENTERPRISE MARKETS AND ALSO RENDERING SALES AND SUPPORT SERVICES FOR ITS PRODUCT. IT FIL ED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07 DECLARING INCOME OF ` 17,35,487/-. THE RETURN WAS PROCESSED U/S 143(1). SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY AS PER GUIDELINES ISSUED BY THE BOARD AND NOTICE U/S 143(2) WAS ISSUE D AND SERVED ON THE ASSESSEE. IN RESPONSE TO THE NOTICE, THE MA NAGER OF THE ASSESSEE-COMPANY APPEARED AND PRODUCED BOOKS OF ACC OUNT AND FURNISHED DETAILS CALLED FOR. AFTER EXAMINING THE BOOKS OF ACCOUNT AND THE DETAILS FILED, THE ASSESSMENT WAS COMPLETED . THE AO NOTICED THAT DURING THE RELEVANT FINANCIAL YEAR, THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS EXCEEDING ` 15 CRORES. THEREFORE, WITH THE PRIOR APPROVAL OF THE CIT, BANG ALORE-1, REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) TO DETERMINE THE ARMS LENGTH PRICE (ALP) AS PER THE P ROVISIONS OF SEC.92CA OF THE ACT. THE ASSESSEE FILED AN APPLICA TION BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE DRP ISSUED DIRE CTIONS UNDER SUB-SEC.(5) OF SEC.144C READ WITH SUB-SECTION (8) O F SEC.144C WHICH WAS RECEIVED BY THE AO ON 31-8-2010. IN CONF ORMITY WITH THE DIRECTIONS OF THE DRP, THE AO HAS COMPLETED THE ASSESSMENT BY MAKING THE FOLLOWING ADDITIONS: I) ADJUSTMENT U/S 92CA `1,84,11,998/- II) EXCESS CLAIM OF DEDUCTION U/S 10A `7,14,465/- ITA 1171/BANG/2011 PAGE 3 OF 18 3. AGGRIEVED BY THIS ORDER OF THE AO, ASSESSEE IS O N APPEAL BEFORE US. THE ASSESSEES APPEAL IS BROADLY ON T HREE ISSUES, VIZ., I) DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS; II) FOR NOT EXCLUDING TELECOMMUNICATION CHARGES AND FOREIGN EXCHANGE LOSS FROM THE TOTAL TURNOVER WHILE EXCLUDING THE SAME FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10A(3), AND III) LEVYING A SUM OF `35,53,271/- AS INTEREST U/S 234B OF THE ACT. 4. LET US FIRST TAKE UP THE ISSUE RELATING TO ALP. SHRI PADAM KHINCHA, LEARNED AR OF THE ASSESSEE HAS FILED ON RE CORD TWO PAPER BOOKS. (A) PAPER BOOK I: SL. NO. PARTICULARS PAGE NO. I) FINANCIAL STATEMENT FOR THE YEAR ENDING 31-3-2006. 1-12 II) FORM NO.3CEB FOR THE YEAR ENDING 31-3-2006. 13-23 III) TRANSFER PRICING DETERMINATION FOR THE YEAR ENDING 31-3-2006. 24-43 IV) COPY OF SOFTWARE DEVELOPMENT AGREEMENT WITH AE. 44-52 V) SHOW CAUSE NOTICE ISSUED BY TPO DT.23-7-2009. 53-80 VI) SUBMISSIONS FILED BEFORE TPO ON 21-8-2009 AGAINST PROPOSED ADDITIONS. 81-192 VII) RELEVANT SUBMISSION FILED BEFORE DRP ON 29-12-2009 AGAINST PROPOSED ADDITIONS. 193 - 464 VIII) ADDITIONAL SUBMISSION BEFORE DRP ON 29-7-2010. 465-474 ITA 1171/BANG/2011 PAGE 4 OF 18 (B) PAPER BOOK II: SL. NO. PARTICULARS PAGE NOS. I) KALS INFORMATION SYSTEMS LTD. REPLY TO NOTICE U/S 133(6) 1-38 II) MEGASOFT LTD. REPLY TO NOTICE U/S 133(6) AND EXTRACT FROM ANNUAL REPORT 39-57 III) TATA ELXSI LTD. REPLY TO NOTICE U/S 133(6) AND EXTRACT FROM ANNUAL REPORT 58-69 IV) ACCEL TRANSMATIC LTD. REPLY TO NOTICE U/S 133(6) AND EXTRACT FROM ANNUAL REPORT 70-81 V) MINDTREE CONSULTING PVT. LTD. ANNUAL REPORT EXTRACT FOR THE FINANCIAL YEAR 2005-06 82 - 96 VI) TVS INFOTECH LTD. - REPLY TO NOTICE U/S 133(6) AND EXTRACT FROM ANNUAL REPORT 97-102 VII) GOLDSTONE TECHNOLOGIES LTD. - REPLY TO NOTICE U/S 133(6) AND EXTRACT FROM ANNUAL REPORT 103-111 VIII) VMF SOFTECH LTD. REPLY TO NOTICE U/S 133(6) AND EXTRACT FROM ANNUAL REPORT 112-124 IX) ORIENT INFORMATION TECHNOLOGY LTD. 125-136 X) COMPUTING SYSTEMS LTD. REPLY TO NOTICE U/S 133(6). 137 - 142 XI) IGATE GLOBAL SOLUTIONS LTD. REPLY TO NOTICE U/S 133(6). 143-146 BESIDES PAPER BOOKS I AND II, THE LEARNED AR HAS AL SO FILED DETAILED WRITTEN SUBMISSIONS. THE LEARNED CIT-DR HA S ALSO FILED DETAILED SUBMISSIONS. APART FROM THE DETAILED SUBM ISSIONS, AS DESIRED BY THE BENCH, BOTH THE ASSESSEES AR AND TH E LD. CIT-DR HAVE FILED CONCISE SYNOPSIS OF THEIR ARGUMENTS WHIC H ARE TAKEN ON RECORD. ITA 1171/BANG/2011 PAGE 5 OF 18 4. THE CONCISE GROUNDS OF APPEAL BY THE ASSESSEE WI TH REGARD TO ALP ARE AS UNDER: THE LOWER AUTHORITIES (THE LEARNED ASSESSING OFFIC ER, LEARNED TRANSFER PRICING OFFICER AND HONBLE DISPUT E RESOLUTION PANEL) HAVE ERRED IN: 1. PASSING THE ORDER DISREGARDING THE PRINCIPLES OF NATURAL JUSTICE. 2. MAKING A REFERENCE TO TRANSFER PRICING OFFICER FOR DETERMINING ARMS LENGTH PRICE. 3. PASSING THE ORDER WITHOUT DEMONSTRATING THAT APPELLANT HAD MOTIVE OF TAX EVASION. 4. NOT APPRECIATING THAT THE MEMBERS OF DISPUTE RESOLUTION PANEL ALSO BEING JURISDICTIONAL COMMISSIONER/DIRECTOR OF INCOME TAX OF THE APPELLANT, THE CONSTITUTION OF THE DISPUTES RESOLUT ION PANEL IS BAD IN LAW. 5. NOT APPRECIATING THAT THE CHARGING OR COMPUTATI ON PROVISION RELATING TO INCOME UNDER THE HEAD PROFIT S & GAINS OF BUSINESS OR PROFESSION DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X AND THEREFORE ADDITION UNDER CHAPTER X IS BAD IN LAW. 6. ADOPTING A FLAWED PROCESS OF ISSUING NOTICES U/ S 133(6) AND RELYING ON THE SAME WITHOUT PROVIDING COMPLETE INFORMATION OR OPPORTUNITY TO CROSS EXAMINE TO THE APPELLANT. 7. USING CURRENT YEAR DATA, REJECTING COST PLUS ME THOD (CPM) AS THE MOST APPROPRIATE METHOD AND REJECTING TRANSFER PRICING ANALYSIS OF THE APPELLANT. 8. CONSIDERING THE DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TP DOCUMENTATION REQUIREMENTS. 9. ADOPTING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD AND ADOPTING INAPPROPRIATE FILTERS IN DOING FRESH TRANSFER PRICI NG ANALYSIS. 10. SELECTING INAPPROPRIATE COMPARABLES AND REJECTING APPROPRIATE COMPARABLES. 11. INAPPROPRIATELY COMPUTING THE OPERATING MARGINS OF COMPARABLES AND THE APPELLANT. ITA 1171/BANG/2011 PAGE 6 OF 18 12. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEVEL AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. 13. NOT ALLOWING THE BENEFIT OF THE +/-5% RANGE MENTIONED IN THE PROVISO TO SECTION 92C(2). 5. AT THE TIME OF HEARING, THE LEARNED AR MADE ELAB ORATE SUBMISSIONS. HOWEVER, THE CRUX OF THE SUBMISSIONS MADE BY HIM IN RESPECT OF DEFICIENCIES IN THE ORDERS OF THE TPO /DRO IS AS UNDER: I) NO OPP ORTUNITY OF HEARING WAS PROVIDED BY THE TPO. BEFORE THE DRP, ONLY ONE OPPORTUNITY WAS PROVIDED. II) THE TPO SELECTED SIX COMPARABLES IN THE ORDER PASSE D U/S 92CA AS COMPARABLES IN ADDITION TO THOSE PROPOSED I N NOTICE WITHOUT GIVING OPPORTUNITY TO THE ASSESSEE T O PRESENT ITS OBJECTIONS. III) DURING THE COURSE OF PROCEEDINGS BEFORE THE DRP, TH E ASSESSEE SUBMITTED THAT COMPUTATION OF ALP, CONSIDE RING CASH PROFIT TO ASSETS EMPLOYED AND OPERATING PROFIT S TO ASETS EMPLOYED AS PLI, AS AN ALTERNATIVE JUSTIFICAT ION OF THE INTERNATIONAL TRANSACTIONS BEING AT ARMS LENGTH. D RP HAS NOT MADE ANY COMMENTS ON THIS ASPECT IN ITS ORDER. IV) EVEN UNDER TNMM, CONSIDERING TURNOVER RANGE OF `1 CRORE TO `200 CRORES AND `1 CRORE TO `500 CRORES AND REJE CTING CERTAIN COMPARABLES SELECTED BY TPO, THE ASSESSEES TRANSACTIONS ARE AT ARMS LENGTH. THE TWO TABLES INCORPORATING THE ABOVE ARE AS UNDER: ITA 1171/BANG/2011 PAGE 7 OF 18 TABLE 1 TURNOVER RANGE 1 TO 200 CRORES SL. NO. NAME OF THE COMPANY OPERATING REVENUES OPERATING MARGIN ON COST WC ADJUSTED OPERATING MARGIN ON COST 1 AZTEC SOFTWARE LTD. 1,286,136,000 18.09% 19.45% 2 GEOMETRIC SOFTWARE LTD. (SEG) 985,957,838 6.70% 6.42% 3 KALS INFORMATION SYSTEMS LTD . 19,690,390 39.75% 42.07% 4 R SYSTEMS INTERNATIONAL LTD(SEG) 794,194,053 22.20% 21.05% 5 TATA ELXSI LTD. (SEG.) 1,888,125,000 27.65% 28.40% 6 LUCID SOFTWARE LIMITED 10,191,181 8.92% 6.17% 7 MEDIA SOFT SOLUTIONS P.LTD. 17,577,145 6.29% 4.90% 8 R S SOFTWARE (INDIA) LTD. 915,707,164 15.69% 15.98% 9 SIP TECHNOLOGIES & EXPORTS LTD. 65,344,634 3.06% 1.80% 10 BODHTREE CONSULTING LTD. 53,189,165 15.99% 15.69% 11 ACCEL TRANSMATICS LTD.(SEG) 80,205,000 44.07% 43.11% 12 SYNFOSYS BUSINESS SOLUTIONS LTD 4,886,725 10.61% 8.09% 13 MEGASOFT LTD 192,185,451 16.97% 10.24% 14 LANCO GLOBAL SOLUTIONS LTD 356,293,560 5.27% 5.58% ARITHMETIC MEAN 17.23% 16.35% NOTES AFTER REMOVING KALS MEAN 15.50% & WC ADJUSTED MEAN 14.38% AFTER REMOVING KALS AND TATA ELXSI MEAN- 14.49% & WC A DJUSTED MEAN 13.21% AFTER REMOVING KALS, TATA ELXSI & ACCEL MEAN- 11.80% & WC ADJUSTED MEAN 10.49% TABLE 2 TURNOVER RANGE 1 TO 500 CRORES SL. NO. NAME OF THE COMPANY OPERATING REVENUES OPERATING MARGIN ON COST WC ADJUSTED OPERATING MARGIN ON COST 1 AZTEC SOFTWARE LTD. 1,286,136,000 18.09% 19.45% 2 GEOMETRIC SOFTWARE LTD. (SEG) 985,957,838 6.70% 6.42% 3 KALS INFORMATION SYSTEMS LTD . 19,690,390 39.75% 42.07% 4 MINDTREE CONSULTING LTD. 4,487,982,158 14.67% 14.16% 5 PERSISTENT SYSTEMS LTD. 2,091,776,542 24.67% 24.63% 6 R SYSTE MS INTERNATIONAL LTD(SEG) 794,194,053 22.20% 21.05% ITA 1171/BANG/2011 PAGE 8 OF 18 7 SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG) 2,400,342,000 13.90% 13.96% 8 TATA ELXSI LTD. (SEG.) 1,888,125,000 27.65% 28.40% 9 LUCID SOFTWARE LTD. 10,191,181 8.92% 6.17% 10 MEDIA SOFT SOLUTIONS P.LTD. 17,577,145 6.29% 4.90% 11 R S SOFTWARE (INDIA) LTD. 915,707,164 15.69% 15.98% 12 SIP TECHNOLOGIES & EXPORTS LTD. 65,344,634 3.06% 1.80% 13 BODHTREE CONSULTING LTD. 53,189,165 15.99% 15.69% 14 ACCEL TRANSMATICS LTD.(SEG) 80,205,000 44.07% 43.1 1% 15 SYNFOSYS BUSINESS SOLUTIONS LTD 44,886,725 10.61% 8.09% 16 MEGASOFT LTD 192,185,451 16.97% 10.24% 17 LANCO GLOBAL SOLUTIONS LTD 356,293,560 5.27% 5.58% ARITHMETIC MEAN 17.32% 16.57% NOTES AFTER REMOVING KALS MEA N 15.92% & WC ADJUSTED MEAN 14.98% AFTER REMOVING KALS AND TATA ELXSI MEAN- 15.14% & WC ADJUS TED MEAN 14.08% AFTER REMOVING KALS, TATA ELXSI & ACCEL MEAN- 13.07% & WC ADJUSTED MEAN 12.01% V) SIX COMPANIES WHICH DO NOT EVEN APPEAR IN THE INITI AL SEARCH LIST OF THE TPO WERE ISSUED NOTICE U/S 133(6 ) TO COLLATE INFORMATION. THE PROCESS ADOPTED IN ISSUING NOTICE U/S 133(6) HAS NOT BEEN DETAILED. THE INFORMATION O BTAINED IN RESPONSE THERETO HAS NOT BEEN FULLY SHARED. VI) DETAILS OF INFORMATION NOT G IVEN TO THE ASSESSEE. THE TPO IN HER REMAND REPORT (AS EXTRACTED IN DRP ORDER, PA GE 12) STATES THAT IT IS INTENTIONAL. SHE FURTHER STATES T HAT EVEN THE DRP HAS TO SEEK INFORMATION FROM HER IN CASE IT WAN TS THE SAME. VII) COPIES OF SUBSEQUENT NOTICES U/S 133(6) ISSUED BY THE TPO AND REPLIES RECEIVED THERE- FROM NOT GIVEN TO THE ASSESSEE. TPO IN HER REMAND REPORT (AS EXTRACTED IN DRP ORDER PAGE 12) STATES THAT SAME IS NOT RELEVANT. VIII) DIFFERENCE BETWEEN REPLIES RECEIVE D U/S 133(6) AND ANNUAL REPORT TABULATED BY THE ASSESSEE. NO COMMENTS EITHE R BY THE TPO OR DRP. ASSESSEE SOUGHT AN OPPORTUNITY TO C ROSS EXAMINE IN CASE REPLIES U/S 133(6) WERE RELIED UPON . NO OPPORTUNITY TO CROSS EXAMINE GRANTED. IX) THE ASSESSEE HAD MADE DETAILED SUBMISSIONS FOR REJE CT ION ITA 1171/BANG/2011 PAGE 9 OF 18 OF KALS AS A COMPARABLE. HOWEVER, TPO AND DRP HAVE NOT COMMENTED ON ASSESSEES SUBMISSIONS. X) AT PAGE 74 OF THE TP ORDER IT IS STATED THAT MEGASO FT WAS REJECTED AS COMPARABLE IN THE SHOW CAUSE NOTICE ON THE GROUND THAT IT FAILS RPT FILTER AND EMPLOYEE COST F ILTER. ON PAGE 61 OF THE TP ORDER IT IS STATED THAT IF A COMP ANY FAILS RPT FILTER OR EMPLOYEE COST FILTER, NO NOTICE IS IS SUED. HOWEVER, NOTICE WAS ISSUED TO MEGASOFT. XI) IN CASE OF MEGASOFT, TPO AND DRP HAS CONSIDERED ENT ITY - WIDE MARGINS ON THE GROUND THAT SOFTWARE PRODUCT SE GMENT ALSO CONSISTS SOFTWARE SERVICES AND THEREFORE AT EN TITY LEVEL SOFTWARE SERVICES ARE MORE THAN 75% OF OPERATING REVENUES. HOWEVER, SIMILAR SITUATION IN CASE OF OTH ER COMPARABLES HAVE BEEN IGNORED. XII) BENEFIT OF 5% DEDUCTION IN DETERMINING THE ARMS LENGTH PRICE IN ACCORDANCE WITH PROVISO TO SEC.92C(2) WAS NOT GIVEN. 6. PER CONTRA, THE CIT-DR, IN HIS CONCISE SUBMISSIO NS HAS ARGUED AS UNDER: (I) ADOPTING FLAWED PROCESS IN ISSUING NOTICES U/S 133(6) AND RELYING UPON SUCH REPLIES TO COMPUTE ALP. (II) NOT GIVING AN OPPORTUNITY TO THE ASSESSEE TO CROSS EXAMINE THE PARTIES INVOLVED. THIS ISSUE HAS BEEN DISCUSSED IN MY WRITTEN SUBMISS ION ON PAGE NO 4 TO 7 AND PAGE NO 21 WHERE IN STATED THAT SECTION 92CA(3) EMPOWER THE TPO TO CONSIDER SUCH EVIDENCE A S HE MAY REQUIRE ON ANY SPECIFIED POINT AND AFTER TAKING INT O ACCOUNT ALL RELEVANT MATERIALS WHICH HE HAS GATHERED, HE SHALL DETERMINE THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION IN ACCORDANCE WITH THE PROVISIONS OF SEC. 92C. THUS, IF THE INFOR MATION GATHERED BY THE TPO IS RELEVANT MATERIAL FOR THE PURPOSE OF DETERMINING THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTIO N THEN THERE WOULD BE NOTHING WRONG IN USING THE UPDATED DATA CO LLECTED BY ISSUE OF NOTICE U/S 133(6) OF THE ACT. ITA 1171/BANG/2011 PAGE 10 OF 18 CASE LAW RELIED UPON: I) M/S.GENESIS INTEGRETING SYSTEM (INDIA) PVT. LTD. VS. DCIT (ITA 231/BANG/2010); II) M/S.SYMANTEC SOFTWARE SOLUTION VS. ACIT (ITA NO.7894/MUM/2010) GROUND NO 7:- (I) DETERMINING THE ARM'S LENGTH PRICE MARGI N / PRICE USING COMPARABLE DATA RELATING F.Y.2005-06 WHICH WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF COMPLYING WITH THE TP DOCUM ENTATION REQUIREMENTS AND HENCE COULD NOT HAVE BEEN USED IN COMPUTING THE ALP. REGARDING THE USE OF CURRENT YEAR DATA THE TPO HAS MADE ELABORATE DISCUSSION IN PARA 8 OF THE TP ORDER SIMI LARLY DRP DRAWN THEIR CONCLUSION IN PARA-4.1 OF THE ORDER U/S 144C (5) OF THE ACT. JUDICIAL PRONOUNCEMENT RELIED UPON 1) M/S. AZTECH SOFTWARE VS. 107 ITD 141 (SB) (BANG) 2) M/S. MENTOR GRAPHICS (NOIDA) PVT. LTD VS. DCIT (200 7) 109 ITD (DELHI- ITAT) 3) M/S. CUSTOMER SERVICES INDIA PVT. LTD VS. ACIT(2009 ) 30 SOT 486 (DELHI) 4) M/S.SYMANTEC SOFTWARE SOLUTION VS. ACIT, ITA NO.7894/MUM/2010 5) M/S. AVAYA INDIA (P) LTD. VS. ACIT, ITA NO.5150/DEI /2010 6) M/S. TNT INDIA PVT. LTD VS ACIT ITA NO.1442/BNG/08 7) M/S. DELOITTE CONSULTING INDIA PVT. LTD VS. DCLT IT A NO.1084/HYD/2010 8) M/S. HONEYWELL AUTOMATION INDIA LTD. VS. DCIT ITA N O.4/PN/08 9) M/S. HOWARTH (INDIA) PVT. LTD. VS DCLT (2011) ITA NO.534/DEL/2010. 10) M/S. PANASONIC INDIA PVT. LTD. VS. ITO .'2010) 43 SOT 68 (DELHI- ITAT 11) M/S. GEODIS OVERSEAS (P) LTD VS. DC IT (2011) 57 D TR (DEL)(TRIB)191 II) REJECTING THE COST PLUS METHOD AS THE MOST APPROPRI ATES METHOD ON UNJUSTIFIED REASON. REASON OF REJECTION DISCUSSED AT PAGE NO 9 TO 14 T HE TPO AND THE DRP REJECTED THE ASSESSEE CPM METHOD BY HOLDING THAT ITA 1171/BANG/2011 PAGE 11 OF 18 A) ABSENCE OF RELIABLE DATA ON FUNCTIONAL COMPARABI LITY (SOME OR SIMILARITY) OF COMPARABLE COMPANIES I.E, DEGREE OF COMPARABILIT Y EXISTING BETWEEN THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS. B) ABSENCE OF RELIABLE GROSS MARGIN DATA OF COMPARA BLE COMPANIES NECESSARY FOR APPLICATION OF THE METHOD. CASE LAWS RELIED UP ON: I) ACIT VS. TARA ULTIMO PRIVATE LIMITED (ITA NO 5098/MUM/2010) II) GEODIS OVEARSEAS (P) LTD VS. DCLT (ITA NO. 4243/DEI/2010 ) III) M/S. ALTAIR ENGINEERING INDIA PVT. LTD VS. D CLT (ITA NO. 1184/BANG/2010) GROUND NO 8 & 9 & 10 :- DOING FRESH TRANSFER PRICING ANALYSIS IN THE ABSENCE OF ANY DEFECT IN THE TRANSFER PRICING ANALY SIS BY THE APPELLANT THE TPO REJECTED THE COMPARABLES AFTER ANALYSING IN DET AIL AS DISCUSSED IN PARA- LL (PAGE NO.40 TO 54 OF THE TP ORDER) ISSUE HAS BEE N DISCUSSED BY ME ON SPECIFIC CONTENTIONS RAISED BY THE ASSESSEE ON PAGE NO 21 TO 40 OF WRITTEN SUBMISSION. GROUND NO 11: NOT RECOGNIZING THAT THE COMPANY WAS INSULATED FRO M RISK AS AGAINST COMPARABLES WHICH ASSUME THESE RISKS AND TH EREFORE HAVE TO BE CREDITED WITH RISK PREMIUM ON THIS ACCOUNT. THE TPO DISCUSSED THIS ISSUE IN DETAILS IN PARA 15 (PAGE 79 TO 101) OF HER ORDER. IN MY WRITTEN SUBMISSION DISCUSSED THIS ISSU E ON PAGE NO 40 TO 42. THE CASE LAWS RELIED UPON. I) M/S.MARUBENI INDIA PRIVATE LIMITED VS ADDL. CIT (ITA NO 945/ DEL/2009) II) SYMANTEC SOFTWARE SOLUTION PRIVATE LIMITED V S ACIT (ITA NO/7894/MUM/2010) III) EXXON MOBIL COMPANY INDIA PVT. LTD VS DCLT ( ITA NO.8311/MUM/2010 IV) ADP (P) LTD VS. DCLT, (ITA NO 106/HYD/2009) V) VEDARIS TECHNOLOGY (P) LTD VS. ACIT (2010) 131 TIJ (DEL) 309 VI) M/S. DELOITTE CONSULTING INDIA PVT. LTD VS DC LT ITA 1171/BANG/2011 PAGE 12 OF 18 VII) ST MICRO ELECTRONICS PVT. LTD VS. CIT(A), IT A NO 1806, 1807/DE1/2008 GROUND NO 12: ASSUMING WITHOUT ADMITTING THAT ADJUSTMENT IS TO B E MADE, THE LOWER INCOME TAX AUTHORITIES HAVE ERRED IN NOT ALLOWING THE BENEFITS OF THE +/-5% RANGE MENTIONED IN THE PROVISO TO SECTION 92C(2) THE TPO REJECTED THE ASSESSES CLAIM BENEFIT OF 5% AS PER PROVISO TO SECTION 92C(2) OF THE ACT AS DISCUSSED IN PARA 16 O F TP ORDER. THE DRP ALSO DISCUSSED IN DETAILS AND UPHELD THE TPO'S STAND. IN MY WRITTEN SUBMISSIONS I DISCUSSED THIS ISSUE AT PAGE 42 TO 44. FURTHER, I HAVE PLACED RELIANCE ON THE CASE LAWS AS FOLLOWS: I) DCIT VS. GLOBAL VANTADGE PVT. LTD. (2010-TIOL- 24-ITAT-DEL) II) DCIT VS. BASF INDIA LTD. (41 SOT 10) III) M/S.DELOITTE CONSULTANCY INDIA PVT. LTD. VS. D CIT (ITA NO.1084/HYD/2010 IV)EXXON MOBIL COMPANY INDIA PVT. LTD. VS. DCIT ITA NO.8311/MUM/2010 V) ST MICRO ELECTRONICS PVT. LTD. VS. CIT (A) ITA N O.1806, 1807/DE/2008 VI) ADP (P)LTD. VS. DCIT, ITA NO.106/HYD/2009. 7. IN HIS REJOINDER, THE LEARNED AR SUBMITTED AS UN DER: (I) IT IS STATED THAT THE ASSESSEE W AS PROVIDED WITH THREE OPPORTUNITIES. HOWEVER, THE ASSESSEE WAS PRO VIDED WITH ONLY ONE OPPORTUNITY OF PERSONAL HEARING BY THE DRP ON 27-7-2009. (II) IT IS STATED THAT THE ASSESSEE DID NOT RA ISE THE ISSUE OF CROSS-EXAMINATION BEFORE THE TPO/DRP. IN THIS R EGARD, THE ASSESSEE SUBMITS THAT IT HAS MADE SPECIFIC REQUEST FOR CROSS ITA 1171/BANG/2011 PAGE 13 OF 18 EXAMINATION BEFORE TPO AS WELL AS DRP. (PAGES 121, 116 & 129 OF PAPER BOOK-I). (III) IT IS STATED THAT IN CASE OF KALS, ` 1.27 CRORES WHICH WAS CONTENDED BY THE ASSESSEE AS INVENTORY IS ACTUA LLY RECEIVABLE FROM CUSTOMERS (RELIANCE PLACED BY LEARNED DR ON AN NEXURE A OF NOTE). IN THIS REGARD, THE ASSESSEE SUBMITS THAT AS PER ANNUAL REPORT, ` 1.27 CRORES IS INVENTORY. SUNDRY DEBTORS ARE SEPARA TELY MENTIONED IN THE ANNUAL REPORT. (IV) IT IS STATED THAT THE ASSESSEE DID NOT R AISE THE ISSUE OF CONVERSION OF WARRANTS IN CASE OF MINDTREE BEFOR E THE TPO/DRP. THE ASSESSEE SUBMITS THAT THE SAME IS INCORRECT AND MADE THE SUBMISSIONS BOTH BEFORE THE TPO AND DRP (REFER PAGE 127 & 324 OF PAPER BOOK-I). 8. IN A NUT-SHELL, LEARNED AR SUBMITTED THAT IN SIM ILAR FACTS AND CIRCUMSTANCES, THE TRIBUNAL, BY ITS ORDER DATED 5-8-2011 IN ITA NO.1231/BANG/2010 IN THE CASE OF M/S.GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD., REMITTED THE MATTER BACK TO THE FILE OF THE TPO WITH CERTAIN DIRECTIONS AND SIMILAR DIRECTI ONS CAN BE GIVEN IN THIS CASE ALSO. 9. WE HAVE HEARD RIVAL SUBMISSIONS AND CONSIDERED T HE FACTS AND MATERIALS ON RECORD INCLUDING THE CONTENT S OF THE PAPER BOOKS AND THE CASE-LAWS CITED THEREIN. AFTER CONSI DERATION OF THE ENTIRE SUBMISSIONS IN THE LIGHT OF THE FACTS OF THE CASE BEFORE US AND FOLLOWING THE DECISION OF THE TRIBUNAL IN THE C ASE OF M/S.GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD., WE DEEM IT FIT AND PROPER TO ACCEPT THE CONTENTION OF THE ASSESSEE THAT THE ITA 1171/BANG/2011 PAGE 14 OF 18 MATTER IS TO BE REMITTED BACK TO THE FILE OF THE TP O FOR FRESH CONSIDERATION. HENCE, WE ARE REMITTING THE MATTER TO THE FILE OF THE TPO WITH THE FOLLOWING DIRECTIONS: (I) THE OPERATING REVENUE AND THE OPERATING COST OF THE TRANSACTIONS RELATING TO ASSOCIATED ENTERPRISES ONL Y SHALL BE CONSIDERED. (II) THE COMPARABLES HAVING THE TURNOVER O F MORE THAN ` 1 CRORE BUT LESS THAN ` 200 CRORES ONLY SHALL BE TAKEN INTO CONSIDERATION. (III) ALL THE INFORMATION RELATING TO COMP ARABLES WHICH ARE SOUGHT TO BE USED AGAINST THE ASSESSEE SHALL BE FUR NISHED TO THE ASSESSEE. (IV) THE ASSESSEE SHALL BE GIVEN AN OPPORTUNITY TO CROSS EXAMINE THE PARTIES WHOSE REPLIES ARE SOUGHT TO BE USED AGAINST THE ASSESSEE IF THE ASSESSEE SO DESIRES. (V) TO CONSIDER THE OBJECTIONS OF THE ASS ESSEE THAT RELATE TO ADDITIONAL COMPARABLES SOUGHT TO BE ADOPTED BY THE TPO AND PASS A DETAILED ORDER, AND (VI) TO GIVE THE STANDARD DEDUCTION OF 5% UNDER THE PROVISO TO SEC.92C(2) OF THE ACT. 10. NOW LET US TURN TO THE NEXT ISSUE RELATING TO DEDUCTION U/S 10A OF THE ACT. THE RELEVANT CONCISE GROUND RE ADS AS UNDER: THE LOWER AUTHORITIES (THE LEARNED ASSESSING OFFIC ER, LEARNED TRANSFER PRICING OFFICER AND HONBLE DISPUT E RESOLUTION PANEL) HAVE ERRED IN: ITA 1171/BANG/2011 PAGE 15 OF 18 NOT EXCLUDING THE TELECOMMUNICATION CHARGES AND FOREIGN EXCHANGE LOSS FROM THE TOTAL TURNOVER WHILE EXCLUDING THE SAME FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10A. 11. WE HAVE HEARD RIVAL SUBMISSIONS AND CONSIDERED THE FACTS AND CIRCUMSTANCES AND MATERIALS ON RECORD. T HE LEARNED AR APPEARING FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IN QUESTION IS NOW SQUARELY COVERED BY THE JUDGMENT OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V M/S. TATA ELXSI LTD. & OTHERS (2011-TIOL-684-HC-KAR-II), HONBLE MUMBAI HIGH COUR T IN THE CASE OF CIT V GEM PLUS JEWELLERY INDIA LTD. (330 ITR 175) AND THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE C ASE OF SAK SOFT (313 ITR 353). IN THE CASE OF M/S.TATA ELXSI LTD. & OTHERS (SUPRA) THE HONBLE HIGH COURT OF KARNATAKA HAS OBSERVED AS UNDER: ..SECTION 10A IS ENACTED AS AN INCENTIVE TO EXP ORTERS TO ENABLE THEIR PRODUCTS TO BE COMPETITIVE IN THE G LOBAL MARKET AND CONSEQUENTLY EARN PRECIOUS FOREIGN EXCHA NGE FOR THE COUNTRY. THIS ASPECT HAS TO BE BORNE IN MI ND. WHILE COMPUTING THE CONSIDERATION RECEIVED FROM SUC H EXPORT TURNOVER, THE EXPENSES INCURRED TOWARDS FREI GHT, TELECOMMUNICATION CHARGES, OR INSURANCE ATTRIBUTABL E 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 SERVIC ES OUTSIDE INDIA SHOULD NOT BE INCLUDED. HOWEVER, THE WORD TOTAL TURNOVER IS NOT DEFINED FOR THE PURPOSE OF TH IS SECTION. IT IS BECAUSE OF THIS OMISSION TO DEFINE TOTAL TURNOVER, THE WORD TOTAL TURNOVER FALLS FOR INTE RPRETATION BY THIS COURT; ..IN SECTION 10A, NOT ONLY THE WORD TOTAL TURNOV ER IS NOT DEFINED, THERE IS NO CLUE REGARDING WHAT IS TO BE ITA 1171/BANG/2011 PAGE 16 OF 18 EXCLUDED WHILE ARRIVING AT THE TOTAL TURNOVER. HOW EVER, WHILE INTERPRETING THE PROVISIONS OF SECTION 80HHC, THE COURTS HAVE LAID DOWN VARIOUS PRINCIPLES, WHICH ARE INDEPENDENT OF THE STATUTORY PROVISIONS. THERE SHO ULD BE UNIFORMITY IN THE INGREDIENTS OF BOTH THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA, SINCE OTHERWISE IT WOULD PRODUCE ANOMALIES OR ABSURD RESULTS. SECTION 10A I S A BENEFICIAL SECTION WHICH INTENDS TO PROVIDE INCENTI VES TO PROMOTE EXPORTS. IN THE CASE OF COMBINED BUSINESS OF AN ASSESSEE, HAVING EXPORT BUSINESS AND DOMESTIC BUSIN ESS, THE LEGISLATURE INTENDED TO HAVE A FORMULA TO ASCER TAIN THE PROFITS FROM EXPORT BUSINESS BY APPORTIONING TH E TOTAL PROFITS OF THE BUSINESS ON THE BASIS OF TURNOVERS. APPORTIONMENT OF PROFITS ON THE BASIS OF TURNOVER W AS 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 ASSES SEE, WHEREAS IN SECTION 10-A, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS OF THE UNDERTAKING. EVEN IN THE CASE OF BUSINESS OF AN UNDERTAKING, IT MAY I NCLUDE EXPORT BUSINESS AND DOMESTIC BUSINESS, IN OTHER WOR DS, EXPORT TURNOVER AND DOMESTIC TURNOVER. TO THE EXTE NT OF EXPORT TURNOVER, THERE WOULD BE A COMMONALITY BETWE EN THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA. IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIV ED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD A LSO BE EXCLUDED IN COMPUTING THE EXPORT TURNOVER AS A COMP ONENT OF TOTAL TURNOVER IN THE DENOMINATOR. THE REASON B EING THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER. THE COMPONENTS OF THE EXPORT TURNOVER IN THE NUMERATOR AND THE DENOMINATOR CANNOT BE DIFFERENT. THEREFORE, TH OUGH THERE IS NO DEFINITION OF THE TERM TOTAL TURNOVER IN SECTION 10A, THERE IS NOTHING IN THE SAID SECTION T O MANDATE THAT, WHAT IS EXCLUDED FROM THE NUMERATOR T HAT 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, AND 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 TH E ITA 1171/BANG/2011 PAGE 17 OF 18 MEANING OF THE TOTAL TURNOVER, WHEN THE TOTAL TURNO VER INCLUDES EXPORT TURNOVER. IF WHAT IS EXCLUDED IN COMPUTING THE EXPORT TURNOVER IS INCLUDED WHILE ARR IVING 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 IMPERMISS IBLE. THUS, THERE IS NO ERROR COMMITTED BY THE TRIBUNAL I N FOLLOWING THE JUDGEMENTS RENDERED IN THE CONTEXT OF SECTION 80HHC IN INTERPRETING SECTION 10A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE A ND THE SAME. 12. RESPECTFULLY FOLLOWING THE HONBLE HIGH COURTS DECISION, WE DIRECT THAT TELECOMMUNICATION CHARGES AND FOREIG N EXCHANGE LOSS ARE TO BE EXCLUDED NOT ONLY FROM TOTAL TURNOVE R BUT ALSO FROM EXPORT TURNOVER IN COMPUTING DEDUCTION U/S 10A OF T HE ACT. 13. TURNING TO THE LAST ISSUE, RELATING TO LEVY OF INTEREST U/S 234B, WHICH IS MANDATORY AND CONSEQUENTIAL IN N ATURE, WE DO NOT DEEM FIT TO ADDRESS THE SAME. 14. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY, 2012 . SD/- SD/- (GEORGE GEORGE K) JUDICIAL MEMBER (N.BHARATHVAJA SANKAR) VICE-PRESIDENT PLACE : BANGALORE DATED: 31 ST JANUARY, 2012. EKS ITA 1171/BANG/2011 PAGE 18 OF 18 COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) CONCERNED 4. CIT 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE