Hewlett - Packard global Soft Private Limited, Bangalore V. DCIT, Bangalore

ITA 1211/BANG/2012

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3761 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-08-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 21-09-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Onus to prove; Revised return
• Section: 92C; 143(3); 92F; 234B; 263; 10; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B, BANGALORE BEFORE SHRI S.K.YADAV, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER IT (TP) A NO.1211 (BANG) 2012 (ASSESSMENT YEAR : 2004 05) M/S HEWLETT PACKARD GLOBALSOFT PVT. LTD., 39/40, ELECTRONIC CITY, PHASE II, HOSUR ROAD, BANGALORE 560100 PAN: AAACH 7164B APPELLANT VS DCIT, CIRCLE 11 (4), BANGALORE RESPONDENT ASSESSEE BY : SHRI T. SURYANARAYANA, ADVOCATE REVENUE BY : MS. NEERA MALHOTRA, CIT(DR) DATE OF HEARING : 23-08-2016 DATE OF PRONOUNCEMENT: 17-10-2016 O R D E R PER A. K. GARODIA, A. M.: THIS IS AN ASSESSEES APPEAL DIRECTED AGAINST THE ORDER OF CIT (A) IV BANGALORE DATED 17.07.2012 FOR A. Y. 2004 05. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: - THE ORDER PASSED BY THE LEARNED COMMISSIONER OF IN COME-TAX (APPEALS)- IV, BANGALORE ['CIT(A)'] UNDER SECTION 250 OF THE I NCOME-TAX ACT, 1961 ('ACT') IS BAD IN LAW AND ON FACTS IN MORE THAN ONE OF THE FOLLOWING GROUNDS: NON-ADJUDICATION OF GROUNDS PERTAINING TO THE ORIGI NAL ASSESSMENT ORDER ('ORIGINAL ASSESSMENT') AND DENIAL OF NATURAL JUSTI CE TO THE APPELLANT IT (TP) A NO.1211/B/2012 2 1. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN NO T ADJUDICATING THE GROUNDS OF APPEAL PREFERRED BY THE APPELLANT THAT P ERTAINED TO THE ORIGINAL ASSESSMENT AND WERE INCLUDED IN THE REVISED ASSESSM ENT ORDER ('REVISED ASSESSMENT') PURSUANT TO THE ORDER OF THE LEARNED C OMMISSIONER OF INCOME-TAX ('CIT') UNDER SECTION 263 OF THE ACT 2. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN NO T ADJUDICATING THE GROUNDS PREFERRED BY THE APPELLANT THAT PERTAINED T O THE ORIGINAL ASSESSMENT ALTHOUGH THE LEARNED CIT(A) HAD IN HIS O RDER DATED MARCH 26, 2009 IN RESPECT OF THE APPEAL FILED AGAINST THE ORI GINAL ASSESSMENT, DISMISSED THESE GROUNDS HOLDING THEM TO BE INFRUCTU OUS. 3. THE LEARNED CIT(A) ERRED IN LAW IN ADOPTING A VIE W OF NOT ADJUDICATING THE GROUNDS PERTAINING TO THE ORIGINAL ASSESSMENT ALTHOUGH THE SAME WERE NOT ADJUDICATED IN APPEAL AGAINST THE ORIGINAL ASSESSMENT, THEREBY ADOPTING A VIEW THAT RESULTED IN DENIAL OF NATURAL JUSTICE TO THE APPELLANT. HOLDING REVISED ASSESSMENT NOT TO BE IN THE NATURE OF A 'FRESH ASSESSMENT' 4. THE LEARNED CIT (A) ERRED IN LAW AND IN FACT IN HOLDING THE REVISED ASSESSMENT NOT TO BE IN THE NATURE OF A 'FRESH ASSE SSMENT' PURSUANT TO THE DIRECTIONS OF THE CIT UNDER SECTION 263 OF THE ACT. 5. THE LEARNED CIT (A) ERRED IN LAW AND IN FACT IN HOLDING THE REVISED ASSESSMENT NOT TO BE IN THE NATURE OF A 'FR ESH ASSESSMENT' ALTHOUGH THE LEARNED CIT (A) HAD IN HIS ORDER DATED MARCH 26 , 2009 IN RESPECT OF THE APPEAL FILED AGAINST THE ORIGINAL ASSESSMENT HELD T HE ORIGINAL ASSESSMENT TO HAVE BEEN SET ASIDE PURSUANT TO THE ORDER OF THE CIT UNDER SECTION 263 OF THE ACT. 6. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN FA ILING TO APPRECIATE THAT THE LEARNED CIT HAD IN THE ORDER UNDER SECTION 263 OF THE ACT SPECIFICALLY SET ASIDE THE ORIGINAL ASSESSMENT AND DIRECTED THE ASSESSING OFFICER ('AO') TO CARRY OUT A 'FRESH ASSESSMENT' AF TER MAKING NECESSARY VERIFICATION IN LIGHT OF THE OBSERVATIONS MADE BY T HE CIT. 7. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN AP PRECIATING THAT THE LEARNED AO HAD IN THE REVISED ASSESSMENT ADMITTED T HAT THE CIT HAD SET ASIDE THE ORIGINAL ASSESSMENT AND DIRECTED THE LEAR NED AO TO MAKE A FRESH ASSESSMENT. DISREGARDING FAILURE OF THE AO TO PASS A DRAFT ASSE SSMENT ORDER UNDER SECTION 144C OF THE ACT 8. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN HO LDING THAT THE LEARNED AO NEED NOT HAVE PASSED A DRAFT ASSESSMENT ORDER UNDER SECTION 144C OF THE ACT IN RESPECT OF THE REVISED ASSESSMEN T ALTHOUGH THE REVISED IT (TP) A NO.1211/B/2012 3 ASSESSMENT ENTAILED A TRANSFER PRICING ('TP') ADJUS TMENT UNDER SECTION 92C OF THE ACT. 9. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN HO LDING THE PROVISIONS OF SECTION 144C OF THE ACT NOT TO BE APP LICABLE ON ACCOUNT OF THE ORIGINAL ASSESSMENT HAVING BEEN PASSED PRIOR TO THE PROVISIONS OF SECTION 144C COMING INTO FORCE; INCORRECT RELIANCE ON THE DECISIONS 10. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN PL ACING RELIANCE ON THE DECISION OF THE SUPREME COURT IN THE CASE OF SH REE MANJUNATHESWARE PACKING PRODUCTS AND COMPHOR WORKS (231 ITR 53) AND THE DECISION OF THE KOLKATA ITAT IN THE CASE OF ITO VS UMA KANT NEW ATIA (97 ITD 414) IN THE PRESENT CASE. OTHER GROUNDS ON THE PROCESS IN RESPECT OF THE REVI SED ASSESSMENT 11. THE LEARNED CIT (A) ERRED IN UPHOLDING THE REVISE D ASSESSMENT, CONTAINING THE TP AND OTHER ADJUSTMENTS THAT FORMED A PART OF THE ORIGINAL ASSESSMENT AND DID NOT SURVIVE PURSUANT TO THE DIRE CTIONS OF THE CIT UNDER SECTION 263 OF THE ACT. SPECIFIC GROUNDS IN RESPECT OF THE EACH OF THE ADJU STMENTS EXCLUSION OF FOREIGN CURRENCY EXPENSES IN THE COMPUTATION OF RELIEF UNDER SECTION 10A OF THE ACT 12. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN UP HOLDING THE ADJUSTMENT OF EXCLUDING FOREIGN CURRENCY EXPENSES F ROM 'EXPORT TURNOVER' IN THE COMPUTATION OF RELIEF UNDER SECTION 10A OF T HE ACT AS MADE BY THE LEARNED AO IN THE REVISED ASSESSMENT BY HOLDING THA T THE LEARNED CIT(A) WAS NOT EMPOWERED TO DECIDE ISSUES WHICH WERE DECID ED BY THE CIT IN THE ORDER PASSED UNDER SECTION 263 OF THE ACT 13. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN UP HOLDING THE SUBJECT ADJUSTMENT IN THE COMPUTATION OF RELIEF UNDER SECTI ON 10A HOLDING WITHOUT EXAMINING THE ARGUMENTS OF THE APPELLANT ON THE MER ITS OF THE CASE 14. THE LEARNED CIT (A) ERRED IN LAW AND ON FACTS IN CONFIRMING THE LEARNED AO'S COMPUTATION OF RELIEF UNDER SECTION 10 A OF THE ACT AT RS 869,588,513 (AS AGAINST THE AMOUNT OF RS 1,396,336,628 CLAIMED BY THE APPELLANT IN ITS RETURN OF INCOME). 15. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN C ONFIRMING THAT THE AMOUNT IN RESPECT OF COMMUNICATION EXPENSES (RS 74, 335,818) AND FOREIGN CURRENCY EXPENSES (RS 2,201,568,748) INCURRED BY TH E APPELLANT SHOULD BE IT (TP) A NO.1211/B/2012 4 EXCLUDED FROM THE AMOUNT OF 'EXPORT TURNOVER' FOR T HE PURPOSE OF COMPUTATION OF RELIEF UNDER SECTION 10A OF THE ACT. 16. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN D ISREGARDING THE CONTENTION OF THE APPELLANT THAT THE COMPANY IS ENG AGED ONLY IN DEVELOPMENT OF COMPUTER SOFTWARE AND NOT INVOLVED I N RENDERING TECHNICAL SERVICES OUTSIDE INDIA. 17. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN DI SREGARDING THE PRINCIPLES UPHELD BY THE JURISDICTIONAL KARNATAKA H IGH COURT IN THE CASE OF TATA ELXSI (ITA 70 OF 2009) 18. THE LEARNED AO ERRED IN LAW AND ON FACTS IN CONFI RMING THAT THE EXPENSES OF RS 2,201,568,748 INCURRED IN FOREIGN CU RRENCY HAS NOT BEEN INCURRED FOR THE PURPOSE OF RENDERING TECHNICAL SER VICES OUTSIDE INDIA AND CONSEQUENTLY REDUCING THE SAME FROM THE 'EXPORT TUR NOVER'. 19. THE LEARNED CIT(A) ERRED IN LAW IN DISREGARDIN G THE WITHOUT PREJUDICE CONTENTION OF THE APPELLANT THAT IN CASE THE FOREIGN CURRENCY EXPENDITURE AND TELECOMMUNICATION EXPENDITURE IS RE DUCED FROM THE 'EXPORT TURNOVER', THE SAME SHOULD ALSO BE REDUCED FORM THE AMOUNT OF 'TOTAL TURNOVER' FOR THE PURPOSE OF COMPUTATION OF RELIEF UNDER SECTION 10A OF THE ACT. SET OFF OF LOSSES PERTAINING TO ONE OF THE 10A UNIT OF THE APPELLANT 20. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN DI SMISSING THE GROUNDS REGARDING SET OFF OF LOSSES RAISED BY THE A PPELLANT WITHOUT PROVIDING ANY SPECIFIC REASONS FOR THE SAME. 21. THE LEARNED CIT(A) ERRED IN LAW IN DISMISSING THE GROUND ON SET OFF OF LOSSES BASED ON AN INCORRECT OBSERVATION THAT TH E RELIEF UNDER SECTION 10A OF THE ACT WAS COMPUTED UNDERTAKING WISE BY THE LEARNED AO IN THE REVISED ASSESSMENT. 22. THE LEARNED CIT(A) ERRED IN LAW IN DISREGARDING T HE GROUNDS RAISED BY THE APPELLANT THAT THE LEARNED AO HAD COMPUTED R ELIEF IN RESPECT OF ALL THE 10A UNITS OF THE APPELLANT ON A CONSOLIDATED BA SIS WITHOUT COGNIZANCE OF THE UNIT WISE COMPUTATION. 23. THE LEARNED CIT(A) ERRED IN LAW IN DISREGARDING T HE PRINCIPLES UPHELD BY THE JURISDICTIONAL KARNATAKA HIGH COURT I N THE CASE OF ACIT VS YOKOGAWA INDIA LTD (ITA NO 78 OF 2011) AND VARIOUS OTHER JUDGMENTS CITED BY THE APPELLANT ON THE MATTER REGARDING SET OFF OF LOSSES IN RESPECT OF 10A UNITS IT (TP) A NO.1211/B/2012 5 DEDUCTION UNDER SECTION 80HHE OF THE ACT 24. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN D ISMISSING THE GROUND AND THEREBY CONFIRMING THE AMOUNT OF DEDUCTI ON UNDER SECTION 80HHE OF THE ACT AT RS 2,488,343, BY DISREGARDING T HE COMPUTATION OF DEDUCTION UNDER SECTION 80HHE OF THE ACT AS PROVIDE D IN THE REVISED RETURN OF INCOME, AS PER WHICH THE AMOUNT OF DEDUCTION IS RS 3,922,804. 25. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT ( A) HAS ERRED ON FACTS BY NOT ADJUDICATING ON THE GROUND RAISED BY T HE APPELLANT AGAINST THE FACTUAL ERROR MADE BY THE LEARNED AO BY NOT GIVING DUE EFFECT TO THE ADJUSTMENTS MADE IN HIS OWN ASSESSMENT ORDER AND TH EREBY NOT ARRIVING AT THE DEDUCTION UNDER SECTION 80HHE OF THE ACT AT RS 3,572,753. TP ADJUSTMENT 26. THE LEARNED AO ERRED IN NOT REVIEWING THE TP DOCU MENTATION ALREADY MAINTAINED BY THE APPELLANT, BEFORE DEEMING IT NECESSARY AND EXPEDIENT TO REFER THE TRANSACTION TO THE LEARNED T RANSFER PRICING OFFICER ('TPO'). 27. THE LEARNED AO ERRED IN LAW IN MAKING A REFERENCE IN A MECHANICAL, ROUTINE AND CASUAL MANNER TO THE LEARNED TPO UNDER SECTION 92CA OF THE ACT WITHOUT RECORDING DETAILED REASONS FOR SUCH A R EFERENCE. THE LEARNED AO ERRED IN MERELY MAKING AN ENTITY-WISE REFERENCE TO THE LEARNED TPO RATHER THAN TRANSACTION-WISE REFERENCE. BASED ON THE FACTS NARRATED IN THE ORIGINAL ASSESSM ENT, THE CIT HAS ERRED IN LAW AND ON FACTS IN ACCORDING APPROVAL TO THE AC TION OF THE LEARNED AO TO MAKE A REFERENCE TO THE LEARNED TPO UNDER SECTION 9 2CA OF THE ACT AND THE LEARNED AO ERRED IN MAKING A REFERENCE TO THE L EARNED TPO ON THAT BASIS. 28. THE LEARNED AO AND THE LEARNED TPO HAVE ERRED IN LAW AND ON FACTS IN MAKING AN ADJUSTMENT OF RS 175,348,548 TO THE IN COME OF THE APPELLANT CONSEQUENT TO DETERMINING THE ARM'S LENGTH PRICE (' ALP'). 29. THE LEARNED AO ERRED IN LAW IN RELYING ON THE ORD ER PASSED BY THE LEARNED TPO UNDER SECTION 92CA OF THE ACT, WHICH IN ITSELF IS BAD IN LAW AND ON FACTS AND IS THEREFORE LIABLE TO BE QUASHED. 30. THE LEARNED AO ERRED IN LAW IN NOT CARRYING OUT A REASONED EXAMINATION INDEPENDENTLY AS TO WHETHER THE TP ADJU STMENT PROPOSED BY THE LEARNED TPO WAS MAINTAINABLE AS REQUIRED BY SEC TION 92C OF THE ACT. 31. THE LEARNED TPO AND THE LEARNED AO ERRED IN LAW A ND ON FACTS IN CONCLUDING THAT IN RESPECT OF THE CALL CENTRE SERVI CES, THE APPELLANT WAS IT (TP) A NO.1211/B/2012 6 OPERATING ON A COST PLUS 10 PER CENT MODEL WHEREAS THE APPELLANT WAS ACTUALLY REMUNERATED ON THE BASIS OF NUMBER OF E-MA ILS AND CALLS ATTENDED. HENCE, THE LEARNED TPO AND THE LEARNED AO HAVE ERRE D IN LAW AND ON FACTS IN DETERMINING THE ALP ON COST PLUS BASIS. 32. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN REJECTING THE APPELLANT'S SUBMISSIONS THAT THE CALL CENTRE ACTIVI TIES WERE IN THE NASCENT STAGE AND THAT THE SUBJECT YEAR WAS THE FIRST FULL- FLEDGED YEAR OF OPERATIONS. 33. GIVEN THE ABOVE, THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN COMPARING THE APPELLANT WITH A FRESH SET OF COMPARA BLE COMPANIES THAT WERE AT A MATURE PHASE OF THE BUSINESS CYCLE, BY RE JECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT. 34. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN REJECTING THE CAPACITY UTILIZATION APPROACH ADOPTED BY THE APPELL ANT IN JUSTIFYING THE ARM'S LENGTH NATURE OF THE REVENUES EARNED FROM REN DERING OF CALL CENTRE SERVICES. 35. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN ADOPTING AN ADHOC APPROACH OF COMPUTING THE ARM'S LENGTH MARGIN BY PROVIDING A 30 PER CENT DOWNWARD ADJUSTMENT ON THE ARITHMETIC MEAN (IE APPROXIMATELY 10 PERCENT) FOR UNDER UTILISATION OF CAPACITY OF TH E CALL CENTRE ACTIVITIES. 36. THE LEARNED TPO AND THE LEARNED AO HAVE ALSO ERRE D IN LAW AND ON FACTS IN HOLDING THAT THE TRAINING COSTS AND THE CO STS RELATING TO PREPARATORY ACTIVITIES DID NOT ACCRUE ANY ENDURING BENEFITS TO THE APPELLANT AND THEREBY ATTRIBUTING SUCH COSTS TO THE SUBJECT YEAR, ENTIREL Y. 37. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN LAW AND ON FACTS IN NOT ACCEPTING THE MARGINS OF THE COMPARABLE COMP ANIES AS COMPUTED IN THE TP DOCUMENTATION MAINTAINED BY THE APPELLANT. 38. WITHOUT PREJUDICE, THE LEARNED TPO AND THE LEARNE D AO HAVE ERRED IN LAW AND ON FACTS IN ARRIVING AT THE MARGIN OF 21 PER CENT AS THE ARM'S LENGTH MARGIN. 39. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN USING DATA PERTAINING TO THE FINANCIAL YEAR ('FY') 2003-04, BY DISREGARDING THE FACT THAT THE SAME WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPILATION OF THE TP DOCUMENTATION. THE LEARNED TPO AND THE LE ARNED AO HAVE ERRED IN NOT APPRECIATING THAT ONLY THE FINANCIAL INFORMA TION AVAILABLE ON OR BEFORE OCTOBER 31, 2004 [AS SPECIFIED BY SECTION 92F (IV)] CAN BE USED IN COMPILING THE TP DOCUMENTATION AND NOT INFORMATION THAT MAY BE AVAILABLE AFTER THAT DATE. IT (TP) A NO.1211/B/2012 7 40. WITHOUT PREJUDICE, THE LEARNED TPO AND THE LEARNE D AO ERRED IN USING THE DATA PERTAINING TO FY 2003-04 WITHOUT USI NG THE DATA PERTAINING TO THE PREVIOUS TWO FYS, IE FYS 2002-03 AND 2001-02 . 41. WITHOUT PREJUDICE, THE LEARNED TPO AND THE LEARNE D AO ERRED IN LAW AND ON FACTS IN REJECTING THE SUBMISSIONS OF THE AP PELLANT THAT THE DATA PERTAINING TO THE PREVIOUS TWO FYS HAD TO BE USED A S THE PREVIOUS TWO YEARS' DATA DEMONSTRATED FACTS THAT INFLUENCED THE DETERMINATION OF THE TRANSFER PRICES IN THE SUBJECT YEAR. FURTHER, THE L EARNED TPO ERRED IN NOT DISCHARGING THE ONUS TO PROVE THAT SUC H FACTS DID NOT EXIST. 42. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN RELYING ON EXTERNAL REPORTS AND DATA BASES AS A BASIS FOR DETE RMINING THE ALP AND IN ADOPTING METHODOLOGIES BEYOND THE METHODOLOGIES AND PROCEDURE PRESCRIBED IN THE INCOME-TAX RULES, 1962 ('RULES'). 43. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN CONCLUDING THAT THE MARGINS OBTAINED BY COMPARABLE COMPANIES ENGAGE D IN DOMESTIC TRANSACTIONS CANNOT BE USED IN DETERMINING THE ALP OF THE 'INTERNATIONAL TRANSACTIONS' OF THE APPELLANT. 44. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN CONCLUDING THAT CATERING TO THE OVERSEAS MARKET AND THE DOMESTIC MA RKET IS TO BE REGARDED AS A PART OF THE FUNCTIONS PERFORMED, BY DISREGARDI NG THE APPELLANT'S SUBMISSIONS AND PRESCRIBED RULES FOR ANALYZING COMP ARABILITY, IE, FUNCTIONS PERFORMED, RISKS ASSUMED AND ASSETS EMPLOYED BY A P ARTICULAR COMPANY IN ORDER TO JUDGE ITS COMPARABILITY. THE LEARNED TPO H AS ERRED IN NOT APPRECIATING THAT THE AFORESAID FACTORS DO NOT CHANGE DEPENDING UPON WHETHER THE SERVICES ARE PROVIDED LOCALLY OR TO OVE RSEAS CUSTOMERS. 45. FURTHER THE LEARNED TPO ERRED IN NOT PROVIDING AN Y EVIDENCE TO DEMONSTRATE AS TO HOW, THE MARKETS TO WHICH THE APP ELLANT (OVERSEAS) AND THE COMPARABLE COMPANY (DOMESTIC) CATERS TO, HAVE A N INFLUENCE ON THE COMPARABILITY FACTORS PROVIDED FOR IN THE RULES AND EVEN IF THEY NEED TO BE CONSIDERED, HOW THIS DIFFERENCE HAS A MATERIAL EFFE CT ON THE PRICING OR PROFITS. 46. THE LEARNED TPO ERRED IN APPLYING THE ADDITIONAL FILTER OF REJECTING THE COMPANIES WHOSE REVENUE TO ASSETS RATIO IS LESS THAN 50 PER CENT. 47. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED TPO A ND THE LEARNED AO HAVE ERRED IN LAW AND ON FACTS IN REJECTING THE OBJ ECTIONS RAISED BY THE APPELLANT IN RELATION TO THE SELECTION / REJECTION OF COMPARABLE COMPANIES IN PASSING THE ORDER UNDER SECTION 92CA OF THE ACT- THE LEARNED TPO ERRED IN REJECTING ACE SOFTWARE LIM ITED ('ASL') AS A COMPARABLE COMPANY MERELY ON THE BASIS THAT THE ENT IRE REVENUES OF ASL ARE DERIVED FROM ONE CUSTOMER ONLY (IE APEX DAT A SERVICES INC, IT (TP) A NO.1211/B/2012 8 USA) AND ACCORDINGLY, THE REVENUES ARE DERIVED FROM AN 'ASSOCIATED ENTERPRISE' AS DEFINED IN THE ACT. FURTHER, THE LEA RNED TPO ERRED IN NOT SUBSTANTIATING AS TO HOW SUCH RELATIONSHIP INFLUENC ED THE PRICES CHARGED BY ASL TO ITS CUSTOMER. HENCE, THE LEARNED TPO ERRE D IN REJECTING ASL AS A COMPARABLE COMPANY MERELY ON SURMISES AND CONJ ECTURES. THE LEARNED TPO ERRED IN REJECTING CMC LIMITED AND CS SOFTWARE LIMITED AS COMPARABLE COMPANIES ON THE BASIS THAT T HESE COMPANIES HAVE NOT DERIVED ANY EXPORT REVENUES. FURTHER, THE LEARNED TPO ALSO ERRED IN CONCLUDING THAT THESE COMPANIES CANNOT BE USED AS COMPARABLE COMPANIES AS THEY OPERATE IN THE DOMESTIC MARKET AN D WERE FUNCTIONALLY DIFFERENT FROM THE APPELLANT. THE LEARNED TPO ERRED IN REJECTING COMPUDYNE WINFOS YSTEMS LIMITED (UCWLU) AS A COMPARABLE COMPANY MERELY BECAUSE CWL HAS INCURRED LOSSES, WHICH AS PER THE LEARNED TPO ARE N OT ON ACCOUNT OF NORMAL BUSINESS FACTORS. HOWEVER, IT CAN BE NOTED C LEARLY FROM THE NATURE OF SUCH LOSS THAT CWL HAS SUFFERED SUCH LOSS IN THE ORDINARY COURSE OF BUSINESS. THE LEARNED TPO ERRED IN REJECTING MAPRO INDUSTRIES LIMITED C'MIL') AS A COMPARABLE COMPANY ON ACCOUNT OF LOW CAPACITY UTILIZATION. FURTHER, IN ARRIVING AT SUCH A CONCLUSION, THE LEAR NED TPO ERRED IN COMPARING THE REVENUES GENERATED BY MIL AS A PERCEN TAGE OF THE ASSETS EMPLOYED. THE LEARNED TPO ALSO ERRED IN OBSERVING T HAT THIS CRITERION HAS BEEN USED IN ARRIVING AT ALL THE COMPARABLE COM PANIES, WITHOUT ADDUCING EVIDENCE FOR SUCH AN OBSERVATION. THE LEARNED TPO ERRED IN REJECTING SPANCO TELESYSTE MS & SOLUTIONS LIMITED (USTSL') AS A COMPARABLE COMPANY ON THE BAS IS THAT STSL DID NOT DERIVED ANY EXPORT REVENUES. FURTHER, THE L EARNED TPO ERRED IN CONCLUDING THAT STSL CANNOT BE USED AS COMPARABLE C OMPANY AS IT OPERATES IN THE DOMESTIC MARKET AND IS FUNCTIONALLY DIFFERENT FROM THE APPELLANT. THE LEARNED TPO ERRED IN REJECTING COSMIC GLOBAL LI MITED (CGL') AS A COMPARABLE COMPANY ON THE BASIS THAT THE ANNUAL R EPORTS OF CGL IS NOT AVAILABLE AND BY DISREGARDING THE INFORMATION P RODUCED BY THE APPELLANT FROM THE PUBLIC DATA BASES MERELY ON THE GROUND THAT THE NAME IS DIFFERENT, WITHOUT APPRECIATING THAT THERE WAS A CHANGE IN THE NAME OF CGL. THE LEARNED TPO ERRED IN INCLUDING WIPRO BPO LIMITE D AND TRICOM INDIA LIMITED AS COMPARABLE COMPANIES BY REJECTING THE SUBMISSIONS OF THE APPELLANT THAT THE FINANCIALS OF THESE COMPANIE S WERE NOT AVAILABLE AT THE TIME OF COMPILING THE TP DOCUMENTATION FOR T HE SUBJECT YEAR. FURTHER, THE LEARNED TPO ERRED IN NOT APPRECIATING THAT THE TP IT (TP) A NO.1211/B/2012 9 DOCUMENTATION HAD TO BE COMPLIED BEFORE THE DUE DAT E (IE OCTOBER 31, 2004) PRESCRIBED FOR THE SUBJECT YEAR AND THE FINAN CIAL INFORMATION WAS NOT AVAILABLE TILL THEN. THE LEARNED TPO ERRED IN INCLUDING ULTRAMARINE PIGM ENTS LIMITED (UPL') AS A COMPARABLE COMPANY EVEN THOUGH UPL DID NOT FEATURE IN THE SEARCH PROCESS BASED ON THE QUALITATIVE FILTERS APPLIED. HENCE, THE LEARNED TPO ERRED IN 'CHERRY-PICKING' UGL FOR COMPA RISON PURPOSES. THE LEARNED TPO ERRED IN RE-COMPUTING THE MARGINS O F ALLSEC TECHNOLOGIES LIMITED (ATL') FOR THE SUBJECT YEAR B Y NORMALISING CERTAIN EXPENSES, IE, CONNECTIVITY COSTS AND EMPLOY EE COSTS, AND BY COMPLETELY ELIMINATING DATABASE COSTS IN ARRIVING A T THE MARGIN. FURTHER, THE LEARNED TPO ERRED IN REJECTING THE SUB MISSIONS OF THE APPELLANT THAT THE PERCENTAGE OF THE EXPENSES (NORM ALIZED) TO TOTAL EXPENSES OF ATL FOR THE SUBJECT YEAR VIS-A-VI S THE PERCENTAGE OF THESE EXPENSES IN OTHER YEARS PRESENTED FOR COMPARI SON WAS NORMAL. THE LEARNED TPO ALSO ERRED IN CONSIDERING THE SAID EXPENSES AS BEING ABNORMAL MERELY ON COMPARING THESE EXPENSES WITH TH E REVENUES OF THE COMPANY, WITHOUT DEMONSTRATING HOW THESE EXPENSES H AD A CORRELATION WITH THE REVENUES. 48. THE LEARNED TPO AND THE LEARNED AO ERRED IN CONSIDE RING ONLY 'CONNECTIVITY COSTS' AND 'DATABASE COSTS' AS ABNORM AL IN THE SHOW-CAUSE NOTICE AND ACTUALLY CONSIDERING EVEN 'EMPLOYEE COST S' AS ABNORMAL, WITHOUT GIVING AN OPPORTUNITY TO THE APPELLANT IN T HIS REGARD. 49. IN ARRIVING AT THE MARGINS OF THE COMPARABLE COMPAN IES, THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN NOT CONSIDERIN G EXCHANGE GAIN / LOSS AS BEING OPERATING IN NATURE. 50. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN MA KING A LOWER WORKING CAPITAL ADJUSTMENT. THE LEARNED TPO HAS ERR ED IN MAKING THE DOWNWARD MARGIN ADJUSTMENT OF ONLY 2 PERCENT WITHOU T GIVING ANY BASIS / WORKING SUPPORTING SUCH COMPUTATION. 51. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN RE JECTING THE WORKINGS PROVIDED BY THE APPELLANT IN RELATION TO T HE WORKING CAPITAL ADJUSTMENT BY HOLDING THAT THE SAME AS INACCURATE T HOUGH IT WAS SUBMITTED THAT THE WORKINGS WERE ARRIVED AT ON THE BASIS OF THE FINANCIAL INFORMATION AVAILABLE IN THE FINANCIAL RE PORTS. 52. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN NO T MAKING A FURTHER DOWNWARD MARGIN ADJUSTMENT TO CONSIDER THE RISK DIFFERENTIALS BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. 53. THE LEARNED TPO AND THE LEARNED AO ERRED ON FACTS I N REJECTING THE SUBMISSION THAT THE APPELLANT IS A RISK MITIGATED S ERVICE PROVIDER AND IT (TP) A NO.1211/B/2012 10 THEREFORE, GIVEN THAT THE COMPARABLE COMPANIES BEAR ENTREPRENEURIAL RISKS, THE MARGINS OF THE COMPARABLE COMPANIES SHOU LD BE ADJUSTED FOR SUCH RISK. 54. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN MA KING AN ADHOC DOWNWARD ADJUSTMENT OF ONLY 2 PER CENT TOWARDS BOTH WORKING CAPITAL AND RISK DIFFERENTIALS, WHICH IS BASELESS AND VERY MINIMAL. 55. WITHOUT PREJUDICE, IN ARRIVING AT THE ARM'S LENGTH MARGIN, THE LEARNED TPO AND THE LEARNED AO HAVE ERRED IN NOT CONSIDERIN G THE LOWER RANGE OF 5 PER CENT AS ALLOWED BY THE RULES. THE LEARNED TPO AND THE LEARNED AO HAVE THEREFORE ERRED IN CONSIDERING THE COMPARAB LE MARGIN AS 21 PER CENT INSTEAD OF 16 PER CENT AS ALLOWED BY THE R ULES. DENIAL OF FOREIGN TAX CREDIT 56. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN DISMISSING AND THEREBY DENYING THE ELIGIBLE FOREIGN TAX CREDIT AS PER THE PROVISIONS OF SECTION 90 OF THE ACT READ WITH THE RELEVANT DOUBLE TAXATION AVOIDANCE AGREEMENTS, IN RESPECT OF THE FOREIGN TAX ES PAID BY THE APPELLANT FOR THE AY 2004-05. CHARGE OF INTEREST 57. THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE LEV Y OF INTERESTS UNDER SECTION 234B AND SECTION 234D OF THE ACT. 58. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T , SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL , A T ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE HONOURAB LE INCOME TAX APPELLATE TRIBUNAL TO DECIDE THIS APPEAL ACCORDING TO LAW. 3. LEARNED AR OF THE ASSESSEE SUBMITTED A COPY OF T HE TRIBUNAL ORDER RENDERED IN ASSESSEES OWN CASE FOR A. Y. 200506 I N ITA NO. 162/BANG/2012 DATED 24.06.2016 AND SUBMITTED THAT A S IN THE PRESENT YEAR, IN THAT YEAR ALSO, THE ISSUE IN DISPUTE WAS I N COURSE OF ASSESSMENT ORDER PASSED BY THE A.O. IN PURSUANCE TO DIRECTIONS OF CIT U/S 263. HE SUBMITTED THAT IN THE PRESENT YEAR ALSO, THE ISSUES IN DISPUTE MAY BE DECIDED ON SIMILAR LINE AS THE FACTS ARE SIMILAR. L EARNED DR OF THE REVENUE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. IT (TP) A NO.1211/B/2012 11 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIN D THAT PARA 9 TO 12 OF THE TRIBUNAL ORDER IN A.Y. 2005 06 ARE RELEVAN T AND HENCE, THESE PARAS ARE REPRODUCED HEREIN BELOW:- 9. WE HAVE GONE THROUGH THE ORDER PASSED BY THE LD. CIT U/S 263 OF THE ACT AND AS PER THE SAME, HE HAS SET ASIDE THE ORIGI NAL ASSESSMENT ORDER IN RESPECT OF TWO ISSUES I.E. ALLOWABILITY OF DEPRECIA TION ON THE SOFTWARE EXPENDITURE AND ALLOWABILITY OF DEDUCTION U/S 10A A ND U/S 80HHE OF THE ACT IN RESPECT OF PROFIT DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE. THEREFORE, IN RESPECT OF THESE TWO ISSUES ONLY, AO CAN PASS FRESH ASSESSMENT ORDER CONSEQUENT TO ORDER PASSED BY THE LD. CIT U/S 263 OF THE IT ACT, 1961 AND AS A CONSEQUENCE, ONLY THESE TWO I SSUES CAN BE RAISED IN AN APPEAL BEFORE THE LD. CIT (A) AND BEFORE THE TRI BUNAL IN THE PROCEEDINGS U/S 143(3) OF THE IT ACT, R.W.S.263 OF THE IT ACT, 1961. 10. IN THE PRESENT APPEAL, THE ASSESSEE HAS RAISED BE FORE US SOME TP ISSUES ALSO WHICH IN OUR CONSIDERED OPINION, CANNOT BE RAISED BEFORE US, IN THE PRESENT PROCEEDINGS. HENCE, THESE GROUNDS OF AS SESSEE ARE REJECTED. 11. REGARDING THE ISSUE IN RESPECT OF ALLOWABILIT Y OF DEDUCTION 10A OF THE IT ACT, WE FEEL IT PROPER THAT THIS ISSUE SHOUL D GO BACK TO THE FILE OF THE LD.CIT (A) FOR A FRESH DECISION IN THE LIGHT OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S TATA E LXSI LTD., (SUPRA). 12. REGARDING THE ISSUE NO.1, 2 & 3 NOTED BY THEL D.CIT (A) IN PARA-9 OF HIS ORDER, THESE WERE NOT DECIDED BY THE LD. CIT (A ). WE REMAND THE MATTER BACK TO THE FILE OF THE LD. CIT(A) FOR A FRESH DECI SION ON THIS ISSUE BECAUSE THESE ISSUES WERE SET ASIDE BY THE LD.CIT TO THE FI LE OF THE AO FOR A FRESH DECISION AND THEREFORE, THESE ISSUES HAD TO BE DECI DED BY THE LD. CIT(A) IN THE PRESENT PROCEEDINGS. WE ORDER ACCORDINGLY. 4. AS PER THE ORDER PASSED BY CIT U/S 263 IN THE PR ESENT YEAR, COPY AVAILABLE ON PAGES 56 TO 59 OF THE PAPER BOOK, ONLY ON TWO ISSUES, THE CIT HAS SET ASIDE THE ASSESSMENT ORDER I.E. ABOUT 1) DE DUCTION U/S 10A AND 2) DEDUCTION U/S 80 HHE. HENCE IN THE PRESENT YEAR ALS O, WE HOLD THAT THE ASSESSEE CAN RAISE ONLY THESE TWO ISSUES IN APPEAL BEFORE CIT (A) AND BEFORE THE TRIBUNAL AND ACCORDINGLY, ALL OTHER GROUNDS ARE REJECTED. ON THE ISSUE OF DEDUCTION U/S 10A, WE RESTORE THE MATTER BACK TO CI T (A) FOR A FRESH DECISION IT (TP) A NO.1211/B/2012 12 IN THE LIGHT OF THE JUDGMENT OF HONBLE KARNATAKA H IGH COURT RENDERED IN THE CASE OF TATA ELXSI LTD. AS REPORTED IN 349 ITR 98. ON THE ISSUE OF DEDUCTION U/S 80HHE ALSO, WE RESTORE THE BACK TO CIT (A) FOR A FRESH DECISION BECAUSE THIS ISSUE WAS NOT DECIDED BY HIM. 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MEN TIONED ON THE CAPTION PAGE. SD/- (SUNIL KUMAR YADAV) SD/- (A.K. GARODIA) JUDIC AL MEMBER ACCOUNTANT MEMBER PLACE: BANGALORE: D A T E D : 17.10.2016 AM / AKG / DS / COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) - II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE