M/s. Centillium India Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1354/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57496 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-02-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 31-01-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 01-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIII
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Related party transaction; Business income; Transfer pricing; Principle of natural justice; International transaction; Avoidance of tax
• Section: 92C; 143(3); 92D; 92F; 80HHC; 234B; 133(6); 10B; 139; 92

Judgement Text

PAGE 1 OF 34 ITA NO.1354/BA NG/2010 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES A BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M ITA NO.1354/BANG/2010 (ASST. YEAR 2006-07) M/S CENTILLIUM INDIA PVT. LTD., (A TRANSWITCH GROUP COMPANY), #3, SALAPURIA CITADEL, 1 ST FLOOR, ADUGODI, HOSUR ROAD, BANGALORE-30. PA NO.AAACV 9845 K VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(2), BANGALORE. (APPELLANT) (RESPONDENT) DATE OF HEARING 31.01.2012 DATE OF PRONOUNCEMENT 29.02.2012 APPELLANT BY : SHRI R VIJAYA RAGHAVAN, A DVOCATE RESPONDENT BY : SHRI ETWA MUNDA, CIT-III O R D E R PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT CONCLUDED U/S 143(3) R.W.S 144C OF THE I T ACT, 1961. THE RELEVANT ASSESSMENT YEAR IS 2006-07. THE ASSESSEE I S AGGRIEVED BY THE DIRECTION ISSUED BY THE DISPUTE RESOLUTION PANEL (DR P) DATED 17/09/2010. THE DRP HAD APPROVED BUT FOR MINOR MODIFICATION, TH E DRAFT ORDER OF ASSESSMENT, MAKING TRANSFER PRICE ADJUSTMENT AS SUG GESTED BY THE TRANSFER PRICING OFFICER (TPO) U/S 92CA OF THE ACT. PAGE 2 OF 34 ITA NO.1354/BA NG/2010 2 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS I N AN EXHAUSTIVE AND NARRATIVE MANNER. FOR THE SAKE OF CLARITY, THEY ARE REFORMULATED AS UNDER:- (1) AS DIRECTED BY THE DRP, THE AO HAS ERRED IN HOLDING THAT THE COMMUNICATION EXPENSES ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA SHOULD BE REDUCED FROM EXPOR T TURNOVER WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT; (2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED AO HAS ERRED IN LAW BY NOT CONSIDERING THAT, IF THE COMMUNICATION EXPENSES (I.E. LEASE LINE CHARGES) AT TRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA ARE REDU CED FROM EXPORT TURNOVER, AN EQUAL AMOUNT SHOULD ALSO BE RED UCED FROM TOTAL TURNOVER FOR COMPUTING THE DEDUCTION U/S 10A OF THE ACT. THE LOWER AUTHORITIES (THE AO, TPO AND DRP) HAVE ERRED IN (3) MAKING AN ADDITION OF RS.2.82 CRORES TO THE TOTAL I NCOME ON ACCOUNT OF ADJUSTMENT IN ARMS LENGTH PRICE (ALP) OF THE SO FTWARE DEVELOPMENT SERVICES TRANSACTION ENTERED WITH ITS A SSOCIATE ENTERPRISE (AE); (4) CONDUCTING AFRESH ECONOMIC ANALYSIS FOR DETERMINATIO N OF ALP WITH REGARD TO INTERNATIONAL TRANSACTION DISOWNING THE A NALYSIS UNDER TAKEN BY THE ASSESSEE; (5) IGNORING THE FACT THAT THE ASSESSEE HAS BEEN AVAILI NG TAX HOLIDAY U/S 10A OF THE ACT AND THERE WAS NO INTENTION TO SH IFT THE PROFIT BASE OUT OF INDIA WHICH WAS ONE OF THE BASIC INTENT IONS OF INTRODUCTION OF TRANSFER PRICING PROVISIONS; (6) DETERMINING THE ARMS LENGTH MARGIN/PRICE USING ONL Y FY 2005-06 DATA WHICH WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION RE QUIREMENTS; (7) REJECTING CERTAIN COMPARABLES CONSIDERED BY THE ASSE SSEE IN THE COMPARABILITY ANALYSIS BY APPLYING DIFFERENT QUANTITAT IVE/ QUALITATIVE FILTERS: PAGE 3 OF 34 ITA NO.1354/BA NG/2010 3 AO/TOP ERRED BY REJECTING CERTAIN COMPARABLE COMPANI ES IDENTIFIED BY THE ASSESSEE: - WHERE CONSOLIDATED RESULTS HAVE BEEN USED FOR ANALYS IS; THAT THE ASSESSEE HAD CONSIDERED THE CONSOLIDATED RESULT S IN ONLY THOSE CASES WHERE THE SOFTWARE SERVICES RELATED INC OME OF THE INDIAN OPERATIONS CONSTITUTED MORE THAN 75% OF THE CONSOLIDATED COMPANY-WIDE/SEGMENTAL REVENUE; - USING TURNOVER < RS.1 CRORE AS A COMPARABILITY CRITE RION; - AS HAVING ECONOMIC PERFORMANCE CONTRARY TO THE INDU STRY BEHAVIOUR (E.G. COMPANIES SHOWED DIMINISHING REVENU E TRENDS); - IN THE COMPARABILITY ANALYSIS AS THE COMPARABLES WERE HAVING DIFFERENT ACCOUNTING YEAR (OTHER THAN 31 ST MARCH OR COMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS); - IN THE COMPARABILITY ANALYSIS USING ONSITE REVENUES GREATER THAN 75 PER CENT OF THE EXPORT REVENUES AS A COMPARABILI TY CRITERIA; & - IN THE COMPARABILITY ANALYSIS USING EMPLOYEE COST GR EATER THAN 25 PER CENT OF THE TOTAL REVENUES AS A COMPARABILI TY CRITERIA; (8) BY ACCEPTING CERTAIN COMPANIES USING UNREASONABLE CO MPARABILITY CRITERIA; (9) OBTAINING INFORMATION WHICH WAS NOT AVAILABLE IN PU BLIC DOMAIN BY EXERCISING POWERS U/S 133(6) OF THE ACT AND RELYING ON THE INFORMATION FOR COMPARABILITY ANALYSIS; (10) NOT CONSIDERING THE FOREIGN EXCHANGE FLUCTUATION GA IN (LOSS) AS PART OF THE OPERATING INCOME WHILE COMPUTING THE OPERATI NG MARGIN; (11) NOT CONSIDERING THE PROVISIONS WRITTEN BACK AS PART OF HE OPERATING INCOME WHILE COMPUTING THE OPERATING MARGIN; (12) NOT MAKING SUITABLE ADJUSTMENTS ON ACCOUNT OF DIFFE RENCE IN THE RISK PROFILE OF THE ASSESSEE VIS--VIS THE COMPARAB LES WHILE CONDUCTING COMPARABILITY ANALYSIS; (13) COMPUTING THE ALP WITHOUT GIVING BENEFIT OF +/- 5% UNDER THE PROVISO TO S. 92C OF THE ACT; (14) CHARGING OF INTEREST 234B AND 234D OF THE ACT; & (15) INITIATION OF PENAL PROCEEDINGS U/S 271(1)(C) OF TH E ACT. PAGE 4 OF 34 ITA NO.1354/BA NG/2010 4 BRIEF FACTS OF THE CASE A RE AS FOLLOWS: 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROV IDING SOFTWARE DEVELOPMENT SERVICE OF ITS AE IN USA. THE RETURN O F INCOME FOR CONCERNED ASST. YEAR WAS FILED ON 15/11/2006 DECLARING AN INCO ME OF RS.8,45,107/-. DURING THE COURSE OF HEARING, THE AO OBSERVED THAT FOR THE PERIOD OF RELEVANT FINANCIAL YEAR, THE ASSESSEE HAD INTERNATIO NAL TRANSACTION TO THE EXTENT OF RS.27 CRORES. WITH THE APPROVAL OF THE J URISDICTIONAL CIT, A REFERENCE WAS MADE TO THE TPO TO DETERMINE THE ALP AS PER THE PROVISIONS OF S. 92CA OF THE ACT. FOR THE REASONS RECODED, TH E ALP OF THE INTERNATIONAL TRANSACTION PERTAINING TO PROVIDING S OFTWARE DEVELOPMENT WAS DETERMINED BY THE TPO AT RS.29.91 CRORES INSTEAD OF RS.27.07CRORES, RESULTING IN AN ADJUSTMENT TO THE EXTENT OF RS.2.83 CRORES AND THE EXCESS CLAIM OF DEDUCTION U/S 10A OF THE ACT AT RS.3.1 LAK HS. 3.1. AGGRIEVED BY THE SAID ORDER, THE ASSESSEE HAD APPROACHED THE DRP FOR RELIEF. HOWEVER, THE DRP IN ITS DIRECTION S DATED 17.9.2010 HAD ALMOST RATIFIED THE TPOS STAND, EXCEPT A MARGINAL RELIEF OF RS.1.5 LAKHS. 4. AGITATED, THE ASSESSEE IS IN APPEAL BEFORE US. THE ASSESSEES APPEAL IS LARGELY CONFINED TO THE FOLLOWING COUNTS: (I) DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TR ANSACTIONS; (II) THE AUTHORITIES BELOW ERRED BY HOLDING THAT THE COMM UNICATION SOFTWARE ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SO FTWARE OUTSIDE INDIA WERE NOT TO BE REDUCED FROM EXPORT TU RNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT; OR ALTERNAT IVELY IF THE EXPENDITURE IS REDUCED FROM THE EXPORT TURNOVER, TH E SAME SHOULD BE REDUCED ALSO FROM THE TOTAL TURNOVER WHILE COMPU TING DEDUCTION UNDER SECTION 10A OF THE ACT; AND PAGE 5 OF 34 ITA NO.1354/BA NG/2010 5 (III) CHARGING OF INTEREST U/S 234B AND 234D OF THE ACT A ND ALSO INITIATION OF PENAL PROCEEDINGS U/S 271(1)(C) OF TH E ACT. 4.1. DURING THE COURSE OF HEARING THE LD. A R HAD SUBMITTED HIS SUBMISSION IN AN EXHAUSTIVE MANNER NARRATING VARIOU S CONTENTIONS PUT FORTH BEFORE THE TPO AS WELL AS BEFORE THE DRP. THE SUB MISSIONS OF THE LD. A R ARE SUMMARIZED AS UNDER: (1) THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES DURING THE RELEVANT AY FOR THE PROVISION OF SOFTWARE DEVEL OPMENT SERVICES AT RS.27.07 CRORES; THAT FOR THE PURPOSE O F ESTABLISHING THE ALP OF ITS INTERNATIONAL TRANSACTION WITH ITS A E, THE ASSESSEE HAD UNDERTAKEN A TRANSFER PRICING STUDY IN ACCORDAN CE WITH THE PROVISIONS OF THE ACT. BASED ON A DETAILED ANALYSIS WITH REGARD TO THE FUNCTIONS PERFORMED, RISKS ASSUMED AND ASSETS U TILIZED BY THE ASSESSEE AND ITS AES IN RESPECT OF INTERNATIONAL TR ANSACTIONS BETWEEN THEM AND, ACCORDINGLY, CONCLUDED THAT THE PR ICE RECEIVED BY THE ASSESSEE IN RESPECT OF ITS TRANSACTIONS WITH AES WAS AT ARMS LENGTH; (2) THAT THE KEY FEATURES OF THE TP STUDY UNDERTAKEN FOR SOFTWARE DEVELOPMENT SERVICES WERE THAT - AS PER THE FUNCTIONAL ANALYSIS, THE ASSESSEE WAS CAT EGORIZED AS A RISK MITIGATED CONTRACT SERVICE PROVIDER AND SELE CTED AS THE TESTED PARTY; - THAT THE TNMM WAS DETERMINED AS THE MOST APPROPRIAT E METHOD TO DETERMINE THE ALP; THAT A SEARCH WAS COND UCTED ON PROWESS DATABASE AND CAPITOLINE DATABASE UP-DATED T ILL 25.8.2006 TO SELECT COMPARABLE COMPANIES; - THAT GIVEN THE NATURE OF THE INTERNATIONAL TRANSACT ION UNDER REVIEW, ECONOMIC CONDITIONS, DIFFERENCES IN BUSINES S OR PRODUCT LIFE CYCLES AND OTHER SIMILAR FACTORS AND ALSO THE F ACT THAT FINANCIAL DATE FOR THE FY 2005-06 WAS NOT AVAILABLE IN ALL CASES, FINANCIAL DATA OF FY 2003-04 WAS ALSO CONSIDERED AL ONG WITH DATE FOR FY 2004-05 WHEREVER AVAILABLE; PAGE 6 OF 34 ITA NO.1354/BA NG/2010 6 (3) HOWEVER, THE TPO HAD NOT ACCEPTED THE ECONOMIC ANAL YSIS UNDERTAKEN BY THE ASSESSEE AND CONDUCTED A FRESH EC ONOMIC ANALYSIS; THAT THE TPO FAILED TO APPRECIATE THAT SUC H DATA WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF COMPL YING WITH THE MANDATORY TP DOCUMENTATION RULES BY THE PRESCRIBED DU E DATA; THAT THE TPO APPLIED CERTAIN FILTERS AND DID NOT UN DERTAKE AN OBJECTIVE COMPARATIVE ANALYSIS FOR SELECTION OF COMP ARABLE COMPANIES; THAT WHILE ARRIVING AT THE ALP, THE TPO REJECTED CERTAIN COMPARABLES IDENTIFIED BY THE ASSESSEE ON TH E FOLLOWING FILTERS: - IN THE CASE OF COMPANIES WHERE CONSOLIDATED RESULTS HAS BEEN USED FOR ANALYSIS; - COMPANIES WITH TURNOVER LESS THAN RS. 1 CRORE; - COMPANIES HAVING ECONOMIC PERFORMANCE CONTRARY TO TH E INDUSTRY BEHAVIOUR (E.G., COMPANIES WHICH SHOWED A D IMINISHING REVENUE TREND); - COMPANIES HAVING DIFFERENT ACCOUNTING YEAR (OTHER TH AN MARCH 31 OR COMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS); - IN THE CASE OF COMPANIES WHERE ON SITE REVENUES WER E GREATER THAN 75 PER CENT OF THE EXPORT REVENUES; THAT IN TH E CASE OF COMPANIES WHERE EMPLOYEE COST WAS LESS THAN 25 PER C ENT OF THE TOTAL REVENUES; & (A) THE TPO HAD EXCLUDED THE FOREIGN EXCHANGE GAIN OR LOSS IN COMPUTING THE OPERATING MARGIN OF THE COMPARABLE CO MPANIES; (B) THE TPO PROVIDED AN ADJUSTMENT TOWARDS WORKING CAPITAL 1.72 PER CENT; THAT THE ADJUSTED NET MARGIN OF COMP ARABLE COMPANIES AFTER PROVIDING THE WORKING CAPITAL ADJUS TMENT WAS DETERMINED AT 18.96 PER CENT ON OPERATING COST; (C) THE TPO DID NOT MAKE SUITABLE ADJUSTMENTS TO AC COUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE ASSESSEE VIS --VIS THE COMPARABLE COMPANIES; (D) THAT THE TPO DID NOT CONSIDER THAT THE ADJUSTME NT TO THE ALP, IF ANY, SHOULD BE LIMITED TO THE LOWER END OF 5 % RANGE AS THE ASSESSEE HAD THE RIGHT TO EXERCISE THIS POTION UNDER THE PROVISO TO S.92C(2) OF THE ACT; AND PAGE 7 OF 34 ITA NO.1354/BA NG/2010 7 (E)THE TPO INITIATED PENALTY PROCEEDINGS UNDER EXPL ANATION 7 TO S.271(1)(C) OF THE ACT. (4) THAT THE AO HAD ISSUED DRAFT ASSESSMENT ORDER PROPO SING TO MAKE AN ADDITION OF RS.2.83 CRORES ON ACCOUNT OF TP ADJU STMENT AND RE- COMPUTED THE DEDUCTION U/S 10A OF THE ACT BY REDUCIN G THE COMMUNICATION CHARGES (I.E; LEASE LINE CHARGES OF RS.25.31 LAKHS FROM THE EXPORT TURNOVER WITHOUT SIMULTANEOUSLY REDU CING THE SAME FROM THE TOTAL TURNOVER) HENCE, REDUCING THE D EDUCTION U/S 10A OF THE ACT TO THE EXTENT OF RS.3.1 LAKHS; (5) EVEN THE DRP AGREED WITH THE STAND OF THE AO/TPO AN D REJECTED THE ASSESSEES REASONABLE CONTENTIONS WITH A MARGIN AL RELIEF OF RS.1.5 LAKHS ON ACCOUNT OF RE-COMPUTATION OF OPERAT ING MARGIN OF MEGASOFT LIMITED WHEREBY RE-DETERMINING THE ALP AT R S.2.82 CRORES. (6) CORPORATE TAX : DISPUTING THE AOS STAND BY HOLDING THAT THE COMMUNICATION EXPENSES ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA SHOULD BE REDUCED FROM EXPOR T TURNOVER WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT, I T WAS CLAIMED, AMONG OTHERS, THAT FOR THE PURPOSE OF ADJUSTMENT SP ECIFIED U/S 10A OF THE ACT, ONLY THE EXPENDITURE INCURRED IN FOR EIGN CURRENCY IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA ALONE NEEDS TO BE EXCLUDED FROM EXPORT TURNOVER. IN THIS CONTEXT, IT WAS PERTINENT TO NOTE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINE SS OF DEVELOPMENT AND EXPORT OF SOFTWARE AND, THUS, AS TH E ASSESSEE WAS NOT ENGAGED IN RENDERING ANY TECHNICAL SERVICES OU TSIDE INDIA, THE QUESTION OF EXCLUDING EXPENDITURE INCURRED IN FOREI GN CURRENCY DID NOT ARISE; RELIES ON CASE LAWS : (I) INFOSYS TECHNOLOGIES LTD 109 TTJ (BANG) 631; (II) PATNI TELECOM (P) LTD V. ITO 120 TTJ967 (HYD) ; (III)MPHASIS LTD (2008 PAGE 8 OF 34 ITA NO.1354/BA NG/2010 8 (7) COMMUNICATION EXPENSES: THAT EVEN IF COMMUNICATION EXPENSES WERE REDUCED FR OM EXPORT TURNOVER AN EQUAL AMOUNT SHOULD BE REDUCED FROM TH E TOTAL TURNOVER FOR COMPUTING THE PROFITS ELIGIBLE FOR DE DUCTION U/S 10A OF THE ACT. RELIES ON CASE LAWS : (I) ITO V. SAK SOFT LIMITED 313 ITR 353 ITAT, C HENNAI(SB); (II) ITO V. MOTOROLA INDIA PVT. LTD (2009 TIOL-46 0 ITAT, BANG; (III)ACIT V. KHODAY INDIA LTD. ITA NO.89/BANG/2008 ; THAT THE COMMUNICATION EXPENSES SHOULD NOT BE REDUC ED FROM THE EXPORT TURNOVER WHILE COMPUTING THE ELIGIBLE DEDU CTION U/S 10A OF THE ACT AND PRAYS THAT THE DEDUCTION U/S 10A OF THE ACT BE RE- COMPUTED ON THIS BASIS; & WITHOUT PREJUDICE, IF COMMUNICATION EXPENSES WERE T O BE REDUCED FOR COMPUTING THE EXPORT TURNOVER, THE EXPENSES SHO ULD ALSO BE REDUCED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10A OF THE ACT; (8) TRANSFER PRICING MATTERS: THAT THE ASSESSEE CONDUCTED A COMPARABLE SEARCH ANA LYSIS USING DATA FROM THE TWO RECOGNIZED DATABASES AND HAD DETE RMINED THE ALP OF THE INTERNATIONAL TRANSACTION BY USING THE FI NANCIAL INFORMATION OF THE COMPARABLE COMPANIES PERTAINING TO FYS 2003- 04 TO 2005-06 AS WAS AVAILABLE TO THE ASSESSEE AT T HE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION RE QUIREMENTS; - WITH REGARD TO PROVISIONS OF S.92C(3) OF THE ACT, T HE AO COULD DETERMINE THE PRICE ONLY UNDER THE CIRCUMSTANCES ENU MERATED IN CLAUSES (A) TO (D), FOR WHICH, IT WAS SUBMITTED THAT (A) THE ALP IN THE CASE OF THE INTERNATIONAL TRANSA CTION HAS BEEN DETERMINED BY APPLYING THE PRESCRIBED METHOD IN ACCORDANCE WITH SUB-SEC. (1) AND (2) OF S.92C; PAGE 9 OF 34 ITA NO.1354/BA NG/2010 9 (B) ALL THE RELEVANT INFORMATION AND DOCUMENTS RELA TING TO THE INTERNATIONAL TRANSACTION HAS BEEN MAINTAINED AS PR ESCRIBED AND PROVIDED TO THE TPO; (C) THE DATA USED IN COMPUTATION OF ALP WAS TAKEN F ROM THE TWO DATABASES FOR OBTAINING PUBLICLY AVAILABLE FINANCIAL INFORMATION IN INDIA, NAMELY, PROWESS (A DATABASE COMPILED AND M ANAGED BY THE CENTRE FOR MONITORING INDIAN ECONOMY) AND CAPITO LINE (A CORPORATE DATABASE COMPILED AND MANAGED BY CAPITAL M ARKET PUBLISHERS); THAT THE ASSESSEE HAD USED THE CONTEMP ORANEOUS DATA FOR COMPUTATION OF ALP AS ON THE DATE OF FILIN G OF RETURN OF INCOME IN ACCORDANCE WITH RULE 10D(4), AS SUCH, THE DATA USED FOR COMPUTATION OF THE ALP WAS RELIABLE AND CORRECT ; & (D) THE TP DOCUMENTATION, DETAILED WORKINGS OF THE ECONOMIC ANALYSIS AND ALL THE OTHER DOCUMENTS REQUESTED BY THE TPO HAVE BEEN PROVIDED DURING THE COURSE OF ASSESSMENT; - THAT THE ASSESSEE HAD UNDER TAKEN THE COMPARABILITY ANALYSIS BASED ON WELL ACCEPTED TP PRINCIPLES AND IN THE ABS ENCE OF ANY INFORMATION TO THE CONTRARY, THAT IT WAS INAPPROPRIA TE ON THE PART OF THE REVENUE TO REJECT THE COMPARABILITY ANAL YSIS WHICH WAS UNDERTAKEN IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH RULES; - TAKING CUE FROM THE BOARDS CIRCULARS 12 OF 23.8.20 01 AND 14 OF 2001 AND ALSO PLACING RELIANCE ON THE JUDICIAL VIEW S IN THE CASES OF (I) MENTOR GRAPHICS (NOIDA) PVT. LIMITED (2007) 109 ITD 101 (DEL); (II) SONY INDIA (P) LTD (2007) 288 ITR 52 (DE L); (III) DCIT V. M/S INDO AMERICAN JEWELLERY (41 SOT (MUM) 1); AND (IV) SONY INDIA PVT. LTD V. CIT 288 ITR 52 (2007) (DEL), IT WAS ARGUED THAT THE TPO WAS REQUIRED TO ACCEPT THE ASSE SSEES ANALYSIS ON ACCOUNT OF THE REASONS THAT (I) ANALYSIS UNDERTAKEN IN ACCORDANCE WITH LAW; (II) ANALYSIS UNDERTAKEN BY A N EXTERNAL AGENCY; & (III) THE AO/TPO HAD NO REASONS TO BELIEVE THAT THE TRANSACTIONS WERE NOT AT ARMS LENGTH. PAGE 10 OF 34 ITA NO.1354/B ANG/2010 10 (9) AVAILING TAX HOLIDAY U/S 10A OF THE ACT: THE ASSESSEE HAS BEEN AVAILING TAX EXEMPTION U/S 10 A AND THERE WAS NO REASON OR MOTIVE FOR AVOIDANCE OF TAX IN IND IA THROUGH REDUCED PAYMENTS BY THE PARENT COMPANY OUTSIDE INDIA T O THE ASSESSEE WHICH ENJOYS TAX HOLIDAY IN INDIA AND THERE BY ERODE THE INDIAN TAX BASE. RELIES ON CASE LAWS : (I) PHILIPS SOFTWARE CENTRE PVT. LT D V. ACIT (119 TTJ 721 BANG); (II)DCIT V. M/S. INDO AMERICAN JWEL LERY (41 SOT (MUM) 1; (III)M/S ZYDUS ATLANTA HEALTHCARE P VT. LTD V. ITO 44 SOT (MUM)132; (IV)ITO V. M/S. PANASONIC INDIA PVT . LTD (6 ITR (TRI) 502 (DEL) (10) DETERMINING THE ALP USING ONLY FY 2005-06 DATA: THAT IT WAS SUBMITTED BEFORE THE TPO THAT CONDUCTI NG A SEARCH IN THE DATABASES AFTER THE SPECIFIED DATE FOR DETERMIN ING THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTION BASE D ON THE FINANCIAL INFORMATION OF THE COMPARABLE COMPANIES F OR THE FY 05- 06, THE DATA PERTAINING TO WHICH WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING D OCUMENTATION REQUIREMENTS AND WAS NOT IN ACCORDANCE WITH THE PRO VISIONS OF THE LAW; - THAT THE ASSESSEE WAS A SUBSIDIARY OF CENTILLIUM COM MUNICATIONS INC., USA WHICH WAS ACQUIRED BY TRANSWITCH CORPORATI ON IN OCT. 08; THAT TRANSWITCH HAS BEEN INCURRING LOSSES AT TH E NET LEVEL OVER THE YEARS FROM 2005 TO 2010; THAT IN SPITE OF T HE PARENT COMPANY INCURRING OPERATING LOSSES, THE ASSESSEE HAD EARNED INCOME ON COST PLUS MARGIN CONSISTENTLY OVER THE SAI D PERIOD; AND THAT THE ASSESSEE EARNED A CONSISTENT MARGIN IR RESPECTIVE OF THE LOSSES INCURRED BY THE PARENT COMPANY REITERAT ES THAT THE ASSESSEE IS A LIMITED RISK SERVICE PROVIDER AND , THUS, IT WAS ARGUED, AN ADJUSTMENT TO THE ALP PROPOSED BY THE TPO WAS NOT WARRANTED; PAGE 11 OF 34 ITA NO.1354/B ANG/2010 11 (11) THAT THE COMPARABLE DATA FOR THE FY 2005-06 WAS NOT AVAILABLE IN MOST CASES AT THE TIME OF COMPLYING WITH THE TP DOCU MENTATION REQUIREMENTS UNDER THE PROVISIONS OF THE ACT; THAT THE REJECTION OF THE COMPARABILITY DATA USED BY THE ASSESSEE ON T HE ABOVE GROUND WOULD BE CONTRARY TO WHAT WAS PRESCRIBED UNDE R THE ACT AND THE RELEVANT RULES; - THAT EXTENSIVELY QUOTING THE PROVISIONS OF S.92(1) OF THE ACT READ WITH RULE 10B AND ALSO S.92B READ WITH RULE 10D, IT WAS SUBMITTED THAT - IN COMPLIANCE WITH THE REGULATIONS THE ASSESSEE MAI NTAINED THE DOCUMENTATION AS PER RULE 10D BASED ON THE DATA THA T WAS AVAILABLE ON THE PUBLIC DATABASES BEFORE THE PRESCR IBED DATE. FURTHER, RULE 10D(4) PROVIDES THAT TRANSFER PRICING DOCUMENTATION SHOULD, AS FAR AS POSSIBLE, BE CONTEMPORANEOUS AND SHOULD EXIST LATEST BY THE DUE DATE FOR FILING OF INCOME-TAX RETU RN IE., 31.10.2006 FOR THE FY 2005-06; THAT ALL THE COMPANI ES DO NOT PUBLISH THE FINANCIAL RESULTS BY THE DUE DATE AND, H ENCE, USE OF FINANCIAL DATA ONLY FOR THE FY 2005-06 WAS PRACTICAL LY NOT POSSIBLE AND THAT EVEN THE PRESS NOTE DATED 22.8.2001 HAD CL ARIFIED THAT MULTIPLE YEAR DATA PERTAINING TO COMPARABLE TRANSACT IONS CAN BE CONSIDERED FOR DETERMINING THE ARMS LENGTH PRICE. RELIES ON CASE LAWS: (I) PHILIPS SOFTWARE CENTRE PVT. LTD V. ACIT [119TT J 721 (BNG)] (II)SPUD OF TAXES, DHUBRI & OTHERS (1975 CTR (SC) 172 4.1.1 IN CONCLUSION IT WAS CLAIMED THAT T HE USE OF MULTIPLE YEAR AND CONTEMPORANEOUS DATA AVAILABLE BY THE PRESCRIBED DAT E BE ALLOWED TO THE ASSESSEE. PAGE 12 OF 34 ITA NO.1354/B ANG/2010 12 4.2. ON THE OTHER HAND, THE LD. D R ALSO CA ME UP WITH EQUALLY EXHAUSTIVE SUBMISSION RUNNING INTO FORTY SIX PAGES. THE SUBMISSION OF THE LD. D R IS SUMMARIZED IN CAPTION-WISE AS BELOW: CORPORATE TAX MATTERS: QUOTING A NUMBER OF JUDICIAL PRONOUNCEMENTS, AMONG OTHERS, ON A SIMILAR ISSUE, THE LD. D R, RELYING ON THE FIND INGS OF THE HONBLE CHENNAI TRIBUNAL (SB) IN THE CASE OF ITO V. SAK SOFT LTD (2 009) 313 ITR (AT) 353, HAD SUBMITTED THAT FROM THE FACTS AVAILABLE (SIC) ON RECORD, IT IS NOT CLEAR WHETHER EXPORT TURNOVER INCLUDE COMMUNICATION CHARG ES. IN VIEW OF THE OBSERVATION ABOVE, THE HONBLE ITAT IS REQUESTED TO REMAND BACK TO THE MATTER TO THE AO FOR RE-EXAMINATION THE ISSUE IN TH E INTEREST OF JUSTICE. TRANSFER PRICING MATTERS: AFTER COMMENTING ON THE ASS ESSEES CONTENTIONS COUPLED WITH VARIOUS CASE-LAWS, THE LD. D R, EXTENSIVELY EXPLAINI NG THE PROVISIONS OF S.92 AND ALSO QUOTING THE FINDINGS IN THE CASE OF M/S. A ZTEC SOFTWARE AND TECHNOLOGY SERVICE PVT. LTD V. ACIT REPORTED IN 107 ITD 141 (SB) (BANG), SUBMITTED THAT THERE IS NO MERIT IN THE ASSESSEES OBJECTION WHICH DESERVES TO BE REJECTED. HE HAD ALSO SUBMITTED THAT OUT OF THE COMPARABLES SELECTED BY THE ASSESSEE, THE TPO ACCEPTED ACCEL TRANSMATIC L TD (SEG), AZTEC SOFTWARE AND TECHNOLOGY AND MEGA SOFT LTD AND, THUS, COMPARABLES ELIMINATED AS COMPARABLE AFTER DETAILED ANALYSIS AND , HENCE, THIS GROUND OF THE ASSESSEE REQUIRES TO BE REJECTED. PAGE 13 OF 34 ITA NO.1354/B ANG/2010 13 TRANSFER PRICING DOCUMENTATION: PLACING RELIANCE ON THE FINDINGS IN THE CASE OF M/S. AZTEC SOFTWARE & TECHNOLOGY V. ACIT (294 ITR (AT) 32/BANG/ (SB), THE LD. D R OPINED THAT THE ASSESSEES GROUND IS NOT SUSTAINABL E. DETERMINATION OF THE ARMS LENGTH MARGIN/PRICE: CONTESTING THE ASSESSEES ARGUMEN TS, THE LD. D R, BY ILLUSTRATING THE PROVISIONS OF RULE 10B (4), S.92B READ WITH RUL E 10D, 10D (3) AND ALSO 10D (4), MAINTAINED THAT THE ASPECT RAISED BY THE ASSESS EE HAS BEEN DISCUSSED BY THE TPO IN HIS IMPUGNED ORDER; THAT THE DRP WAS A LSO IN AGREEMENT WITH THE TPOS VIEW AND HELD THAT ORDINARILY ONLY THE DATA PERTAINING TO THE FY OF THE TRANSACTION CAN BE CONSIDERED. IT WAS, FURTHER , EXPLAINED THAT THE PROVISO TO RULE 10B (4) WHICH PERMITS THE USE OF DA TA RELATING TO OTHER THAN FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTIO NS HAVE BEEN ENTERED INTO BEING NOT MORE THAN TWO YEARS PRIOR TO SUCH FY DATA BUT IT HAS A LIMITED ROLE ONLY WHEN THE DATA OF EARLIER YEARS REVEALS FACTS WHI CH COULD HAVE INFLUENCED ON DETERMINATION ON THE TRANSFER PRICING IN RELATIO N TO THE TRANSACTIONS BEING COMPARED. IT WAS, FURTHER, ARGUED THAT THE ASSESSE E HAD NOT MADE OUT A CASE THAT TAKING DATA FOR ONLY THE CURRENT FY WILL N OT PRESENT THE CONCEPT AND FAIR FINANCIAL RESULT OF THE COMPARABLES, THE C LAIM FOR MULTI-YEAR DATA HAS BEEN REJECTED. RELIES ON THE CASE LAWS : (I) SYANTECH SOFTWARE SOLUTION V. ACIT ITA NO.7894 /MUM/2010; (II) AVAYA INDIA (P) LTD V. ACIT ITA NO.5150/DEL/2 010; (III)TNT INDIA (P) LTD V. ACIT ITA NO.1442/BANG/0 8; & (IV) EXXON MOBILE CO. INDIA PVT. LTD V. DCIT ITA NO.8311/MUM/2011 PAGE 14 OF 34 ITA NO.1354/B ANG/2010 14 IT WAS THE CASE OF THE LD. D R THAT, AS THE TPO AND THE DRP HAVE RIGHTLY HELD, THE CONTEMPORANEOUS DATA OF RELEV ANT FY WAS TO BE USED FOR MAKING THE COMPARABLE ANALYSIS FOR ARRIVING AT T HE ALP AS THE ASSESSEE UNABLE TO PROVE THAT THE PRICING PATTERN OF THE ASS ESSEE FOR THE RELEVANT FY HAS BEEN INFLUENCED BY THE MARKET CONDITIONS, BUSINE SS CYCLE/PRODUCT LIFE CYCLE OF THE EARLIER YEARS REJECTION OF CERTAIN COMPARABLES CONSIDERED BY THE A SSESSEE IN THE COMPARABILITY ANALYSIS BY APPLYING DIFFERENT QUANTITA TIVE AND QUALITATIVE FILTERS : THE LD. D R HAS DETAILED THE FOLL OWING REASONS FOR ELIMINATING THE COMPANIES AS COMPARABLES BY THE TPO: THE COMPANIES HAVING IN BUSINESS OF IT ENABLE SERVICES (I) THE ACCOUNTING PERIODS WERE DIFFERENT FROM THE FINA NCIAL YEAR; (II) THE COMPANIES HAVING DIMINISHING REVENUE AS T HE TREND OF THE SOFTWARE SERVICES SECTOR IS INCREASING; (III) USE OF MULTIPLE YEAR DATA INSTEAD OF RELEVANT FINANCIAL YEAR DATA; (IV) THE COMPANIES HAVING ONSITE REVENUE IS MORE TH AN 75% OF EXPORT REVENUE; (V) THE COMPANIES HAVE EMPLOYEE COST IS LESS 25% OF EXPORT REVENUE. IT WAS THE CONTENTION OF THE LD. D R THAT THESE WERE THE CERTAIN FILTER CRITERION FOR NON-INCLUSION AS COMPA RABLE. THERE WERE OTHER FACTORS, THE TPO HAD ELIMINATED DESPITE OF THE FACT S THAT HIGH MARGINS, FOR INSTANCE: MPHASIS BFL LTD 52.87% INTERTEC COMMUNICATION 46.07% PAGE 15 OF 34 ITA NO.1354/B ANG/2010 15 VISUAL SOFT TECHNOLOGIES LTD 29.02% TRANS WORLD INFOTECH 26.34% SATYAM COMPUTER SERVICES LTD. 30.00% CITING THE ABOVE REASONS, IT WAS THE CONTENTION OF THE LD. D R THAT THE TPO ELIMINATED THE COMPARABLE CHOSEN BY THE ASSESSEE BY A PPLYING FILTER CRITERIA ADOPTED BY HIM AND, HENCE, THERE IS NO MERIT IN THE OBJECTION OF THE ASSESSEE. BY ACCEPTING CERTAIN COMPANIES BY THE AO/TPO USING UN REASONABLE COMPARABILITY CRITERIA: CONTESTING THE ASSESSEES VAR IOUS CONTENTIONS TO EXCLUDE SIX COMPANIES, NAMELY, (I) MEGA SOFT LIMITED; (II) INFOS YS TECHNOLOGIES LIMITED; (III) KALS INFORMATION SYSTEM LIMITED; (IV) TATA ELX I LIMITED; (V) ACCEL TRANSMATIC LIMITED; AND (VI) FLECTRONICS SOFTWARE S YSTEM LIMITED, THE LD. D R SUBMITTED THAT FOR THE DETAILED REASONS RECORDED IN HIS IMPUGNED ORDER, THE TPO WAS JUSTIFIED IN CONSIDERING AS COMPARABLES . FURTHER, IT WAS ARGUED THAT IN THE MARGIN COMPUTATION SHEET AS PER ANNEXUR E B, THE TPO HAD CORRECTLY ADOPTED SEGMENTAL DATA FOR THE CALCULATION OF MARGINS AND, THUS, THERE WAS NO MERIT IN THE ASSESSEES ARGUMENT. IT WAS, FURTHER, SUBMITTED THAT THE ASSESSEE HAD RAISED THOSE OBJECTIONS ONLY B ECAUSE OUT OF 20 COMPARABLES, 6 OF THE COMPARABLES WERE HAVING HIGH PROFIT AND HIGH DIFFERENCE IN THE TURN OVER AND NOT BECAUSE OF THE HIGH OR LOW TURNOVER HAD INFLUENCED THE OPERATING MARGIN OF THE COMPARABLES; THAT ALL THE OBJECTIONS AND CONTENTIONS RAISED BY THE ASSESSEE IN RESPECT OF THOSE ISSUES WERE GENERAL IN NATURE AND NO SPECIFIC FACT HAD BEEN BR OUGHT ON RECORD TO SHOW THAT DUE TO THE DIFFERENCE IN TURN OVER THE COMPARA BLES BECOME NON- COMPARABLES. IT WAS, FURTHER, ARGUED THAT THE ASSE SSEE HAD NOT PAGE 16 OF 34 ITA NO.1354/B ANG/2010 16 DEMONSTRATED AS TO HOW THE DIFFERENCE IN THE TURNOV ER HAD INFLUENCED THE RESULT OF COMPARABLES; THAT IT WAS ACCEPTED ECONOMI C PRINCIPLES AND COMMERCIAL PRACTICE THAT IN HIGHLY COMPETITIVE MARKE T CONDITION, ONE CAN SURVIVE AND SUSTAIN ONLY BY KEEPING LOW MARGIN BUT HI GH TURNOVER. THUS, HIGH TURNOVER AND LOW MARGIN WERE NECESSARY OF THE HIGHLY COMPETITIVE MARKET TO SURVIVE. IT WAS SUBMITTED THAT THE ARITH METIC MEAN OF OPERATING PROFITS OF THE COMPANIES SELECTED AS COMPARABLE BY THE TPO W AS 19.45% WHILE THE OPERATING PROFITS EARNED BY THE FOLLOWING SUPER NORM AL PROFIT MAKING COMPANIES SELECTED BY THE TPO WHICH WERE SIGNIFICANT LY MORE THAN THE ARITHMETIC MEAN SEVEN COMPANIES WERE OUT-LINERS AND CANNOT BE CONSIDERED AS COMPARABLE TO A RISK MITIGATED SERVICE PROVIDER. OBTAINING INFORMATION NOT AVAILABLE IN PUBLIC DOMAI N BY EXERCISING POWERS U/S 133(6) OF THE ACT: IT WAS THE CASE OF THE LD. D R THAT ALL THE INFORMATION RECEIVED DURING THE PERIOD FROM 29.4.09 TO 20.7.09 WERE FURN ISHED TO THE ASSESSEE BY THE TPO, AND THAT ALL THE INFORMATION/ADVERSE USE D AGAINST THE ASSESSEE WAS DULY INTIMATED IN DUE COURSE. ALSO COPIES OF NO TICES U/S 133(6) ISSUED TO THE COMPANIES AND THE COPIES OF REPLIES RECEIVED FR OM SUCH COMPANIES WERE FURNISHED TO THE ASSESSEE IN A SOFT COPY FOR ITS COM MENTS; AND THAT THE FINDINGS OF THE TPO BASED ON INFORMATION COLLECTED WAS COMMUNICATED TO THE ASSESSEE. IT WAS, FURTHER, SUBMITTED THAT AFTER DUE CONSIDERATION OF THE ASSESSEES OBJECTION, THE DRP UPHELD THE TPOS ACTI ON IN COLLECTING THE RELEVANT INFORMATION REQUIRING FOR BETTER COMPARABI LITY ANALYSIS. IT WAS ALSO CONTENDED THAT THE TPO USED THE DATA FOR INFORMATIO N THAT WAS AVAILABLE TO PAGE 17 OF 34 ITA NO.1354/B ANG/2010 17 HIM IN THE PUBLIC DOMAIN WHENEVER A COMPANY DID NOT SUBMIT THE INFORMATION OR WHEREVER THE NOTICE U/S 133(6) NOT SERVED AT THE LATEST ADDRESS AVAILABLE EVEN AFTER REPEATED ATTEMPTS. WITH REGARD TO THE ASSESSEES C ONTENTION THAT THE FOREIGN EXCHANGE GAIN/LOSS ARISE IN THE NORMAL COURSE OF BU SINESS AND, THEREFORE, SHOULD BE CONSIDERED AS OPERATING IN NATURE, THE LD . D R CLAIMED THAT THE MUMBAI TRIBUNAL IN THE CASE OF DHL EXPRESS (INDIA) PVT. LTD V. ACIT IN ITA NO.7360/MUM/2010 TOOK A CONTRARY VIEW ON THE ISSUE. HOWEVER, IN THE FINANCIAL STATEMENT FOR THE FY 2005-06 INCOME CREDI TED ON ACCOUNT OF GAIN ON FOREIGN EXCHANGE FLUCTUATION ONLY SUM OF RS.7.2 L AKHS SHOWN AS LOSS ON FOREIGN EXCHANGE FLUCTUATION, THUS, THERE WAS NO ME RIT IN THE ASSESSEES CONTENTIONS. IT WAS THE CASE OF THE REVENUE THAT EV EN LOSS CLAIMED SEEMS TO BE MEAGRE AND NOT MUCH EFFECT IN DETERMINATION OF A LP. NOT MAKING SUITABLE ADJUSTMENTS ON ACCOUNT OF DIFF. IN THE RISK PROFILE : IT WAS CONTENDED BY THE LD . D R THAT AS THE ASSESSEE FAILED TO BRING ANY EVIDENCE ON RECORD TO SHOW THAT THEIR E XIST ANY DIFFERENCE IN THE RISK PROFILE OF THE COMPARABLE COMPANIES VIS-- VIS OF THE ASSESSEE, THE TPO/DRP HAD REJECTED THE ASSESSEES CLAIM, THAT TO AVAIL BENEFIT OF SUCH ADJUSTMENT, INFORMATION SHOULD BE SUBMITTED ALONG W ITH DETAILS MAINTAINED BY THE ASSESSEE UNDER RULE 10D. IT WAS, FURTHER, AR GUED THAT S. 92D(1) PROVIDES THAT EVERY PERSON ENTERING INTO AN INTERNAT IONAL TRANSACTION WAS REQUIRED TO KEEP AND MAINTAIN SUCH INFORMATION AND DOCUMENT IN RESPECT THEREOF, AS WAS BEING PRESCRIBED UNDER RULE 10D(1) OF I.T. RULES. THIS RULE REQUIRES TO MAINTENANCE OF A RECORD OF THE ANALYSIS PERFORMED TO EVALUATE COMPARABLE AS WELL AS A RECORD OF THE ACTUAL WORKIN G CARRIED OUT FOR PAGE 18 OF 34 ITA NO.1354/B ANG/2010 18 DETERMINING THE ALP. IT WAS, FURTHER, EXPLAINED TH AT RULE 10D(4) REQUIRES THAT THE INFORMATION AND DOCUMENTATION TO BE MAINTA INED; AND THAT UNDER RULE 10D(1) SHOULD BE CONTEMPORANEOUS AS FAR AS POS SIBLE AND SHOULD EXIST LATEST BY THE DUE DATE OF FILING OF THE RETURN. IT WAS THE CASE OF THE LD D R THAT THE ASSESSEE ADMITTED THAT IT DID NOT UNDERTAK E ANY RISK ADJUSTMENT IN THE TP DOCUMENT REPORT AND IN THE ABSENCE OF THAT C OMPARABILITY; IT WAS DIFFICULT TO MAKE ADJUSTMENT. RELIES ON THE CASE LAWS : (I) M/S. MARUBENI INDIA PRIVATE LTD V. ADDL CIT IN ITA NO.945/DEL/2009; (II)SYMANTEC SOFTWARE SOLUTION PVT. LTD V. ACIT IN I TA NO.7894/MUM/2010; (III)EXXON MOBIL COMPANY INDIA PVT. LTD V. DICT IT A NO.8311/MUM/2010; (IV)ADP (P) LTD V. DCITITA NO.106/HYD/09/(2011) 57 DTR (HYD)(TRI)310; (V) VEDARIS TECHNOLOGY (P) LTD V. ACIT (2010) 131 TT J (DEL) 309; & (VI)ST. MICRO ELECTRONICS PVT. LTD V. CIT (A) ITA NO.1806 & 1807/DEL/2008 COMPUTATION OF ALP WITHOUT GIVING BENEFIT OF +/- 5% UNDER THE PROVISO TO SEC.92C OF THE ACT : EXTENSIVELY QUOTING THE PROVISO TO S.92C(2) AS SU BSTITUTED BY THE FINANCE ACT, 2002 W.E.F. 1.4.2002 AND ALSO COUN TERING THE ASSESSEES CONTENTIONS COUPLED WITH A NUMBER OF JUDICIAL PRONO UNCEMENTS, THE LD. D R CONTENDED THAT THE TPO HAD HELD THAT PROVISO TO S. 92C(2) WAS AMENDED W.E. F 1.10.2009 BY INTRODUCING A CLARIFICATORY AMENDMENT; THAT THE SECOND PROVISION SAYS THAT IF ARITHMETICAL MEAN PRICE DETER MINED IS WITHIN +/- 5% FROM PRICE CHARGED IN THE INTERNATIONAL TRANSACTION , THE PRICE CHARGED BY THE TAX PAYER HAS BEEN TREATED AS ARMS LENGTH PRICE . IT WAS, FURTHER, ARGUED THAT NO ADJUSTMENT WOULD BE MADE, IF THE ARI THMETICAL MEAN PRICE FALLS BEYOND +/- 5% FROM THE PRICE CHARGED IN THE IN TERNATIONAL TRANSACTION, PAGE 19 OF 34 ITA NO.1354/B ANG/2010 19 AND THEN SECOND PROVISO WAS NOT APPLICABLE; THAT IN SUCH CASE, ONLY THE FIRST PROVISO SHALL ALONE BE APPLICABLE AS PER WHICH THE ARITHMETICAL MEAN PRICE SHALL BE TAKEN TO BE THE ARMS LENGTH PRICE. MEANI NG THEREBY, IT WAS SUBMITTED, THE TRANSFER PRICING ADJUSTMENT WOULD BE MADE ONLY FROM ARITHMETICAL MEAN PRICE. THUS, IT WAS ARGUED BY THE LD. D R, ACCORDING TO THE TPO, BY VIRTUE OF AMENDMENT, +/- 5% VARIATION IS ALLOWABLE ONLY THE CASE OF THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTI ONS AND NOT THE ADJUSTMENT. RELIES ON THE CASE LAWS : (I) ADP (P) LTD V. DCITITA NO.106/HYD/09/(2011) 57 DTR (HYD)(TRI)310; (II) M/S. MARUBENI INDIA PRIVATE LTD V. ADDL CIT IN ITA NO.945/DEL/2009. IN CONCLUSION, THE LD. D R PLEADED THAT THE STAND OF THE AUTHORITIES BELOW REQUIRES TO BE SUSTAINED. 5. WE HAVE DULY CONSIDERED RIVAL SUBMISSIONS, CAREF ULLY PERUSED THE RELEVANT CASE RECORDS AND ALSO VOLUMINOUS PAPER BOOKS FURNISHED BY THE LD. A.R. WITH DUE RESPECTS, WE HAVE ALSO PERUSED V ARIOUS CASE LAWS ON WHICH EITHER PARTY HAD PLACED THEIR CONFIDENCE. THE PRIME THRUST AND GRIEVANCES OF THE APPELLANT BEING: (I) THAT THE AO HAD ERRED BY HOLDING THAT THE COMM UNICATION EXPENSES ATTRIBUTABLE TO THE DELIVE RY OF COMPUTER SOFTWARE OUTSIDE INDIA SHOULD BE REDUCED FRO M EXPORT TURNOVER WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT; (II) THAT THE TPO HAD SELECTED SIX COMPA NIES IN THE ORDER PASSED U/S 92CA OF THE ACT AS COMPA RABLES IN ADDITION TO THOSE PROPOSED IN THE NOTICE WITHOU T GIVING AN OPPORTUNITY TO THE APPELLANT TO PRESENT ITS OBJ ECTION(S)/COMMENTS; PAGE 20 OF 34 ITA NO.1354/B ANG/2010 20 (II) EVEN UNDER TNMM, CONSIDERING TURNOVER RANGE OF RS.1 CRORE TO RS.200 CRORES AND RS.1 CRORE TO RS.500 CRORES AN D REJECTING CERTAIN COMPARABLES SELECTED BY TPO, THE APPELLANTS TRANSACTIONS WERE AT ARMS LENGTH; (III) SIX COMPANIES WHICH DID NOT EVEN APPEAR IN THE INIT IAL SEARCH LIST OF THE TPO WERE ISSUED NOTICE U/S 133(6) OF TH E ACT TO COLLATE INFORMATION. THE PROCESS ADOPTED IN ISSUIN G NOTICE U/S 133 (6) OF THE ACT WAS NOT DETAILED. THE INFOR MATION OBTAINED IN RESPONSE THERETO HAD NOT BEEN FULLY SHAR ED; (IV) THAT THE AO/TPO ERRED IN DETERMINING THE ARMS LENG TH MARGIN/PRICE USING ONLY FY 2005-06 DATA WHICH WAS NO T AVAILABLE TO THE ASSESSEE AT THE TIME OF COMPLYING W ITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS; (V) THE ASSESSEE HAD MADE DETAILED SUBMISSIONS FOR REJE CTION OF KALS AS COMPARABLE, HOWEVER, THE APPELLANTS SUBMISS IONS HAVE NOT BEEN COMMENTED EITHER BY THE TPO OR THE DRP ; (VI) IN THE CASE OF MEGASOFT, THE TPO AND THE DRP HAVE CONSIDERED ENTITY-WIDE MARGINS ON THE GROUND THAT SO FTWARE PRODUCT SEGMENT ALSO CONSISTS SOFTWARE SERVICES AN D, THEREFORE, AT ENTITY LEVEL SOFTWARE SERVICES WERE MO RE THAN 75% OF OPERATING REVENUES. HOWEVER, SIMILAR SITUATI ON IN THE CASE OF OTHER COMPARABLES HAVE BEEN IGNORED. IF AT ALL MEGASOFT WAS TO BE ADOPTED AS A COMPARABLE, THE MAR GIN OF THE SOFTWARE SEGMENT MAY BE USED; (VII) THE AO/TPO ERRED IN NOT CONSIDERING THE FOREIGN EXC HANGE FLUCTUATION GAIN (LOSS) AS PART OF THE OPERATING IN COME WHILE COMPUTING THE OPERATING MARGIN; (VIII) ALSO ERRED IN NOT CONSIDERING THE PROVISIONS WRITTE N BACK AS PART OF THE OPERATING INCOME WHILE COMPUTING THE OP ERATING MARGIN; & (IX) BENEFIT OF 5% DEDUCTION IN DETERMINING THE ARMS LE NGTH PRICE IN ACCORDANCE WITH PROVISO TO S.92C OF THE AC T NOT GIVEN. 5.1. AFTER ANALYZING THE SUBMISSIONS OF RIVAL PARTI ES AND ALSO DELIBERATING THE SPECIFIC APPREHENSIONS OF THE APPE LLANT AS NARRATED ABOVE, PAGE 21 OF 34 ITA NO.1354/B ANG/2010 21 THE MATTER HAS NOW BEEN NARROWED DOWN FOR CONSIDERA TION, THE FOLLOWING ISSUES, NAMELY: (1) WHAT IS THE DATA TO BE CONSIDERED BY THE TPO AT THE TIME OF DETERMINING ALP? & (2) WHETHER THE APPELLANT SHOULD HAVE BEEN GIVEN AN OPPORTUNITY TO REFUTE THE MATERIAL SOUGHT TO BE UTI LIZED BY THE TPO? 5.2. AS FAR AS THE DATA TO BE USED BY THE TPO WHILE DETERMINING THE ALP WAS CONCERNED, IT IS OBSERVED THAT IT IS COVERE D BY THE PROVISIONS OF RULE 10D SUB-RULE 4 OF THE INCOME-TAX RULES. SECTION 92 C PROVIDES THAT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHODS BEING THE MOST APPRO PRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PE RSONS OR SUCH OTHER RELEVANT FACTORS FOR COMPUTING THE ALP AND ALSO ANY OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. SECTION 92D PROVIDES THAT (I) EVERY PERSON WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION SHALL MAINTAIN AND KEEP SUCH INFORMATION AND DOCUMENTS IN RESPECT THEREOF; (II) THE BOARD MAY ALSO PRESCRIBE THE PERIOD FOR WHICH THE INFORMATION AND DOCUMENTS SHALL BE KEPT AND MAINTAINED; AND (III) THE AO OR THE CIT (A) MAY, IN THE COURSE OF ANY PROCEEDING UNDER THE ACT, REQUIRE ANY PERSON WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION TO FURNISH ANY INFORMATION OR DOCUMENT IN RESPECT THEREOF. THUS, IT SUBSCRIBES THAT THE REQUIREMENT IS ONLY TO MAINTAIN AND KEEP THE INFORMATION AND DOCUMENTS RELATING TO INTE RNATIONAL TRANSACTIONS SO THAT THEY ARE AVAILABLE AS AND WHEN REQUIRED DURING ANY PROCEEDING UNDER THE ACT. THE SECTION DOES NOT PROVIDE THAT THE INFORMA TION AND DOCUMENTS ARE PAGE 22 OF 34 ITA NO.1354/B ANG/2010 22 TO BE KEPT AND MAINTAINED FOR A PERIOD OF EIGHT YEAR S. RULE 10-D OF SUB- SEC.1 SPECIFIES THE DOCUMENTS AND INFORMATION WHICH ARE TO BE KEPT AND MAINTAINED BY THE ASSESSEE AND SUB-RULE 2 THEREOF P ROVIDES THAT NOTHING CONTAINED IN SUB-RULE 1 SHALL APPLY IN A CASE WHERE THE AGGREGATE VALUE AS RECORDED IN THE BOOKS OF ACCOUNTS, THE INTERNATIONA L TRANSACTIONS ENTERED INTO BY THE ASSESSEE DOES NOT EXCEED RS.1 CRORE. SU B-RULE 3 PROVIDES THE SUPPORTING AUTHENTIC DOCUMENTS WHICH ARE TO BE KEPT AND MAINTAINED AND SUB-RULE 4 THEREOF PROVIDES THAT THE INFORMATION AN D DOCUMENTS SPECIFIED UNDER SUB-RULE 1 & 2 SHOULD AS FAR AS POSSIBLE BE C ONTEMPORANEOUS AND SHOULD EXISTS LATEST BY THE SPECIFIED DATE REFERRE D TO IN CLAUSE-4 OF SECTION 92F. CLAUSE 4 OF SECTION 92F GIVES THE DEFINITION OF SPECIFIED DATE TO HAVE THE SAME MEANING AS ASSIGNED TO DUE DATE IN EXPLA NATION 2 BELOW SUB- SECTION 1 OF SECTION 139. EXPLANATION 2 TO SECTION 139 DEFINES DUE DATE IN A CASE OF A COMPANY TO BE 30 TH OF SEPTEMBER OF THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE IS SUPPOSED TO MAINTAIN INFORMATION AN D DOCUMENTS. AFTER GOING THROUGH THE ABOVE PROVISIONS OF LAW, IT IS C LEAR THAT THE ACT HAS NOT PROVIDED FOR ANY CUT OFF DATE UP-TO WHICH ONLY THE IN FORMATION AVAILABLE IN PUBLIC DOMAIN HAS TO BE TAKEN INTO CONSIDERATION BY THE TPO, WHILE MAKING THE TRANSFER PRICING ADJUSTMENTS AND ARRIVING AT AR MS LENGTH PRICE. THE ASSESSEE AS WELL AS THE REVENUE IS BOTH BOUND BY THE ACT AND THE RULES THERE-UNDER AND, THEREFORE, AS PROVIDED UNDER THE A CT AND RULES, THEY ARE SUPPOSED TO BE TAKING INTO CONSIDERATION, THE CONTE MPORANEOUS DATA RELEVANT TO THE PREVIOUS YEAR IN WHICH THE TRANSACTION HAS TA KEN PLACE. THE ASSESSEE HAD STRENUOUSLY ARGUED THAT THE PROVISIONS OF SECTIO N 92D AND RULE 10D IS DEFEATED, IF THE TPO TAKES THE DATA WHICH IS AVAILA BLE IN THE PUBLIC DOMAIN AFTER THE SPECIFIED DATE AND THE ALP WOULD BE FLUID AND THERE WOULD BE NO PAGE 23 OF 34 ITA NO.1354/B ANG/2010 23 CERTAINTY FOR THE SAME. WE ARE, HOWEVER, NOT IN AGR EEMENT WITH THE ARGUMENTS PUT-FORTH BY THE LD. A.R. THE ALP HAS TO BE DETERMINED BY THE TPO IN ACCORDANCE WITH LAW AND THE ACT PROVIDES THA T THE TPO SHALL TAKE INTO CONSIDERATION THE CONTEMPORANEOUS DATA. THE A SSESSEE WAS ONLY REQUIRED TO MAINTAIN THE INFORMATION AND DOCUMENTS AS MAY BE NECESSARY RELATING TO THE INTERNATIONAL TRANSACTIONS SO THAT IT CAN BE MADE AVAILABLE TO THE TPO OR THE AO OR ANY OTHER AUTHORITY IN ANY PROCEE DINGS UNDER THE ACT. BY PROVIDING A SPECIFIED DATE IN THE ACT, THE OBLIGA TION IS CAST UPON THE ASSESSEE TO KEEP AND MAINTAIN THE DOCUMENTS FOR THA T PERIOD. BUT, IT DOES NOT RESTRICT THE TPO FROM MAKING ENQUIRIES THEREAFT ER FOR DETERMINING THE CORRECT ALP. 5.3. HAVING HELD SO, WE SHALL NOW GLIMPSE AT THE NEXT QUESTION, AS TO WHETHER THE TPO CAN MAKE HIS OWN ENQUIRIES AND CALL FOR INFORMATION FROM VARIOUS ENTITIES KEEPING THE ASSESSEE IN THE DARK. UNDER SUB-SEC. (3) & (7) OF S. 92CA, THE TPO IS ENTRUSTED WITH ALL THE POWER S UNDER CLAUSES (A) TO (D) OF SUB-SECTION (1) OF SECTION 131 OR SUB-SECTION (6 ) OF SECTION 133 TO CALL FOR AND GATHER ANY INFORMATION AS MAY BE REQUIRED. WHEN THE TPO IS MAKING THE SEARCH FOR A RELEVANT COMPARABLE, HE CAN ISSUE NOTI CES TO THE PARTIES WHOM HE CONSIDERS AS RELEVANT TO GATHER REQUISITE INFORM ATION AND ON BEING SATISFIED WITH REGARD TO RELEVANCY OF THE MATERIAL W HICH CAN BE USED AGAINST THE ASSESSEE ONLY THEN THE ASSESSEE HAS TO BE GIVEN AN OPPORTUNITY OF PRESENTING ITS OBJECTIONS, IF ANY. THUS, THE TPO NE ED NOT INFORM THE ASSESSEE ABOUT THE PROCESS USED BY HIM FOR ISSUING T HE NOTICES U/S 133(6) OF THE ACT NOR IS HE UNDER ANY OBLIGATION TO FURNISH TH E ENTIRE INFORMATION TO THE ASSESSEE. PAGE 24 OF 34 ITA NO.1354/B ANG/2010 24 5.4. HOWEVER, WE ARE OF THE FIRM VI EW THAT THE PRINCIPLES OF NATURAL JUSTICE REQUIRES THAT WHEN ANY INFORMATION I S SOUGHT TO BE USED AGAINST THE APPELLANT, THE APPELLANT HAS TO BE GIVE N A REASONABLE OPPORTUNITY OF HEARING ON THAT MATERIAL. IN THE PRESENT CASE, THE TPO HAD FURNISHED ALL THE INFORMATION TO THE APPELLANT IN THE FORM OF CD AND THE APPELLANT, AFTER PERUSING THE SAME, HAD SUBMITTED A DETAILED SUBMISS ION ALONG WITH ITS OBJECTIONS FOR TAKING VARIOUS COMPANIES AS COMPARAB LES. IT WAS ANOTHER MATTER, IF THE TPO HAD NOT CONSIDERED THE OBJECTION S OF THE APPELLANT JUDICIOUSLY. IN SUCH A CASE, IT WOULD BE AN ERROR O F JUDGMENT, BUT, NOT VIOLATION OF PRINCIPLES OF NATURAL JUSTICE. THE OB JECTIONS OF THE APPELLANT WERE THAT CERTAIN COMPANIES HAVE BEEN TAKEN INTO CO NSIDERATION BY THE TPO AS COMPARABLES WITHOUT AFFORDING THE APPELLANT AN O PPORTUNITY OF FURNISHING ITS OBJECTIONS, IF ANY, AND ALSO WITH REGARD TO CERT AIN OTHER COMPANIES, IT HAD SOUGHT OPPORTUNITY TO CROSS-EXAMINE THEM, BUT, IT HA S BEEN OBSERVED THAT NO SUCH AN OPPORTUNITY HAS BEEN EXTENDED TO THE APPELLA NT. 5.5. AS RECORDED EARLIER, IF ANY INFORMAT ION IS SOUGHT TO BE USED AGAINST THE APPELLANT, THE SAME HAS TO BE FURNISHED TO THE APPELLANT AND THEREAFTER, TAKING INTO CONSIDERATION THE APPELLANT S OBJECTIONS, IF ANY, ONLY THEN CAN THE TPO PROCEED TO TAKE A DECISION. IF TH E APPELLANT SEEKS AN OPPORTUNITY TO CROSS-EXAMINE THE PARTIES CONCERNED, THE APPELLANT SHALL BE PROVIDED SUCH AN OPPORTUNITY. IT IS ONLY DURING A CR OSS-EXAMINATION THAT THE APPELLANT CAN REBUT THE STAND OF THAT PARTICULAR PA RTY (COMPANY). AS LISTED OUT EARLIER, THE APPELLANT HAD ALSO BROUGHT OUT VAR IOUS DEFECTS IN THE ADDITIONAL COMPARABLES SELECTED BY THE TPO AND HAD B ROUGHT OUT THE STRIKING DIFFERENCES BETWEEN THE FUNCTIONS OF THOSE COMPARAB LES AS COMPARED TO THE PAGE 25 OF 34 ITA NO.1354/B ANG/2010 25 APPELLANT AND ALSO AS TO HOW THE ENTIRE REVENUE OF THE APPELLANT HAS BEEN TAKEN INTO CONSIDERATION IN SPITE OF THERE BEING IN COME FROM UNRELATED PARTY TRANSACTIONS ALSO. ALL THESE OBJECTIONS HAVE BEEN DETAILED IN ITS WRITTEN SUBMISSION WHICH HAS ALSO BEEN INCORPORATED IN THIS ORDER IN A SUMMARIZED MANNER. IT HAS BEEN OBSERVED THAT THE TPO HAD NOT CONSIDERED THOSE OBJECTIONS WHILE DETERMINING THE ALP. FURTHER, IT WAS ALSO THE STAND OF THE APPELLANT THAT IT SHOULD BE GIVEN A STANDARD DEDUCT ION OF 5% AS PROVIDED UNDER THE PROVISO TO S.92C (2) BEFORE MAKING ADJUST MENTS FOR THE TRANSFER PRICE. TO DRIVE HOME ITS POINT, THE ASSESSEE HAD P LACED STRONG RELIANCE ON THE FOLLOWING DECISIONS: (1) M/S. IPOLICY NETWORK PVT. LTD V. ITO ITA NO.55 04/DEL/2010 (2)SYMANTEC SOFTWARE SOLUTIONS PVT. LTD V. ACIT IT A NO.7894/MUM/2010 (3) SAP LABS INDIA PVT. LTD V. ACIT 2010-T II-44-IT T-BANG-TP; (4) TNT INDIA PVT. LTD V. ACIT - ITA NO.1442 (BANG ) 2008 (5) GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD V. D CIT ITA NO.1231(BANG)/2010 (6) DIAGEO INDIA PVT. LTD V. DCIT ITA NO. 8602(MU M) 20210 (7) EXXON MOBIL CO. INDIA PVT. LTD V. DCIT ITA NO .8311/MUM/2010 (8) EMERSON PROCESS MANAGEMENT INDIA PVT. LTD V. AC IT ITA NO.8118/MUM/2010 (9) HAWORTH (INDIA) PVT. LTD V. DCIT ITA NO.5341/ DEL/2010; (10)UE TRADE CORPORATION (INDIA) (P) LTD V. ACIT 44 SOT 457(DEL)PHILIPS (11) CUMMINS INDIA LIMITED V. DCIT - ITA NO.277/PUN E/07; (12) CIT V. KERALA ELECTRIC LAMP WORKS (2003)261 IT R 721 (KER); (13) CIT V. RAJASTHAN MERCANTILE CO. LTD (1995) 211 ITR 400(DEL); (14) K.P.VARGHESE V. ITO & ANR. (1981) 24 CTR (SC) 358 & 131 ITR 597 (SC) (15)ALOM EXTRUSIONS LTD 319 ITR 306(SC) ON THE OTHER HAND, THE LD. D R, P LACING STRONG RELIANCE ON THE STAND OF THE AUTHORITIES BELOW, SUBMITTED THAT 5% W AS NOT THE STANDARD, PAGE 26 OF 34 ITA NO.1354/B ANG/2010 26 BUT, IT WAS THE RANGE WITHIN WHICH IF THE ALP FAILS , THEN, THE ALP OF THE APPELLANT HAS TO BE ACCEPTED. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND OF THE FIRM VIEW THAT THIS ISSUE HAS ALREADY BEEN COVERED BY THE DECISIONS WHICH HAVE BEEN RELIED ON BY THE APPELLANT. 5.5. TURNOVER FILTER: AS REGARD THE ASSESSEES OBJECTION OF TPO ADOPTING INFINITY FIGURES FOR UPPER LIMIT TURNOVER F OR THE SELECTION OF COMPARABLES, WE FIND THAT THE ISSUE IS SQUARELY COVE RED BY THE ORDER OF BANGALORE BENCH OF TRIBUNAL IN THE CASE OF M/S GENI SYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. THE RELEVANT FINDING OF THE TRIB UNAL AT PARA 9 READS AS FOLLOWS: 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONS IDERED THE RIVAL CONTENTIONS AND ALSO THE JUDICIAL PRECEDE NTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTE D THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE A N UPPER LIMIT ALSO. W HAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENT ION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SI ZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A PO SITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMER S. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WH O ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOU LD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHI CH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUD ED. PAGE 27 OF 34 ITA NO.1354/B ANG/2010 27 FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON T HE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REAS ONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET A ND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT TH E CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUIT ABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HA VE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEI NG IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMP ANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES O NLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. IN THE INSTANT CASE, THE TURNOVER OF THE COMPANY IS IN THE RANGE OF 30 CRORES, THEREFORE, THE COMPANIES, WHICH HAVE TURNOVER OF RS.1.00 CRORE TO 200 CRORES ALONE SHOULD BE TAKEN I NTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 5.7. IN THESE CIRCUMSTANCES, WE ARE OF THE CONSID ERED VIEW THAT THIS ISSUE REQUIRES TO BE REMITTED BACK TO THE FILE OF THE TPO FOR FRESH CONSIDERATION 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 OF MORE THAN RS .1 CRORE, BUT, LESS THAN RS.200 CRORES ONLY SHALL BE TA KEN INTO CONSIDERATION; (III) ALL THE INFORMATION RELATING TO COMPARABLES WHICH W ERE SOUGHT TO BE USED AGAINST THE APPELLANT SHALL BE FU RNISHED TO THE APPELLANT; PAGE 28 OF 34 ITA NO.1354/B ANG/2010 28 (IV) TO CONSIDER THE OBJECTIONS OF THE APPELLANT THAT RE LATE TO ADDITIONAL COMPARABLES SOUGHT TO BE ADOPTED BY THE T PO AND TO PASS A DETAILED ORDER; AND (V) TO GIVE THE STANDARD DEDUCTION OF 5% UNDER THE PROV ISO TO S.92C(2) OF THE ACT. 6. BEFORE PARTING WITH, WE WOULD LIKE TO RECALL TH AT MOST OF THE ISSUES RAISED IN THIS APPEAL HAD ALSO CROPPED UP IN THE EARLIER BENCH IN THE CASES OF (1) M/S. GENISYS INTEGRATING SYSTEMS (INDIA ) PVT. LTD V. DCIT IN ITA NO.1231 (BANG)/2010 DATED: 5-8-2011 (ASSESSMENT YEAR 2006-07); AND (2) M/S KODIAK NETWORKS (INDIA) PRIVATE LTD V. ACIT IN ITA NO.1413 (BANG)/2010 DATED: 27-1-2012 (ASSESSMENT YEAR 2006 -07 WHEREIN THE HONBLE BENCH, AFTER DUE CONSIDERATION, HAD TAKEN S IMILAR VIEWS. 7. WITH REGARD TO DEDUCTION U/S 10A OF THE ACT, IT WAS CONTENDED BY THE ASSESSEE THAT IF THE COMMUNICATION EXPENSES A TTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA WERE RED UCED FROM EXPORT TURNOVER, AN EQUAL AMOUNT SHOULD ALSO BE REDUCED FR OM TOTAL TURNOVER FOR COMPUTING THE DEDUCTION U/S 10A OF THE ACT. 7.1. THE LD. AR SUBMITTED THAT THE ISSUE IN QUESTI ON IS SQUARELY COVERED BY THE JUDGMENT OF THE HONBLE KARNATAKA HIG H COURT IN THE CASE OF CIT V. M/S. TATA ELXSI LTD & OTHERS (2011-TIOL-684- HC-KAR-II), HONBLE MUMBAI HIGH COURT IN THE CASE OF CIT V. GEM PLUS JE WELLERY INDIA LTD [330 ITR 175] AND THE ORDER OF THE SPECIAL BENCH IN THE CASE OF ITO V. M/S SAK SOFT LTD (313 ITR 353). PAGE 29 OF 34 ITA NO.1354/B ANG/2010 29 7.2. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSE D THE MATERIAL ON RECORD. THE HONBLE KARNATAKA HIGH COURT IN THE CA SE OF CIT V. M/S. TATA ELXSI LTD & OTHERS HAD HELD THAT WHILE COMPUTING TH E EXEMPTION U/S 10A, IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIV ED AT AFTER EXCLUDING CERTAIN EXPENSES; THE SAME SHOULD ALSO BE EXCLUDED IN COMPUTING THE EXPORT TURNOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DE NOMINATOR. THE RELEVANT FINDING OF THE HONBLE COURT READS AS FOLLOWS: .SECTION 10A IS ENACTED AS AN INCENTIVE TO EXPORT ERS TO ENABLE THEIR PRODUCTS TO BE COMPETITIVE IN THE GLOB AL MARKET AND CONSEQUENTLY EARN PRECIOUS FOREIGN EXCHAN GE FOR THE COUNTRY. THIS ASPECT HAS TO BE BORNE IN MIN D WHILE COMPUTING THE CONSIDERATION RECEIVED FROM SUC H EXPORT TURNOVER, THE EXPENSES INCURRED TOWARDS FREI GHT, TELE-COMMUNICATION CHARGES, OR INSURANCE ATTRIBUTAB LE 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 WORK TOTAL TURNOVER IS NOT DEFINED FOR THE PURPOSE OF TH IS SECTION. IT IS BECAUSE OF THIS OMISSION TO DEFINE TOTAL TURNOVER, FALLS FOR INTERPRETATION BY THIS COURT; .IN SECTION 10A, NOT ONLY THE WORD TOTAL TURNOVER IS NOT DEFINED, THERE IS NO CLUE REGARDING WHAT IS TO BE 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 SHOU LD 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 20A 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, PAGE 30 OF 34 ITA NO.1354/B ANG/2010 30 THE LEGISLATURE INTENDED TO HAVE A FORMULA TO ASCER TAIN THE PROFITS FROM EXPORT BUSINESS BY APPORTIONING THE TOTAL PROFITS OF THE BUSINESS ON THE BASIS OF TURNO VERS. 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 INC LUDE EXPORT BUSINESS AND DOMESTIC BUSINESS, IN OTHER WO RDS, EXPORT TURNOVER AND DOMESTIC TURNOVER. TO THE EXTE NT EXPORT TURNOVER, THERE WOULD BE A COMMONALITY BETWEE N 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 COMPONENT OF TOTAL TURNOVER IN THE DENOMINATOR. TH E REASON BEING THE TOTAL TURNOVER INCLUDES EXPORT TUR NOVER. THE COMPONENTS OF THE EXPORT TURNOVER IN THE NUMERA TOR AND THE DENOMINATOR CANNOT BE DIFFERENT. THEREFORE , THOUGH THERE IS NO DEFINITION OF THE TERM TOTAL TU RNOVER IN SECTION 10A, THERE IS NOTHING IN THE SAID SECTIO N TO MANDATE THAT WHAT IS EXCLUDED FROM THE NUMERATOR TH AT 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 MEANING OF THE TOTAL TURNOVER, WHEN THE TOTAL TURN OVER 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 IMPERMISSIBLE. THUS, THERE IS NO ERROR COMMITTED B Y THE TRIBUNAL IN FOLLOWING THE JUDGMENTS RENDERED IN THE PAGE 31 OF 34 ITA NO.1354/B ANG/2010 31 CONTEXT OF SECTION 80HHC IN INTERPRETING SECTION 10 A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE AND THE SAME. 7.3. FURTHER, IT MAY WORTHWHILE TO RECALL THE RULIN G OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY I NDIA LTD (SUPRA) IN IDENTICAL CIRCUMSTANCES, HELD THAT SINCE THE EXPORT TURNOVER FORMS PART OF THE TOTAL TURNOVER, IF AN ITEM IS EXCLUDED FROM THE TOTAL TURNOVER TO MAINTAIN PARITY BETWEEN NUMERATOR AND DENOMINATOR WHILE CALCU LATING DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HONBL E BOMBAY HIGH COURT READS AS FOLLOWS: THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY TH E UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPO RT AND THE TURNOVER FROM LOCAL SALES. THE EXPORT TURN OVER CONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB-SECTION (4). EXPORT TURNOVER ALSO FORMS A CONSTITUENT ELEMENT OF THE DENOMINATOR IN AS MUCH A S THE EXPORT TURNOVER IS APART OF THE TOTAL TURNOVER. TH E EXPORT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAM E MEANING AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRES SION EXPORT TURNOVER IN EXPLN. 2 TO S.10A WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES, T HINGS OR COMPUTER SOFTWARE RECEIVED IN OR BROUGHT INTO IN DIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGHT, TELECOMMUNICATIO N CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS, OR SOFTWARE OUTSIDE INDIA. THERE FORE, IN COMPUTING THE EXPORT TURNOVER THE LEGISLATURE HAS M ADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE CHARG ES. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF TH E REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES ARE PAGE 32 OF 34 ITA NO.1354/B ANG/2010 32 LIABLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD T O TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POINT THAT THE EXPRESSION TOTAL TURNOVE R HAS NOT BEEN DEFINED AT ALL BY PARLIAMENT FOR THE PURPOS ES OF S.10A. HOWEVER, THE EXPRESSION EXPORT TURNOVER H AS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNO VER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIF IC EXCLUSION OF FREIGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING W HEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUB TEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PREVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTHER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE CONTENTION OF THE REVENUE WERE TO BE ACCEPTED, THE SAME EXPRESSION VIZ., EXPORT TURNOVER WOULD HAVE A DIF FERENT CONNOTATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE BEEN SPECIFICALLY EXCLUDED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PA RT OF THE EXPORT TURNOVER WHEN IT FORMS AN ELEMENT OF T HE TOTAL TURNOVER AS A DENOMINATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISION WHICH WOULD LE AD TO AN ABSURDITY MUST BE AVOIDED. MOREOVER, A RECEIPT S UCH AS FREIGHT AND INSURANCE WHICH DOES NOT HAVE ANY ELE MENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL TURNOVER. FREIGHT AND INSURANCE CHARGES DO NOT HAVE ANY ELEMEN T OF TURNOVER. FOR THIS REASON IN ADDITION, THESE TWO I TEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURNOVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRI PTION TO THE CONTRARY CIT V. SUDARSHAN CHEMICALS INDUSTR IES LTD (2000) 163 CTR (BOM) 596; (2000) 245 ITR 769 (BOM) APPLIED; CIT V. LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1; (2007) 290 ITR 667(SC) AND CIT V. PAGE 33 OF 34 ITA NO.1354/B ANG/2010 33 CATAPHARMA (INDIA) (P) LTD (2007) 211 CTR (SC) 83; (2007) 292 ITR 641 (SC) RELIED ON. 7.4. IN THE CASE OF SAK SOFT LTD. (SUPRA), THE ASS ESSEE WAS ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTWARE AND CLAIMED DEDUCTION U/S 10B OF THE ACT. IN CONCLUDING THE ASSESSMENT U/S 1 43(3) OF THE ACT, THE AO REDUCED THE EXPENDITURE INCURRED IN FOREIGN EXCHANG E IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA FROM THE EXPORT TU RNOVER WITHOUT CORRESPONDING REDUCTION FROM TOTAL TURNOVER, THEREB Y REDUCING THE DEDUCTION CLAIMED BY THE ASSESSEE U/S 10B OF THE ACT . 7.5. IN THE LIGHT OF THE ABOVE FACTS, THE SPECIAL BENCH HELD AS UNDER: FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PURPOS E OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTIO N 10B, THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS O R COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHN ICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN TH E FORMULA. THE APPEALS FILED BY THE DEPARTMENT ARE TH US DISMISSED. ALTHOUGH THE ORDER OF SPECIAL BENCH IS IN THE CONTE XT OF S. 10B OF THE ACT, THE RATIO LAID DOWN IN THE ABOVE DECISION APPLIES T O S.10A OF THE ACT AS WELL, AS THE PROVISIONS OF S.10A AND 10B ARE IDENTICAL ON ALL MATERIAL ASPECTS. MORE PARTICULARLY, BOTH THE SECTIONS DEFINE ONLY EXPORT T URNOVER BUT NOT TOTAL TURN OVER AND SUB-SECTION (4) OF BOTH THE SECTIONS PRESCRIBE AN IDENTICAL FORMULA FOR COMPUTING THE EXPORT PROFITS. PAGE 34 OF 34 ITA NO.1354/B ANG/2010 34 7.6. WE, THEREFORE, DIRECT THAT WHEN THE COMMUNICA TIONS EXPENSES SHOULD BE REDUCED NOT ONLY FROM THE EXPORT TURNOVER BUT ALSO FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE A CT. IT IS ORDERED ACCORDINGLY. 8. THE ISSUE OF LEVYING OF INTEREST U/S 234B OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE AND, THEREFORE , IT HAS NOT BEEN ADDRESSED TO. HOWEVER, INTEREST U/S 234D OF THE AC T FOR THE AY UNDER CONSIDERATION HAS BEEN CORRECTLY CHARGED. THE ACTIO N OF THE AO IS IN CONSONANCE WITH THE FINDING OF THE HONBLE ITAT, DE LHI (SB) IN THE CASE OF ITO V EKTA PROMOTERS P. LTD. 305 ITR (AT) 1 (DELHI) (SB). 9. THE INITIATION OF PENAL PROCEEDING U/S 271(1)(C ) OF THE ACT WAS IN ITS INFANCY WHEN THE ASSESSMENT WAS CONCLUDED AND , THEREFORE, IT CANNOT BE AGITATED IN THIS QUANTUM APPEAL. THUS, THIS GR OUND IS DISMISSED AS NOT MAINTAINABLE. 10. IN THE RESULT, THE APPELLANTS APP EAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH DAY OF FEBRUARY, 2012. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO:- 1. THE REVENUE 2. THE ASSESSEE 3. TH E CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.