Trilogy E Business Software India P.Ltd, Bangalore V. DCIT, Bangalore

ITA 1201/BANG/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5523 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 28-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 03-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIIIDR
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Working capital adjustments
• Section: 143(3); 234B; 133(6); 131; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.1201/BANG/2010 ASSESSMENT YEAR : 2006-07 TRILOGY E BUSINESS SOFTWARE INDIA PVT. LTD., 4 TH FLOOR, NO.97, PATTON HOUSE II, 4 TH B CROSS, 5 TH BLOCK, KORAMANGALA INDUSTRIAL AREA, BANGALORE 560 095. : APPELLANT VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 12(4), BANGALORE. : RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, C.A. RESPONDENT BY : SHRI ETWA MUNDA, CIT-III(DR) O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL INSTITUTED BY THE ASSESSEE COMPANY TRILOGY E BUSINESS SOFTWARE INDIA PVT. LTD IS DIRECTED AGAINST THE O RDER OF THE LD. AO PASSED U/S 143(3) R.W.S.144C OF THE ACT FOR THE ASSESSMENT YEA R 2006-07. 2 2. THE ASSESSEE COMPANY IN ITS GROUNDS OF APPEAL HAD RAISED FIFTEEN GROUNDS IN AN ILLUSTRATIVE AND EXTENSIVE MANNER. H OWEVER, IN AN ATTENTIVE SCRUTINIZING OF THE SAME, IT WAS NOTICED THAT THE G RIEVANCES OF THE ASSESSEE ARE CHIEFLY CONFINED TO THE FOLLOWING ISSUES, NAMELY: (I) THAT THE IMPUGNED ORDER OF THE AO U/S 143(3) R.W.S. 144C OF THE ACT REQUIRES TO BE QUASHED; (II) IN THE ALTERNATIVE, THE ADJUSTMENTS MADE BY THE TRA NSFER PRICING OFFICER(TPO) / AO AND CONFIRMED BY THE DISPUTE RESO LUTION PANEL (DRP) VARYING THE REPORTED VALUE OF INTERNATIONAL T RANSACTION BE DELETED; (III) VARIOUS ADJUSTMENTS OUGHT TO HAVE BEEN MADE TO REDU CE THE ALP BUT HAVE NOT BEEN SO MADE, BE DIRECTED TO BE MADE; (IV) TELECOMMUNICATION CHARGES, INSURANCE CHARGES AND EX PENSES INCURRED IN FOREIGN CURRENCY BE NOT EXCLUDED FROM EXPORT TURNOV ER IN COMPUTING DEDUCTION U/S 10A; (V) WITHOUT PREJUDICE, EXPENSES, IF ANY, REDUCED FROM E XPORT TURNOVER TO BE REDUCED FROM THE TOTAL TURNOVER IN COMPUTING DEDUCT ION U/S 10A OF THE ACT;& (VI) INTEREST LEVIED U/SS. 234B AND 234D OF THE ACT REQU IRE TO BE DELETED. 3. BRIEFLY STATED, THE ASSESSEE COMPAN Y [THE ASSESSEE IN SHORT] ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE INCLUDING E-BUSINESS SOFTWARE. FOR THE AY UNDER CONSIDERATION, THE ASSE SSEE FILED ITS RETURN OF INCOME, ADMITTING A TOTAL INCOME OF RS.4.91 LAKHS. THE CASE WAS REFERRED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AES U/S 92CA OF THE ACT TO THE TRANSFER PRICING OFFICER (TPO) WHO, AFTER MUCH DELIBERATION, PASSED AN ORDER U/S 92CA OF THE ACT. THE DRAFT OF THE PROPOSED ORDER SERVED ON THE ASSESSEE CONTAINED VARIATION TO THE RETURNED INCOME SUCH AS RE-DETERMI NATION OF ARMS LENGTH PRICE (ALP) ON CERTAIN INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE AND ALSO 3 THREE OTHER ISSUES OTHER THAN TRANSFER PRICING. BE ING AGGRIEVED, THE ASSESSEE HAD FILED ITS VARIOUS OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL [DRP]. 3.1. AFTER DELIBERATING THE ISSUES, THE DRP HAD MADE THE FOLLOWING OBSERVATIONS IN ITS DIRECTIONS DATED 31.8.2010 , THE GIST OF WHICH, ARE DETAILED, ITEMS-WISE AS UNDER: (I) VALIDITY OF THE ACTION OF THE AO IN PREPARING A DRA FT ASSESSMENT ORDER : THE PANEL IS OF THE OPINION THAT THERE IS FATAL ERR OR IN THE PROCESS CONNECTED WITH ASSESSMENT OR DETERMINATION OF ALP BY THE TPO. THE ALLEGED LACK OF OPPORTUNITY BY THE TPO TO THE ASSESSEE GETS CURED B Y THE PANEL GIVING THE ASSESSEE AN OPPORTUNITY OF HEARING AND CONSIDERING ITS OBJECTIONS . (II) THE TPO REJECTING THE TRANSFER PRICING DOCUMENTATIO N MAINTAINED BY THE ASSESSEE AND SUBSTITUTING IT BY HIS OWN TP STUDY: THIS PANEL IS OF THE OPINION THAT THE TPO HAS FOLLO WED STRICT OBJECTIVE CRITERIA FOR SELECTING/REJECTING COMPARABLES. IF ANY INFORMATIO N WAS NOT MADE AVAILABLE TO THE ASSESSEE AT THE TIME OF TP STUDY, THE SAME IS M ADE GOOD BY THE PANEL TAKING NOTE OF THE ASSESSEES OBJECTIONS AT THE TIME OF DI SPOSAL OF THE REFERENCE U/S 144C. SINCE THE PANEL IS OF THE OPINION THAT THE TPO FOLLOWED OBJECTIVE CRITERIA FOR NOT ACCEPTING THE TP STUDY OF THE ASSESSEE AND CONDUCTING HIS OWN TP STUDY, THE OBJECTIONS OF THE ASSESSEE WITH REGARD REJECTIO N OF ITS TP STUDY BY THE TPO AND THE METHODOLOGY FOLLOWED BY THE TPO IN CONDUCTI NG HIS OWN TP STUDY, THE OBJECTION OF THE ASSESSEE WAS NOT ACCEPTED (III) EXERCISING OF POWERS U/S 133(6) OF THE ACT BY THE T PO : THE OBJECTION OF THE ASSESSEE WAS NOT ACCEPTED SINC E SUB-SECTION (7) OF S.92CA EMPOWERS THE TPO TO CALL FOR ANY INFORMATION BY EXE RCISE OF POWERS U/S 131 OR133(6) OF THE ACT. (IV) REJECTION OF SOME OF THE FILTERS PROPOSED BY THE AS SESSEE IN ITS OWN TP STUDY: 4 AFTER GOING THROUGH THE REASONING OF THE TPO AND AL SO WEIGHING THE SAME AGAINST THE OBJECTIONS OF THE ASSESSEE, THE PANEL I S IN AGREEMENT WITH THE REASONING OF THE TPO. (V) REJECTION OF CERTAIN COMPANIES TAKEN BY THE ASSESSE E AS COMPARABLE AND ADOPTION OF CERTAIN COMPANIES AS COMPARAB LE BY THE TPO: AFTER GOING THROUGH THE REASONS GIVEN BY THE TPO FO R ACCEPTING/ REJECTING COMPARABLES, THE PANEL IS IN AGREEMENT WITH TPO. D URING THE COURSE OF HEARING, THE ASSESSEE HAD RAISED OBJECTION THAT M/S . MEGASOFT LTD. HAS TO BE REJECTED AS A COMPARABLE BECAUSE IT IS A IT PRODUCT COMPANY. THE PANEL HAD CALLED FOR A REPORT FROM THE TPO WHO HAD HELD THAT MEGASOFT LTD IS MAINLY A SOFTWARE DEVELOPMENT COMPANY CAN BE RETAINED AS A C OMPARABLE. THE PANEL FOUND THAT THE CORRECT PLI I.E., OPERATING PROFIT/ OPERATING COST OF THE COMPANY IS 51.73% INSTEAD OF 52.74%. WHILE PASSING THE FINAL ASSESSMENT ORDER, THE TPO IS DIRECTED TO TAKE THE MEAN PLI OF COMPARABLE COMPANI ES AFTER ADOPTING THE CORRECT PLI OF MEGASOFT LTD. APART FROM THIS, OTHER OBJECTIONS OF THE ASSESSEE TO USE OF FILTERS AND ADOPTION OF COMPARABLES IS NOT A CCEPTED. (VI) THE TPO EXCLUDING FOREIGN EXCHANGE GAIN, BANK CHARG ES OF THE ASSESSEE AS PART OF OPERATING PROFIT WHILE CO MPUTING NET PROFIT MARGINS: THE PANEL IS OF THE OPINION THAT THE TPO HAD CORREC TLY HELD THAT THESE SUMS CREDITS TO THE P & L A/C OF THE ASSESSEE HAVING NOT HING TO DO WITH OPERATING PROFITS AND HAS CORRECTLY BEEN EXCLUDED. (VII) WITH REGARD TO NOT ALLOWING RISK ADJUSTMENTS BY THE TPO, THE PANEL WAS IN AGREEMENT WITH THE REASONS RECORDED BY THE TPO IN H IS REPORT [PAGES 154 185]. THE LAST OBJECTION BEING THE TRANSFER PRICING IS TH AT WORKING CAPITAL ADJUSTMENT OF 1.4% HAS BEEN WRONGLY CALCULATED . DIRECTIONS OF THE DRP: THE AO IS DIRECTED TO CONTACT THE TPO AND IF ANY RE ADJUSTMENT OF WORKING CAPITAL ADJUSTED IS REQUIRED TO BE DONE EITHER ON A CCOUNT OF MISTAKE IN COMPUTATION IN ORIGINAL TP REPORT OR ON ACCOUNT OF TAKING THE REVISED FIGURE OF PLI IN THE CASE OF M/S. MEGASOFT LTD. THE SAME SHOU LD BE DONE . THE OTHER ADJUSTMENTS PROPOSED BY THE AO BEING : - RE-COMPUTING RELIEF U/S 10A AT RS.4.44 CRORES AS AG AINST RS.4.89 CRORES CLAIMED; - ERRED IN REDUCING RS.57.64 LAKHS [TELECOMMUNICATION AND INSURANCE EXPENSES] FROM THE EXPORT TURNOVER FOR COMPUTING 10 A RELIEF ON THE BASIS 5 THE ASSESSEE HAD INCLUDED THE SAME IN THE EXPORT T URNOVER WHEN THE ASSESSEE HAD NOT INCLUDED THE SAME; - IN REDUCING RS.2.41 CRORES [FOREIGN TRAVEL, CONVEYA NCE AND TRAINING AND RECRUITMENT EXPENSES INCURRED IN FOREIGN CURRENCY] FROM EXPORT TURNOVER FOR COMPUTING RELIEF U/S 10A; - IN HOLDING THAT DELIVERY OF COMPUTER SOFTWARE WAS I N THE NATURE OF RENDERING TECHNICAL SERVICES AS DEFINING IN EXPL N.2 TO S.9(1)((VII) DISREGARDING JUDICIAL VIEW ON THE ISSUE; - ERRED IN NOT REDUCING THE EXPENSES OF RS.2.99 CRORE S ONLY FROM THE EXPORT TURNOVER AND NOT FROM THE TOTAL TURNOVER FOR COMPUT ING 10A RELIEF. DIRECTIONS OF THE DRP: SINCE SIMILAR DISALLOWANCES WERE MADE BY THE AO WHI LE COMPUTING TOTAL INCOME OF THE ASSESSEE FOR EARLIER YEARS AND THE ISSUE IS SUB-JUDICE, THE DISALLOWANCE AS PROPOSED BY THE AO WAS APPROVED. WITH REGARD TO LEVY OF INTEREST U/S 234D OF THE ACT , THE AO WAS DIRECTED BY THE DRP TO EXAMINE THE ISSUE OF CHARGING OF INTERES T AS PER THE PROVISIONS OF LAW WHILE PASSING THE FINAL ASSESSMENT ORDER. 3.2. IN THE FINAL ASSESSMENT ORDER U/S 143( 3) R.W.S. 144C OF THE ACT ON 13.9.2010, THE LD. AO HAD COMPUTED THE DEDUCTION U/ S 10A OF THE ACT AT RS.4,44,03,914/-. WHILE DOING SO, THE LD. AO HAD REDUCED RS.57.64 LAKHS BEING TELECOMMUNICATION AND INSURANCES EXPENSES AND ALSO EXPENSES IN FOREIGN EXCHANGE OF RS.2.41 CRORES [TRAVELING AND CONVEYANC E AND TRAINING AND RECRUITMENT EXPENSES] FROM THE EXPORT TURNOVER, AS ACCORDING TO THE LD. AO, ALL THE ABOVE EXPENSES IN FOREIGN EXCHANGE WERE ATTRIBU TABLE TO PROVIDING TECHNICAL SERVICES OUTSIDE INDIA IN ACCORDANCE TO PROVISO TO EXPLANATION 2(IV) OF S.10A(8) OF THE ACT. UNDER THE CAPTION TRANSFER PRICING , ON RECEIPT OF ORDER U/S 92CA OF THE ACT FROM TPO AND AFTER CONSIDERING THE ASSESSEES O BJECTIONS, THE TOTAL ADJUSTMENT U/S 92 CA OF THE ACT WAS RS.46,96,90,273 /- AS AGAINST RS.43,61,89,694/- SHOWN BY THE ASSESSEE, THE DIFFER ENCE OF RS.3,35,00,579/- 6 BEING ADJUSTMENT U/S 92CA OF THE ACT, THE SAME WAS ADDED TO THE ASSESSEES INCOME UNDER THE HEAD TRANSFER PRICING AND, ACCOR DINGLY, THE ASSESSMENT WAS CONCLUDED. 4. AGGRIEVED, THE ASSESSEE HAS COME UP WI TH THE PRESENT APPEAL. DURING THE COURSE OF HEARING, SHRI PADAM CHAND KHINCHA, TH E LD. A R HAD ARGUED AT LENGTH, THE GIST OF WHICH IS SUMMARIZED AS UNDER: - DURING THE YEAR UNDER DISPUTE, THE ASSESSEE HAD T HE FOLLOWING INTERNATIONAL TRANSACTION WITH ITS AE - (I) RENDERING OF SOFTWARE DEVELOPMENT; (II) IMPORT OF ASSETS FOR A PRICE; (III) RECEIPT OF ASSETS FREE OF COST; (IV) CROSS CHARGE OF PROFESSIONAL CHARGES TOWARDS TRAINI NG OF EMPLOYEES; & (V) COST REIMBURSEMENTS TO AE. - THAT THE LD. TPO HAD NO OBJECTION WITH RESPECT TO PURCHASE OF ASSETS, RECEIPT OF ASSETS FREE OF CHARGE, CROSS CHARGE OF PROFESSIO NAL CHARGES AND COST REIMBURSEMENTS TO AE BY THE ASSESSEE; - THE ASSESSEE RENDERED SOFTWARE DEVELOPMENT SERV ICES TO ITS AE FOR 43.61 CRORES. THE ASSESSEE ADOPTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) TO JUSTIFY THE PRICE CHARGED IN THE INTERNATIONAL TRAN SACTIONS. AFTER ADOPTING VARIOUS SEARCH FILTERS, THE ASSESSEE SELECTED 36 CO MPANIES AS COMPARABLES AND THE ARITHMETIC MEAN OF THESE COMPARABLES WAS 12.06 %. THE ASSESSEES OPERATING MARGIN ON COST WAS 11.22%. A +/- 5 PERCE NT VARIANCE FROM THE MEAN ARMS LENGTH PRICE, AS PERMITTED UNDER LAW MEANT TH AT THE RANGE OF THE ARMS LENGTH OPERATING MARGINS OF THE COMPARABLES WOULD F ALL BETWEEN 6.46 PERCENT AND 17.66 PERCENT. SINCE THE ASSESSEES MARGIN OF 11.22% WAS WITHIN THE ABOVE RANGE, IT WAS CONCLUDED THAT THE INTERNATIONAL TRAN SACTIONS RELATING TO SOFTWARE DEVELOPMENT SERVICES ARE AT ARMS LENGTH; - THAT THE TPO IN HIS SHOW-CAUSE NOTICE PROPOSED TO RE-DETERMINE THE ARMS LENGTH PRICE FOR SOFTWARE DEVELOPMENT SERVICES AND ALSO REMARKS ON ASSESSEES STUDY, NEW SEARCH METHODOLOGY, COMPARABLES PROPOSES AND COPIES OF REPLIES RECEIVED U/S 133(6) FROM OTHER COMPANIES FOR WHICH THE ASSESSEE FILED A DETAILED REPLY WHEREIN IT HAD RAISED VARIOUS OBJECTIONS TO T HE PROPOSED ACTION OF THE LD. TPO; 7 - THAT THE TPO IN HIS FURTHER SHOW-CAUSE NOTICED DT . 21.4.09 REQUIRING INFORMATION ON INTRA GROUP CROSS CHARGES AND REIMBU RSEMENTS TRANSACTIONS BETWEEN THE ASSESSEE AND ITS AE WHICH WAS DULY FURN ISHED; THAT THERE WAS NO OBJECTION BY THE TPO WITH RESPECT TO THESE TRANSACT IONS AND THEY HAVE BEEN ACCEPTED AT VALUES THEY WERE UNDERTAKEN; - IN HIS FINAL ORDER, THE LD. TPO HAD SELECTED 20 C OMPANIES AS COMPARABLES AND CONSIDERED SIX ADDITIONAL COMPANIES AS COMPARABLES FROM THAT PROPOSED, OUT OF WHICH TWO COMPANIES WERE SELECTED BY THE ASSESSEE, THAT THESE NEW COMPANIES WERE ADOPTED AS COMPARABLES WITHOUT PROPOSING THE S AME OR AFFORDING AN OPPORTUNITY TO THE ASSESSEE TO PRESENT ITS OBJECTIO N TO THEIR ADOPTION; THAT THE ARITHMETIC MEAN WAS DETERMINED AT 20.68% AND AFTER FACTORING A WORKING CAPITAL ADJUSTMENT OF 1.47%, THE ADJUSTED ARITHMETIC MEAN W AS DETERMINED AT 19.2%. THE TRANSFER PRICING ADJUSTMENT FOR THE SOFTWARE DE VELOPMENT SERVICES WAS, ACCORDINGLY, DETERMINED AT RS.3,39,73,620/-. - WHEN THE ASSESSEE HAD APPROACHED THE DISPUTE RES OLUTION PANEL [DRP] FOR SUCCOR, THE DRP HAD, HOWEVER, VIRTUALLY REJECTED TH E ASSESSEES OBJECTION EXCEPT FOR CORRECTING AN ERROR IN THE MARGIN COMPUTATION O F ONE COMPARABLE, VIZ., M/S. MEGASOFT. THE LD. AO INCORPORATED THE TP ADJUSTMEN T AS PER THE DIRECTIONS OF THE DRP, WILE DETERMINING THE TOTAL INCOME; SUBMISSION ON TURNOVER FILTER: - THAT IN ITS TRANSFER PRICING ANALYSIS, THE ASSESS EE DID NOT APPLY TURNOVER RANGE EITHER ON THE LOWER END OR AT THE HIGHER END, HOWEV ER, THE TPO HAD APPLIED A LOWER TURNOVER FILTER OF RS.1 CRORE, BUT, THE TPO HAD NOT APPLIED THE UPPER TURNOVER LIMIT ON THE GROUND THAT THERE WAS NO RELA TIONSHIP BETWEEN SALES AND MARGINS; THAT SIZE OF THE COMPARABLE IS AN IMPORTAN T FACTOR IN COMPARABILITY WHICH IS ALSO RECOGNIZED BY THE STATUTE ESPECIALLY THE RULES. RULE 10B(3) LAYS DOWN GUIDELINES FOR COMPARING AN UNCONTROLLED TRANS ACTION WITH AN INTERNATIONAL TRANSACTION; - THAT DIFFERENCES FOR TRANSFER PRICING PURPOSES CA N BE OF TWO TYPES, VIZ., (I) DIFFERENCES IN TRANSACTIONS BEING COMPARED OR (II) DIFFERENCES IN ENTERPRISES. A COMPARABLE SHOULD BE REJECTED, IF ANY OF THE ABOVE DIFFERENCE MATERIALLY AFFECTS THE PRICE CHARGED OR COST PAID, OR PROFIT ARISING F ROM SUCH TRANSACTIONS IN THE OPEN MARKET UNLESS AN ACCURATE ADJUSTMENT CAN BE MA DE FOR REMOVING THE EFFECT OF SUCH DIFFERENCES; - THAT WHILE APPLYING ANY OF THE METHODS, THE RULE RECOGNIZES AND PROVIDES FOR IRONING OUT THE ENTERPRISE WIDE DIFFERENCES; THAT T HE TNMM (WHICH HAS BEEN ACCEPTED AS THE MOST APPROPRIATE METHOD IN THE INST ANT CASE) FOR E.G., 8 CONTEMPLATES AN ADJUSTMENT FOR AN ENTERPRISE WIDE D IFFERENCE [RULE 10B(1)(E)]. THE SAID RULE OUTLINES VARIOUS CONDITIONS FOR COMPA RABILITY; THAT IN CHOOSING THE MOST APPROPRIATE METHOD, RULE 10C(2)(E) FACTORS THE ABILITY OF MAKING RELIABLE AND ACCURATE ADJUSTMENT TO ACCOUNT FOR THE DIFFEREN CES IN THE ENTERPRISES LEVELS; THAT SIZE WAS AN IMPORTANT FACET OF AN ENTERPRISE L EVEL DIFFERENCE. SIZE OF AN ENTERPRISE IS THUS TO BE EXAMINED FOR COMPARABILITY PURPOSES; THAT SIGNIFICANT DIFFERENCES IN SIZE OF COMPANIES REMAINING UNADJUST ED WOULD IMPACT COMPARABILITY; - THAT COMPANIES OPERATING ON A LARGE SCALE BENEFIT FROM ECONOMIES OF SCALE, HIGHER RISK TAKING CAPABILITIES, ROBUST GLOBAL DELI VERY AND BUSINESS MODELS AS OPPOSED TO THE SMALLER OR MEDIUM-SIZED COMPANIES AN D THAT SIZE THEREFORE MATTERS. TWO COMPANIES OF DISSIMILAR SIZE, THEREFO RE, CANNOT BE ASSUMED TO EARN COMPARABLE MARGINS; - THAT VARIOUS TRIBUNALS HAVE TAKEN A STAND THAT TH E SIZE AS ONE OF THE SELECTION CRITERIA AND ESPECIALLY THE HONBLE CHANDIGARH SPEC IAL BENCH HAD REJECTED ADOPTION OF THE TURNOVER RANGE OF ONE CRORE ON LOWE R END AND INFINITY ON THE HIGHER END DCIT V. QUARK SYSTEMS PVT. LTD. 38 SOT 207]. SUCH A VIEW HAS BEEN ACCEPTED BY VARIOUS TRIBUNALS, VIZ., (A) EGAIN COMMUNICATIONS PVT. LTD. V. ITO 118 TTJ 3 54 (PUNE); (B) M/S. SONY INDIA (P) LTD V. DCIT 114 ITD 448 (DE L); (C) DCIT V. INDO AMERICAN JEWELLERY LTD., - ITA NO. 6194/MUM/2008 MUMBAI; (D) PHILIPS SOFTWARE CENTRE PVT. LTD. 26 SOT 226 (B ANG); - THAT THE SIZE AS A CRITERIA FOR SELECTION OF COMP ARABLE WAS ALSO RECOMMENDED BY OECD IN ITS TP GUIDELINES, 2010 THAT - (PAGE 343) SIZE CRITERIA IN TERMS OF SALES, ASSE TS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PARTIES MIGHT AFFECT THE RELATIVE COMPETITIV E POSITIONS OF THE BUYER AND SELLER AND, THEREFORE, COMPARABILITY. - THAT THE ICAI TP GUIDANCE NOTE (PARA 15.4) HAD AL SO OBSERVED THAT A TRANSACTION ENTERED INTO BY A RS.1000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY RS.10 CRORES COMPAN Y, THAT THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE; - THAT AN APPROPRIATE TURNOVER RANGE SHOULD HAVE BE EN APPLIED IN SELECTING COMPARABLE UNCONTROLLED COMPANIES; IN THE ALTERNATI VE, A SELECTION ON THE BASIS OF SIZE TO BE MADE BASED ON THE NASSCOM CATEGORIZAT ION; 9 WITH REGARD TO USE OF INFORMATION IN PURSUANCE OF N OTICE U/S 133(6) OF THE ACT: - THAT THE LD. TPO HAD ADOPTED THE PROCESS FOR ISSU ANCE OF NOTICES AND USE OF SUCH INFORMATION WAS INAPPROPRIATE FOR THE REASONS THAT - (I) THAT IN ALL, 165 COMPANIES WERE ISSUED NOTICES, HOW EVER, IT WAS NOT CLEAR AS TO HOW THESE COMPANIES WERE SELECTED; (II) THAT THE ASSESSEE WAS NOT FED WITH THE BASIS OF SEL ECTION OF THOSE COMPANIES FOR ISSUANCE OF NOTICES; THAT IT WAS NOT CLEAR WHETHER ALL THE RESPONSES HAVE BEEN INCORPORATED IN THE CD PROVIDED TO THE ASSESSEE AND THAT THE WHOLE EXERCISE APPEARED TO BE A SELECTIVE; (III) THAT THE SELECTION OF MEGASOFT LIMITED AS COMPARABL E, AS PER INITIAL SHOW-CAUSE NOTICE, IN FACT MEGASOFT LIMITED WAS RE JECTED ON THE GROUND THAT IT FAILED RPT FILTER AND EMPLOYEE COST FILTER; THAT IN SPITE OF TPOS DENIAL, A NOTICE WAS ISSUED TO MEGASOFT AND INFORM ATION RECEIVED THERE- FROM WAS USED AGAINST THE ASSESSEE; (IV) THOUGH THE TPO HAD, INITIALLY, DETAILED THE PROCESS ADOPTED, THEREAFTER, THE DISCLOSING THE PROCESS OF EXERCISE U/S 133(6) AND INFORMATION OBTAINED BEING SECRETIVE; (V) WHEN THE DRPS ATTENTION WAS DRAWN TO THE ATTITUDE OF THE TPO, THE PANEL HAD OBSERVED THAT (ON PAGE 12) THE PANEL IS OF THE OPINION THAT THER E IS FATAL ERROR IN THE PROCESS CONNECTED WITH ASSESSMENT OR DETERMINAT ION OF ALP BY THE TPO. THE ALLEGED LACK OF OPPORTUNITY BY THE TP O TO THE ASSESSEE GETS CURED BY THE PANEL GIVING AN OPPORTUNITY OF HE ARING AND CONSIDERING ITS OBJECTIONS. (VI) THAT EVEN THE DRP HAD AFFORDED ONLY ONE OPPORTUNITY THAT TOO THE HEARING WAS FOR A VERY MINIMAL DURATION AS MANY CAS ES WERE HEARD BY THE PANEL ON THE SAME DAY; THAT THE ASSESSEE WAS NO T MADE KNOWN BY THE DRP THAT THE OPPORTUNITY OF NOT BEING HEARD EARLIER BY THE TPO WAS BEING CURED NOW AND, THUS, AS ADMITTED BY THE DRP T HAT THE ERROR OF NOT HAVING AFFORDED A SUFFICIENT OPPORTUNITY TO THE ASS ESSEE CONTINUES, VITIATING THE ENTIRE PROCESS WHEREBY MAKING THE ORD ERS BAD IN LAW; AUTHENTICITY OF THE INFORMATION RECEIVED : - RULE 10(3) PROVIDE THAT THE INFORMATION SPECIFIED IN SUB-RULE (1) SHALL BE SUPPORTED BY AUTHENTIC DOCUMENTS. THE TPO, HAD NOT , HOWEVER, ESTABLISHED 10 WHETHER THE INFORMATION OBTAINED BY WAY OF NOTICE U /S 133(6) WAS AUTHENTIC AND COMPLETE; - BRUSHED ASIDE THE DIFFERENCES BETWEEN THE ANNUAL REPORTS OF THE COMPARABLES AND REPLIES RECEIVED U/S 133(6) [FOR E.G., IN THE C ASE OF ACCEL] AS HIGHLIGHTED BY THE ASSESSEE, THE LD. TPO HAD RELIED AND CONCLUDED HIS REPORT BASED ON REPLIES RECEIVED, IN PREFERENCE TO ANNUAL REPORT OF THE COM PANIES WHICH WERE AUDITED BY PROFESSIONAL QUALIFIED CAS AND APPROVED BY BOARD OF DIRECTORS; - FOR E.G., SANKHYA INFOTECH WAS SELECTED AS COMPAR ABLE IN PRECEDING AY (2005- 06) ON THE GROUND THAT IT WAS A SOFTWARE DEVELOPMEN T COMPANY DESPITE THE STOUT OBJECTION OF THE ASSESSEE THAT THIS COMPANY WAS A P RODUCT COMPANY. FOR THE AY UNDER CONSIDERATION, SANKHYA INFOTECH WAS REJECT ED ON THE GROUND THAT IT WAS SOFTWARE PRODUCT COMPANY. THIS INCONSISTENCY R AISES DOUBTS AS TO WHETHER THE ENTIRE PROCESS WAS TRANSPARENT AND ALSO FAIR. INFORMATION OBTAINED U/S 133(6) OF THE ACT: - THAT THE ASSESSEE HAD KEPT AND MAINTAINED THE INF ORMATION AND DOCUMENTS REQUIRED U/S RULE 10D; THAT THE TPO WAS COLLECTING, COLLATING AND COMPILING DATA TWO/THREE YEARS AFTER THE DATE OF THE ASSESSEE S DOCUMENTATION WHICH WAS IMPERMISSIBLE; THAT THE POWER U/S 133(6)OF THE ACT WAS TO BE EXERCISED BY THE TPO TO CHECK AND CONFIRM THE VERACITY OF DATA USED AND ADOPTED BY A COMPANY AND THAT THE POWER WAS NOT TO BE USED TO GATHER INF ORMATION THAT COMES INTO PUBLIC DOMAIN AFTER THE SPECIFIED DATE; - THAT TO INVOKE THE POWERS U/S 92C(3) BY EITHER AO OR TPO TO DISCARD THE BASIS ON WHICH THE ALP COMPUTED BY THE ASSESSEE MUST BE T HAT THE MATERIAL OR DOCUMENT OR INFORMATION IN EXISTENCE BY THE SPECIFI ED DATE, OTHERWISE WHAT WAS CORRECT AND COMPLETE ON THE BASIS OF DATA EXISTING BY THE SPECIFIED DATE COULD BECOME UNRELIABLE OR INCOMPLETE IN THE LIGHT OF DAT A OF OTHER COMPANIES THAT COMES INTO EXISTENCE SUBSEQUENTLY; THAT POWERS U/S 133(6) WERE NOT TO BE USED FOR GATHERING DATA NOT IN EXISTENCE IN PUBLIC DOMAI N BY THE SPECIFIED DATE, THAT THE POWER U/S 133(6) WAS TO BE USED FOR VALIDATING DATA WHICH HAS BEEN ADOPTED, BUT, CANNOT BE USED TO OBTAIN INFORMATION TO ENABLE SELECTION OF COMPARABLES; - THAT THE AMENDMENT MADE TO THE DEFINITION OF SPEC IFIED DATE BY THE FINANCE ACT 2011 RECOGNIZES THAT THE DATA HAS TO BE IN EXIS TENCE BY THE SPECIFIED DATE WHICH WAS DEFINED AS 30 TH NOVEMBER; THAT THE EXTENSION OF THE SPECIFIED DATE WAS A RECOGNITION THAT THE COMPARABILITY ANALYSIS A S ALSO DETERMINATION OF ALP HAS TO BE ON THE BASIS OF DATA THAT WAS AVAILABLE I N THE PUBLIC DOMAIN BY THE SPECIFIED DATE; THAT IF SUBSEQUENT INFORMATION IS P ERMITTED TO BE USED, THEN THE 11 ALP WOULD REMAIN FLUID AND, THUS, THE ASSESSEE MAY DETERMINE ALP ON THE BASIS OF DATA EXISTING UP-TO A PARTICULAR DATE AND THE TPO MAY RE-DETERMINE THE ALP ON THE DATA SUBSEQUENTLY AVAILABLE AND SUBSEQUE NTLY, THE DRP WILL HAVE TO RE-DETERMINE ALP ON THE BASIS OF UP-DATED INFORMATI ON; - THAT THE OECD IN ITS TP GUIDELINES DISCOURAGES US E OF SECRET COMPARABLES, THE DATA OF WHICH IS UNAVAILABLE TO THE TAXPAYER; - THAT THE DATA AS AVAILABLE TO IT MAY BE USED FOR DETERMINATION OF THE ARMS LENGTH PRICE; THAT THE DATA AVAILABLE SUBSEQUENTLY OR OBTAINED THROUGH NOTICES U/S 133(6) SHOULD BE REJECTED AS SUCH APPROACH ADOP TED BY THE TPO OF USING SUBSEQUENT DATA WAS BAD IN LAW; - WITHOUT PREJUDICE, THAT EVEN ADOPTING THE SUBSEQU ENT DATA AS USED BY THE TPO, THE ASSESSEES MARGIN SATISFY THE ARMS LENGTH RANG E MARGIN OR ADOPTION OF VARIOUS COMPANIES AS COMPARAB LES: (I) MEGASOFT LTD: - THAT MEGASOFT LTD. [ML] WAS SELECTED BY THE TPO I N HIS FINAL ORDER U/S 92CA BY ADOPTING THE MARGIN AT 52.74% IN THE FINAL COMPU TATION OF THE ARMS LENGTH PRICE WITHOUT AFFORDING AN OPPORTUNITY TO THE ASSES SEE; - THAT IT WAS CONTENTED BEFORE THE DRP THAT ML WAS HAVING REVENUES FROM SOFTWARE PRODUCTS AS WELL AS SOFTWARE REVENUES AND ITS YEAR-ENDING WAS FROM JANUARY TO MARCH, HOWEVER, THE TPO COLLECTED THE DA TA OF THE FINANCIAL YEAR APRIL TO MARCH U/S 133(6) WHICH WAS OTHERWISE NOT AVAILABLE IN THE PUBLIC DOMAIN; THAT ML HAD REVENUES FOR SOFTWARE PRODUCTS WHICH WAS FORTIFIED BY THE REPLY RECEIVED FROM ML, ACCORDING TO WHICH, IT HAD TWO DIVISIONS, VIZ., PRODUCT SEGMENT AND SOFTWARE SERVICES SEGMENT. ML HAD PROV IDED SEGMENTAL BREAK-UP BETWEEN THE SOFTWARE SERVICES SEGMENT AND SOFTWARE PRODUCT SEGMENT; THAT THE TPO, IN CASE OF OTHER COMPARABLES SIMILARLY PLACED, HAD ADOPTED THE MARGINS OF ONLY THE SOFTWARE SERVICE SEGMENT FOR COMPARABILITY PURPOSES; THAT CONSISTENT WITH SUCH STAND, THE MARGINS OF THE SOFTWARE SEGMEN T ONLY SHOULD BE ADOPTED IN CONTRAST TO THE ENTITY LEVEL MARGINS WHICH CONTENTI ON HAS BEEN REJECTED BY DRP; - THAT DRP HAD, HOWEVER, CONCLUDED THAT 65% OF THE EFFORTS OF THE PRODUCT DIVISION COULD BE CATEGORIZED AS RESULTING TO SOFTW ARE SERVICES; THAT THE RESIDUAL PRODUCT EFFORTS, PERFORMANCE AND REVENUES COMPRISED OF ONLY 23% OF THE TOTAL REVENUES; THAT THE CONTRIBUTION OF THE PRODUCT DIVI SION TO THE OVERALL REVENUES UNDER SUCH ANALYSIS BEING LESS THAN 25%, THE ML, AC CORDING TO DRP, WAS TO BE 12 REGARDED AS PREDOMINANTLY SOFTWARE SERVICE COMPANY AND, HENCE, ELIGIBLE FOR BEING ADOPTED AS A COMPARABLE; - THAT IN THE CASES OF IGATE GLOBAL, GEOMETRIC, KAL S INFO SYSTEMS, R SYSTEMS, SASKEN COMMUNICATION, TATA ELXSI, FLEXTRONICS ETC., THE TPO HAD USED SEGMENTAL MARGINS FOR COMPARABILITY PURPOSES; THAT THE REVENUES FROM SOFTWARE DEVELOPMENT IN THESE CASES, EXCEED 75% OF TOTAL REV ENUES OF THE ENTITY AND, THUS, CONSIDERING MEGASOFT LTD. AT THE ENTITY LEVEL WOULD BE INCONSISTENT WITH THE PTOS POSITION IN CASE OF OTHER COMPARABLES; THAT I N CASE OF ML, ONLY THE SEGMENTAL MARGINS SHOULD BE USED FOR COMPARABILITY PURPOSES AND BOTH THE SEGMENTS BEING SUBSTANTIALLY DIFFERENT, CONSIDERING THE MARGINS AT ENTITY LEVEL WOULD VITIATE THE COMPARABILITY; AND THE MARGIN OF 52.74% BEING ABNORMAL IN THE CASE OF ML, ML WAS TO BE REJECTED AS A COMPARAB LE. - RELIES ON CASE LAWS: (A) ITO V. EGAIN COMMUNICATION PVT. LTD. 2008-TIOL 282 CHD SB (B) M/S. SAP LABS INDIA PVT. LTD. V. ACIT 2010-TII-44 I TAT-BANG-TP (C) ITO V. M/S. SAUNAY JEWELS PVT. LTD. 2010-TII-51-ITA T-MUM-TP (D) MENTOR GRAPHICS (NOIDA) PVT. LTD. V. DCIT 109 ITD 1 01 (II) KALS INFORMATION SYSTEMS LIMITED: THE TPO HAD CONSIDERED KALS AS A COMPARABLE ON THE GROUND THAT IT WAS ENGAGED IN SOFTWARE SERVICES AND ITS MARGIN WAS COM PUTED AT 39.75%. AS THERE WERE UNUSUAL FEATURES SUCH AS CONSISTENT LOSSES IN PROVIDING TRAINING, SALARY COST ETC., THE ASSESSEE URGED THAT KALS CANNOT BE ADOPTE D AS A COMPARABLE. HOWEVER, TPO AND DRP HAVE CONSIDERED KALS AS A COMP ARABLES ADOPTING THE FIGURES SUPPLIED IN COMPLIANCE TO NOTICE U/S 133(6) , THAT KALS HAD CLAIMED THAT THE CORE OF OUR BUSINESS MAY BE CLASSIFIED AS THAT OF PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER, WHICH WAS CONTRARY TO THE INFORMATION AVAILABLE IN THE ANNUAL REPORT OF KALS; THAT THE AS SESSEES REQUEST TO SUMMON KALS FOR CROSS EXAMINATION WAS TURNED DOWN WHICH IS AGAINST VARIOUS RULINGS INCLUDING THAT OF KISHINCHAND CHELLARAM V. CIT 125 ITR 713 (SC) THUS, KALS INFORMATION SYSTEMS LIMITED CANNOT BE CO NSIDERED AS COMPARABLE. (III) TATA ELXSI LIMITED : TATA ELXSI LTD. [TEL] HAD TWO SEGMENTS, VIZ., SOFTW ARE DEVELOPMENT AND SERVICES & SYSTEM INTEGRATION AND SERVICES FOR COMPARABILITY ; THAT UNDER SOFTWARE DEVELOPMENT & SERVICES SEGMENT TEL WAS ENGAGED IN V ARIOUS ACTIVITIES SUCH AS (I) PRODUCTS DESIGN SERVICES, (II) INNOVATIVE DESIG N ENGINEERING SERVICES AND (III) VISUAL COMPUTING LABS AND THAT AS PER ITS ANNUAL RE PORT, TEL WAS ENGAGED IN 13 DIVERSE ACTIVITIES AND WAS NOT JUST RESTRICTED TO P URE SOFTWARE DEVELOPMENT ACTIVITIES LIKE THAT OF THE ASSESSEE AND THAT TEL I N COMPLIANCE TO NOTICE U/S 133(6) HAD STATED THAT IT SHOULD NOT BE SELECTED AS COMPARABLE FOR OTHER SOFTWARE COMPANIES. IN SPITE OF SUCH FORE-WARNING, TEL HAS BEEN ADOPTED AS A COMPARABLE WITHOUT REBUTTING OR CONDUCTING FRESH IN VESTIGATION TO DISPROVE THE LIMITATION EXPRESSED; (IV) ACCEL TRANSMATIC LIMITED [ATL] : THE TPO SELECTED ATL AS COMPARABLE AND COMPARED THE SOFTWARE SERVICES SEGMENT BASED ON THE REPLY RECEIVED U/S 133(6) OF T HE ACT. ATL WAS NOT A PURE SOFTWARE DEVELOPMENT SERVICE COMPANY AS THE DIRECTO RS REPORT HAD STATED THAT ATL HAD PRODUCTS. COMPUTATION OF MARGINS OF THE ASSESSEE : FOREIGN EXCHANGE GAIN: - THAT THE TPO HAD TREATED FOREIGN EXCHANGE GAIN OF RS.21.16 LAKHS AS NON- OPERATING INCOME WHICH IS QUITE CONTRAST TO HONBLE TRIBUNALS FINDING IN THE CASE OF M/S.SAP LABS INDIA PVT. LTD. V. ACIT 6 ITR (TRIB) 81 BNG WHEREIN IT HAS BEEN HELD THAT FOREIGN EXCHANGE GAIN NEEDS TO B E CONSIDERED AS BEING OPERATING IN NATURE WHILE DETERMINING ARMS LENGTH PRICE INCOME FROM AOP : - THE ASSESSEE HAD EARNED RS.1.12 CRORES AS ASSESSE ES SHARE IN PRIZE MONEY RECEIVED BY AOP FROM PARTICIPATING IN AN ONLINE COM PETITION. THE SCHEME OF COMPETITION WAS TO CREATE SOLUTIONS THAT ENABLE USE RS OF POPULAR DATABASES TO MIGRATE TO INGRES OPEN SOURCE PLATFORM, THAT THE AO P RECEIVED THE PRIZE MONEY FOR DEVELOPING A MIGRATION TOOLSET FOR ORACLE DATAB ASES AND APPLICATIONS; THAT THE ASSESSEE ALONG WITH CERTAIN EMPLOYEES FORMED A TEAM TO PARTICIPATE IN THE COMPETITION WITH AN AGREEMENT WITH THE EMPLOYEES TH AT THEY WOULD BE PAID RS.1 LAKH EACH FOR PARTICIPATING AND IF THE PRIZE WAS AW ARDED TO THE TEAM AND THE BALANCE WAS TO BE RETAINED BY THE ASSESSEE; THAT TH E EMPLOYEES WHO WERE PAID SALARIES IN THE NORMAL COURSE, SPENT TIME AND USED THE ASSESSEES INFRASTRUCTURE. ALL THESE EXPENSES RELATING TO THE PARTICIPATION WE RE DEBITED TO P & L ACCOUNT. ON RECEIPT OF PRIZE MONEY BY THE TEAM, EACH EMPLOYE E WAS PAID RS.1 LAKH AND THE BALANCE AMOUNT WAS CREDITED TO P & L A/C. SINC E THIS ACTIVITY WAS IN THE NATURE OF SOFTWARE DEVELOPMENT SERVICE WHICH WAS TH E MAIN BUSINESS OF THE ASSESSEE AND THE ASSESSEE INCURRED VARIOUS EXPENSES TOWARDS THIS, THE SAID INCOME SHOULD BE CONSIDERED AS OPERATING IN NATURE; 14 - THAT THE ASSESSEES MARGINS AFTER CONSIDERING FOR EIGN EXCHANGE GAIN AND SHARE IN PRIZE MONEY FROM ONLINE COMPETITIONS, THE OPERAT ING PROFIT/OPERATING COST WAS WORKED OUT AT 14.05%; THAT THE MARGIN OF THE ASSESS EE AS WORKED OUT WAS GREATER THAN THE ADJUSTED MARGIN OF THE COMPARABLES AFTER E LIMINATING KALS, TATA ELXSI AND ACCEL. EVEN AT THE UNADJUSTED LEVEL AND WITHOU T ELIMINATION OF THE ABOVE COMPANIES, THE DIFFERENTIAL IS WITHIN THE PERMISSIB LE 5% BANDWIDTH AND, THUS, NO ADJUSTMENT WAS REQUIRED TO BE MADE TO THE REPORTED VALUE OF THE ASSESSEES TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES; & - BASED ON ALL THE ABOVE, THE ASSESSEES TRANSACTIO NS WITH THE ASSOCIATED ENTERPRISES WERE AT ARMS LENGTH AND THE ADDITION M ADE BY THE TPO WHICH WAS SUSTAINED BY THE DRP REQUIRES TO BE DELETED; ALTERNATIVE CONTENTION : ASSUMING WITHOUT ADMITTING THAT TURNOVER FILTER SHO ULD NOT BE APPLIED, THE FOLLOWING COMPANIES DESERVE TO BE REJECTED ON MERIT S: (I) MINDTREE CONSULTING PVT. LTD : AS PER NOTES TO ACCOUNTS, MINDTREE HAD ENTERED INTO AN AGREEMENT WITH THE CUSTOMER IN DECEMBER, 2003 WHEREBY THE WARRANTS HAV E BEEN ISSUED TO CUSTOMER. TOTAL WARRANTS OF 82.66 LAKHS CAN BE CON VERTED INTO EQUITY SHARES AT AN EXERCISE PRICE OF RS.2/SHARE; THAT THE CUSTOMER CAN CONVERT THESE WARRANTS INTO EQUITY SHARES BASED ON REVENUES GENERATED BY T HE CUSTOMERS DURING THE DEFINED PERIOD AND ON FULFILLING THE CONDITIONS SPE CIFIED IN THE AGREEMENT; THAT THE ISSUE OF MINDTREE SHARES WAS FIXED AT RS.425/SH ARE AS ON THE LISTING DATE 7.3.2007 WHICH PROVIDES AN INCENTIVE OF RS.423/SHAR E TO THE CUSTOMER. THIS WAS AN INDIRECT BENEFIT TO THE CUSTOMER TO THE TUNE OF RS.349.68 CRORES. MINDTREE HAD THROUGH THE ABOVE STRATEGY MOVED THE MARKETING EXPENDITURE FROM P & L ACCOUNT TO BALANCE SHEET WHICH HAS ELIMINATED THE I MPACT ON THE P & L A/C. BECAUSE OF THIS UNUSUAL EVENT, MINDTREE SHOULD BE REJECTED AS A COMPARABLE. ALTERNATIVELY, IF MINDTREE WAS TO BE SELECTED AS CO MPARABLE, THE INCENTIVE AS ABOVE SHOULD BE FACTORED AS A COST WHILE COMPUTING OPERATING MARGINS; (II) INFOSYS TECHNOLOGIES LIMITED : - INFOSYS WAS 207 TIMES BIGGER THAN THE ASSESSEE W AS DISSIMILAR IN SIZE AND, THUS, SHOULD NOT BE ACCEPTED AS COMPARABLE; THAT TH E DELHI TRIBUNAL IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. V. ITO IN ITA N O. 3856 (DEL) / 2010 HAD HELD THAT INFOSYS TECHNOLOGIES LIMITED CANNOT B E COMPARED WITH SMALL COMPANIES HAVING NOMINAL TURNOVER AND BEARING MINIM AL RISKS; 15 - THAT THE FOLLOWING COMPANIES ARE COMPARABLES OUT OF THE TPOS COMPARABLES WITHOUT APPLYING TURNOVER FILTER AND REJECTING THE COMPARABLES FOR THE DETAILED REASONS AND AFTER CONSIDERING THE MARGINS OF MEGASO FT AT THE SEGMENT LEVEL:: (A) AZTEC SOFTWARE LIMITED; (B) GEOMETRIC SOFTWA RE LIMITED (SEG); (C) IGATE GLOBAL SOLUTIONS LTD. (SEG); (D) PERSISTENT SYSTEMS LTD.; (E) R SYSTEMS INTERNATIONAL LIMITED (SEG); (F) SASKEN COMMUNICATI ON TECHNOLOGIES LTD (SEG) (G) LUCID SOFTWARE LTD., (H) MEDIA SOFT SOLUTIONS P VT. LTD., (I) R.S.SOFTWARE (INDIA) LTD., (J) SIP TECHNOLOGIES & EXPORTS LTD., (K) BODHTREE CONSULTING LTD. (L) SYNFOSYS BUSINESS SOLUTIONS LTD. (M) MEGASOFT LTD. (N) LANCO GLOBAL SOLUTIONS LTD. & (O) FLEXTRONICS SOFTWARE SYSTEMS LTD. - THAT THE MARGINS OF THE ASSESSEE AS COMPUTED AFTE R CONSIDERING FOREIGN EXCHANGE GAIN AND INCOME FROM SHARE IN PRIZE MONEY FROM ONLINE COMPETITION WAS GREATER THAN THE ADJUSTED MARGIN OF THE COMPARA BLES ON THE ABOVE COMPANIES AFTER ELIMINATING KALS, TATA ELXSI, ACCEL , INFOSYS TECHNOLOGIES AND MINDTREE AND, THUS, NO ADJUSTMENT WAS REQUIRED TO B E MADE TO THE REPORTED VALUES OF THE ASSESSEES TRANSACTIONS WITH ITS ASSO CIATED ENTERPRISES. BENEFIT OF 5 PER CENT RANGE: - ASSUMING WITHOUT ADMITTING THAT A TP ADJUSTMENT W AS TO BE MADE, IT SHOULD BE GIVEN A STANDARD DEDUCTION OF 5% AS PROVIDED UNDER PROVISO TO S.92C(2) BEFORE MAKING ADJUSTMENTS FOR THE TRANSFER PRICE; THAT THE FOLLOWING CASE LAWS SUPPORT THE ASSESSEES VIEW: (I) M/S.SAP LABS INDIA PVT. LTD. V. ACIT 2010-TII-44-IT AT-BANG-TP (II) PHILIPS SOFTWARE CENTRE PVT. LTD. 26 SOT 226 (III) MSS INDIA PVT. LTD. 32 SOT 132 (IV) CUSTOMER SERVICES INDIA (P) LTD. V.ACIT 30 SOT 486 (V) DEVELOPMENT CONSULTANTS P. LTD. V. DCIT 23 SOT 455 (VI) SONY INDIA P. LTD. 315 ITR 150 (VII) TNT INDIA PVT. LTD. V. ACIT 10 TXMANN.COM 161 THAT THE HONBLE BANGALORE BENCH IN THE CASE OF SAP LABS (SUPRA) HAD HELD THAT AMENDMENT TO S.92C WAS NOT RETROSPECTIVE IN NA TURE; THAT BASED ON THE ABOVE, IF AT ALL ANY ADJUSTMENT IS TO BE MADE, IT S HOULD BE GIVEN THE BENEFIT OF STANDARD DEDUCTION OF 5% & IN CONCLUSION, EVEN AFTER ADOPTING THE COMPARABLES AS CHOSEN BY THE TPO SUBJECT TO REJECTION OF SOME COMPANIES FOR REASONS SUPRA, THE MARGINS OF THE ASSESSEE IS ABOVE THE ARITHMETIC MEAN OF COMPARABLE COMPANIES, THAT THESE 16 MARGINS WOULD SKEW MORE FAVOURABLY, IF COMPARABLES OF THE ASSESSEE THAT DESERVE TO BE ADOPTED ARE CONSIDERED. 4.1. TO STRENGTHEN HIS ARGUMENTS, THE LD. A.R DURING THE COURSE OF HEARING, FURNISHED TWO VOLUMINOUS PAPER BOOKS WHICH CONSIST OF, AMONG OTHERS, COPIES OF (I) FINANCIAL STATEMENTS; (II) FORM NO.3CEB; (III) TRANSFER PRICING STUDY, (IV) CORRESPONDENCE WITH TPO, DRP, AO; (V) REPLIES TO N OTICE U/S 133(6) AND EXTRACTS FROM ANNUAL REPORTS OF KLAS, MEGASOFT LTD. , TATA ELXSI LTD. ACCEL TRANSMATIC LTD., MINDTREE CONSULTING PVT. LTD. ETC. , 4.2. ON THE OTHER HAND, SHRI ETWA MUNDA, THE LD. D R HAD STRONGLY SUPPORTED THE STAND OF THE LD. AO, LD. TPO AS WELL AS DRP IN ARRIVING AT SUCH A CONCLUSION WHICH, ACCORDING TO THE LD. D.R, REQUIRES TO BE SUS TAINED. 5. WE HAVE DECISIVELY CONSIDERED THE RIVAL S UBMISSIONS, DILIGENTLY PERUSED THE RELEVANT CASE RECORDS AND ALSO VARIOUS DOCUMENT ARY EVIDENCES ADDUCED BY THE LD. A R THROUGH VOLUMINOUS PAPER BOOKS. 5.1. WHILE CONCLUDING THE ASSESSMENT U/S 143 (3) R.W.S.144C OF THE ACT, THE LD. AO, UNDER THE HEAD COMPUTATION OF INCOME U/S 1 0A HAD REDUCED RS.3,23,84,900 [RS.57,64,220 + 2,41,79,150] (SIC) R S.2,99,43,370/- (RS.57.64 LAKHS BEING TELECOMMUNICATION EXPENSES AND INSURANC E AND RS.2.41 CRORES BEING TRAVELING, CONVEYANCE, TRAINING AND RECRUITME NT EXPENSES) FROM THE EXPORT TURNOVER OF RS.43,83,06,498/- CLAIMED BY THE ASSESS EE. BRUSHING ASIDE THE ASSESSEES OBJECTION, THE LD. AO MADE AN ADDITION O F RS.33,43,357/- UNDER THIS HEAD AFTER RE-COMPUTATION. 17 5.1.1. UNDER THE HEAD TRANSFER PRICING AS PER THE ORDER OF LD. TPO U/S 92CA OF THE ACT, THE DIFFERENCE OF RS.3,35,00,579/- [TOT AL ADJUSTMENT WAS DETERMINED U/S 92CA AT RS.46,96,90,273/- AS AGAINST THE ASSESS EES CLAIM OF RS.43,61,89,694/-] WAS ALSO ADDED TO THE ASSESSEES INCOME. 5.2. THE CRUXES OF THE SUBMISSION OF THE AS SESSEE ARE SUMMARIZED AS UNDER: (I) THE TPO HAD APPLIED A LOWER TURNOVER FILTER OF RS.1 CRORE, BUT, NOT APPLIED THE UPPER TURNOVER LIMIT ON THE GROUND THAT THERE W AS NO RELATIONSHIP BETWEEN SALES AND MARGINS WHICH, ACCORDING TO THE A SSESSEE, CONTRARY TO THE GUIDELINES LAID DOWN IN RULE 10B(3); (II) THE TPO HAD NOT PROVIDED THE BASIS OF SELECTION OF COMPANIES FOR ISSUANCE OF NOTICE U/S 133(6) OF THE ACT AND ALSO IT WAS NOT CLEAR AS TO WHETHER ALL THE RESPONSES RECEIVED HAVE BEEN INCORPORATED IN THE CD SUPPLIED TO THE ASSESSEE; (III) AS THE INITIAL DETAILS PROVIDED TO THE ASSESSEE, E. G., MEGASOFT LTD WAS REJECTED ON THE GROUND THAT IT FAILS RPT FILTER AND EMPLOYEE COST FILTER; (IV) IN INITIAL SHOW CAUSE NOTICES, THE TPO HAD DETAILED THE PROCESS ADOPTED, HOWEVER, IN DISCLOSING THE PROCESS EXERCISE OF ITS POWERS U/S 133(6) AND THE INFORMATION OBTAINED THERE-UNDER, IT WAS BEING SECR ETIVE AND ONLY RELEVANT INFORMATION WAS PROVIDED WHICH, ACCORDING TO THE AS SESSEE, LEADS TO BIAS IN CHOOSING THE COMPARABLES; (V) WHEN DRPS ATTENTION WAS DRAWN TO THIS LAPSE OF THE TPO, THE DRP OPINED THAT THERE WAS A FATAL ERROR IN THE PROCESS CONNECTED WI TH ASSESSMENT OR DETERMINATION OF ALP BY THE TPO. THE ALLEGED LACK OF OPPORTUNITY BY THE TPO TO THE ASSESSEE GETS CURED BY THE PANEL GIV ING AN OPPORTUNITY OF HEARING AND CONSIDERING ITS OBJECTION; (VI) THAT DRP HAD AFFORDED ONLY ONE OPPORTUNITY THAT TOO THE HEARING WAS FOR A VERY MINIMAL DURATION AS MANY CASES WERE HEARD BY T HE PANEL ON THE SAME DAY THAT THE ASSESSEE WAS NOT INFORMED BY THE PANE L THAT THE OPPORTUNITY OF BEING HEARD EARLY WAS CURED NOW; (VII) THE TPO HAD NOT ESTABLISHED WHETHER THE INFORMATION OBTAINED BY WAY OF NOTICE U/S 133(6) WAS AUTHENTIC AND COMPLETE AND WH EN THE ASSESSEE DREW THE ATTENTION OF THE TPO THE DIFFERENCE BETWEEN THE ANNUAL REPORTS OF THE COMPARABLES AND REPLIES RECEIVED (FOR E.G., ACCEL), IGNORING THE ASSESSEES PROTEST, THE TPO HAD RELIED AND COMPLETED THE PROCE SS BASED ON REPLIES 18 RECEIVED U/S 133(6) IN PREFERENCE TO ANNUAL REPORTS OF THE COMPANIES AUDITED BY THE PROFESSIONALLY QUALIFIED C.AS; (VIII) SANKHYA INFOTECH WAS, FOR EXAMPLE, SELECTED AS COMP ARABLE IN PRECEDING AY ON THE GROUND THAT IT WAS A SOFTWARE DEVELOPMENT CO MPANY DESPITE THE ASSESSEES OBJECTION THAT IT WAS A PRODUCT COMPANY. FOR THE YEAR UNDER CONSIDERATION, THE SAID COMPANY WAS AGAIN REJECTED ON THE GROUND THAT IT WAS A SOFTWARE COMPANY BASED ON REPLY U/S 133(6). THESE TYPES OF INCONSISTENCY-GALORE ON THE PART OF TPO, LEADS TO Q UESTION AS TO WHETHER THE ENTIRE PROCESS WAS TRANSPARENT AND FAIR; (IX) THE INFORMATION OBTAINED BY PROCESS OF ISSUANCE OF NOTICE U/S 133(6) WAS NOT AVAILABLE IN PUBLIC DOMAIN OR AT THE TIME OF ST UDY BY THE ASSESSEE; (X) MEGASOFT LTD WAS SELECTED BY THE TPO IN THE ORDER PASSED U/S 92CA OF THE ACT WITHOUT AFFORDING AN OPPORTUNITY TO THE ASSESSE E OF BEING HEARD. THE MARGIN OF THIS COMPANY WAS ADOPTED AT 52.74% IN THE FINAL COMPUTATION OF THE ARMS LENGTH PRICE. WHEN THE DRPS ATTENTION W AS DRAWN BY THE ASSESSEE TO THE EFFECT THAT MEGASOFT LTD. WAS HAVIN G REVENUES FROM SOFTWARE PRODUCTS AS WELL AS SOFTWARE REVENUES, THE DRP HAD OVERRULED THE ASSESSEES OBJECTION AND CONCLUDED THAT 65% OF THE EFFORTS OF THE PRODUCT DIVISION COULD BE CATEGORIZED AS RESULTING TO SOFTWARE SERVI CES. THIS VIEW OF THE DRP WAS QUITE CONTRAST TO THE TPOS VIEW THAT A PRODUCT SEGMENT IS SUBSTANTIALLY DIFFERENT FROM A SOFTWARE SERVICE SEG MENT . AT PAGE 55 OF THE TP ORDER, THE TPO HIMSELF HAS LISTED VARIOUS DIFFER ENCES BETWEEN SOFTWARE PRODUCT COMPANY AND SOFTWARE SERVICE COMPANY ; (XI) IN THE CASES OF IGATE GLOBAL, GEOMETRIC, KALS INFO SYSTEMS, R.SYSTEMS, SASKEN COMMUNICATION, TATA ELXSI COMPARABLES, THE T PO HAD USED SEGMENTAL MARGINS FOR COMPARABILITY PURPOSES WHERE THE REVENUES FROM SOFTWARE DEVELOPMENT EXCEED 75% OF TOTAL REVENUES O F THE ENTITY. CONSIDERING MEGASOFT AT THE ENTITY LEVEL WOULD BE I NCONSISTENT WITH THE TPOS POSITION IN CASE OF OTHER COMPARABLES. IN CA SE OF MEGASOFT, THE MARGINS AT THE ENTITY LEVEL WERE HIGHER THAN THAT A T THE SEGMENT LEVEL WHEREAS IN CASE OF OTHER COMPARABLES E.G., KALS, SA SKEN, TATA ELXSI, IGATE ETC., MARGINS AT THE SEGMENT LEVEL WERE HIGHER. TH IS SHOWS THE APPROACH OF THE TPO WAS ARBITRARY AND WITHOUT BASIS. 5.3. ON A DECISIVE EXAMINATION OF THE RELEVANT RECORDS, PERUSAL OF IMPUGNED ORDERS OF TPO, DRP AND ALSO SUBMISSION OF THE LD. A .R, THE FOLLOWING LACUNAE HAVE BEEN NOTICED, NAMELY: (I) THE TPO HAD APPLIED A LOWER TURNOVER FILTER OF RS.1 CRORE, BUT, NOT APPLIED THE UPPER TURNOVER LIMIT ON THE GROUND THAT THERE W AS NO RELATIONSHIP 19 BETWEEN SALES AND MARGINS WHICH, ACCORDING TO THE A SSESSEE, CONTRARY TO THE GUIDELINES LAID DOWN IN RULE 10B(3); - THE ASSESSEE, IN ITS ARGUMENT BEFORE THIS BENCH, HA D VEHEMENTLY PORTRAYED THAT THE SIZE OF THE COMPARABLE WAS AN IMPORTANT FACTOR IN COMPARABILITY. WHILE DOING SO, IT HAD DRAWN STRENGTH BY CITING RULE 10B( 3) WHICH LAID DOWN GUIDELINES FOR COMPARING AN UNCONTROLLED TRANSACTIO N WITH AN INTERNATIONAL TRANSACTION; (II) THE ASSESSEES OTHER GRIEVANCE WAS THAT THE TPO HAD SELECTED THE COMPANIES FOR ISSUANCE OF NOTICES U/S 133(6) IN AN ARBITRARY MANNER. TO DRIVE HOME ITS POINT, THE ASSESSEE HAD CITED THE SELECTION OF MEGA SOFT LIMITED AS COMPARABLE. ACCORDING TO THE ASSESSEE, FROM THE DE TAILS PROVIDED ALONG WITH THE INITIAL SHOW-CAUSE NOTICE, MEGASOFT LIMITED WAS REJECTED AS IT FAILED RPT FILTER AND EMPLOYEE COST FILTER. IN SPITE OF TPOS AVERMENT THAT THE COMPANY WAS NOT ISSUED NOTICE U/S 133(6) AS IT FAILED RPT F ILTER, HOWEVER, AS PER ASSESSEES VERSION, A NOTICE WAS NONETHELESS ISSUED ; (III) WHEN THE TPO HAD SELECTIVELY DISCLOSED THE PROCESS OF EXERCISE OF HIS POWERS U/S 133(6) AND THE INFORMATION OBTAINED THERE-UNDER , THAT THE ASSESSEE HAD URGED FOR DISCLOSURE OF THE ENTIRE PROCESS AS ALSO THE FURNISHING OF ALL THE REPLIES, THE TPO, ACCORDING TO THE ASSESSEE, WAS UN RESPONSIVE; - WHEN THIS SHORT-COMING ON THE PART OF THE TPO WAS B ROUGHT TO THE REFERENCE OF DRP, THE DRP HAD OBSERVED, IN ITS FINDING, THAT THE PANEL IS OF THE OPINION THAT THERE IS FATAL ERR OR IN THE PROCESS CONNECTED WITH ASSESSMENT OR DETERMINATION OF ALP BY THE TPO. THE ALLEGED LACK OF OPPORTUNITY BY THE TPO TO THE ASSESSEE GETS CURED B Y THE PANEL GIVING AN OPPORTUNITY OF HEARING AND CONSIDERING ITS OBJECTIO NS. HOWEVER, ON A QUICK LOOK AT THE PANELS REPORT, IT WAS NOTICED THAT THE PANEL HAD AFFORDED AN OPPORTUNITY TO THE ASSESSEE ONLY ON 24. 6.2010 THAT WAS BEING THE HEARING DATE AND CONSEQUENTLY THE DIRECTIONS WERE I SSUED ON 31.8.2010. ACCORDING TO THE ASSESSEE, ON RECEIPT OF THE DIRECT IONS OF THE DRP, THE ASSESSEE CAME TO KNOW THAT THE DRP MENTIONS ABOUT HAVING MAD E GOOD THE OPPORTUNITY NOT BEING AFFORDED EARLIER. IT APPEARS THAT NO REA SONABLE OPPORTUNITY WAS AFFORDED TO THE ASSESSEE EITHER BY THE TPO OR BY TH E DRP TO PUT-FORTH ITS VIEW ON THE ISSUE AND, THUS, AS ADMITTED BY THE DRP, THE ER ROR WAS ALLOWED TO CONTINUE THEREBY VITIATING THE ENTIRE PROCESS AS HIGHLIGHTED BY THE ASSESSEE; (IV) THERE WERE INCONSISTENCIES IN SELECTING THE COMPANI ES AS COMPARABLES; (V) ON THE MARGIN OR ADOPTION OF VARIOUS COMPANIES AS C OMPARABLE, IT WAS THE CASE OF THE ASSESSEE THAT MEGASOFT LIMITED WAS SELE CTED BY THE TPO IN HIS FINAL ORDER U/S 92CA OF THE ACT WITHOUT GIVING AN O PPORTUNITY OF HEARING AT ANY TIME TO THE ASSESSEE AND WHEN THE ASSESSEE HAD PROTESTED BEFORE THE 20 DRP THE SELECTION OF MEGASOFT LIMITED AS COMPARABLE BY THE TPO, THE DRP, BRUSHING ASIDE THE ASSESSEES OBJECTION, HAD JUSTIF IED THE TPOS STAND; (VI) THE ASSESSEE ALSO OPPOSED THE TPOS STAND IN CONSID ERING KALS INFORMATION SYSTEMS LIMITED, TATA ELEXSI LIMITED, A CCEL TRANSMATIC LIMITED ETC., AS COMPARABLES WHICH HAS BEEN SUMMARI LY REJECTED BY THE TPO AS WELL AS DRP; (VII) WITH REGARD TO COMPUTATION OF MARGINS OF THE ASSESS EE UNDER FOREIGN EXCHANGE GAIN, THE LD. TPO HAD, PERHAPS, TREATED T HE SAME AS NON- OPERATING INCOME WHICH IS QUITE CONTRARY TO THE FIN DING OF THE HONBLE BENCH IN THE CASE OF M/S. SAP LABS INDIA PRIVATE LI MITED V. ACIT REPORTED IN 6 ITR (TRIB)81 (BNG) WHEREIN IT WAS HELD THAT FOREIGN EXCHANGE GAIN NEEDS TO BE CONSIDERED AS BEING OPERATING IN NATURE WHILE DETERMINING ARMS LENGTH PRICE. THE FINDING OF THE JURISDICTIONAL TRIBUNAL HAS NO T BEEN ADHERED TO WHILE DEALING WITH A SIMILAR ISSUE (VIII) THE ASSESSEES SUSTAINED URGE WAS THAT SOME OF THE COMPANIES SUCH AS (A) MINDTREE CONSULTING PRIVATE LIMITED, (B) INFOSYS TE CHNOLOGIES LIMITED OUGHT NOT TO HAVE BEEN CONSIDERED AS COMPARABLES FO R THE REASONS LISTED (SUPRA). THE TPO HAD REJECTED, ACCORDING TO THE AS SESSEE, CERTAIN COMPARABLES SELECTED BY THE ASSESSEE WITHOUT ASSIGN ING VALID REASONS; (IX) ACCORDING TO THE ASSESSEE, IT SHOULD BE GIVEN STAND ARD DEDUCTION OF 5% AS PROVIDED UNDER PROVISO TO S. 92C(2) BEFORE MAKING A DJUSTMENTS FOR THE TRANSFER PRICE. TO DRIVE HOME ITS POINT, THE ASSES SEE RELIES ON THE JURISDICTIONAL BENCHS FINDING IN THE CASE OF TNT I NDIA PRIVATE LIMITED V. ACIT [10 TAXMANN.COM 161 ITA NO.1442 (BNG)/08 WHE REIN IT WAS HELD THAT 15.2. HAVING HEARD BOTH PARTIES AND HAVING CONSI DERED THE MATERIAL ON RECORD, WE RESPECTFULLY FOLLOW THE DECI SIONS OF OUR CO-ORDINATE BENCHES CITED SUPRA AND DIRECT THE AO THAT THE ALP SHALL BE ARRIVED AT AFTER GIVING THE STANDARD DEDUCTION OF 5% OF THE AR ITHMETICAL MEAN ARRIVED AT BY THE TPO/AO. THE AO IS DIRECTED TO AD OPT THE ARMS LENGTH PRICE ACCORDINGLY & (X) WITH REGARD TO DEDUCTION U/S 10A OF THE ACT, THE AS SESSEES CONTENTION WAS THAT THE EXPENSES CLAIMED WERE NOT RECOVERED FROM T HE CUSTOMERS AND ALSO DID NOT FORM PART OF EXPORT TURNOVER AND THE ASSESS EE WAS NOT ENGAGED IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. 5.3.1. OUT OF THE 10 POINTS LISTED OUT ABOV E, TWO ISSUES AS MENTIONED AT SL. NOS. (VII) AND (X), WE FIND THAT THE DECISIONS OF THE HONBLE TRIBUNALS ARE SQUARELY APPLICABLE TO THE FACTS OF ISSUES ON HAND WHICH ARE ILLUSTRATED AS UNDER: 21 (I) WITH REGARD TO COMPUTATION OF MARGINS OF THE ASSESSEE UNDER FOREIGN EXCHANGE GAIN WE FIND THAT AN IDENTICAL ISSUE HAD CROPPED UP BEFO RE THE EARLIER BENCH WHEREIN THE HONBLE BENCH IN THE CASE OF SAP LABS INDIA PVT. LIMITED V. ACIT REFERRED SUPRA HAD HELD THAT THE FOREIGN EXCHANGE GAIN NEEDS TO BE CONSIDERED AS BEING OPERATING IN NATURE WHILE DETERMINING ARMS LENGTH PRICE. IN CONFORMITY WITH THE SAID FINDING, WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE; AND (II) IN RESPECT OF DEDUCTION U /S 10A OF THE ACT, THE ASSESSEES CONTENTION WAS THAT THE EXPENSES CLAIMED WERE NOT R ECOVERED FROM THE CUSTOMERS AND ALSO DID NOT FORM PART OF EXPORT TURN OVER AS THE ASSESSEE WAS NOT ENGAGED IN PROVIDING TECHNICAL SERVICES OUTSIDE IND IA. IN THIS CONNECTION, WE RECALL THE FINDING OF THE HONBLE ITAT, CHENNAI SPECIAL BENCH IN THE CASE OF ITO V. SAK SOFT LTD. REPORTED IN (2009) 313 ITR (AT ) 353 (CHENNAI)[SB] WHEREIN THE HONBLE SPECIAL BENCH MADE IT UNAMBIGUOUSLY T HAT 53..THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA A RE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN THE FORMULA. IN CONFORMITY WITH THE FINDING OF THE HONBLE SPECI AL BENCH REFERRED SUPRA, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. 22 5.3.1. TAKING INTO ACCOUNT THE FACTS AND CIRCU MSTANCES WITH REGARD TO THE REMAINING SHORT-COMINGS AS LISTED OUT IN THE FORE-G OING PARAGRAPHS AND ALSO A FACT THAT THE ASSESSEE HAS BEEN DEPRIVED OF ITS RIG HTFUL OPPORTUNITY TO PUT-FORTH ITS VIEW ON THE ISSUES WHICH HAVE BEEN DEALT WITH AT TH E LEVELS OF TPO AND DRP AND IN THE INTERESTS OF NATURAL JUSTICE AND FAIRNESS, T HE ISSUES RAISED BY THE ASSESSEE ARE REMITTED BACK ON THE FILES OF THE LD. AO/LD. TP O FOR CONSIDERATION AFRESH AND ALSO AFFORDING A REASONABLE OPPORTUNITY TO THE ASSE SSEE OF BEING HEARD. IN THE MEANWHILE, THE ASSESSEE, THROUGH ITS LD. A.R, IS AD VISED TO PLACE ALL THE RELEVANT PARTICULARS BEFORE THE AUTHORITIES CONCERNED TO FAC ILITATE THEM TO IMPLEMENT THE DIRECTIONS OF THIS BENCH CITED SUPRA, EXPEDITIOUSLY . 5.4. BEFORE PARTING WITH, WE WOULD LIKE TO EMP HASIZE THAT THOUGH THE ASSESSEE HAD RAISED A GROUND THAT THE IMPUGNED ORDER OF THE AO U/S 143(3) R.W.S. 144C OF THE ACT REQUIRES TO BE QUASHED, HOWEVER, DURING THE COURSE OF HEARING, NO SUBMISSIO N WAS MADE TO SUBSTANTIATE THAT THE IMPUGNED ORDER OF THE LD. AO DESERVES TO BE QUASHED. IN VIEW OF THE ABOVE, THIS GROUND HAS NOT BEEN TAKEN COGNIZANCE OF. THE OTHER GROUND BEING CHARGING OF INTEREST OF INTE REST U/S 234B OF THE ACT. THIS GROUND IS NOT MAINTAINABLE AS CHARGING OF INTEREST U/S 234B OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE. WITH REGARD TO CHARGING OF INTEREST U/S 234D OF THE ACT, WE WOULD LIKE TO RECALL THE FINDIN G OF THE HONBLE ITAT DELHI E SPECIAL BENCH IN THE CASE OF EKTA PROMOTERS P. LTD. (2008) 113 ITD 719- WHEREIN IT HAS BEEN HELD THAT THE LEVY OF INTEREST U/S 234D IS PURELY A LEGAL GROUND AND IS CHARGEABLE FOR THE AY 2006-07 AND, TH US, THIS GROUND GOES AGAINST THE ASSESSEE. 23 6. IN THE RESULT , THE ASSESSEES APPEAL IS PARTLY ALLOWED PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF JUNE, 2011. SD/- SD/- ( SMT. P. MADHAVI DEVI ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 30 TH JUNE, 2011. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.